HONOLULU—The state’s job is to do the people’s business, but who watches the state? That’s Marion Higa’s career. Appointed as Hawaii’s State Auditor by the Legislature in 1992, Higa is now in her third eight-year term. She’s charged with eliminating waste and inefficiency in government while providing the Legislature with a check against the powers of the executive branch to ensure that public funds are spent as intended. She is the State of Hawaii’s watchdog.
Involved in controversial audits ranging from the State’s retirement fund to the Felix Consent decree, Higa is currently embroiled in a conflict over the financial examination of the Department of Budget and Finance. Higa remains steadfast in her findings that the department did not meet its fiscal responsibilities in managing the State’s treasury.
Two issues are at the heart of Higa’s audit: whether the Department of Budget and Finance leadership followed best practice management and accountability policies; and the legality of how part of the State’s portfolio of investments was augmented.
Higa says this was first brought to her attention by Deloitte & Touche, the accounting firm that had been contracted for the State’s FY 2007 Comprehensive Annual Financial Report. At that time, the firm expressed their concern over a $1 billion investment in student loan auction-rate securities (ARS). According to Higa, this is disproportionally high given a total ARS market of $330 billion and thousands of ARS investors.
“There was more than a doubling of the State’s investments in these securities in the seven-month period just before the auctions had stopped,” Higa says, noting that the Department of Budget and Finance did not analyze the risk of the investment and only eyed the potential high yields. This was contrary to what the department was supposed to do.
“The investment policy clearly says yield is secondary to safety and liquidity—the return of capital—and the law also says that the State may invest in these kinds of instruments provided that again safety and liquidity are primary considerations,” Higa states.
She also says the department directly told her—and the company she had hired to find out how so much money could have been invested into ARS—that the department was pursuing high yield. It was attracted to the interest because these securities promised to pay almost double what might be expected from competing investment choices. But who was consulted before making the purchase?
“Their processes don’t provide for a consultation with the director unless it’s on an exception basis,” Higa says. “We asked was this exception basis exercised and there was no evidence of that so the director was not consulted even as they were buying in millions each month. ... Basically the decision was made at the fourth level down with consultation with someone in the third level.”
With the ARS market frozen and the value of Hawaii’s investment in these securities plummeting, the State had to write down in June 2008 $114 million from the original $1 billion value. And Higa says she expects there to be another write down of an additional $140 million for FY 2009.
Higa also claims the department violated State law by investing in securities with more than a five-year maturity date from the date the securities were purchased. As auctions had been held every seven to 49 days, the department has countered that it believed they had met the five-year requirement and a memorandum from the State Attorney General agrees. Nevertheless, both failed to account for “the maturity dates of the underlying loans, which range from 2016 to 2045,” according to Higa’s report.
Higa admits she didn’t expect her report to have unleashed the backlash that has played across the media and in the Legislature, nor the curious response of the department to accept some of the audit’s recommendations. She also doesn’t regret using such strong language to make her point that too many years had passed since the last informal review of the investment policy despite ongoing requests to substantiate verbal acknowledgments.
“It seems as though so many of the structures for investing and so many guidelines for managing money were either ignored or not there in the first place,” Higa says. “The official investment policy dates back to November 1999. When we asked this administration have you ever looked at this, they claimed they had informally reviewed it in 2002. We asked for documentation—who was involved, how did you review it, etc.—and they couldn’t produce it. And the answers have since changed.”
Her bottom line: There was no conscious commitment to following the rules.
While the Lingle administration and the Department of Budget and Finance trade their own fighting words with Higa, she seems unaffected by attempts to view this controversy in a political context. “Ask Governors Waihee and Cayetano,” she laughs. Higa says she sleeps well at night knowing she’s doing her job and doesn’t take personally any accusative remarks fired at her.
“We know why some people are fighting back; the truth always hurts,” Higa says. “We’re saying the king has no clothes. This isn’t a message people want to hear.” Moreover, she says, neither the administration nor the department has offered countervailing facts to her report. What remains is the fact that a lot of the State’s money has lost value and we will have to wait and see if they can recover.
“Some of it will probably recover as the market recovers and there’s been a little bit of movement—about 1.5% has already turned over either because the loans are paid off or something matured,” Higa says.
That’s only a very small portion compared to the ARS still held by Hawaii. So how will best practices be developed, and followed, to mitigate the chance of this scenario recurring in future?
“I would hope that when the dust settles, when perhaps calm is restored, the department will take another look at our findings and will at least appreciate them,” Higa says. “Because if they want to make recommendations, they will still have to acknowledge that problems are there.”
With the current cash crunch, Higa doesn’t expect a fresh attitude any time soon.
“There is still a good deal of confusion and a lot of misinformation being tossed around,” Higa says. “The reality is we have a $1 billion with a current value of $750,000. No matter how you value it, it is still illiquid. That money is not available to us to make other money. I believe we’re stuck—at least until the market turns.”
And while we all wait, a new question is how the student loan law signed by President Barack Obama will affect whether ARS will ever again become marketable. With financial institutions out of the student loan business, can ARS auctions return—or will those who hold these securities be forced to hang onto them until maturity? Whatever happens, we’re all getting a lesson in paper money.
You can learn more about the Office of the State Auditor and hear the entire interview with Marion Higa on the Town Square archive at hawaiipublicradio.org.