HB3089 HD1

Report Title:

Public Employees' Trust Fund; Established; Health Benefits Costs

Description:

Establishes a Public Employees' Trust Fund and a board of trustees for the fund to offset costs incurred by the State to fund public employee health benefit costs. Makes an appropriation to the fund. Prohibits the tapping of moneys until the fund's principal reaches $1,000,000,000. (HB3089 HD1)

HOUSE OF REPRESENTATIVES	H.B. NO.	3089
TWENTY-THIRD LEGISLATURE, 2006		H.D. 1
STATE OF HAWAII

A BILL FOR AN ACT

relating to the public employees' trust fund.

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

SECTION 1. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"Chapter

PUBLIC EMPLOYEES' TRUST FUND

§ -1 Definitions. As used in this chapter, unless the context otherwise requires:

"Board" means the board of trustees of the public employees' trust fund.

"Dependent-beneficiary" has the same meaning as defined in section 87A-1.

"Employee" has the same meaning as defined in section 87A-1.

"Employee-beneficiary" has the same meaning as defined in section 87A-1.

"Regular interest" means interest at four and one-half per cent a year, compounded annually.

"Trustee" means a trustee serving on the board of trustees of the public employees' trust fund.

"Trust fund" means the public employees' trust fund established pursuant to section -2.

§ -2 Public employees' trust fund; established. There shall be established a public employees' trust fund for the purpose of offsetting the funding liability incurred by the State, as a public employer, as required under sections 87A-33, 87A-34, 87A-35, 87A-36, and 87A-37. The fund shall have the powers and privileges of a corporation and shall be known as the "public employees' trust fund of the State of Hawaii" and by that name may sue or be sued, transact all of its business, invest all of its funds, and hold all of its cash and securities and other property.

§ -3 General administration of the public employees' trust fund vested in its board of trustees. The general administration and the responsibility for the proper operation of the public employees' trust fund and for making effective the provisions of this chapter are vested in a board of trustees, subject, however, to the area of administrative control vested in the department of budget and finance by sections 26-8 and 26-35. To fulfill its responsibilities, the trust fund may require any department or agency of the State to furnish information to the trust fund to carry out the purposes of this chapter.

§ -4 Composition of board. The board of trustees of the public employees' trust fund shall consist of eight members as follows:

(1) The director of finance of the State, ex officio;

(2) Four members of the employer-union health benefits trust fund, two of whom shall be general employees of the State, one of whom shall be a teacher, and one of whom shall be a retirant to be elected by the members and retirants who receive benefits from the employer-union health benefits trust fund, under rules adopted by the board governing the election, to serve for terms of six years each, with one of the terms expiring on January 1 of each even-numbered year; provided that, if after the close of filing of petitions for candidacy, a member is unopposed for election to a trustee position, the member shall be declared duly and legally elected to the position of trustee without an election; and

(3) Three citizens of the State who are not employees, one of whom shall be a responsible officer of a bank authorized to do business within the state or a person of similar experience, to be appointed by the governor, with the advice and consent of the senate, to serve for a term of six years each, one of the terms to expire January 1 of each odd-numbered year.

Each trustee shall serve until the trustee's successor is elected or appointed, as the case may be, and qualified.

§ -5 Oath of trustees. Each trustee, within ten days after the trustee's appointment or election, shall take an oath of office that, so far as it devolves upon the trustee, the trustee will diligently and honestly administer the affairs of the board of trustees and will not knowingly violate, or willingly permit to be violated, any of the provisions of law applicable to the trust fund. The oath shall be subscribed to by the member making it and certified by the officer before whom it is taken and shall be immediately filed in the office of the lieutenant governor.

§ -6 Voting; rules. Each trustee shall be entitled to one vote on the board of trustees. Five concurring votes shall be necessary for a decision by the trustees at any meeting of the board.

Subject to the limitations of this chapter, the board, from time to time, shall establish rules for the administration of the funds of the trust fund and for the transaction of its business.

§ -7 Officers, employees, legal adviser. The board of trustees shall elect from its membership a chairperson and, by a majority vote of all its members, shall appoint an administrator and a chief investment officer who shall be exempt from chapter 76 and serve under and at the pleasure of the board. The salary of the administrator shall be set by the board; provided that the salary shall be set at not more than the salary of the governor, as established under section 26-51. The board shall engage actuarial and other services as shall be required to transact the business of the trust fund. The compensation for all services engaged by the board, and all other expenses of the board necessary for the operation of the trust fund, shall be paid at rates and in amounts the board shall approve.

The attorney general or an appointed representative may serve as legal adviser to the board of trustees or the board of trustees may select its own legal counsel.

§ -8 Vacancy. If a vacancy occurs in the office of trustee, the vacancy shall be filled for the unexpired term in the same manner as the office was previously filled, except in the case of the trustees elected by the members, in which case the vacancy may be filled for the unexpired term by the appointment of a member by the remaining trustees of the board of trustees.

§ -9 Expenses of trustees. The trustees shall serve without compensation but shall be reimbursed from the expense fund established under section -11 for all necessary expenses, including travel and lodging expenses, and for any loss of salary or wages they may suffer through serving the board of trustees.

§ -10 Records. (a) The board of trustees shall keep a record of all its proceedings that shall be open to public inspection. It shall publish annually a report showing in detail:

(1) The fiscal transactions of the trust fund for the year ending the preceding June 30;

(2) The amount of the accumulated cash and securities of the trust fund; and

(3) An actuarial valuation of the assets and liabilities of the trust fund.

The board shall submit the report to the governor and the legislature and shall furnish copies thereof to the heads of the various departments of the State for their use and the use of the members employed therein.

(b) The board shall include in its annual report submitted prior to January 1 of each odd-numbered year a comparison of the investment performance of the trust fund with the investment performances of the public employees' trust funds of other jurisdictions that have authority to make investments substantially similar to the investment authorized under section -16.

§ -11 Interest. The board of trustees shall establish an expense fund and a public employer contribution fund and annually allocate the interest and other earnings of the trust fund to the funds of the trust fund, as follows:

(1) The expense fund shall be credited with such sums as provided in section -15; and

(2) The remaining investment earnings, if any, shall be credited to the public employer contribution fund.

§ -12 Cash for meeting disbursements. For the purpose of meeting disbursements to offset the State's contribution cost obligation as required under sections 87A-33, 87A-34, 87A-35, 87A-36, and 87A-37 and other payments, there may be kept available cash, not exceeding ten per cent of the total amount in the funds of the trust fund, on deposit in any one or more banks or trust companies of the state, organized under the laws thereof or of the United States. The sum on deposit in any one bank or trust company shall not exceed twenty-five per cent of the paid up capital and surplus of the bank or trust company.

§ -13 Board; trustees of funds. The board of trustees shall be trustees of the funds of the trust fund and may invest and reinvest moneys under the board's control as authorized by this chapter and as may be otherwise provided by law. Subject to the terms, conditions, limitations, and restrictions of this chapter and as may be otherwise provided by law, the trustees may hold, purchase, sell, assign, transfer, or dispose of any of the securities and investments in which any of the funds created under this chapter shall have been invested, as well as of the proceeds of the investments and any moneys belonging to the funds.

§ -14 Custodian of the funds. The state director of finance shall be the custodian of the funds established under this chapter. All payment from the funds shall be made by the director of finance only upon vouchers signed by the chairperson and countersigned by such other person as may be designated by the board of trustees.

§ -15 Expense fund. The expense fund shall be the fund to which shall be credited all money to pay the administration expenses of the trust fund and from which shall be paid all the expenses necessary in connection with the administration and operation of the trust fund. Biennially, the board of trustees shall estimate the amount of money necessary to be paid into the expense fund during the ensuing biennium to provide for the expense of operation of the trust fund. The board shall pay the estimated amount into the expense fund from the investment earnings of the trust fund, subject to review by the legislature and approval by the governor.

§ -16 Investments. Investments may be made in:

(1) Real estate loans and mortgages. Obligations (as defined in section 431:6-101) of any of the following classes:

(A) Obligations secured by mortgages of nonprofit corporations desiring to build multirental units (ten units or more) subject to control of the government for occupancy by families displaced as a result of government action;

(B) Obligations secured by mortgages insured by the Federal Housing Administration;

(C) Obligations for the repayment of home loans made under the Servicemen's Readjustment Act of 1944 or under Title II of the National Housing Act;

(D) Other obligations secured by first mortgages on unencumbered improved real estate owned in fee simple; provided that the amount of the obligation at the time investment is made therein shall not exceed eighty per cent of the value of the real estate and improvements mortgaged to secure it, and except that the amount of the obligation at the time investment is made therein may exceed eighty per cent but no more than ninety per cent of the value of the real estate and improvements mortgaged to secure it; provided further that the obligation is insured or guaranteed against default or loss under a mortgage insurance policy issued by a casualty insurance company licensed to do business in the State. The coverage provided by the insurer shall be sufficient to reduce the trust fund's exposure to not more than eighty per cent of the value of the real estate and improvements mortgaged to secure it. The insurance coverage shall remain in force until the principal amount of the obligation is reduced to eighty per cent of the market value of the real estate and improvements mortgaged to secure it, at which time the coverage shall be subject to cancellation solely at the option of the board of trustees. Real estate shall not be deemed to be encumbered within the meaning of this subparagraph by reason of the existence of any of the restrictions, charges, or claims described in section 431:6-308;

(E) Other obligations secured by first mortgages of leasehold interests in improved real estate; provided that:

(i) Each such leasehold interest at such time shall have a current term extending at least two years beyond the stated maturity of the obligation it secures; and

(ii) The amount of the obligation at the time investment is made therein shall not exceed eighty per cent of the value of the respective leasehold interest and improvements, and except that the amount of the obligation at the time investment is made therein may exceed eighty per cent but no more than ninety per cent of the value of the leasehold interest and improvements mortgaged to secure it;

provided further that the obligation is insured or guaranteed against default or loss under a mortgage insurance policy issued by a casualty insurance company licensed to do business in the State. The coverage provided by the insurer shall be sufficient to reduce the trust fund's exposure to not more than eighty per cent of the value of the leasehold interest and improvements mortgaged to secure it. The insurance coverage shall remain in force until the principal amount of the obligation is reduced to eighty per cent of the market value of the leasehold interest and improvements mortgaged to secure it, at which time the coverage shall be subject to cancellation solely at the option of the board of trustees;

(F) Obligations for the repayment of home loans guaranteed by the department of Hawaiian home lands pursuant to section 214(b) of the Hawaiian Homes Commission Act, 1920; and

(G) Obligations secured by second mortgages on improved real estate for which the mortgagor procures a second mortgage on the improved real estate for the purpose of acquiring the leaseholder's fee simple interest in the improved real estate; provided that any prior mortgage does not contain provisions that might jeopardize the security position of the trust fund or the borrower's ability to repay the mortgage loan.

The board of trustees may retain real estate, including leasehold interests therein, as it may acquire by foreclosure of mortgages or in enforcement of security, or as may be conveyed to it in satisfaction of debts previously contracted; provided that all such real estate, other than leasehold interests, shall be sold within five years after acquiring the real estate, subject to extension by the governor for additional periods not exceeding five years each, and that all such leasehold interests shall be sold within one year after acquiring the interests, subject to extension by the governor for additional periods not exceeding one year each;

(2) Government obligations, etc. Obligations of any of the following classes:

(A) Obligations issued or guaranteed as to principal and interest by the United States or by any state thereof or by any municipal or political subdivision or school district of any of the foregoing; provided that principal of and interest on such obligations are payable in currency of the United States; or sovereign debt instruments issued by agencies of, or guaranteed by foreign governments;

(B) Revenue bonds, whether or not permitted by any other provision hereof, of the State or any municipal or political subdivision thereof, including the board of water supply of the city and county of Honolulu, and street or improvement district bonds of any district or project in the State; and

(C) Obligations issued or guaranteed by any federal home loan bank including consolidated federal home loan bank obligations, the Home Owner's Loan Corporation, the Federal National Mortgage Association, or the Small Business Administration;

(3) Corporate obligations. Below investment grade or nonrated debt instruments, foreign or domestic, in accordance with investment guidelines adopted by the board of trustees;

(4) Preferred and common stocks. Shares of preferred or common stock of any corporation created or existing under the laws of the United States or of any state or district thereof or of any country;

(5) Obligations eligible by law for purchase in the open market by federal reserve banks;

(6) Obligations issued or guaranteed by the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, or the African Development Bank;

(7) Obligations secured by collateral consisting of any of the securities or stock listed above and worth at the time the investment is made at least fifteen per cent more than the amount of the respective obligations;

(8) Insurance company obligations. Contracts and agreements supplemental thereto providing for participation in one or more accounts of a life insurance company authorized to do business in Hawaii, including its separate accounts, and whether the investments allocated thereto are comprised of stocks or other securities or of real or personal property or interests therein;

(9) Interests in real property. Interests in improved or productive real property in which, in the informed opinion of the board of trustees, it is prudent to invest funds of the trust fund. For purposes of this paragraph, "real property" includes any property treated as real property either by local law or for federal income tax purposes. Investments in improved or productive real property may be made directly or through pooled funds, including common or collective trust funds of banks and trust companies, group or unit trusts, limited partnerships, limited liability companies, investment trusts, title-holding corporations recognized under section 501(c) of the Internal Revenue Code of 1986, as amended, similar entities that would protect the trust fund's interest, and other pooled funds invested on behalf of the trust fund by investment managers retained by the trust fund;

(10) Other securities and futures contracts. Securities and futures contracts that, in the informed opinion of the board of trustees, it is prudent to invest funds of the trust fund, including currency, interest rate, bond, and stock index futures contracts and options on such contracts to hedge against anticipated changes in currencies, interest rates, and bond and stock prices that might otherwise have an adverse effect upon the value of the trust fund's securities portfolios; covered put and call options on securities; and stock; whether or not the securities, stock, futures contracts, or options on futures are expressly authorized by or qualify under the foregoing paragraphs, and notwithstanding any limitation of any of the foregoing paragraphs (including paragraph (4)); and

(11) Private placements. Investments in institutional blind pool limited partnerships or direct investments that make private debt and equity investments in privately held companies, including but not limited to investments in Hawaii high technology businesses or venture capital investments that, in the informed opinion of the board of trustees, are appropriate to invest funds of the trust fund. In evaluating venture capital investments, the board of trustees shall consider, among other things, the impact an investment may have on job creation in Hawaii and on the state economy.

§ -17 Investment guidelines. Notwithstanding any other law to the contrary, real estate loans and mortgages made pursuant to section -16(1)(D) and (E) shall be in accordance with conditions and restrictions set forth by the board of trustees; provided that the board may establish the minimum and maximum loan amounts and interest rates for these real estate loans and mortgages by motion, at any duly noticed meeting of the board. The board of trustees, subject to chapter 91, shall adopt, amend, and repeal rules having the force of and effect of law to implement all provisions of this section other than those relating to loan amounts and interest rates for its real estate loans and mortgages.

§ -18 Service charges. The board of trustees may pay out of any of the funds held for investment a reasonable amount to:

(1) Any person for servicing and handling of mortgages purchased by the board or for supplying investment advisory or consultative services; and

(2) Meet such other costs incident to the prudent investment of trust fund funds as the board may approve.

§ -19 Power to make agreements to protect securities on reorganization or otherwise. Anything in this chapter to the contrary notwithstanding, the board of trustees may enter into an agreement or agreements for the purpose of protecting the interests of the trust fund in securities held by the trust fund, or for the purpose of reorganization of a corporation that issued securities so held, and deposit of securities thereunder with a committee or depositories appointed under the agreement; provided that the agreement and deposit shall first be approved in writing by a majority of the members of the board with a statement of their reasons for such approval. The board may accept corporate stock or bonds or other securities, which may be distributed pursuant to any agreement approved pursuant to this section or to any plan or reorganization approved in writing by a majority of the members of the board with a statement of their reasons for such approval. But if securities so received consist in whole or in part of stock in any corporation or of bonds or obligations that are not secured by adequate collateral security or where less than two-thirds of the total value of the required collateral security therefor consist of collateral other than stock, then any stock and any such bond or obligation so received shall be disposed of within five years from the time of acquisition or before expiration of such further period or periods of time as may be fixed in writing for that purpose by the governor.

§ -20 Power to enter into security loan agreements. Anything in this chapter to the contrary notwithstanding, the board of trustees may enter into an agreement or agreements with a financially responsible stock or bond brokerage firm, bank, or similar financial institution ("borrower") authorized to do business under the laws of any state or the United States for the purpose of lending to the borrower securities held by the trust fund, subject to the following conditions:

(1) The securities shall be loaned to the borrower for a period not to exceed one year;

(2) At the termination of the loan period, the borrower shall deliver to the board of trustees certificates for identical securities that are of the same class and issue as the loaned securities;

(3) For the protection of the trust fund, the borrower shall deliver to the board of trustees or its agent collateral in the form of cash, letters of credit, bonds, or other interest-bearing notes and obligations of the United States or federal instrumentalities that are eligible for investment by the board of trustees, in an amount not less than one hundred two per cent of the market value of the loaned securities, as determined by the board of trustees. The trust fund shall have a security interest in the collateral to secure borrower's obligations under the agreement. The board of trustees shall not be obligated to return the collateral or any part thereof to the borrower, except upon borrower's delivery to the board or its agent of securities identical to the loaned securities, as provided in paragraph (2). The board of trustees or its designated agent shall monitor the market value of the loaned securities daily, and if, on any business day, the amount of the collateral deposited by the borrower is less than one hundred two per cent of the market value of the loaned securities on that day, the borrower shall immediately deposit with the board or its agent additional collateral in the form of cash, letters of credit, bonds, or other interest-bearing notes and obligations of the United States or federal instrumentalities that are eligible for investment by the board of trustees. Such additional collateral, together with the collateral previously on deposit, shall be in an amount not less than one hundred two per cent of the market value of the loaned securities at the time of the deposit;

(4) The board of trustees, at its election, may use or invest any collateral delivered by a borrower to the board or its agent pursuant to the agreement, and any income and profits earned on the collateral shall be retained for the benefit of the trust fund. Any investment of the collateral shall be subject to section -16;

(5) Until the termination of the loan, the borrower may exercise all the incidents of ownership of loaned securities, including the right to transfer the loaned securities to others and vote or otherwise consent as a holder of the securities; provided that the borrower shall be obligated to the board of trustees for all dividends and distributions made with respect to the loaned securities during the period of the agreement, including, without limitation, cash, stock or property dividends or distributions, interest payments, and subscription rights; and

(6) If the borrower, at the termination of the loan period, fails to deliver to the board of trustees certificates for identical securities that are of the same class and issue as the loaned securities, the borrowers shall forfeit to the trust fund the collateral deposited.

§ -21 Guaranty. Regular interest charges payable, the creation and maintenance of reserves in the public employer contribution fund, and all expenses in connection with the administration and operation of the trust fund are made obligations of the State. All income, interest, and dividends derived from deposits and investments authorized by this chapter shall be used for the payment of these obligations. After June 30, 2007, the income shall include capital gains or losses, whether realized or unrealized, in the value of the trust fund assets as taken from time to time thereafter by the board of trustees. It is hereby declared that any and all sums contributed or paid from whatever source to the trust fund for the funds created by this chapter, and all funds of the trust fund, including any and all interest and earnings of the trust fund, are and shall be held in trust by the board for the exclusive use and benefit of the trust fund and for offsetting the costs incurred by the State, as a public employer, under sections 87A-33, 87A-34, 87A-35, 87A-36, and 87A-37, and shall not be subject to appropriation for any other purpose whatsoever.

§ -22 Use of trust fund moneys to offset employer contribution costs; threshold requirement. (a) Except as may be otherwise provided by law, no funds shall be expended from the public employee's trust fund for the purpose of offsetting the State's contribution cost obligation established under sections 87A-33, 87A-34, 87A-35, 87A-36, and 87A-37 until the value of principal assets contained in the public employee's trust fund exceeds $1,000,000,000.

(b) Once the $1,000,000,000 threshold established under subsection (a) has been achieved, only the interest on the $1,000,000,000 principal may be used by the board of trustees to offset the State's contribution cost obligation established under sections 87A-33, 87A-34, 87A-35, 87A-36, and 87A-37."

SECTION 2. There is appropriated out of the general revenues of the State of Hawaii the sum of $150,000,000 or so much thereof as may be necessary for fiscal year 2006-2007 for deposit into the public employees' trust fund.

The sum appropriated shall be expended by the public employees' trust fund for the purposes of this Act.

SECTION 3. This Act shall take effect on July 1, 2050.