A group of Hawai'i taxpayers can challenge the expenditure of about $2.8 million a year in state tax money for the Office of Hawaiian Affairs, a federal appeals court ruled yesterday in yet another appellate decision jeopardizing programs that benefit Native Hawaiians.

But because the 9th U.S. Circuit Court of Appeals ruling limited the lawsuit to that money, the decision isn't expected to have the far-reaching impact of the U.S. Supreme Court's 2000 decision that struck down the Hawaiians-only voting for OHA trustees or the 9th Circuit's recent decision that declared Kamehameha Schools' admissions policy a violation of federal civil rights law.

In a 40-page decision, a three-member panel of the appeals court unanimously overturned a 2002 decision by U.S. District Judge Susan Oki Mollway and ruled that the taxpayers can contest the constitutionality of taxpayer funding equal to about 10 percent of OHA's budget.

The court, however, affirmed Mollway's dismissal of the rest of the suit and said taxpayers cannot challenge other revenues for OHA and cannot contest the constitutionality of government funding for the Department of Hawaiian Home Lands and Hawaiian Homes Commission.

"It's like being kissed by your sister," said H. William Burgess, the lawyer for the taxpayers who wanted the appeals court to reinstate the entire lawsuit.

Supporters of programs for Native Hawaiians also underscored the limited decision and repeated the call for the passage of the so-called Akaka bill, which they said will make it easier to defend taxpayer funding for OHA.

"We dodged a legal bullet, and this bullet is aimed at the heart of the programs that benefit the Hawaiian people, and thereby benefits the state of Hawai'i," Gov. Linda Lingle said. Lingle said the state will continue to defend the programs.

Clyde Namu'o, OHA administrator, said OHA gets about $2.8 million from the state general fund and it could be lost "under a worst-case scenario" if the lawsuit is successful in District Court. The amount represents about 10 percent of the agency's $28.5 million annual operating budget and is used for a limited number of programs that seek funding from OHA, he said.

The lion's share of the $2.8 million goes to three nonprofit organizations that benefit Native Hawaiians — Na Pua No'eau, the Native Hawaiian Legal Corp. and Alu Like.

David Sing, director of Na Pua No'eau, said about $700,000 of its $1.5 million budget comes from OHA. The program provides educational enrichment for about 1,500 Native Hawaiian students annually.

"The ruling doesn't change the conditions that will continue to exist but it will impact the efforts that are being made," Sing said.

Alan Murakami, litigation director for the Native Hawaiian Legal Corp., said the roughly $600,000 his organization receives from OHA represents "more than half" of its operating budget. About $300,000 of the OHA money is from the state general fund, and could be lost if the lawsuit prevails.

The taxpayers' suit was filed by former Honolulu police officer Earl F. Arakaki and about a dozen others in 2002 challenging the constitutionality of government funding for the Hawaiian Home Lands program and OHA because their programs benefit only residents of Hawaiian ancestry.

In 2004, Mollway ruled the taxpayers did not have legal standing to challenge the Hawaiian Home Lands program established by Congress in 1920 that provided 200,000 acres to Hawaiians to build homes on property leased for 99 years at $1 a year.

She ruled they could sue OHA, but also ruled that the court should not interfere with the ongoing congressional debate over the Akaka bill that would recognize Native Hawaiians as a political group.

The appeals court yesterday essentially affirmed all aspects of Mollway's ruling except its finding that the court should refrain from making a decision because of the pending Akaka bill.

The court ruled that the Akaka bill would only go to the issue of what kind of standard a judge would use to evaluate the constitutionality of the tax money to OHA. That the bill is still pending does not bar the court from hearing the lawsuit, the appeals court said.

The court also made clear it would be a limited challenge only to tax money, not revenues from ceded lands that once belonged to the Hawaiian monarchy.

"We agree with the district court that plaintiffs, as taxpayers, may not challenge the expenditure of such nontax revenues, the court said.

Arakaki, 58, an 'Ewa Beach resident who retired from the Police Department in 1994, said he had not had a chance to review the decision with Burgess, but said his reaction is mixed. He's pleased the suit is "still alive," but "it sounds to me there are still race-based programs that the government is providing."

Deputy Attorney General Girard Lau, also had mixed feelings about the decision. He's pleased the appeals court affirmed the dismissal of most of the lawsuit, but he's disappointed the tax money to OHA can be challenged.

He said the office is considering asking for a rehearing or an appeal to the U.S. Supreme Court. He said other states may also have concerns about taxpayer challenges to state programs.

In some ways, the decision is part of a legal continuum that began five years ago with the U.S. Supreme Court's Rice v. Cayetano decision that OHA's Hawaiian-only ballots for its trustees violated constitutional voting rights protections. In the wake of the decision, OHA no longer restricts voting or the trusteeships to people with Hawaiian blood.

That high-court decision also prompted U. S. Sen. Daniel Akaka, D-Hawai'i, to introduce a bill seeking to clarify the status of Native Hawaiians as a political rather than racial group to help defend Native Hawaiian entitlements.

Lau said passage of the bill would make it clear that a federal judge should evaluate the constitutionality of tax money under a "rational basis" standard that is much easier for OHA to meet than the higher standard of "strict scrutiny." That tougher standard is used to determine whether the government has a compelling interest in interfering with fundamental rights, such as equal protection under the law.

"That is why the passage of the Akaka bill is really, really important," Lau said.

Yesterday, Lingle also stressed the need for the passage of the Akaka bill. Senators are slated to decide Tuesday whether the Akaka bill should come to a vote on the Senate floor. Lingle said she and Micah Kane, DHHL director, will fly to Washington over the weekend to "solidify support" for the bill.

Akaka said yesterday the future of Hawaiian programs could hinge on whether the bill is successful. "When that happens, the courts I think will view these cases differently," Akaka told The Advertiser's editorial board. "But it will be in the hands of the courts."

Supporters of OHA, and advocates of Native Hawaiian programs in general, used yesterday's decision as a rallying point for gathering support for the Akaka bill.

There was disappointment when word of the court's decision first broke at the annual Native Hawaiian Conference, which officially opened at the Sheraton Waikiki yesterday. But as the day wore on and Hawaiian advocates began to realize the immediate impact of the decision was not monumental, those in support of the Akaka bill began to use the news as a rallying cry.

Haunani Apoliona, chairwoman of the OHA board of trustees, said the decision "represents another serious blow to the rights of Native Hawaiians and, consequently, to our entire Hawai'i community."

Apoliona said the ruling, as well as a ruling last month against Kamehameha Schools' Hawaiians-first admissions policy, are only the latest attacks against programs that aid Native Hawaiians.

"The courts and their doctrines clearly do not favor Hawai'i's native people," she said. "You can expect possible further lawsuits. You can also expect further efforts to erode Hawaiian rights."

However, Hui Pu, an umbrella group of Native Hawaiians opposing the Akaka bill, said in a statement yesterday that it's wrong to use the court's decision to support the Akaka bill because "it actually hurts the group which this ruling protects — Hawaiian Homeland lessees. With ... new amendments, the bill takes away their right to file legitimate claims against the government. From 1959 to 1995 alone, more than 4,000 claims have been filed. The state Office of Hawaiian Affairs betrays the Hawaiian people by spending millions on Washington, D.C., lobbyists to pass a bad bill, instead of addressing the socio-economic conditions of the Hawaiian people."

Reach Ken Kobayashi at kkobayashi@honoluluadvertiser.com and Gordon Y.K. Pang at gpang@honoluluadvertiser.com.