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The Honolulu Advertiser

Posted on: Wednesday, December 26, 2001

Trust's outreach seen as sound endeavor

By Walter Wright
Advertiser Staff Writer

Kamehameha Schools' plan to reach 26,000 more Hawaiians by spending $60 million a year on new off-campus programs can be achieved without damaging existing classes or risking assets, experts say.

The expansion was widely endorsed last week by many who have watched the $4.9 billion estate struggle to emerge from an era of strife and scandal.

Confronted with woeful statistics about health, poverty, education and crime among people of Hawaiian ancestry, Kamehameha's board of trustees said last week they will spend much of the estate's new revenues providing pre-school programs for the very young, enriching public schools in existing facilities, training adults for career changes, and helping more Hawaiians go to college.

Marcus S. Owens, a nationally recognized expert on tax-exempt organizations, said he applauds charitable groups that break new ground and extend their reach. Owens, now with the Washington, D.C., firm of Caplin and Drysdale, was director of the Internal Revenue Service exempt organizations division until January 2000.

Owens said charitable organizations created for the benefit of a group of people, or for the population in a particular area, are "moving in the right direction" when they try to help all the citizens of the area.

Another expert in tax exempt organizations, attorney Jerry J. McCoy of Washington, D.C., said the plan as reported "sounds like a constructive ... move for the Schools and the Trust to adopt. ... This seems like a method that may even have some advantages in reaching more students."

The trust was established by the 1884 will of Princess Bernice Pauahi Bishop, who asked that her trustees build schools for boys and for girls of Hawai'i, and that some of the trust income be used for the support and education of orphans and "others in indigent circumstances, giving the preference to Hawaiians of pure or part aboriginal blood."

Sweeping changes at the estate began in 1997, after Kamehameha Schools' parents, teachers, alumni and community leaders complained trustees were micromanaging the schools and mismanaging the trust. An investigation by the attorney general followed. A probe by the Internal Revenue Service, it was later revealed, already was under way.

In May 1999, the turmoil ultimately led to the resignation of trustee Oswald Stender and ouster of trustees Richard "Dickie" Wong, Henry Peters, Lokelani Lindsey and Gerard Jervis.

The release of the new plan last week was the first chance for the community to see a new slate of trustees declare their goals, and propose to allocate new millions of estate dollars to achieve them.

The five trustees are the first permanent members to be appointed by the Probate Court rather than by justices of the state Supreme Court. They are attorney J. Douglas Ing; Robert Kihune, a retired vice admiral; American Savings Bank President Constance Lau; Hemmeter Company veteran Diane Plotts; and Hokule'a navigator Nainoa Thompson.

The new trustees seem to realize that "the sole purpose of this trust is to provide education to the youth of Hawai'i," said Assistant Attorney General Hugh Jones. "It is not a trust that exists to accumulate income or make a profit. What the trustees are proposing to do is first and foremost consistent with the desires of Princess Bernice Pauahi Bishop."

The Attorney General's office still guards the interests of the estate's beneficiaries, and is expected to support the outreach plans when the trustees go to Probate Court Feb. 8 for guidance.

"The princess didn't direct them to have a business empire," Jones said. "The princess directed them to educate children."

But former trustee Gerard Jervis warns that the business side is the basis for the educational activities.

"Expanding the reach is a very good thing, (but) essentially that's a business up there," Jervis said. "The worst thing that can be done is to commit on the one hand to various programs and on the other hand not pay attention to the business end, and then have to pull back from the programs three or five or seven years down the road."

Jervis, a Kailua attorney, said that in the 1970s the estate was so cash poor that it had to sell land to pay teachers.

The new trustees have stabilized the estate's income by moving "from a high-risk portfolio of speculative ventures to something more likely to generate a fixed return," said Jones.

The trustees plan to increase annual spending from about $200 million to about $260 million within five years. The additional spending, Jones said, probably could be paid for entirely with returns on the $1.2 billion the estate received from sales of portions of its holdings in the Goldman Sachs investment firm during the past two years alone.

Robert Midkiff, president of the Atherton Foundation and long-time Hawai'i businessman, said the new board has revolutionized the way it calculates how much money to spend.

Formerly, the trust used income from income-producing assets to support the schools. Now it commits to spend 4 percent of the five-year average value of its marketable assets (that is, not counting the schools themselves, nor the estate's agricultural and conservation land).

Midkiff credits trustee Lau with pushing for the change to increase spending but keep the estate on firm financial and legal ground.

Kamehameha today reaches about 20,500 people with its programs, representing just 3 percent of people of Hawaiian ancestry. Under the new plan, it will reach an additional 26,000, 90 percent of them through off-campus programs.

Former trustee Stender said the new direction echoes proposals he made years ago. One key is partnership with others in the education business, Stender said.

"If it costs the estate $35 million to build a new Kamehameha elementary school for 125 kids, and you already have a public school next door with 500 kids in the public school, and a high percentage of them of Hawaiian ancestry, why build a new school?" he said.

There are 25 public elementary schools in Hawai'i, with a total of 6,500 students who are in Hawaiian communities with 75 percent or more Hawaiian population, Stender said.

University of Hawai'i Law Professor Randy Roth, one of the authors of the "Broken Trust" essay, which challenged the old Bishop Estate regime, endorsed the outreach plan.

"It is a terrific idea, and they are heading in the right direction. Although they have asked for court guidance, it seems like it is eminently do-able."

It looks like the estate has the money to do what it plans, "now that their method of calculating what they should spend is on a more rational basis," said U. S. District Court Senior Judge Sam King, who also was instrumental in pushing for change at the estate. "Income from a billion bucks at 4 percent is a lot of moolah, and one of the reasons these guys are able to do all those things is they don't have to pay taxes."

Support for the sweeping plan, particularly its emphasis on reaching young children, is coming from teachers and parents as well.

"The faculty is strongly supportive of these initiatives," said Kamehameha Faculty Association leader Larry McElheny. "Of course, it's human nature to kind of protect your own interests, and there will be concerns about where the money (for outreach) is coming from, and whether programs up here will suffer.

"But I don't think there is an educator in the world that will argue with the theory that the earlier the better."

The Kamehameha Association of Parents and Teachers endorses and encourages new projects to expand educational opportunities for Hawaiians, said Johnen Akiona, who heads the organization.

Asked about fears expressed by some parents that the outreach will be paid for with higher campus tuitions, Akiona said the 5 percent tuition increases in each of the past two years have not been linked to the outreach efforts.

A 5 percent increase in all tuition, fees and educational income would only raise about $420,000 in additional money today, Kamehameha officials say.

The past increases still leave Kamehameha parents paying $1,400 a year for tuition, fees and meals for a non-boarding high school student. That is far less than the actual $20,000 cost to teach such a student and is a small fraction of the $9,000 and $10,000 tuition at Punahou and Iolani, Akiona said.

Tuition is still being reviewed, she said, but not to raise money for outreach. It is also clear, she said, that the trustees intend to maintain excellence of existing programs, so that the campus students are not jeopardized.

The proposals being made by the trustees now, Akiona said, are largely the result of suggestions from members of the Kamehameha 'ohana and others during many community meetings.

Now that the new plans have been formulated, she said, the trustees intend to go back to the community in another series of meetings for reaction and comment.

Reach Walter Wright at wwright@honoluluadvertiser.com or 525-8054.