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By Randall W. Roth

Friday, July 7, 2000

Former trustees
performed poorly

AS demonstrated by two recent letters to the editor, the investment performance of former Bishop Estate trustees is sometimes misunderstood. Both writers apparently accepted the former trustees' numbers at face value and out of context.

Doug Carlson complained that a Star- Bulletin headline should have highlighted $3 billion of revenues reported by the Bishop Estate during the 1990s, rather than $335 million of recently disclosed losses ("Bishop Estate story was spin-doctored," June 22).

Paul Lemke called the net revenue figure of $2.665 billion "a handsome sum," and suggested that the former trustees had done an outstanding job of investing trust funds ("Modern-day trustees did good job investing," June 22).

But the revenue figure is highly misleading. For example, it includes "gains" from the forced sale of leasehold property. The former trustees arbitrarily used 1965 assessed values as the starting point in calculating these gains. Never mind that it made no sense to do so. Had they more appropriately used assessed values as of the beginning of the period in question, the result would have been substantial losses, not gains.

At various times during the mid and late 1990s, the former trustees claimed -- but never substantiated -- that they were earning an average rate of return of more than 17 percent a year. But in 1998, when the accounting firm of Arthur Anderson was appointed by the court to review the actual numbers, it calculated an average rate of return of minus 1 percent for 1994-1996, the years under review.

During the 1990s, the assets of most American charitable trusts more than doubled in value, thanks primarily to a strong stock market. The Bishop Estate got smaller during this same period.

It was worth at least $10 billion in 1990, according to a trustee at that time. But when the court ordered the former trustees to value all estate assets in 1996, the total was only $5.7 billion. And earlier this month, the interim trustees disclosed in a court document that trust assets still are only $5.5 billion to $6 billion, despite big gains from the investment in Goldman Sachs.

The former trustees took great risks with trust money. While virtually every other charitable trust in the country was investing primarily in diversified marketable securities, the former Bishop Estate trustees were putting only 1 percent of trust funds into such investments.

Almost every penny of available trust funds were instead put into speculative private ventures. The total amount invested in marketable securities was less than what they had poured into a single oil and gas deal.

THE law allows trustees to make speculative investments, but only as part of a carefully structured overall investment plan. According to the court-appointed master, these trustees never had such a plan.

The master and Anderson firm both found "a lack of appropriate investment virtually all areas of investment and management decision-making."

For trustees of a charitable trust, the financial bottom line is the level of support they provide to their charitable mission. On this crucial score, the former trustees again measure up poorly.

During the 1990s, most charitable trusts spent at least 5 percent of trust value each year directly on charitable activities. The former trustees spent on average less than 1 percent.

Bishop Estate Archive
Kamehameha Schools

Randall W. Roth, a law professor at the
University of Hawaii, was a co-author of the "Broken Trust"
essay published in the Star-Bulletin in August 1997.

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