REPORT TITLE:
Retirement System; Investment


DESCRIPTION:
Requires the investment of employees' retirement system funds in
economically targeted investment venture capital enterprises,
subject to minimum and maximum limits.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        
THE SENATE                              S.B. NO.           967
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
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                   A  BILL  FOR  AN  ACT
RELATING TO THE EMPLOYEES' RETIREMENT SYSTEM.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  Section 88-119, Hawaii Revised Statutes, is
 
 2 amended to read as follows:
 
 3      "88-119  Investments.  (a)  Investments may be made in:
 
 4      (1)  Real estate loans and mortgages.  Obligations (as
 
 5           defined in section 431:6-101) of any of the following
 
 6           classes:
 
 7           (A)  Obligations secured by mortgages of nonprofit
 
 8                corporations desiring to build multirental units
 
 9                (ten units or more) subject to control of the
 
10                government for occupancy by families displaced as
 
11                a result of government action;
 
12           (B)  Obligations secured by mortgages insured by the
 
13                Federal Housing Administration;
 
14           (C)  Obligations for the repayment of home loans made
 
15                under the Servicemen's Readjustment Act of 1944 or
 
16                under Title II of the National Housing Act;
 
17           (D)  Other obligations secured by first mortgages on
 
18                unencumbered improved real estate owned in fee
 
19                simple; provided that [the]:
 
20                (i)   The amount of the obligation shall not at
 

 
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                                     S.B. NO.           967
                                                        
                                                        

 
 1                      the time investment is made therein exceed
 
 2                      eighty per cent of the value of the real
 
 3                      estate and improvements mortgaged to secure
 
 4                      it, and except that the amount of the
 
 5                      obligation at the time investment is made
 
 6                      therein may exceed eighty per cent but no
 
 7                      more than ninety per cent of the value of
 
 8                      the real estate and improvements mortgaged
 
 9                      to secure it; [provided further that the]
 
10                      and
 
11                (ii)  The obligation is insured or guaranteed
 
12                      against default or loss under a mortgage
 
13                      insurance policy issued by a casualty
 
14                      insurance company licensed to do business in
 
15                      the State.
 
16                The coverage provided by the insurer [should]
 
17                shall be sufficient to reduce the system's
 
18                exposure to not more than eighty per cent of the
 
19                value of the real estate and improvements
 
20                mortgaged to secure it.  [Such} The insurance
 
21                coverage shall remain in force until the principal
 
22                amount of the obligation is reduced to eighty per
 
23                cent of the market value of the real estate and
 
24                improvements mortgaged to secure it, at which time
 

 
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                                     S.B. NO.           967
                                                        
                                                        

 
 1                the coverage shall be subject to cancellation
 
 2                solely at the option of the board of trustees.
 
 3                Real estate shall not be deemed to be encumbered
 
 4                within the meaning of this subparagraph by reason
 
 5                of the existence of any of the restrictions,
 
 6                charges, or claims described in section 431:6-308;
 
 7           (E)  Other obligations secured by first mortgages of
 
 8                leasehold interests in improved real estate;
 
 9                provided that:
 
10                (i)   Each [such] leasehold interest [at such
 
11                      time] shall have a current term extending at
 
12                      least two years beyond the stated maturity
 
13                      of the obligation it secures; and
 
14               (ii)   The amount of the obligation shall not at
 
15                      the time investment is made therein exceed
 
16                      eighty per cent of the value of the
 
17                      respective leasehold interest and
 
18                      improvements, and except that the amount of
 
19                      the obligation, at the time investment is
 
20                      made therein, may exceed eighty per cent but
 
21                      no more than ninety per cent of the value of
 
22                      the leasehold interest and improvements
 
23                      mortgaged to secure it;
 

 
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                                     S.B. NO.           967
                                                        
                                                        

 
 1                provided further that the obligation is insured or
 
 2                guaranteed against default or loss under a
 
 3                mortgage insurance policy issued by a casualty
 
 4                insurance company licensed to do business in the
 
 5                State.  The coverage provided by the insurer
 
 6                [should] shall be sufficient to reduce the
 
 7                system's exposure to not more than eighty per cent
 
 8                of the value of the leasehold interest and
 
 9                improvements mortgaged to secure it.  [Such] The
 
10                insurance coverage shall remain in force until the
 
11                principal amount of the obligation is reduced to
 
12                eighty per cent of the market value of the
 
13                leasehold interest and improvements mortgaged to
 
14                secure it, at which time the coverage shall be
 
15                subject to cancellation solely at the option of
 
16                the board of trustees;
 
17           (F)  Obligations for the repayment of home loans
 
18                guaranteed by the department of Hawaiian home
 
19                lands pursuant to section 214(b) of the Hawaiian
 
20                Homes Commission Act, 1920; and
 
21           (G)  Obligations secured by second mortgages on
 
22                improved real estate for which the mortgagor
 
23                procures a second mortgage on the improved real
 

 
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                                     S.B. NO.           967
                                                        
                                                        

 
 1                estate for the purpose of acquiring the
 
 2                leaseholder's fee simple interest in the improved
 
 3                real estate; provided that any prior mortgage does
 
 4                not contain provisions which might jeopardize the
 
 5                security position of the retirement system or the
 
 6                borrower's ability to repay the mortgage loan.
 
 7           The board of trustees may retain such real estate,
 
 8           including leasehold interests therein, as it may
 
 9           acquire by foreclosure of mortgages or in enforcement
 
10           of security, or as may be conveyed to it in
 
11           satisfaction of debts previously contracted; provided
 
12           that all such real estate, other than leasehold
 
13           interests, shall be sold within five years after
 
14           acquiring the same, subject to extension by the
 
15           governor for additional periods not exceeding five
 
16           years each, and that all such leasehold interests shall
 
17           be sold within one year after acquiring the same,
 
18           subject to extension by the governor for additional
 
19           periods not exceeding one year each;
 
20      (2)  Government obligations, etc.  Obligations of any of the
 
21           following classes:
 
22           (A)  Obligations issued or guaranteed as to principal
 
23                and interest by the United States or by any state
 

 
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                                     S.B. NO.           967
                                                        
                                                        

 
 1                thereof or by any municipal or political
 
 2                subdivision or school district of any of the
 
 3                foregoing; provided that principal of and interest
 
 4                on such obligations are payable in currency of the
 
 5                United States; or sovereign debt instruments
 
 6                issued by agencies of, or guaranteed by foreign
 
 7                governments;
 
 8           (B)  Revenue bonds, whether or not permitted by any
 
 9                other provision hereof, of the State or any
 
10                municipal or political subdivision thereof,
 
11                including the board of water supply of the city
 
12                and county of Honolulu, and street or improvement
 
13                district bonds of any district or project in the
 
14                State; and
 
15           (C)  Obligations issued or guaranteed by any federal
 
16                home loan bank including consolidated federal home
 
17                loan bank obligations, the Home Owner's Loan
 
18                Corporation, the Federal National Mortgage
 
19                Association, or the Small Business Administration;
 
20      (3)  Corporate obligations.  Investments may be made in
 
21           below investment grade or nonrated debt instruments,
 
22           foreign or domestic, in accordance with investment
 
23           guidelines adopted by the board of trustees;
 

 
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                                     S.B. NO.           967
                                                        
                                                        

 
 1      (4)  Preferred and common stocks.  Shares of preferred or
 
 2           common stock of any corporation created or existing
 
 3           under the laws of the United States or of any state or
 
 4           district thereof or of any country;
 
 5      (5)  Obligations eligible by law for purchase in the open
 
 6           market by federal reserve banks;
 
 7      (6)  Obligations issued or guaranteed by the International
 
 8           Bank for Reconstruction and Development, the Inter-
 
 9           American Development Bank, the Asian Development Bank,
 
10           or the African Development Bank;
 
11      (7)  Obligations secured by collateral consisting of any of
 
12           the securities or stock listed above and worth, at the
 
13           time the investment is made, at least fifteen per cent
 
14           more than the amount of the respective obligations;
 
15      (8)  Insurance company obligations.  Contracts and
 
16           agreements supplemental thereto providing for
 
17           participation in one or more accounts of a life
 
18           insurance company authorized to do business in Hawaii,
 
19           including its separate accounts, and whether the
 
20           investments allocated thereto are comprised of stocks
 
21           or other securities or of real or personal property or
 
22           interests therein;
 
23      (9)  Interests in real property.  Interests in improved or
 

 
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                                     S.B. NO.           967
                                                        
                                                        

 
 1           productive real property in which, in the informed
 
 2           opinion of the board of trustees, it is prudent to
 
 3           invest funds of the system.  For purposes of this
 
 4           paragraph, "real property" includes any property
 
 5           treated as real property either by local law or for
 
 6           federal income tax purposes.  Investments in improved
 
 7           or productive real property may be made directly or
 
 8           through pooled funds, including common or collective
 
 9           trust funds of banks and trust companies, group or unit
 
10           trusts, limited partnerships, investment trusts, title-
 
11           holding corporations recognized under section 501(c)(2)
 
12           or section 501(c)(23) of the Internal Revenue Code of
 
13           1986, as amended, and other pooled funds invested on
 
14           behalf of the system by investment managers retained by
 
15           the system;
 
16     (10)  Other securities and futures contracts.  Securities and
 
17           futures contracts in which in the informed opinion of
 
18           the board of trustees it is prudent to invest funds of
 
19           the system, including currency, interest rate, bond,
 
20           and stock index futures contracts and options on such
 
21           contracts to hedge against anticipated changes in
 
22           currencies, interest rates, and bond and stock prices
 
23           that might otherwise have an adverse effect upon the
 

 
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                                     S.B. NO.           967
                                                        
                                                        

 
 1           value of the system's securities portfolios; covered
 
 2           put and call options on securities; and stock; whether
 
 3           or not the securities, stock, futures contracts, or
 
 4           options on futures are expressly authorized by or
 
 5           qualify under the foregoing paragraphs, and
 
 6           notwithstanding any limitation of any of the foregoing
 
 7           paragraphs (including paragraph (4)); and
 
 8     (11)  Private placements.  Investments in institutional blind
 
 9           pool limited partnerships or direct investments which
 
10           make private debt and equity investments in privately
 
11           held companies.
 
12      (b)  At least        per cent of assets at the start of a
 
13 fiscal year, up to a maximum of $        per fiscal year, shall
 
14 be invested by the board of trustees in economically targeted
 
15 investment venture capital enterprises.  For purposes of this
 
16 subsection, "economically targeted investment" means an
 
17 investment selected for the economic benefits it creates apart
 
18 from its investment return to the system.  "Venture capital
 
19 enterprises" mean businesses registered to do business in the
 
20 State that are engaged in the development and commercialization
 
21 of any product, device, or process having the potential to create
 
22 new employment opportunities or to diversify the economy of the
 
23 State.  Investment under this subsection shall be made under the
 

 
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                                     S.B. NO.           967
                                                        
                                                        

 
 1 condition that there shall be three or more unrelated investors
 
 2 other than the system involved in the investment.  The board, in
 
 3 making investments under this subsection, may consult with
 
 4 knowledgeable state agencies, corporations, and financial
 
 5 institutions before investing assets in economically targeted
 
 6 investment venture capital enterprises."
 
 7      SECTION 2.  Statutory material to be repealed is bracketed.
 
 8 New statutory material is underscored.
 
 9      SECTION 3.  This Act shall take effect upon its approval.
 
10 
 
11                              INTRODUCED BY:______________________