Posted on: Tuesday, May 14, 2002

State pension fund loses money

By John Duchemin
Advertiser Staff Writer

The state's public employee pension fund lost money in the first quarter of this year as a slight gain on investments was exceeded by benefit payments to retirees.

The $8.4 billion State of Hawai'i Employees Retirement System made about 0.9 percent on its investments last quarter, according to a report by ERS investment adviser Callan Associates. But payments to beneficiaries — about 30,000 retired public employees — wiped out that gain, said Matt Beck, assistant vice president with Callan, at the ERS Board of Trustees meeting yesterday.

The quarterly operating loss is the latest decline posted by ERS, which grew swiftly in the 1990s but has lost more than 15 percent of its value since mid-2000. The fund had $9.9. billion in assets as of June 2000, but since then has languished as the stock market plummeted, the state Legislature cut contributions and benefit payments grew slightly.

The drop in assets has stirred controversy, as the State of Hawai'i Organization of Police Officers last month sued the state alleging that legislators acted illegally by withholding $350 million in ERS contributions in the late 1990s. ERS also opposed the Legislature's move, but has not crafted a formal position supporting or opposing the police union's class-action lawsuit.

ERS meanwhile has come under scrutiny from legislators for going against Callan's advice and retaining a poorly performing fund, 3Bridge Capital, among whose principals is former ERS administrator Stanley Siu. The action prompted the state House and Senate to authorize a performance and management audit of the pension fund.

At the meeting yesterday, ERS trustees voted to give 3Bridge one more quarter to prove itself, despite another quarter of sub-par performance. 3Bridge lost 1.4 percent of its $160 million share of the ERS fund — ranking in the bottom 10 percent of similar managers, according to Callan. Callan in February had recommended ERS terminate 3Bridge, but fund trustees instead voted to cut in half 3Bridge assets. Trustees have said Siu's position with 3Bridge had nothing to do with their vote.

Yesterday, trustees said they will give 3Bridge until June 30 to show substantial improvement or face final termination. The fund had lost millions of dollars in ERS money in preceding quarters.

"Six months is a fair time to have them show they can change their ways," trustee Rick Humphreys said.

Aside for 3Bridge and a few other underperforming managers, Beck said ERS' portfolio did well in the first quarter given the poor overall stock market. The fund's investment managers posted gains that were over the average first-quarter results for its type of portfolio.

"We had very consistent contributions from managers this quarter," Beck said.

Still, the less-than-1-percent quarterly gain is well down from ERS' performance during the 1990s stock market expansion, when its asset base regularly grew by more than 10 percent. The fund's target annual rate of gain, picked so that assets can keep pace with retirees' benefit payments, is 8 percent.