House wants audit
of retirement fund

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By Pat Omandam
pomandam@starbulletin.com

The state House is pushing for a legislative audit of the $8.4 billion Employees' Retirement System after the ERS board went against the advice of its investment adviser and did not fire an investment management company that lost money for the fund in the past two years.

The chairman of the ERS board told legislators yesterday another audit is unnecessary but is welcomed to help clear up any public misperception that the pension fund for 93,000 state and county workers and retirees is being mismanaged.

"If you're looking to find something that is going to cause alarm, it's not there," said Toby Martyn, ERS board chairman. "This is an organization that is performing very well."

The House Labor Committee approved a concurrent resolution that asks state Auditor Marion Higa to conduct a management and performance audit of the fund.

The report, which would be due before the 2003 state Legislature begins, is to focus on a review of the fund's investment expenses; the number of investment managers; the criteria to hire, review and fire money managers; and a comparison of the ERS's investment decisions compared with retirement systems elsewhere. The last legislative audit of the fund was in 2000.

"Since the executive director (David Shimabukuro) of the ERS has been quoted in the dailies as ERS's books being in order, such an audit by Marion Higa should be of no problem," said Arvid Youngquist, a Liliha Neighborhood Board member, in written testimony on House Concurrent Resolution 130.

Youngquist said the faster the audit is conducted, the better the public employees' confidence will be in the system.

The money manager in question is 3Bridge Capital, a value capital manager that seeks bargain prices of quality stocks. The company has underperformed in recent years as an investment manager with control over $330 million of the ERS assets, according to the resolution. Over the last three years, the 3Bridge portfolio has lost 5.7 percent annually, compared with a gain of 2.7 percent a year in value portfolios nationwide over the same period, the resolution said.

Martyn stressed that former ERS Administrator Stanley Y.H. Siu, who is a partner in 3Bridge, did not affect the board's decision to keep the company. Siu is aware of any possible conflict of interest and was not involved in the board's decision, Martyn said.

"There is no truth to that at all," Martyn said. Legislators are also worried about decisions by 3Bridge to buy stock in Global Crossing, a now-bankrupt telecommunications giant.

Last fall, the fund lost $11.3 million, or 0.13 percent, when the energy giant Enron collapsed, the resolution said.

The entire ERS fund is under growing pressure to increase assets through better investment performance as the number of retirees grows and the state does not cover the full cost of the fund.

The Legislature is considering a bill to delay full funding of the pension fund until 2023 so it can use that money in the short term to help the state's $315 million revenue shortfall.

Martyn told lawmakers that, overall, 3Bridge has performed well. For example, the rate of return of its portfolio between 1995 and 1999 was 25.6 percent a year, which tripled the ERS investments over this period.

Even with the losses over the past two years, the total value of the 3Bridge portfolio is more than double what it was in 1995, Martyn said.

Nevertheless, Callan Associates, the board's investment adviser, which oversees all of its money managers, recently recommended to trustees that 3Bridge be fired. But the board refused, saying there were "extenuating circumstances" to the fund's performance.

Trustees also felt it was not in the best interest to terminate 3Bridge at the lowest point in its performance cycle. The potential for the fund to recover was greater than the probability it will decline further, Martyn said.

He added the ERS board cut the amount of assets in 3Bridge's control to half, or to $165 million, and put the company on a watch list, which means they will be fired if they continue to underperform.

Overall, the pension fund has made money in 32 out of the last 34 years. For the last five years, investment returns were $3.4 billion, with an average annual return of 8.8 percent, according to ERS testimony.

State Reps. Joseph Souki (D, Wailuku) and David Pendleton (R, Kailua) questioned the need for another audit so soon.

"I'm not sure getting another audit would be worth having them pulled of their other responsibilities," Pendleton said of the system's staff, who would have to cooperate fully with the audit.

But House Labor Chairman Scott Saiki (D, McCully) said the audit has not been opposed by the ERS.

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