A bill to abolish the Aloha Tower Development Corp. failed earlier this year despite an April audit that recommended such a fate for the state agency. But a late maneuver by the Legislature will prevent ATDC from operating effective July 1.

State House and Senate negotiators withheld funding from the agency for the fiscal year that starts July 1.

The move appears to have been made to disband an agency that has come under fire from some lawmakers and critics for a legacy of poor achievement, and not as part of efforts to balance the state budget.

The agency has about $1.5 million in a special fund generated from lease rent on land that ATDC oversees. But the agency needs legislative approval to spend the money for operations, including paying its staff of nine.

Without a budget appropriation, the ATDC won't be able to pursue its main function — facilitating redevelopment of underused state land around Aloha Tower, roughly from Piers 5 to 23 at Honolulu Harbor.

It's also unclear how other ATDC duties, such as collecting ground lease rent from Aloha Tower Marketplace, will be continued.

The budget amendment prohibits Gov. Linda Lingle or her successor from transfering ATDC special fund money to another agency for the purpose of achieving ATDC's mission.

The ATDC was created in 1981 largely to manage prime waterfront land that could enhance revenue for the state and improve a run-down industrial section of O'ahu's main commercial harbor through private development partnerships. A seven-member board made up of city and state government officials and three community members governs the agency, which is administratively attached to the Department of Business, Economic Development and Tourism.

One important role that the agency has performed since 2008 — leading a roughly $600 million state initiative to modernize state harbors on O'ahu, Maui, Kaua'i and the Big Island — is expected to be assumed by the Department of Transportation.

Mike Formby, deputy director of DOT's Harbors Division, said assuming the role shouldn't be a problem.

"The impact should be minor," he said.

Formby anticipates being able to hire five ATDC staffers closely involved in the harbor project.

"They'll just continue to do the same work as they did at (ATDC)," he said.

Staffing for the harbors modernization project is expected to expand by another 10 or 12 positions next year as work ramps up further.

Money for the harbors project originates from DOT special funds, and was being transfered to ATDC, so continued funding of the work isn't an issue.

In a legislative conference committee report on the state budget, committee members said that modernizing Hawai'i harbors is critical for commerce and will play an important role in helping revive the state's struggling economy. The committee also said ATDC led the project ineffectively, and that DOT is more capable and appropriate for the job.

Sandy Pfund, ATDC's executive director, reserved comment on the Legislature's budget action. But she has previously defended the agency. In written testimony on a bill introduced this year that proposed abolishing ATDC, Pfund said the agency had made "tremendous progress" on the harbors work, with 14 executed design, planning and construction contracts as of February.

Pfund acknowledged that ATDC is troubled by past development impasses and litigation involving the Aloha Tower area lands, but said "steady progress" had been made to resolve those issues and position the agency with a clean slate for future development efforts. Those include an idea to fill in 7 acres of harbor between Piers 6 and 8 to expand development opportunities near a mass transit station planned by the city.

The bill, Senate Bill 2942, initially proposed abolishing ATDC and splitting its responsibilities between DOT-Harbors and the Hawai'i Community Development Authority, an agency performing a similar development role for state land in Kaka'ako including Honolulu Harbor Piers 1 and 2. A House committee amended the bill to call for a task force study of ATDC's effectiveness. The bill failed to pass.

In the state budget, lawmakers last year agreed to approve ATDC's budget only for the first year of the biennial state budget. That followed a request in 2008 by more than a dozen state senators calling for an audit of ATDC.

This year, Lingle requested that ATDC's budget be restored, and the House Finance Committee agreed. Initially the Senate Ways and Means Committee also agreed, but then ATDC's operating budget was axed in a floor amendment made a few days before the critical state audit was released.

At the end of the legislative session, House and Senate negotiators couldn't agree to restore ATDC's budget.

The audit report hit ATDC hard, recommending that ATDC be abolished and that its responsibilities be split between the DOT and HCDA.

"After 30 years of effort, the corporation has managed to complete only one phase of its original mixed-use development plan — and that development, the Aloha Tower Marketplace, is struggling," the report said.

The private developer of the marketplace ran into financial problems in the mid-1990s and aborted the remainder of its plan that included two condo towers, an office tower, a business hotel, cruise ship terminal and 2,000 underground parking stalls. The full buildout was projected to deliver roughly $4 billion in rent to the state over 65 years. Instead, the marketplace has struggled because of a shortage of parking and a lack of surrounding development needed to support the retail complex.

ATDC officials have said the marketplace needs the agency's help to facilitate additional development in the area. Others say, that after more than 10 years of trying, the agency has shown that it is incapable of achieving the task.

The latest problem and perhaps the last straw for ATDC had been a failed development agreement with Texas developer Ken Hughes of UC Urban, who was awarded $1.6 million in damages after working with the agency for about six years on a plan for Piers 5 and 6.

The $1.6 million, which stemmed from an arbitration award that a federal judge confirmed in September, was provided by the Legislature to pay the judgement.

Sen. Donna Mercado Kim, chairwoman of the Senate Ways and Means Committee, said the audit confirmed her view that ATDC is a dysfunctional agency that has squandered millions of dollars on failed projects.

"I think the audit confirmed everything that was being said," she said.