REPORT TITLE:
ERS; Venture Capital Investment


DESCRIPTION:
Authorizes ERS to invest up to 0.5 per cent of assets in
economically targeted investment venture capital enterprises.
Defines "economically targeted investment", "venture capital
enterprises".

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        
THE SENATE                              S.B. NO.           2356
TWENTIETH LEGISLATURE, 2000                                
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.  (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 amount of the obligation
 

 
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                                     S.B. NO.           2356
                                                        
                                                        

 
 1                at the time investment is made therein shall not
 
 2                exceed eighty per cent of the value of the real
 
 3                estate and improvements mortgaged to secure it,
 
 4                and except that the amount of the obligation at
 
 5                the time investment is made therein may exceed
 
 6                eighty per cent but no more than ninety per cent 
 
 7                of the value of the real estate and improvements
 
 8                mortgaged to secure it; provided further that the
 
 9                obligation is insured or guaranteed against
 
10                default or loss under a mortgage insurance policy
 
11                issued by a casualty insurance company licensed to
 
12                do business in the State.  The coverage provided
 
13                by the insurer 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.  The insurance coverage
 
17                shall remain in force until the principal amount
 
18                of the obligation is reduced to eighty per cent of
 
19                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
 

 
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                                     S.B. NO.           2356
                                                        
                                                        

 
 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 at the time
 
12                     investment is made therein shall not exceed
 
13                     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 made
 
17                     therein may exceed eighty per cent but no
 
18                     more than ninety per cent of the value of the
 
19                     leasehold interest and improvements mortgaged
 
20                     to secure it;
 
21                provided further that the obligation is insured or
 
22                guaranteed against default or loss under a
 
23                mortgage insurance policy issued by a casualty
 

 
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                                     S.B. NO.           2356
                                                        
                                                        

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

 
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                                     S.B. NO.           2356
                                                        
                                                        

 
 1                security position of the retirement system or the
 
 2                borrower's ability to repay the 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
 

 
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                                     S.B. NO.           2356
                                                        
                                                        

 
 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.  Below investment grade or
 
17           nonrated debt instruments, foreign or domestic, in
 
18           accordance with investment guidelines adopted by the
 
19           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;
 

 
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                                     S.B. NO.           2356
                                                        
                                                        

 
 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 the
 
 9           time the investment is made at least fifteen per cent
 
10           more than the amount of the respective obligations;
 
11      (8)  Insurance company obligations.  Contracts and
 
12           agreements supplemental thereto providing for
 
13           participation in one or more accounts of a life
 
14           insurance company authorized to do business in Hawaii,
 
15           including its separate accounts, and whether the
 
16           investments allocated thereto are comprised of stocks
 
17           or other securities or of real or personal property or
 
18           interests therein;
 
19      (9)  Interests in real property.  Interests in improved or
 
20           productive real property in which, in the informed
 
21           opinion of the board of trustees, it is prudent to
 
22           invest funds of the system.  For purposes of this
 
23           paragraph, "real property" includes any property
 

 
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                                     S.B. NO.           2356
                                                        
                                                        

 
 1           treated as real property either by local law or for
 
 2           federal income tax purposes.  Investments in improved
 
 3           or productive real property may be made directly or
 
 4           through pooled funds, including common or collective
 
 5           trust funds of banks and trust companies, group or unit
 
 6           trusts, limited partnerships, limited liability
 
 7           companies, investment trusts, title-holding
 
 8           corporations recognized under section 501(c) of the
 
 9           Internal Revenue Code of 1986, as amended, similar
 
10           entities that would protect the system's interest, and
 
11           other pooled funds invested on behalf of the system by
 
12           investment managers retained by the system;
 
13     (10)  Other securities and futures contracts.  Securities and
 
14           futures contracts in which in the informed opinion of
 
15           the board of trustees it is prudent to invest funds of
 
16           the system, including currency, interest rate, bond,
 
17           and stock index futures contracts and options on such
 
18           contracts to hedge against anticipated changes in
 
19           currencies, interest rates, and bond and stock prices
 
20           that might otherwise have an adverse effect upon the
 
21           value of the system's securities portfolios; covered
 
22           put and call options on securities; and stock; whether
 
23           or not the securities, stock, futures contracts, or
 

 
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                                     S.B. NO.           2356
                                                        
                                                        

 
 1           options on futures are expressly authorized by or
 
 2           qualify under the foregoing paragraphs, and
 
 3           notwithstanding any limitation of any of the foregoing
 
 4           paragraphs (including paragraph (4)); and
 
 5     (11)  Private placements.  Investments in institutional blind
 
 6           pool limited partnerships or direct investments that
 
 7           make private debt and equity investments in privately
 
 8           held companies.
 
 9      (b)  Up to 0.5 per cent of assets at the start of a fiscal
 
10 year, up to a maximum of $50,000,000 per fiscal year, shall be
 
11 invested by the board of trustees in economically targeted
 
12 investment venture capital enterprises in Hawaii.  For purposes
 
13 of this subsection, "economically targeted investment" means an
 
14 investment selected for the economic benefits it creates apart
 
15 from its investment return to the system.  "Venture capital
 
16 enterprises" mean businesses registered to do business in the
 
17 State that are engaged in the development and commercialization
 
18 of any product, device, or process having the potential to create
 
19 new employment opportunities or to diversify the economy of the
 
20 State.  Investment under this subsection shall be made under the
 
21 condition that there shall be three or more unrelated investors
 
22 other than the system involved in the investment.  The board, in
 
23 making investments under this subsection, may consult with
 

 
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                                     S.B. NO.           2356
                                                        
                                                        

 
 1 knowledgeable state agencies, corporations, and financial
 
 2 institutions before investing assets in economically targeted
 
 3 investment venture capital enterprises."
 
 4      SECTION 2.   New statutory material is underscored.
 
 5      SECTION 3.  This Act shall take effect upon its approval.
 
 6 
 
 7                           INTRODUCED BY:  _______________________