Legislators seek audit of state retirement fund
By John Duchemin
Advertiser Staff Writer
Legislators are seeking an investigation into the management practices of the state pension fund, which recently retained a poorly performing investment firm with ties to a former ERS administrator.
Twelve Democrats and Republicans from the state House and Senate have proposed a legislative audit of the Employees' Retirement System to look at practices they believe are questionable, particularly the Feb. 11 decision by ERS trustees to retain 3Bridge Capital, whose top officials include former ERS administrator Stanley Siu.
The trustees chose to keep 3Bridge in charge of $165 million in state money, disregarding their investment adviser's recommendation to fire the firm. Trustees later said their decision had nothing to do with Siu, who is partner and business development officer at 3Bridge.
But legislators say the trustees should have terminated 3Bridge rather than leave an impression of indecisiveness or impropriety.
"I think it's fair to say that decision raised some red flags," said Rep. Brian Schatz, D-24th (Makiki, Tantalus), the principal sponsor of the House audit proposal. "While I'm confident that no one in that position would make a decision based on a personal relationship, we have been hearing people express concerns to that effect.
"It's our responsibility to make sure that all these decisions are above board, and to assure the public that their money has been managed as well as possible."
An audit, if it gained legislative approval, would likely take until 2003, said Mark Segami, spokesman for House Speaker Calvin Say.
ERS administrator David Shimabukuro said yesterday that the fund would cooperate with an audit.
"I guess we can understand their concern because of what's been in the news, but we do get audited annually, and we've always been given a clean opinion," Shimabukuro said. "The staff works hard to make sure the books are clean and the records are accurate."
ERS finances are audited annually by Grant Thornton LLP, but that financial examination is different than the performance and practices evaluation sought by the legislators.
Schatz' proposal has been endorsed by Democratic Reps. Sylvia J. Luke, Marcus R. Oshiro, Scott K. Saiki and Say. The proposal must be approved by majority votes in the House and Senate.
A companion bill in the Senate is being sponsored by Democratic Sens. Colleen Hanabusa, J. Kalani English, Jonathan Chun, David Ige, Brian Taniguchi and Republican Sen. Sam Slom.
Republican Sen. Fred Hemmings has introduced his own proposal calling for an ERS audit, alleging fund trustees violated fiduciary duty in retaining 3Bridge.
Legislators said they also are concerned about the ERS portfolio's recent performance.
It has made money in 32 of the last 34 years, but has suffered since 2000 because of global stock turmoil and economic troubles. It has averaged 6.8 percent returns over the past five years, below its 8 percent annual target, and now ranks as one of the poorest-performing state pension funds in the nation.
That is in part because of the recent performance of 3Bridge, a firm that manages hundreds of millions of dollars in state money and has posted some of the worst short- and long-term returns among comparable managers nationwide.
ERS has fired nine investment managers in the last three years, citing poor performance. When investment advisor Callan Associates in February recommended 3Bridge be terminated, trustees instead voted to cut the state assets under 3Bridge management by half.
Trustees said it would be unfair to terminate 3Bridge in poor economic times, and that they wanted to give the firm another chance.
ERS also lost hundreds of millions of dollars when the state government, seeking to balance the budget, decided to slash its payments to the fund in 2000 and 2001. The pension fund portfolio has lost about $1.4 billion, or 15 percent of its value, since June 2000.
"These concerns are shared by lots of members of the Legislature," said Segami, spokesman for House Speaker Say, D-18th (Palolo, St. Louis, Kaimuki). "An audit is warranted. Particularly with the fund's need to maximize its investments, given the fact that the number of retirees is growing, (it) is even more crucial."
Legislators last scrutinized ERS in 1999. In that review, state Auditor Marion Higa cited inefficiencies that had cost ERS millions of dollars in lost revenues and increased expenses. The audit found that delays in executing banking contracts had led to $1 million in lost income, and a computerization project had cost $740,000 with few material benefits.
This time, Segami said, the auditor would be asked "to go through them with a fine-toothed comb" to see whether ERS had corrected the deficiencies discovered in 1999.
Reach John Duchemin at jduchemin@honoluluadvertiser.com or 525-8062.
