Source: April 2010 Ka Wai Ola o OHA Column

There is no question that from the Territorial Government to the present, the state has consistently mismanaged our ceded lands.  Politicians have leased thousands of acres to their friends for as little as a dollar a year through insider deals.  A previous Governor even suspended landing fees at the airport, which sits on ceded lands, for two years to allow airlines to bring in more tourists.  We all know that didn’t happen.  And they wonder why they don’t have any money!

These same politicians are now forced to come up with “creative” ways to supplement their shortfalls during these tight economic times such as legalized gambling, raising taxes and, worst of all, selling ceded lands.  They wouldn’t have to look far if they simply managed our ceded lands properly.

The state’s failure to manage ceded lands should not be used as an excuse to sell a resource that is so critical to the future success of our future nation.  Just a year ago, state legislators agreed with us and voted to preserve ceded lands.  Act 176, 2009, established that the state cannot sell any ceded lands unless they get a two-thirds majority vote in both the State House and State Senate.  Now they’re going back on their word and trying to sell ceded lands.  How can we trust these people?

This election year, let’s elect responsible leaders who will make the tough decisions needed to get our economy out of the toilet.  We do not need more politicians to think of even more creative ways to tax us or squander our resources.

ON ANOTHER NOTE:

On February 10, 2010, OHA’s money committee decided to stop investigating whether we should keep or replace our investment managers.  According to the minutes of the meeting, after considering all factors involved, all trustees present at the meeting came to a consensus that our staff would “cease all due diligence efforts at this time and retain the current investment advisors.”

The decision to postpone the evaluation of our investment managers is very shortsighted [I was not at the meeting and did not join the discussion].  It disregards the criticisms that the State Auditor had in her recent audit regarding OHA’s management of the trust.  It also disregards what Trustees Lindsey, Mossman, Heen, Stender and I learned from the Mercer Investment Forum on January 28-29, 2010 in San Francisco. 

The Forum stressed the need for investors to look for managers who are specialized in each field of investment.  More importantly, they recommended that we evaluate whether our managers are able to handle the new requirements of “opportunistic” investing.

Trustee Stender later informed the trustees that our fiscal staff would continue to monitor the top five money managers we are considering and bring this matter back to the committee within a year. 

One year is long time to wait.  At the very least, our staff should report to the committee on a quarterly basis to keep us informed.  In these volatile times, we do not have the luxury to “take our eyes off the ball” for such an extended length of time.

Until the next time.  Aloha pumehana.

Source: March 2010 Ka Wai Ola o OHA Column

Back in September of 2009, the trustees were given a draft of State Auditor Marion Higa’s Investment Portfolio Review of the Office of Hawaiian Affairs.  The 48-page report to the Governor and the State Legislature had many critical things to say about OHA’s investment structure and ability to carry out its duties.

Here are just a few of the Auditor’s concerns:

• The board’s Investment Policy Statement (IPS) is inadequate to ensure potential conflicts and other violations are identified, reported, and resolved.
• OHA does not have a “whistleblower” policy or a toll-free phone line available to OHA staff and beneficiaries to report potential conflicts, violations, or other issues.
• OHA does not track general beneficiary concerns or complaints specifically related to the trust.  Complaints are therefore less likely to be reported and OHA cannot ensure complaints are properly received and resolved.

The Auditor also wrote that the Trust’s lackluster performance warrants review of the advisory service’s policies, processes, and performance. 

• The trust’s investments were underperforming for the majority of the review period of FY2004 to FY2008, not only failing to meet its own target earnings goals in nearly half of the quarters, but also falling below average nationwide peer performance in 18 of the 20 quarters reviewed.
• OHA did not consistently monitor investment compliance during FY2004 to FY2008.  In addition, the investment advisors do not certify quarterly or annually that they are compliant with the trust’s investment guidelines.

On September 8, 2009, Chair Haunani Apoliona responded to the State Auditor and tried to address the concerns the Auditor brought up and what OHA planned to do about it.  It was clear that the Chair wanted the Auditor to soften the harsh report.

However, on October 1, 2009, I received a copy of the State Auditor’s Final Report and, to no surprise to me, nothing substantive was changed.  The Auditor concluded that:

• While a cursory reading of the board’s response may appear to contradict the Auditor’s findings, in most instances the board challenged secondary points but ultimately acknowledged the major points of the Auditor’s findings.
• Moreover, many of those arguments misconstrued the facts presented in the Auditor’s report.
• The Auditor’s final report contains only a few editorial changes based on the board’s response.

On October 2, 2009, an obviously irritated Chair Apoliona personally responded to the Auditor, complaining that she could have gone over the auditor’s comments point-by-point but chose to focus on the “big picture.”

In a memo dated October 23, 2009, I wrote that I agreed with many of the criticisms made by the State Auditor.  Further, Chair Apoliona should focus on making the much needed changes that the State Auditor suggested.  Only then can we move forward as an organization and do better for our beneficiaries.

If you are interested in reading the State Auditor’s report on OHA in its entirety, please visit the State Auditor’s website at http://hawaii.gov/auditor/Reports/2009/09-10.pdf.  Until the next time.  Aloha pumehana.

Source: Ka Wai Ola o OHA, June 2005

‘Ano’ai kakou… On January 16, 2003 the Board  hired Goldman Sachs and Frank Russell to serve as OHA’s two financial managers. Each company was given half of OHA’s Native Hawaiian Trust Fund, which at the time amounted to $125,000,000.

In my March 2004 article, I wrote that while both companies made about the same amount of money for us, there was a glaring difference in what they charged us for their services. Frank Russell charged OHA $64,663 for their first quarter of service in 2003, while Goldman Sachs charged us $74,998 – a difference of $10,335. In the second quarter, Frank Russell charged us $200,712 for their services, while Goldman Sachs charged us $244,255 – a difference of $43,543.

While some people may argue that the $53,543 more Goldman Sachs charged OHA (for the 1st & 2nd Quarters) was not a significant amount, I argued that we could have helped many needy beneficiaries with that money.

Not long after my article was published, Goldman Sachs reviewed their fee schedule, and gave OHA an annual savings of $50,000. I can’t say for certain whether my complaints had any impact on their decision, but I was pleased that Goldman Sachs quickly matched Frank Russell’s lower fees.

While OHA’s leadership at the time may have disagreed with me about how high the fees were, I finally felt some vindication when State Auditor Marion Higa came out with her April 2005 audit of OHA. Not surprisingly, she backed up what I had been saying all along. Here are a few findings from her audit:

1. Frank Russell averaged 0.57 percent in fees, in total, for all traditional assets managed, excluding real estate. Goldman Sachs averaged 0.74 percent of the assets it managed, excluding real estate and hedge funds.

2. The average investment management fee paid by all reporting funds (1,032 reporting funds in 2002) was 0.274 percent in 2002. Smaller funds (such as the Native Hawaiian trust fund) with assets below $500 million had higher average fees of 0.351 percent. OHA pays an average fee for investment management and oversight for the trust fund of 0.65 percent.

3. The “manager-of-managers” strategy employed by OHA has led to higher fees than fees incurred by its peers. In addition, OHA’s use of investment advisors to select investment managers, perform due diligence, and monitor the investment managers, has the effect of increasing the total fee, since the total fee represents more than just investment management fees. In other words, we paid less fees under our old financial management plan.

4. If OHA’s passive assets were in line with its peer median, fees would be reduced by 11 basis points, saving OHA more than $300,000 annually.

5. OHA has begun to review the investment management fees being paid, realizing that Goldman Sachs represents a premium cost for its services.

The auditor recommended that OHA continue to evaluate the returns it receives, net of the fees paid, and explore alternative means of investing portions of its portfolio – all of which I will continue to do on behalf of our beneficiaries.

The auditor also noted that OHA should recognize the inherent conflict of interest within the existing manager-of-managers structure and conduct its own evaluation of whether their investments fulfill OHA’s fiduciary duties and achieve prudent investor standards. Due to space constraints, I will have to take this issue up in another month’s column. Stay tuned.

Imua Hawaii Nei…