REPORT TITLE:
Employees' retirement system


DESCRIPTION:
Allows the board of trustees of the employees' retirement system
to invest in real estate through limited liability companies and
similar entities.  (HB1036 HD2)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        1036
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 2
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
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                   A  BILL  FOR  AN  ACT

RELATING TO INVESTMENTS OF 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.  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 amount of the obligation
 
20                [shall not] at the time investment is made therein
 

 
Page 2                                                     1036
                                     H.B. NO.           H.D. 2
                                                        
                                                        

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

 
Page 3                                                     1036
                                     H.B. NO.           H.D. 2
                                                        
                                                        

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

 
Page 4                                                     1036
                                     H.B. NO.           H.D. 2
                                                        
                                                        

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

 
Page 5                                                     1036
                                     H.B. NO.           H.D. 2
                                                        
                                                        

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

 
Page 6                                                     1036
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1                United States; or sovereign debt instruments
 
 2                issued by agencies of, or guaranteed by foreign
 
 3                governments;
 
 4           (B)  Revenue bonds, whether or not permitted by any
 
 5                other provision hereof, of the State or any
 
 6                municipal or political subdivision thereof,
 
 7                including the board of water supply of the city
 
 8                and county of Honolulu, and street or improvement
 
 9                district bonds of any district or project in the
 
10                State; and
 
11           (C)  Obligations issued or guaranteed by any federal
 
12                home loan bank including consolidated federal home
 
13                loan bank obligations, the Home Owner's Loan
 
14                Corporation, the Federal National Mortgage
 
15                Association, or the Small Business Administration;
 
16      (3)  [Corporate obligations.  Investments may be made in
 
17           below] Below investment grade or nonrated debt
 
18           instruments, foreign or domestic, in accordance with
 
19           investment guidelines adopted by the board of trustees;
 
20      (4)  [Preferred and common stocks.]  Shares of preferred or
 
21           common stock of any corporation created or existing
 
22           under the laws of the United States or of any state or
 
23           district thereof or of any country;
 

 
Page 7                                                     1036
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (5)  Obligations eligible by law for purchase in the open
 
 2           market by federal reserve banks;
 
 3      (6)  Obligations issued or guaranteed by the International
 
 4           Bank for Reconstruction and Development, the Inter-
 
 5           American Development Bank, the Asian Development Bank,
 
 6           or the African Development Bank;
 
 7      (7)  Obligations secured by collateral consisting of any of
 
 8           the securities or stock listed above and worth[,] at
 
 9           the time the investment is made[,] at least fifteen per
 
10           cent more than the amount of the respective
 
11           obligations;
 
12      (8)  [Insurance company obligations.]  Contracts and
 
13           agreements supplemental thereto providing for
 
14           participation in one or more accounts of a life
 
15           insurance company authorized to do business in Hawaii,
 
16           including its separate accounts, and whether the
 
17           investments allocated thereto are comprised of stocks
 
18           or other securities or of real or personal property or
 
19           interests therein;
 
20      (9)  [Interests in real property.]  Interests in improved or
 
21           productive real property in which, in the informed
 
22           opinion of the board of trustees, it is prudent to
 
23           invest funds of the system.  For purposes of this
 

 
Page 8                                                     1036
                                     H.B. NO.           H.D. 2
                                                        
                                                        

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

 
Page 9                                                     1036
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1           put and call options on securities; and stock; whether
 
 2           or not the securities, stock, futures contracts, or
 
 3           options on futures are expressly authorized by or
 
 4           qualify under the foregoing paragraphs, and
 
 5           notwithstanding any limitation of any of the foregoing
 
 6           paragraphs (including paragraph (4)); and
 
 7     (11)  [Private placements.]  Investments in institutional
 
 8           blind pool limited partnerships or direct investments
 
 9           [which] that make private debt and equity investments
 
10           in privately held companies."
 
11      SECTION 2.  Statutory material to be repealed is bracketed.
 
12 New statutory material is underscored.
 
13      SECTION 3.  This Act shall take effect upon its approval.