Ugly Doings in Hawaii
from
November/December 2003
by Julie Connelly
The trustees of Hawaii’s Bishop Estate stand tall as poster perps for out-and-out self-dealing. When she died in 1884, Princess Bernice Pauahi Bishop, the last descendant of the king who unified the Hawaiian Islands, left 337,000 acres, 11% of the state’s land mass, in trust to educate native Hawaiian children. A five-member board of trustees, chosen by justices of the Hawaiian state Supreme Court, has administered the trust ever since. By 2000 the estate was valued at about $6 billion. Its sole beneficiary: the Kamehameha Schools for youngsters from pre-school through high school.
Between 1987 and 1997, according to the Honolulu Star-Bulletin , the trustees paid themselves more than $40 million, even though there was no provision in the princess’s will that the trustees be paid at all. The sums they pocketed varied, but from 1994 to 1997 they collected fees that averaged $900,000 a year apiece. They personally invested a total of $2 million in a methane-gas venture also backed by the trust; as the deal went bad, they increased the trust’s investment to $85 million to prop up their personal investments. When the trust decided to sell a championship golf course it owned, one of the buyers—the one who negotiated the deal, in fact—was a trustee.
Meanwhile, this quintet so mismanaged the investment portfolio that it racked up $235 million in losses and $100 million in write-offs for bad investments during the 1990s, $44 million of that in 1995. “To appreciate the magnitude and meaning of these losses,” the Honolulu Star-Bulletin noted, “one must know that educational and other charitable expenditures for that year totaled just $84 million. Just imagine what could have been accomplished with another 50 percent.”
Because money was getting tight, the trustees cut costs by eliminating the early-education program. Hawaii’s attorney general, Margery S. Bronster, who began investigating the Bishop Estate in 1997, determined that over the previous decade the trustees had failed to spend $350 million on the schools, despite trust rules that all income go to them.
The IRS got involved as well, threatening in 1999 to revoke the trust’s tax-exempt status on the grounds that the trustees had paid themselves excessive compensation, mismanaged the trust assets, and neglected the core mission of educating children. That same year a probate judge finally removed four of the trustees from office. A fifth resigned.
In 2000 the IRS and the attorney general agreed to a $20.1 million settlement with the ex-trustees. The trust’s insurer picked up the tab, however, and $4 million of the amount went to the trustees to pay their legal bills. The IRS did manage to nail all five with an excise tax of about $40,000 each on their excessive compensation, an amount not covered by insurance.
