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Tuesday, April 11, 2000

Schools spending

The schools' operation and
maintenance bills will go up
$59 million this year, under
a new trustees' policy

OHA cancels meeting with Ha Hawaii

By Pat Omandam


The Kamehameha Schools will spend about $59 million more this year than last year for operations and maintenance, under a new spending policy implemented by its interim board of trustees.

In a briefing on its spending plans before the Office of Hawaiian Affairs board, Kamehameha trustee Constance Lau said yesterday that the school's spending rate for fiscal year 2000 has been set at between 2.5 percent and 6 percent of the charitable trust's $5 billion endowment for long-term investment, or between $125 million and $300 million.

Lau said $159 million -- about $125 million in operation costs and $42 million for major repair and construction projects -- has been budgeted this year, minus about $8 million in tuition collected this year. Last year the budget was about $100 million.

With the Rice vs. Cayetano case having ended its 31/2-year journey through the federal court system last Friday, OHA trustees returned their focus to the agency's trust, which was at $394 million as of Feb. 29. The board gathered at a special Committee of the Whole meeting yesterday to pick up tips from Kamehameha Schools on how OHA could spend money on programs while preserving the trust for future generations of Hawaiians.

Lau said the school wanted to maximize the money it could spend each year while ensuring that there was a growing perpetual trust that kept pace with inflation. Trustees settled on a "total return" spending formula used by most other private institutions that takes into account more than just the income generated from the trust to determine how much a trust can spend.

Lau said past practice by private institutions nationwide was to spend only the income generated, such as interests and dividends, and to never touch the principal. But those formulas didn't take into account inflation, and also encouraged trustees to conservatively invest their assets.

Today, she said, the thinking is if you want a trust to grow in perpetuity and to protect it from inflation, you have to invest in growth assets. Kamehameha's goal is to invest 70 percent in growth assets such as stocks, private equities and real estate, with the remaining 30 percent in bonds and cash, she said.

"We believe that if we can achieve a real growth in the endowment, that that will translate into a real growth in spending for the future," Lau said.

The school's spending formula is based on a five-year average of the market value of its $5 billion endowment, assets the school directly invests for the long term. The total, however, does not include all of Kamehameha's assets, such as money set aside for special programs, the value of the Kamehameha Schools campuses, reserve funds for future projects and the estate's 366,000 acres of land it owns in Hawaii.

Those lands, most of which are zoned for agriculture and conservation, generated only $300,000 in revenues last year. Still, the plans are to keep these "legacy lands" forever in the trust, Lau said.

Also, she said, the costs of managing the portfolio or investment expenses are excluded from the spending plan.

"When we put our portfolio out to manage, we require those managers to give us a return -- after they pay for their own expenses, you know, the brokerage costs that they might pay to trade stocks or their own fees," Lau said.

OHA Budget chairwoman Haunani Apoliona agrees with Kamehameha's spending policy of balancing annual spending with the growth of its trust. She said that 95 percent of the institutional trusts nationwide use this formula, but that it has been the missing element at OHA.

"You don't hold it, you don't pile it up," Apoliona said. "It's a balancing thing. You balance for the long-term, but you also expend for the current needs of the people you're supposed to serve, which are native Hawaiians and Hawaiians."

Apoliona believes a strong strategic plan is also needed to support such a spending plan. OHA's master plan is 12 years old and needs to be updated, she said.

OHA chairman Clayton Hee said that while there similarities between the trusts of Kamehameha Schools and OHA, there are also differences. For example, the school focuses entirely on the education of Hawaiians, while OHA's mission is to better the conditions of all Hawaiians, which includes education.

Hee, one of those who nurtured OHA's portfolio to more than $300 million from $19 million during his 10 years as a trustee, said the agency's emphasis on investment helps make up shortfalls in revenue in other areas, such as the 50 percent cut in ceded land revenue payments by the state.

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