Employees' Retirement System trustees yesterday said the $10.7 billion fund that benefits state and county workers could not put money into a proposed Hawaii Innovation Investment Fund because it would jeopardize the ERS's tax status.

The trustees left the door open for other similar investments.

Gov. Linda Lingle lobbied ERS trustees yesterday to support her plan to create a $100 million innovation investment fund — or for the hiring of an investment manager who could provide money to technology companies trying to expand their businesses.

Lingle, in a surprise visit to the board's meeting, gave an impassioned argument for establishing the fund or making such investments, saying it could help the ERS meet investment goals while funding promising local companies and helping to establish more of a venture-capital and investment-management industry in the Islands.

After Lingle's presentation, the trustees voted to express their appreciation of Lingle's plans for economic diversification and sustainability. But they said the ERS could not fund it because of its tax status.

The board directed its new investment consultant to develop a range of targeted investment policies for its consideration that could include venture capital, said David Shimabukuro, administrator of the ERS.

He said the board didn't feel any legislation is necessary for this because the ERS already has statutory authorization to make venture-capital investments in Hawai'i.

Previous efforts to establish special-purpose investment funds with ERS money have failed. Critics have said retirees' pension money could end up being invested incorrectly, including being used for political or public-policy experiments.

Lingle has made an investment fund — or having an investment manager make the venture capital investments — one of the foundations of her call for innovation in the state. In her Jan. 22 State of the State address, the governor said innovation is needed in education, workforce development and the economy to lead Hawai'i into the future. She wants Hawai'i to move away from an economy based on land development by making investments in small but growing local technology businesses that need capital.

"If we continue to just do what we've been doing, we're going to fall behind," said Lingle, who was making her first visit to the board since taking office in 2002.

"For us, the future begins today."

One of her plans calls for using ERS money to create the fund. Another would have the ERS look into hiring an investment manager to look into such investments. All of the investments would be expected to meet the pension fund's criteria and investment targets in directing money toward up and coming local technology businesses.

The ERS now has about 3.4 percent of its assets, or about $360 million, in so-called "alternative investments" that are riskier than the stocks, bonds and real estate that make up most of its portfolio.

Lingle told trustees yesterday that she believed the time was right for establishing such investments that would help grow local businesses while helping build up Hawai'i's investment management industry. Lingle, a Republican, yesterday told ERS trustees the innovation investment fund idea stood little chance of passing the Democratic-controlled Legislature if they didn't endorse it. She said other states, including California, are creating such funds.

"It will be very, very difficult to go through the Legislature," said Lingle, who told of having lunch in Kona with a businessman who had a project producing biofuel using macadamia nutshells and oil. She said the project couldn't find funding in Hawai'i and had received money from the California Public Employees' Retirement System instead.

Previous efforts by Democrats to get similar funds started have failed. In 1999, then-Gov. Ben Cayetano proposed using about $30 million to help startup technology companies. Last session, state Sen. Carol Fukunaga, D-11th (Makiki, Pawa'a) proposed sending $25 million of general-fund money to the ERS for something similar.

Lawmakers, however, have faced concerns from ERS trustees previously about whether they could meet their financial responsibilities by creating a fund. Trustee Colbert Matsumoto told Lingle the board shared her goals, but that in the past, a consultant had warned against getting into such investments. The pension fund has an 8 percent annual investment return as a goal.

Because of subpar investment returns several years ago, and years when the state and counties held back millions owed the ERS, the amount of unfunded liability for future retiree benefits now stands at $5.13 billion.

Lingle told the trustees she understood the concerns and was not asking them to go against their fiduciary responsibilities, and for them to keep making prudent investment decisions. But the proposals could work with those goals, as well as help strengthen the economy and ERS funding in the future, she said.

"These opportunities deserve a chance to be looked at," said Ted Liu, director of the state Department of Business, Economic Development and Tourism.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.