In Hawaii, an imbroglio over an investment gone bad
By Jake Grovum, Special to Stateline

Just as the economy was beginning its nosedive, the state of Hawaii doubled down on its investment in an exotic financial instrument known as auction-rate securities. Between July 2007 and February 2008, the state’s holdings in these investments more than doubled, from $427 million to nearly $1.1 billion. At the time, it seemed like a safe bet. Many other institutional investors, including other state and local governments, had placed their money in these long-term, high-yield securities.

Then, things went wrong. In the spring of 2008, the market for auction-rate securities froze up, and the regular dividends that had made the investments an attractive place to park cash stopped being paid. Hawaii, which was among the most heavily invested in the securities, is now left with the one-third of its more than $3 billion treasury locked up in 30-year investments that are essentially illiquid.

Nobody in Hawaii disputes that the investment didn’t go as planned. The state already has written down the value of the securities by $250 million. What’s less clear — and is one of the hottest political debates in Honolulu at the moment — is how big of a problem this represents.

Marion Higa, the state’s longtime auditor, thinks it’s a crisis. In March, she issued a report faulting Hawaii’s Department of Budget and Finance for prioritizing investment yield above safety. She says buying the securities, which were backed by long-term student loans, violated a law requiring investments to mature within five years. According to the report, the department suffered from a “lack of proper leadership and accountability.”

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How Hawaii's Budget Led to Furloughed Kids
By Suzanne Roig / Honolulu Saturday, Oct. 24, 2009

At Noelani Elementary, the small school near Honolulu where President Obama learned to read and write, the next generation of Hawaii's leaders learned a new word this week: "furlough."

The Noelani students joined nearly 170,000 other children across Hawaii whose teachers on Friday began an unprecedented state furlough program that will close classrooms 34 days over the next two years. The "furlough Fridays" are part of a controversial effort by Gov. Linda Lingle to deal with a projected budget deficit of nearly $1 billion. The cost-cutting measure has angered parents, lawmakers and children. Popular musician and Hawaii public school graduate Jack Johnson sang at a rally Friday morning at the state Capitol to protest the furloughs. During the rally, parents handed a petition bearing thousands of signatures protesting the furloughs to the governor, whose office is on the fifth floor of the state Capitol. (See the top 10 things you didn't know about Hawaii.)

Lingle's two-year contract with the teachers union and its 13,000 members amounts to a 7.9% pay cut. The bulk of the union's teachers will have 17 furlough days a year, giving Hawaii the shortest school year in the nation. "It's completely Draconian," says Vernadette Gonzalez, whose 5-year-old daughter, Inez Anderson, is a kindergartner at Noelani. "People are shocked when they hear that this was allowed, or even considered as a sane solution to the budget crisis." Gonzalez fears that students will not be able to make up for the lost school time, noting that teachers are struggling to adapt their lesson plans. "It's not only passing on the cost to the parents but to the kids," she said. "They're getting a second-rate education."

Read more: http://www.time.com/time/nation/article/0,8599,1932079,...