State Auditor Marion Higa challenged Gov. Linda Lingle to take dueling lie detector tests yesterday, as her office released a stinging report on the Department of Budget and Finance.

Higa's audit contends the department's oversight was lax and that it violated Hawaii law by investing state funds in student loan-backed securities that do not mature in five years or less.

At a news conference earlier this month, Lingle blasted a draft version of the report as “;false and defamatory.”; Higa offered a lie detector test for herself and her staff yesterday, if the Lingle administration would do the same.

“;If there's a question of whether our people, our firm's people are lying, let's go to the lie detectors,”; Higa said. “;If it's good enough for the FBI, it's good enough for me.”;

The Governor's Office declined yesterday to comment on Higa's challenge and stood by its previous statements regarding the audit.

Budget and Finance Director Georgina Kawamura had said the report had “;inferred findings based on legal conclusions that are not supported by facts, substantiating evidence or formal legal opinion.”;

The audit said the state violated the law and the department's own investment diversification requirements when it purchased the student loan securities. Student loans are sold on the auction market to entities like businesses and governments with the hope that the interest would grow when the loans are repaid.

“;If a student defaults on a loan, the federal government does not cover that, and that's the element of risk that must be considered,”; Higa said.

In 2008 the $330 billion auction-rate bond market started to fail, and the market remains frozen. About $1 billion of it is Hawaii money, and the state has lost more than $200 million in market value.

State law says student loan securities can be bought as long as the investments are due to mature no more than five years from the date of investment. Income then goes into the general fund. Hawaii's securities were sold by Citigroup Inc., much of it from local broker Pete Thompson, eight months before the market collapsed.

Higa's report says the budget department violated the law and that the department believed the five-year maturity limit was met because the securities could be auctioned every seven to 49 days. The investments list June 1, 2041, as the final maturity date, according to documents.

State Attorney General Mark Bennett issued an opinion, one day before Lingle's press conference, saying that the law allows for investments below a five-year “;nominal”; maturity date, or within auction cycles. He cited mutual fund investments the state has made in the past that have no stated maturity dates.

Higa said her office disagrees with Bennett's opinion.

“;Attempting to analogize auction rate securities to such investments is absurd as they are clearly distinguishable based on a number of factors, including the fact that ARS do have stated maturity dates,”; her report states in response.

“;We believe that their assertions lack merit, offer very little support and virtually no evidence for their position,”; Higa said yesterday.

There is little the state can do about the money until the auctions resume or a federal bailout occurs, Higa said. Until then, she said she believes the current cash crunch can be blamed on the investments.

Yesterday's news conference was unprecedented for Higa, but she said she needed to respond to Lingle's previous statements.

“;The behavior of the administration has also been unprecedented. I believe it reflects a lack of integrity,”; she said.

“;This administration has in fact brought us to where we are. We are simply delivering the message. There's no point in bashing the messenger, because the message remains the same.”;

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The Associated Press contributed to this report.