Response to Honolulu Advertiser August 30, 2009 article, “$1 billion in Hawai‘i state investments tied up”

The Advertiser’s Aug. 30 article on the State’s investments in auction rate securities (ARS) contained several inaccuracies, including misleading statements by Legislative Auditor Marion Higa and Rep. Karl Rhoads. 

The State has not incurred any actual or real losses by investing in auction rate securities, and in fact we have been receiving the full principal and interest due on the ARS for the past 18 months. 

Auction rate securities are not equity investments like stocks. Rather, the ARS are debt instruments and have a final maturity date.  The State will be repaid the entire interest and principal over the term of the investment.

We would actually lose money if we sold the ARS and that is exactly the reason why we are not selling the securities at this time.

The comment by Higa “that so much of our cash is illiquid,” shows her misunderstanding of the nature of these investments.  There is a secondary market for the ARS that would allow the State to liquidate or sell the ARS, albeit at a loss.  As the State does not need the liquidity or cash from the ARS at this time to meet its ongoing obligations, there is no reason to sell the ARS and incur a loss.  Such a sale would be very similar to a household electing to do an early withdrawal on a 5-year certificate of deposit without having any need or use for the funds, and paying a substantial penalty for the early withdrawal.  Why would the State do this?

The State does not need to have all of our cash liquid, as evidenced by the statutes allowing investments with maturities of up to five years. 

The State has adjusted its investment portfolio to account for this temporary illiquidity of funds and has been able to meet all of its obligations without having to liquidate or sell the ARS and incur an actual or real loss.

Furthermore, we have adjusted our investment portfolio without having to sell or liquidate any of the State's other investments prior to their stated maturity, thus avoiding the risk of selling at less than par or face value at a loss to the State.

Also, contrary to Rep. Rhoads’ comment that it is, “disturbing” to have our investment in “something like that,” the fact is, State law specifically authorizes the State to invest in Student Loan ARS. 

The State invested additional funds in ARS due to the substantially higher interest rate being paid as compared to other investments with similar maturities. 

As the ARS mature or are prepaid, the State will realize an "accounting gain," which will offset the "accounting loss" reflected in the FY 08 audit that the Advertiser based its report on.  The State has been experiencing an increase in prepayments - at full face value - as the issuers of the ARS are replacing ARS debt with other forms of debt.

The article unfairly painted a picture that the State incurred an actual loss of funds and suffered severe negative consequences because of investment in ARS, which is completely inaccurate.

Georgina Kawamura

Director of Budget and Finance

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Advertiser: $1B in Hawaii state investments tied up

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