20 October 2005

Dangers of One-Party Control in a U.S. Democracy

The explosive outbreak in 1997 of a long-simmering scandal in Hawai‘i illustrates the dangers of one political party exercising full control of all three branches of a U.S.-style government for over four decades. In Hawai‘i's case, Democrats maintained constant control of the legislature, the governor's office, and the judiciary--while the state Supreme Court justices appointed the trustees of the largest charitable trust in the country. But Republicans are in no way immune to the same pernicious disease, whether at the state or national level.

University of Hawai‘i law professor Randall Roth was instrumental in bringing the extent of the scandal to public attention and forcing state and federal officials to begin attempts to redress the sorry state of affairs. Here's an excerpt from his article in the journal of the International Center for Not-for-profit Law in 1999. Much has changed since that time.
Kamehameha Schools/Bishop Estate (KS/BE) was established 114 years ago by the will of Princess Bernice Pauahi Bishop, the great-granddaughter and last descendant of King Kamehameha the Great. Initial funding of this charitable trust consisted of roughly 10% of the Kingdom of Hawaii's land mass, including all of Waikiki. The KS/BE corpus today is estimated to be worth approximately $10 billion, including a 10% interest in Goldman Sachs....

The will directs that trustees be chosen by justices of the "Supreme Court," which at the time of the princess' death meant the Supreme Court of the Kingdom of Hawaii. But Supreme Court justices continued to make the selections when Hawaii was a republic, territory and state ... until late last year. It was then that four of the five justices, bowing to public pressure, agreed not to participate in future trustee selections. The one dissenter has suggested privately that he has authority to make future selections "as a majority of one." In past years, the justices did not hesitate to decide cases involving the trustees they selected. But earlier this year, the justices agreed to recuse themselves in such matters.

HIGHLY COMPENSATED TRUSTEES. KS/BE trustees have paid themselves annual fees averaging about $900,000 each. They argue that this has been within the compensation cap set by mechanical application of Hawaii's statutory fee provision. But the nation's preeminent authority on trust law has called this formula "practically incomprehensible ... an awful statute." Among other problems, it does not define "revenue," "income" and "general profits." As a result, it is not clear in what circumstances net income as opposed to gross income is to be used, or to what extent capital losses are to be offset against capital gains.

These ambiguities take on greater meaning when you consider a few numbers. During the three-year period currently under review by a court-appointed master, the trustees experienced losses and loss reserves totaling $241 million. This exceeded investment income from all sources, including Goldman Sachs. Plus, annual management and general expenses rose from $42 million to $52 million to $61 million. According to the master, the total return for this three-year period was minus 1.0%.

Due to a dramatic, last-minute floor vote on the floor of the state House of Representatives, the 1998 Legislature replaced the statutory fee formula with a simple requirement that trustee compensation always be "reasonable under the circumstances." The bill had been bottled up in the House Judiciary Committee (whose chair has for years received a $4,000 monthly retainer from KS/BE), and was actively fought by the Speaker of the House (who recently received a $132,000 consulting fee on a KS/BE land transaction).

POLITICAL CONNECTIONS. One of the current trustees was Speaker of the state House of Representatives at the time of his appointment in 1984 and for several years thereafter. Another had been President of the state Senate just prior to being appointed a trustee. A third had just been chairman of the state Judicial Selection Commission, and a fourth was a physical education teacher turned state Department of Education administrator who recently had served as chairperson of the sitting Governor's re-election committee on the island of Maui. The fifth trustee, Oswald Stender, is sometimes called the accidental trustee. Unlike the other four, he is not politically active and was not the first choice of any justice. Stender emerged as a compromise candidate only when the justices reached a stalemate over other candidates, one of whom was generally regarded at that time as a political "king maker." Stender is the only trustee with CEO-like credentials. [All trustees have now been replaced.--J]

Cynics sometimes point out that members of the Judicial Selection Commission are selected by the Speaker of the House, President of the Senate and Chief Justice of the Supreme Court ... and that KS/BE trustees in recent years have included a Speaker of the House, President of the Senate and Chief Justice of the Supreme Court. The Governor also selects Commission members, and the most recent trustee is the best friend and political confidant of the Governor. [emphasis added]

The law firm of another recent Judicial Selection Commission chairman has received $15 million in fees from KS/BE since his tenure on the Commission, and the law firm of a former Governor received millions in fees soon after he left office in 1995.

Unsuccessful candidates for justice of the state Supreme Court have described being quizzed by members of the Judicial Selection Commission about who they might be inclined to name as a KS/BE trustee. These candidates concluded that no one gets appointed to the high court in Hawaii unless they answer this question "correctly."
The Honolulu Star-Bulletin has a special website devoted to its extensive coverage of this evolving story between 1997 and 2003.

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