When it comes to managing Hawaii’s public pension fund, the state loses points in the State Integrity Investigation because its disclosure rules aren’t tough enough.

Hawaii received an overall D+, or 68 percent, grade for State Pension Fund Management. We ranked 22nd. New Jersey came in first. At the bottom was South Dakota.

Hawaii got dinged because it doesn’t have laws requiring investment managers or third parties to disclosure fees and terms for doing business with the state.

Overall, the State Integrity Investigation ranked Hawaii 10th after Civil Beat reporters researched 330 “Corruption Risk Indicators” across 14 categories of government. (Click here to learn more about the methodology used for the project.)

Bottom line: State-run pension funds must make public disclosures about investments. But investment managers or third parties aren’t required to disclose all fees.

Here’s the basis for the 80-percent grade that contributed to the overall 68 percent score for State Pension Fund Management. It’s your turn to evaluate whether Civil Beat got it right and to share what you think should be done to improve the situation. Share your comments at the bottom of this story.

Here’s the first question the State Integrity Investigation asked regarding State Pension Fund Management.

Are there laws and regulations requiring that state-run pension funds be managed transparently?

Overall score: 80%

Here are the criteria Civil Beat used to answer that question and what Civil Beat found.

1. In law, there is an independent public redress mechanism for members of boards and management of the state-run pension funds.

Notes: The Hawaii Constitution provides people with certain inalienable rights, including the right for an independent public redress of grievances. There are different options for people who want to take their grievances or complaints regarding the state pension board’s trustees and management. Wes Machida, administrator of the State Employees’ Retirement System, said people can take their complaints to the State Ethics Commission, state Ombudsman’s Office or the Office of Information Practices. People may also file a claim in court.

Sources:

Constitution of the State of Hawaii, FREEDOM OF RELIGION, SPEECH, PRESS, ASSEMBLY AND PETITION, Section 4. Visit (http://www.capitol.hawaii.gov/hrscurrent/Vol01_Ch0001-0042F/05-Const/CONST_0001-0004.htm) for details.

Hawaii Revised Statutes, Chapter 96 The Ombudsman. Visit (http://www.capitol.hawaii.gov/hrscurrent/Vol02_Ch0046-0115/HRS0096/HRS_0096-.htm) for details. Visit the Office of the Ombudsman website at (http://www.ombudsman.hawaii.gov/).

Also see State Ethics Commission, §84-31 Duties of commission; complaint, hearing, determination. Visit (http://www.capitol.hawaii.gov/hrscurrent/Vol02_Ch0046-0115/HRS0084/HRS_0084-0031.htm) for details.

Also see §26-7 Department of the attorney general. Visit (http://www.capitol.hawaii.gov/hrscurrent/Vol01_Ch0001-0042F/HRS0026/HRS_0026-0007.htm) for details.

Score: 100%

Scoring criteria: These are the scoring criteria for this question.
Yes: A YES score is earned if there is a mechanism to which members of the public can take grievances regarding the actions of members of boards and management of the state-run pension funds. The mechanism should be independent, but can still be located within the government agency or entity (such as a special commission or board). The public is able to appeal the mechanism’s decisions to the judiciary.
No: A NO score is earned if no such mechanism exists, or if the only recourse the public has is directly through the courts.

2. In law, state-run pension funds are required to publicly disclose information about their investment activities.

Notes: State law requires agencies to make government records available to the public for inspection, unless restricted by law. State law requires the state pension board of trustees to keep records of its proceedings and publish an annual Employees’ Retirement System report with information, such as fiscal transactions. Also see §88-119, which details what investments may be made in.

Sources:

Hawaii Revised Statutes, Chapter 92F Uniform Information Practices Act, Part II. Freedom of Information, §92F-12 Disclosure required. Visit (http://www.capitol.hawaii.gov/hrscurrent/Vol02_Ch0046-0115/HRS0092F/HRS_0092F-0012.htm) for details. Also see §92F-13 Government records; exceptions to general rule. Visit (http://www.capitol.hawaii.gov/hrscurrent/Vol02_Ch0046-0115/HRS0092F/HRS_0092F-0013.htm) for details.

Also see Chapter 88 Pensions and Retirement Systems, Part II. Retirement for Public Officers and Employees, D. Administration; Finance, §88-103 Records. Visit (http://www.capitol.hawaii.gov/hrscurrent/Vol02_Ch0046-0115/HRS0088/HRS_0088-0103.htm) for details.

Also see §88-119 Investments. Visit (http://www.capitol.hawaii.gov/hrscurrent/Vol02_Ch0046-0115/HRS0088/HRS_0088-0119.htm) for details.

Score: 100%

Scoring criteria: These are the scoring criteria for this question.
Yes: A YES score is earned if there are legal provisions that require disclosure of detailed investment portfolios of the state-run pension funds.
No: A NO score is earned if there are no such legal requirements.

3. In law, there are regulations governing the activity of placement agents, or hired third parties used by investment firms to secure business with state-run pension funds.

Notes: The state Employees’ Retirement System Board of Trustees adopted investment guidelines that investment managers are required to follow, according to Colbert Matsumoto, chair of the ERS Board of Trustees. According to Matsumoto investment managers are expected to register to do state business.

“This includes obtaining a certificate of good standing or certificate of authority with the Hawaii State Department of Commerce and Consumer Affairs,” Matsumoto said in an email to Honolulu Civil Beat. “The certificate represents that the investment manager has complied with all of the registration requirements of the Business Corporation Act of the State of Hawaii. They are also required to obtain a GET license from the Department of Taxation.”

The guidelines have the power of regulations and apply to hired third-parties working under the investment firms. If an investment manager doesn’t follow the guidelines, the board may place that person on a watch list.

Sources:

Employees’ Retirement System of the State of Hawaii Policies and Procedures Manual — Investment Policy Statement.

Visit (http://ers.ehawaii.gov/Publications/RFPInv2011/BOTPolicyProc200607/03%20-%20Investment%20Policy%20Statement.pdf) for details.

Score: 100%

Scoring criteria: These are the scoring criteria for this question.
Yes: A YES score is earned if there are formal guidelines regulating placement agents, including registering with the state or disclosing fees associated with finding business for the investment firms. A YES score is also given if the state bans the use of placement agents entirely.
No: A NO score is earned if there are no such regulations.

4. In law, placement agents, or hired third parties used by investment firms to secure business with state-run pension funds, are required to disclose all fees and terms retained for providing “finder” or introduction services.

Notes: Colbert Matsumoto, chair of the ERS Board of Trustees, said he is unaware of any such state law. “However, the ERS does have a procurement process governed by state law that we follow for the engagement of investment managers,” Matsumoto said in an email to Honolulu Civil Beat. “That process involves published open invitations for interested parties to submit their statement of qualifications and proposals to perform investment services.”

Score: 0%

Scoring criteria: These are the scoring criteria for this question.
Yes: A YES score is earned if, in law, placement agents, or hired third parties used by investment firms to secure business with state-run pension funds, are required to disclose all fees and terms retained for providing “finder” or introduction services.
No: A NO score is earned if there are no such legal requirements.

5. In law, placement agents, or hired third parties used by investment firms to secure business with state-run pension funds, are required to register with the state.

Notes: The management of the Hawaii Employees’ Retirement System (ERS) is contracted to outside companies. The ERS Board of Trustees adopted investment guidelines that investment managers are required to follow, according to Colbert Matsumoto, chair of the ERS Board of Trustees. According to Matsumoto investment managers are expected to register to do state business. The investment guidelines have the power of regulations and apply to third-party agents hired by the investment managers.

“This includes obtaining a certificate of good standing or certificate of authority with the Hawaii State Department of Commerce and Consumer Affairs,” Matsumoto said in an email to Honolulu Civil Beat. “The certificate represents that the investment manager has complied with all of the registration requirements of the Business Corporation Act of the State of Hawaii. They are also required to obtain a GET license from the Department of Taxation.”

Sources:

Employees’ Retirement System of the State of Hawaii Policies and Procedures Manual — Investment Policy Statement.

(http://ers.ehawaii.gov/Publications/RFPInv2011/BOTPolicyProc200607/03%20-%20Investment%20Policy%20Statement.pdf)

Score: 100%

Scoring criteria: These are the scoring criteria for this question.
Yes: A YES score is earned if, in law, placement agents, or hired third parties used by investment firms to secure business with state-run pension funds, are required to register with the state.
No: A NO score is earned if there are no such legal requirements.

Discussion: *