ERS severs ties with investment firm 3Bridge

By John Duchemin
Advertiser Staff Writer

After months of defending its choice in investment firms, the state Employees' Retirement System has fired 3Bridge Capital for losing too much money and showing few signs of improvement.

The termination of 3Bridge comes after a several-year period in which the investment firm performed worse than most of its peers, lost tens of millions of dollars in ERS money, and inspired a state investigation of the $8 billion pension fund's performance and management practices.

The pension fund has been under political and economic pressure to improve its performance, even before the recent turbulence in world financial markets. The fund, which oversees benefits for more than 90,000 state employees, retirees and beneficiaries, has lost $2 billion as the stock market has declined, and it ranks near the bottom in long-term performance of similar pension funds nationwide.

The fund is also the focus of a lawsuit against the state by the State of Hawai'i Organization of Police Officers, which has accused the Legislature of illegally draining ERS to help balance the state budget in the late 1990s. That shifting of more than $300 million in ERS profits has pushed the fund into a steep deficit, with benefits due to retirees projected to exceed ERS assets within several years.

Also, a two-year backlog in retirees' benefit calculations has drawn the ire of pensioners who for years have received less than they are owed in their early years of retirement. As ERS struggles to improve its benefit calculation systems in the face of short staffing, it has become mired in a lawsuit with a computer contractor that the fund says has wasted millions of dollars in ERS money.

But it was an ERS decision relating to 3Bridge that drew particular scrutiny to the fund's operations and led to calls for management reform. State legislators criticized ERS for keeping 3Bridge despite an independent advisor's recommendation in February to terminate the firm. The advisor, the San Francisco firm of Callan Associates, pointed to 3Bridge's poor long-term performance, which Callan said ranks 99th out of 100 comparable firms over the past 10 years.

ERS trustees in February voted to reduce by half the assets under 3Bridge management to protect the pension money but also give the firm a chance to rebound. After 3Bridge failed to show much improvement, the trustees changed their minds, said Jackie Ferguson-Miyamoto, chair of the eight-member ERS board.

"We really believed they could bring their numbers up if we gave them time, but they didn't bring them up enough," Ferguson-Miyamoto said. "And with the market the way it is, we felt they would not be able to bring their numbers any higher."

3Bridge executives could not be reached for comment yesterday. The firm lost $19 million, or 11.2 percent, of its ERS money in the three months ended June 30, according to Callan's quarterly report on ERS' holdings. In the past three years, 3Bridge lost 14.1 percent a year, compared with 9.2 percent annually for the broad market, Callan said.

In approving a legislative audit of ERS, lawmakers said 3Bridge's connection to Siu gave the firm's relationship with ERS an appearance of impropriety. Trustees and ERS staff have insisted the decision to retain 3Bridge had nothing to do with Siu. But the legislative audit, currently under way, is investigating whether ERS acted properly in its February vote.

ERS deputy administrator Wesley Machida said two employees of legislative auditor Marion Higa have begun requesting ERS records and interviewing pension fund staff and trustees.

As the audit continues, ERS trustees are considering ways to improve the fund's strategic position, Machida said. ERS lost $400 million in the quarter ending June 2002, a drop of about 5 percent. While that short-term performance is above average for similar-sized pension funds, in the long term ERS has lagged behind most of its peers, according to investment advisor Callan.

Over the past five years, ERS has gained an annual average of 4 percent, half the 8 percent annual growth deemed necessary to keep up with the increasing benefits due to retirees. About 95 percent of comparable funds have performed better in the long run, Callan said, and ERS' assets have declined by $2 billion in the past several years.

Facing these problems, ERS plans to rebalance its portfolio, selling some of its bond portfolio, which has done relatively well, and buying hundreds of millions of dollars in stocks, Machida said.

That would add some pop to ERS' portfolio if its managers can pick up bargains on the stock market, which recently fell to four-year lows.

Machida said ERS trustees are also discussing changing the fund's long-term investment strategy, which puts unusually large emphasis on international investments compared to other funds.

Reach John Duchemin at 525-8062 or jduchemin@honoluluadvertiser.com