State retirement The state auditor says that if widespread management problems in the $8 billion state Employees' Retirement System are not corrected, they may lead to increased legislative oversight of the ERS board.
fund ripped
An audit says ERS problems
could lead to increased oversightBy Pat Omandam
pomandam@starbulletin.com
The problems include a 16-year-old computer system that delays the processing of retirement benefits, an investment consultant whose objectivity is suspect and a poorly performing fund that over the past five years ranked in the bottom 15 percent nationally when compared with other retirement systems, said state Auditor Marion Higa.
"Management problems at the ERS are widespread, affecting both the operation and investments of the system," Higa said in a blistering 83-page management audit released yesterday.
"Unsuccessful attempts to improve on the processing of retirement benefits and the stagnant implementation of its computer system have both showed ERS' lack of foresight and focus on sustainable solutions," she said.
The report, however, was strongly rejected by ERS officials, who said it contained egregious errors, misstatements and unsupported conclusions.
"While we appreciate the effort put forward by the auditor's office, we strongly disagree with the majority of findings in the audit report, which contains numerous factual errors and lacks the objective, qualified research necessary to produce a credible audit," said David Shimabukuro, ERS administrator.
"It is clear that the auditor's office does not fully understand the ERS' operations. Not only has the auditor's office demonstrated a lack of due diligence, but it did not have the necessary expertise to accurately assess some of our functions," he said.
The pension system oversees benefits for about 93,068 members who are active or retired state and county workers or their survivors.
In summary, Higa said the ERS failed to provide members with retirement benefits and information in a timely manner, resulting in poor-quality service.
She said efforts to replace an antiquated Wang computer system are plagued with poor planning, wasted resources and questionable procurement practices -- which has led to a lawsuit between the ERS and the computer contractor.
Also, the ERS board must improve its investment strategy to ensure enough funds are available for all beneficiaries.
Finally, the ERS' investment consultant's objectivity could be suspect, since the consultant disclosed financial relationships with the majority of investment managers it has recommended to the board, she said.
"It is not uncommon for a consultant to charge a money manager in excess of $200,000 for such advice and services -- the same people that pension systems pay the consultant to evaluate," she said.
ERS officials said problems in ensuring sufficient funds are the result of legislative actions that reduced employer contributions by defraying more than $1.6 billion in ERS excess investments earnings.
They added the audit failed to recognize positive performance, including that the ERS ranked in the top half of all public funds in 2002, and the top third in the last quarter of this year.
Rick Humphreys, ERS board investment committee chairman, said the board and its staff take their responsibilities very seriously.
"The ERS is responsible for the financial security of thousands of government employees. ... The numerous misstatements and inaccuracies in the auditor's report can cause our members undue alarm and concern," he said.
Gov. Linda Lingle said she has not read the audit but plans to meet with both sides to discuss what can be done to protect the benefits of retirees.
"It's a little premature for me to comment on it now, but it is an important issue for the retirees and for the state of Hawaii," Lingle said.
The Legislature asked for the audit earlier this year after lawmakers raised concerns about the ERS board's delay in firing investment manager 3Bridge Capital, which had been under-performing and had hired a former ERS administrator, Stanley Siu.
Over the last three years, the 3Bridge portfolio -- which controls about $330 million in ERS assets -- lost 5.7 percent annually, compared with a gain of 2.7 percent a year in value portfolios nationwide over the same period.
Callan Associates, the ERS board's investment advisor, had recommended to trustees that 3Bridge be fired, but the board refused, saying there were "extenuating circumstances" to the fund's performance.
Office of the Auditor
ERS report overview (PDF)
