Hawai'i's controversial system for approving grants to nonprofits appears to be unique and far less open than what typically happens in other states, according to national nonprofit executives, fundraising professionals and budget experts.

National data on how states handle nonprofit funding is hard to come by, but the experts said they weren't aware of a system similar to Hawai'i's.

Nick Johnson, an analyst with the Center on Budget & Policy Priorities in Washington, D.C., said the vast majority of state funding that nonprofits get across the country generally goes through a more systematic process that has less to do with legislators' favorite causes and more to do with attempts to achieve specific public-policy goals.

Having such a discretionary system like Hawai'i's, Johnson said, would raise red flags. "You can just imagine the potential for corruption," he said.

Under Hawai'i's grants-in-aid system, only a handful of legislators decide behind closed doors which charities will get a sought-after spot on the grants list at the end of the session. No public hearings are held to debate those decisions or to even let the nonprofit community and the public know on what basis the selections will be made.

The Legislature usually gets far more grant applications than can be funded, and many consequently are rejected. But because the system is so discretionary, nonprofit executives generally don't know why their requests go unfunded while other organizations get part or all they ask for.

Those who regularly deal with the process generally agree that it needs to be reformed.

The system should be more open, they say, and formal guidelines are essential so the nonprofit community and the public have a better understanding of how decisions are made.

But opinions differ on what should be done to fix the system.

Some legislators believe the grants should be more temporary, or one-time in nature, as opposed to giving money to an organization year after year to pay for an ongoing program. If the program is that critical for the state, they said, it should be incorporated into the regular budget process, subject to regular reviews.

Some nonprofit executives believe the process should be more structured, with a grants bill handled like any other legislation, including going through public hearings and a formal vote.

Others believe the funding requests should be handled by the legislative committees that already deal with bills of similar subject matter.

One idea popular with some nonprofit leaders is for the Legislature to decide early in the session how much to set aside for grants, giving that funding the same kind of importance as other parts of the budget, rather than treating it as "leftovers" at the tail end of the process. Once the amount is set, legislators could spend the rest of the session sifting through applications to decide how to spend the money.

But while key Democratic majority legislators, including Sen. Rosalyn Baker and Rep. Marcus Oshiro, the respective heads of the Senate and House money committees, already are talking about revising the grants system, no specific proposals are on the table yet. House Republicans last session introduced a resolution calling for expansion and bipartisan makeup of the House's one-person grants-in-aid subcommittee, but the proposal died. Democrat Rep. Michael Magaoay was the chairman and sole member last session.

"If there's a way to make (the process) more open and transparent and honest and sincere, I'm open to that," said House Speaker Calvin Say.

At a minimum, people should have a better understanding of how the decisions are made and what criteria are used, dispelling the notion that the process is driven more by political factors and campaign contributions than merit, nonprofit officials and others say.

"The goal for me is always to try to increase transparency," said Sen. Shan Tsutsui, D-4th (Kahului), vice chairman of Ways & Means, the Senate committee that helps craft the grants list.

The practice of legislators earmarking money for private organizations is not even allowed in some states.

In Arizona, for instance, the constitution prohibits the Legislature from designating private entities as recipients of state funds, according to Patrick McWhorton, president of the Alliance of Arizona Nonprofits.

The prohibition is intended to guard against abuse and to ensure that the state's financial dealings with private groups are done through an open, competitive process, McWhorton said.

In Michigan, any appropriation to a private entity requires a two-thirds vote of the Legislature, according to Craig Thiel, director of state affairs for the Citizens Research Council of Michigan.

Some states permit legislators to insert line items in the budget for appropriations to nonprofits and other private groups, but that practice can be controversial, tempering its use, according to budget and nonprofit experts on the Mainland.

In most states, nonprofits get funding through a competitive bid process, the experts said. A government agency gets money to purchase services from an outside vendor, such as a nonprofit, and that agency solicits bids from interested parties and then awards a contract based on the bid evaluations.

Hawai'i uses such a process, but the grants-in-aid system provides another way for nonprofits to get funding. The key difference is that with the grants, legislators designate who gets the money.

Contrary to what's happening in Hawai'i, the trend nationally among states and foundations in dealing with nonprofit funding has been for more openness and accountability, according to Walter Sczudlo, executive vice president for the Association of Fundraising Professionals.

Sczudlo said of the states he's familiar with, the legislatures treat grants like any other government expenditure, using public hearings to get constituent feedback.

"In this day and age, when nonprofits are being pushed very strongly to be more transparent in their decision-making, for any funders — especially foundations and government bodies — to demand that of nonprofit organizations without embracing those principles themselves would be hypocritical," Sczudlo said.

The way other state legislatures handle grant requests — if they allow them at all — can vary considerably.

In New York, nonprofits can get money from individual legislators who have state funds to use at their discretion. The money typically is referred to as pork.

"When it comes to pork in New York, the problem has been that there is very little openness surrounding the process," said Matt Smith of the Manhattan Institute's Empire State Center for New York State Policy, a nonpartisan think tank.

But the process in other states tends to be more open and structured, and the public typically has formal opportunities to provide comments, according to budget and nonprofit experts.

The state with the system most similar to Hawai'i's appears to be Delaware.

Nonprofits submit formal applications, the requests are evaluated by legislators and state agencies, recommendations are made to a joint finance committee and that panel decides — behind closed doors — which requests to fund.

Delaware's process, however, has several key differences.

During a week when the Legislature is in recess, lawmakers hold a series of public hearings on the grant requests.

The panel that decides who gets funding is bipartisan.

And the applications go to a state agency, the Office of the Controller General, which has the staff to evaluate the requests, according to Delaware officials.

Whatever may be done to reform Hawai'i's system, legislators say nonprofits have to temper their expectations and submit more realistic requests.

For their part, people in the nonprofit community are beginning to call for changes.

"I think everybody would like to see (the system) become more fair and transparent," said John Flanagan, chief executive of the Hawai'i Alliance of Nonprofit Organizations.

Reach Rob Perez at rperez@honoluluadvertiser.com.

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