Honorable Robert Bunda

President of the Senate

Twenty-First State Legislature

Regular Session of 2002

State of Hawaii

Sir:

Your Committee on Ways and Means, to which was referred S.B. No. 2983 entitled:

begs leave to report as follows:

The purpose of this measure is to expand the range of investments that may be made by the Employees' Retirement System.

In particular, this measure:

1. Allows the Employees' Retirement System to invest in interests in protected intellectual property which, in the informed opinion of the Board of Trustees, it is prudent to invest funds;
2. Requires the Employees' Retirement System to invest a certain percentage of its investment portfolio in economically targeted investments, including venture capital enterprises and funds, with the intent to assist in the improvement of the economic well-being of the State, its localities, and residents; and
3. Requires the Employees' Retirement System's Board of Trustees to execute all shareholder proxies and voting instructions in a manner that supports corporate governance, social justice, and environmental protection issues unless such a vote would result in long-term harm to the company.

Your Committee agrees with the intent of this measure to expand investment opportunities to the Employees' Retirement System, in order to assist in the improvement of the economic diversification and well-being of the State, its localities, and residents.

Your Committee further finds that having the Employees' Retirement System's Board of Trustees execute shareholder proxies and voting instructions in a reasonably socially responsible manner will ensure that the Board will be more aware of the governing of its assets.

Upon further consideration, your Committee has amended this measure by:

1. Deleting the requirement that the Employees' Retirement System invest a certain percentage of its investment portfolio in economically targeted investments, and instead requires investment in an appropriate venture capital fund that invests in venture capital enterprises and is managed by a private firm under the supervision of the Hawaii Strategic Development Corporation pursuant to section 211F-33(5), Hawaii Revised Statutes. In addition, the measure is amended to add a legislative declaration that investment in such a fund is consistent with the board's fiduciary obligations under the Employees' Retirement System law.

The intent of this change is to require the Employees' Retirement System to invest in the Hawaii Strategic Development Corporation's "fund of funds" managed by MN Capital under the supervision of the Corporation. Your Committee finds that this amendment will assist Hawaii's entrepreneurs in obtaining critically needed access to local venture capital, while at the same time allowing the Employees' Retirement System to exercise its fiduciary correctness.

In essence, this amendment shifts the responsibility for investment decision making onto the fund's managers, while assuring that the investment will be spread across all Hawaii venture funds, thereby mitigating the risk that the Employees' Retirement System may face from challenges to its fiduciary responsibility; and

2. Making technical nonsubstantive changes for the purposes of clarity and consistency.

As affirmed by the record of votes of the members of your Committee on Ways and Means that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 2983, as amended herein, and recommends that it pass Third Reading in the form attached hereto as S.B. No. 2983, S.D. 1.