Hawaii manages its state-run pension fund through a board of trustees instead of a single individual. But the state could do more to protect those trustees from political interference, according to the State Integrity Investigation

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

Hawaii lost points because three trustees who oversee the pension fund are appointed by the governor. Requirements that the board include specific types of people such as a teacher, a general state employee and a Hawaii citizen also raise questions about whether board members are qualified for the job.

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: The state-run pension fund is overseen by a board as opposed to an individual, but trustees are not protected from political interference.

Here’s the basis for the 75-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 second question the State Integrity Investigation asked regarding State Pension Fund Management.

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

Overall score: 75%

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

1. In practice, the state-run pension funds have sufficient staff and resources with which to fulfill their mandate.

Notes: There are plenty of people managing the state-run pension funds, but they don’t work, according to retired actuary George Berish. “They have plenty of staff and resources, but what they don’t have is competent management,” Berish said. According to Honolulu Civil Beat, Hawaii is ranked No. 2 for debt load and pension liabilities.

The State Employees’ Retirement System has about 91 full-time employees, according to administrator Wes Machida. Five or six years ago, there were 110 to 115 employees working, Machida said. Employees try to do as much as they can, but based on the workload there probably is not enough staff, Machida said. However, state Rep. Karl Rhoads, chair of the House Labor and Public Employment Committee, said the ERS has enough staff and resources to run the system and fulfill its mandate.

Sources:

• George Berish, fellow, Society of Actuaries, 9/29/11, interview at Honolulu Civil Beat office.

• Honolulu Civil Beat, staff, 1/27/11, “Hawaii Ranks Near Top for Debt and Pension Liability”.

• Wes Machida, administrator, State Employees’ Retirement System, 9/30/11, telephone interview.

• State Rep. Karl Rhoads, chair, House Labor and Public Employment Committee, 10/2/11, telephone interview.

Score: 75%

Scoring criteria: These are the scoring criteria for this question.
Very Strong: The state-run pension funds have sufficient staff and resources to successfully fulfill the entirety of their mandate.
Fair: The state-run pension funds have limited staff and resources, or staff without necessary qualifications and resources to fulfill all of the fund’s mandate.
Very Weak: The state-run pension funds have no dedicated staff and resources, or such limited staff and resources that they cannot operate in a meaningful way.

2. In practice, members of boards and management of the state-run pension funds are appointed and evaluated according to professional criteria.

Notes: State law has specific requirements for the composition of the state pension board of trustees, such as a teacher, general employees and Hawaii citizens. They are not evaluated at all by the public, because the governor picks three people, according to retired actuary George Berish. However, Wes Machida, administrator of the State Employees’ Retirement System, said the four appointed by the governor’s office goes through an evaluation and screening process. According to the Honolulu Star-Bulletin, Rod June became the Hawaii Employees’ Retirement System chief investment officer on January 2008, after nine years as an ERS investment officer in Los Angeles, Calif. The ERS board of trustees spent a year searching for a chief investment officer, according to the Honolulu Star-Bulletin.

Sources:

• George Berish, fellow, Society of Actuaries, 9/29/11, interview at Honolulu Civil Beat office.

• Wes Machida, administrator, State Employees’ Retirement System, 9/30/11, telephone interview.

• Honolulu Star-Bulletin, Dave Segal, 2/11/08, “New ERS chief hits ground running”

Score: 50%

Scoring criteria: These are the scoring criteria for this question.
Very Strong: Appointments to the boards and management of the state-run pension funds and their professional evaluations are made based on professional qualifications. Individuals appointed are free from conflicts of interest arising from personal loyalties, family connections or other biases. Individuals appointed usually do not have clear political party affiliations.
Fair: Appointments and professional assessments are usually based on professional qualifications. Individuals appointed may have clear party loyalties, however.
Very Weak: Appointments and professional assessments are often based on political considerations. Individuals appointed often have conflicts of interest due to personal loyalties, family connections or other biases. Individuals appointed often have clear party loyalties.

3. In practice, members of boards and management of the state-run pension funds are protected from political interference.

Notes: There are eight members on the state pension board of trustees. Three out are probably not protected from political interference, because they were appointed by the governor, according to retired actuary George Berish. However, state Employees’ Retirement System Administrator Wes Machida said that the board is pretty independent based on discussions during board meetings and decisions made. State Rep. Karl Rhoads, chair of the House Labor and Public Employment Committee, said that the state Legislature has a huge effect on what the ERS does, because trustees have lobbied to make changes. The state Legislature has pushed for a legislative audit of the system, according to the Honolulu Star-Bulletin.

Sources:

• George Berish, fellow, Society of Actuaries, 9/29/11, interview at Honolulu Civil Beat office.

• Wes Machida, administrator, State Employees’ Retirement System, 9/30/11, telephone interview.

• State Rep. Karl Rhoads, chair, House Labor and Public Employment Committee, 10/2/11, telephone interview.

• Honolulu Star-Bulletin, Pat Omandam, 3/23/02, “House wants audit of retirement fund”

Score: 50%

Scoring criteria: These are the scoring criteria for this question.
Very Strong: Members of boards and management of the state-run pension funds operate independently of the political process, without incentive or pressure to render favorable treatment or policy decisions on politically sensitive issues.
Fair: Members of boards and management of the state-run pension funds are typically independent, yet are sometimes influenced in their judgments by negative or positive political or personal incentives. This may include favorable or unfavorable treatment by politically prominent personalities, public criticism or praise by the state officials, or other forms of influence.
Very Weak: Members of boards and management of the state-run pension funds are commonly influenced by political or personal matters. This may include conflicting family relationships, professional partnerships, or other personal loyalties. Negative incentives may include threats, harassment or other abuses of power.

4. In practice, the state-run pension funds disclose information about their investment and financial activity in a transparent manner.

Notes: The state Employees’ Retirement System posts a Comprehensive Annual Financial Report on its website (http://ers.ehawaii.gov/Financials.htm#Comprehensive_Annual_Financial_Report). For example, the annual financial report for fiscal year June 2008 details operations and financial status of the ERS. Wes Machida, administrator of the State Employees’ Retirement System, said the reports are available online. The public can request additional investment information directly from ERS, according to Colbert Matsumoto, chair of the ERS Board of Trustees.

Sources:

• Wes Machida, administrator, State Employees’ Retirement System, 9/30/11, telephone interview.

• Colbert Matsumoto, chair, Board of Trustees of the State Employees’ Retirement System, 10/10/11, email response.

Score: 75%

Scoring criteria: These are the scoring criteria for this question.
Very Strong: The management of the state-run pension fund(s) makes information such as investments/ portfolio holdings and other activities of the fund publicly available online and/or in some other form at no cost or at a reasonable cost, and within a reasonable time period.
Fair: The management of the state-run pension fund(s) usually makes information such as investments/ portfolio holdings and other activities of the fund publicly available online and/or in some other form, at no cost or at a reasonable cost, and within a reasonable time period, but some exceptions are possible.
Very Weak: The management of the state-run pension fund(s) does not make information such as investments/ portfolio holdings and other activities of the fund publicly available, neither online nor in any other form, or they do so in an untimely manner or at a significant cost.

5. In practice, the investment decisions governing the portfolio of state-run pension funds are not concentrated in a single individual’s hands.

Notes: The state pension board of trustees makes the decision based on the recommendations of the chief investment officer and investment consultant, according to Wes Machida, administrator of the State Employees’ Retirement System. The information comes in the form of reports, memos and presentations, which the board reviews, Machida said.

State Rep. Karl Rhoads, chair of the House Labor and Public Committee, said the chief investment officer handles the investment decisions of the state’s pension funds, but the board of trustees can override the decision. It is mostly collaborative work, but the administrator or trustees may disagree and say it is too risky, Rhoads said. However, the state Legislature may also pass a measure to make requests for investments, Rhoads said.

According to Honolulu Civil Beat, five votes are required for every decision the board makes. There are eight trustees.

Sources:

• Wes Machida, administrator, State Employees’ Retirement System, 9/30/11, telephone interview.

• State Rep. Karl Rhoads, chair, House Labor and Public Employment Committee, 10/2/11, telephone interview.

• Honolulu Civil Beat, Noelle Chun, “Hawaii Employees’ Retirement System”

Score: 100%

Scoring criteria: These are the scoring criteria for this question.
Very Strong: Investment decisions affecting how the state-run pension fund’s assets are allocated are made by a group of experts without conflicting family or commercial connections. No single individual is able to direct the fund’s portfolio allocation by him/herself.
Fair: Investment decisions affecting how the state-run pension fund’s assets are allocated are generally made by a group of experts without conflicting family or commercial connections, but some exceptions exist. Certain types of investments in the portfolio may be made by a single individual without oversight from others.
Very Weak: Investment decisions affecting how the state-run pension fund’s assets are allocated are routinely made by a single individual with little to no oversight from others.

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

Notes: The management of the Hawaii Employees’ Retirement System is contracted out to outside companies. The ERS Board of Trustees monitors the performance of investment managers (including fund managers) and may terminate or place them on a “watch list.” For example, an investment manager could be placed on the watch list for violating investment guidelines or underperforming.

According to the Honolulu Star-Bulletin, the state House requested a legislative audit of the state’s Employees’ Retirement System after concerns of mismanagement. The Honolulu Star-Bulletin reported in May 2003 the board terminated its fund manager Trust Co. of the West, and kept Bank of Hawaii on a watch list. In June 2004, one of its real estate portfolio managers ING Clarion was put on watch list, according to the Honolulu Star-Bulletin.

Sources:

• Honolulu Star-Bulletin, Pat Omandam, 3/23/02, “House wants audit of retirement fund”

• Honolulu Star-Bulletin, Dave Segal, 5/13/03, “State ERS slips
for third quarter”

• Honolulu Star-Bulletin, Dan Martin, 6/24/04, “ERS adds portfolio manager to watch list”

Score: 75%

Scoring criteria: These are the scoring criteria for this question.
Very Strong: The regulations governing the activity of placement agents are regularly enforced. This score is also given if placement agents are banned entirely.
Fair: The regulations governing the activity of placement agents are generally applied though exceptions may exist.
Very Weak: The regulations governing the activity of placement agents are routinely ignored or unenforced.

7. In practice, private entities manage portions of state-run pension funds in a transparent manner.

Notes: State Rep. Karl Rhoads, chair of the House Labor and Public Employment Committee, said it is fair to say that private entities manage portions of state pension funds in a transparent manner. The public can access quarterly investment reports covering areas such as real estate holdings, stock holdings and private equity holdings, which are made available at the state Employees’ Retirement System Board of Trustees meeting, according to Nanea Kalani, Honolulu Civil Beat Money Reporter-Host. Investment managers provide updates at the meetings, according to Kalani.

Public pension plan increasing; backlog of payments grows.
West Hawaii Today (Kailua-Kona, HI) – Friday, December 7, 2007.
Author/Byline: Nancy Cook Lauer, Stephens Media Capitol Bureau.
Section: Local.

State retirement fund paying more than it takes in.
West Hawaii Today (Kailua-Kona, HI) – Friday, September 8, 2006.
Author/Byline: Nancy Cook Lauer, Stephens Capitol Bureau.
Section: Local.

Sources:

• State Rep. Karl Rhoads, chair House Labor and Public Employment Committee, 10/2/11, telephone interview.

• Nanea Kalani, Money Reporter-Host, Honolulu Civil Beat, 10/11/11, Civil Beat office interview.

Score: 100%

Scoring criteria: These are the scoring criteria for this question.
Very Strong: Private entities make investments/portfolio holdings and information about their management of the state-run pension funds publicly available (at no or at a reasonable cost, and within a reasonable time period).
Fair: Private entities usually make investments/portfolio holdings and information about their management of the state-run pension funds publicly available (at no or at a reasonable cost, and within a reasonable time period, but some exceptions are possible).
Very Weak: Private entities do not make investments/portfolio holdings and information about their management of the state-run pension funds publicly available, or they do so in an untimely manner or at a significant cost.