It was recently reported that Governor Lingle wants to use some of the assets of the state Employee Retirement System (ERS) to provide investment capital towards high tech companies. These monies would be “second tier” investments to help companies begun with private investment and taking advantage of the state’s high tax credit become viable commercial entities.

The main drive behind such a proposal is the $10.2 billion in assets that the ERS manages. The trustees that manage this fund try to get the best return on their investment. Some question that the return on investment by the state providing investment capital for high tech ventures in Hawaii would have as great a return as elsewhere. Also, there is some risk.

The ERS fund has been growing and was $8.6 billion in 2004, $9.2 billion in 2005 and $9.9 in 2006. The problem is the liabilities are growing too as more employees in an aging population retire. The fund may be larger but the liabilities are also larger.

Standard and Poor’s recently did a state by state analysis of the Unfunded Actuarially Accrued Liability (AAL) for 2004 which is the latest year for which substantially complete data are available. It compared the assets with the long term liabilities of the public employee retirement and pension systems including state and local employees as well as teachers.

S&P reported the AAL in 2004 for Hawaii was $3.74 billion. With $8.6 billion in assets this means the total liability was $12.34 billion with the unfunded shortfall, the AAL, being $3.74 billion. Ideally the amount of assets should cover liabilities one hundred percent. South Carolina had an AAL of $4.2 billion but also has 4 times the population of Hawaii to make up the shortfall.

The size of the asset fund varies according to how well its investment portfolio performs. Typically the portfolio is made up of a majority of relatively safe investments with a reasonable rate of return and a small percentage of higher risk investments, which is 3.8 percent in Hawaii.

The current ERS is reported as being about 65 percent funded. According to S&P it was 71 percent in 2004. While the investment portfolio has surpassed its return goal of 8 percent for the last three years the return has slowed from 15.8 percent in 2004 to 11.1 percent in 2006. With a fund rate of only 65 percent this doesn’t bode well for the fund.

Investing $100 million in high tech companies would be over 25 percent of the high risk portion of the portfolio. Many question whether this is a wise investment for the state to make, especially considering the ratio of AAL to assets. High tech companies already enjoy generous tax credits via Act221/Act215.

Taking $100 million out of the ERS fund for the potential economic benefit brought by assisting the growth of high tech companies in the islands seems rather risky. If these companies have high potential for success why do they need state money? They should be attracting venture capital on their own. But our elected officials can never sit on a pot of money and not try and figure out how to spend it.   

Donald Newman is a policy analyst with the Grassroot Institute of Hawaii.

For more information:

http://the.honoluluadvertiser.com/article/2007/Feb/04/ln/FP702040368.html

http://ripolicyanalysis.org/SandPonPensions.pdf