Anton Krucky, the president and chief executive officer at Tissue Genesis, said Hawai'i's existing high-technology tax credits and the availability of private venture capital has helped his firm and others get through the unsteady early stage between idea and launch.

But what is missing, many believe, is a second tier of financing that would allow companies to go commercial and thrive in the Islands.

Gov. Linda Lingle wants to steer $100 million in the state Employees' Retirement System toward that second tier of investment in technology companies, either by contracting with venture capital investors or through a new innovation investment fund. The proposal is part of her overall economic innovation package.

The retirement system, which administers retirement, disability and death benefits for state and county workers and has $10.2 billion in assets, would only have to invest the money in Hawai'i if the investment proves prudent and would not be held liable for losses.

Tissue Genesis, which has created ways to harvest cells from fat to repair damaged muscle and heart tissue, has shown the potential for the state to develop an innovation sector and diversify the economy.

Krucky said a second tier of investment in technology companies could be "the springboard for the state to get the kind of return on economic development we're all seeking."

Lingle's proposal is the latest to eye the retirement system's investment portfolio as a source of capital for Hawai'i companies. The idea has been controversial because critics have said it could lead to situations where retirees' pensions are used for political or public policy experiments.

Over the past decade, several Democrats, including state House Speaker Calvin Say, D-20th (St. Louis Heights, Palolo Valley, Wilhelmina Rise), and state Senate President Colleen Hanabusa, D-21st (Nanakuli, Makaha), have wanted the retirement system to invest in Hawai'i.

But the retirement system's board of trustees has objected to any such directive as a risk that could undermine its responsibility to get a return on its investment portfolio. The board has not taken a position on Lingle's proposal but is meeting Feb. 12 and could discuss several bills related to the retirement system that are before the Legislature.

"It's not a new idea. There's been different approaches," said David Shimabukuro, the retirement system's administrator. "The board has been trying to do something, but there hasn't been something that the board could do without breaching its fiduciary responsibility."

DEMOCRATS REACT

Like Lingle, many state House and Senate Democrats believe the state should have a role in creating an innovation sector, so the philosophical argument that emerging companies should sink or swim on the strength of private investment or the free market has largely been overcome. But in the three weeks since the Republican governor first announced her proposal, few Democrats have joined her, while many have said they want to hear how the retirement system responds.

The reaction has led some Republicans to privately suggest that this is another example of Democrats abandoning an idea many had favored solely because it is now coming from Lingle. The governor told a state Senate committee last week that it could be the most misunderstood part of her innovation package and accused critics of spreading misinformation for describing it as a raid on the retirement system.

But some in the labor movement (the direct beneficaries of the IRS) do consider the concept a risk. Like others have said about the high-technology tax credits of Act 221/Act 215, they say such investments are better left to the private sector.

"It's a noble idea to develop this kind of high technology industry in Hawai'i," said Randy Perreira, deputy executive director for the Hawai'i Government Employees Association. "But this is what private venture capital is for.

"Pension money should not be used in risky investments."

Lingle is following a model from Oregon, where the state Legislature four years ago directed the Oregon Investment Council to invest $100 million from the state's pension fund in venture capital on emerging state businesses by 2008. The council chose Credit Suisse First Boston to manage the investments.

The Oregonian reported last week that Credit Suisse asked the council to increase the investment by $50 million but was turned down after some on the council said the existing commitment has yet to produce any results.

Other states also have tried to direct some pension fund money to state ventures. The California Public Employees' Retirement System, the nation's largest pension fund with $223 billion in assets, launched its California Initiative in 2001, providing $475 million to private equity funds to invest in traditionally underserved urban and rural markets in the state. The money was committed last summer and a second phase was launched in October, with another $500 million split between the private equity funds and direct co-investment in state-based companies.

EXCEEDING GOALS

In Hawai'i, the retirement system has an annual goal of an 8 percent return on its investment portfolio, which it has exceeded in each of the past three fiscal years. It has an alternative investment class for higher risk ventures that makes up about 3.8 percent, or $371 million, of its portfolio, but does not have a history of investing in Hawai'i.

The retirement system is recovering from stock market losses during the last recession and years when the state and counties diverted millions to cover budget shortfalls. The board was told in December that its uncovered liability is increasing because state and county retirees are living longer and worker pay raises are higher than anticipated when benefit estimates were calculated. The system has assets to cover about 65 percent of its future liability.

But the retirement system appears stronger with investments than when then-Gov. Ben Cayetano proposed using about $30 million in 1999 for start-up high-tech companies, an idea Say called "exciting" at the time. When the Senate passed a bill in 2002 to require a percentage of the investment portfolio be used in Hawai'i, Hanabusa said she had little empathy for the board's fears about risk and pointed out their bad investments in Enron.

State Sen. Carol Fukunaga, D-11th (Makiki, Pawa'a), the chairwoman of the Senate Economic Development and Taxation Committee, said many senators are generally supportive of Lingle's idea. "We'll be asking for some more information," she said.

INVESTMENT HOPES

State lawmakers approved a $36 million venture capital fund in concept a few years ago that was intended to provide the kind of second-tier financing Krucky and others favor, but they never followed up with the money. Fukunaga and other senators tried last session to send $25 million in general-fund money to the retirement system for high-tech investment opportunities in Hawai'i, but the proposal was locked up in committee.

State Sen. David Ige, D-16th (Pearl City, 'Aiea), said the hope is to get the board to invest in Hawai'i companies while also fulfilling their duty to turn a profit. "We want to do it in a responsible way. That's been the challenge," he said.

In the House, state Rep. Kyle Yamashita, D-12th (Pukalani, Makawao, Olinda), the chairman of the House Economic Development and Business Concerns Committee, said he will weigh Lingle's proposal along with a House plan to use general funds for a new corporation that would invest in technology, life sciences and renewable energy ventures.

Yamashita said lawmakers want to invest in innovation yet want to be careful with retirement system or general-fund money. "Either way, we have the responsibility to do the right thing," he said.

Last session, a move by Say to use $100 million in general-fund money for an innovation fund died in the final days during negotiations with the Senate. He has offered his backing for a new investment corporation but has not cited it as among his priorities for the session.

"We are at a point in time where we can either invest in the technological future or let it pass us by," he said in a statement after a House hearing last week.

But despite his support in the past for getting the retirement system to invest Hawai'i companies, the speaker said in an interview that he is inclined to wait and hear from the board on Lingle's idea.

"At this point, I would defer to the trustees," he said. "It's their fiduciary responsibility."

Reach Derrick DePledge at ddepledge@honoluluadvertiser.com.