The stock investment portfolio for the Office of Hawaiian Affairs shrank by 27.9 percent during the first 10 months of 2008, 12 percent during October alone, OHA officials said.

The immediate impact is a hiring freeze, but the agency may be forced to cut money for programs in future budgets.

OHA is one of numerous multimillion-dollar agencies, organizations and businesses dealing with dramatic shifts in the stock market and the tough economic times that are forcing sweeping cutbacks nationwide.

The agency's analysts report that on Dec. 31, 2007, the value of its Native Hawaiian Trust Fund was $444.3 million. As of Oct. 21, the total market value was $320.4 million, a 27.9 percent decline through the first 10 months of the year. The decrease was 12.2 percent from where it stood on Sept. 30, less than a month before.

The 10-month value loss is "lower than many other long-term investors because of (OHA's) investment policy," which allows its operations to absorb and weather sudden volatility in the market, the agency said in an e-mail.

OHA said it does not expect to make any cuts in services for the current fiscal year, which runs through June 30, 2009. But it relies heavily on revenues derived from investments to fund programs, so the story may be different in upcoming budgets.

OHA must now seriously scrutinize how it prioritizes its money, said trustee Oswald Stender, who chairs OHA's Asset and Resource Management Committee.

For Stender, the main priorities are housing, healthcare, education and human services.

"We're going to have to sit down with the grants people to set up new guidelines as to what grants take priority," Stender said. "In other words, should we subsidize the Polynesian Voyaging Society? I don't think so. Should we make a grant for healthcare? Well, that's important."

OHA has already made commitments for the coming year, but future grants will need to be reduced, he said.

The agency has already instituted a hiring freeze. Five full-time positions have been eliminated through attrition, the agency said. "Our cost-cutting measures will focus on reducing the workforce through attrition instead of reducing spending on programs to minimize the impact on our beneficiaries, many of whom are vulnerable to the current downturn in the economy," OHA said.

NO CUTBACKS FOR NOW

The agency said it does not expect any impact on its programs and policies until fiscal year 2011, which begins July 1, 2010. This is because OHA spending policy "allows trustees to authorize spending of 5 percent of the most recent 12-quarter (36-month) average valuation of the Native Hawaiian Trust Portfolio," the agency said.

The operating budget for the current year is about $45 million, Stender said. About $15 million comes from the state as OHA's share of revenues derived from ceded lands. Another $3 million in general state grants covers OHA's administrative costs. The remaining $27 million or so comes from the return on its investments.

Stender, speaking by telephone from Chicago where he is attending an investment conference in his capacity as a trustee of several unrelated mutual funds, said he and OHA financial officers are looking at "rebalancing" investments to safeguard against deeper losses.

"We're taking money and moving it between the different asset classes that would give us the least risks," he said. "There's not much else you can do to meet the losses. You just sit back and take it."

About 42 percent of OHA's portfolio is invested in the stock market, and OHA has "increased our cash position" in the past year, the agency said. About 25.2 percent of its assets is allocated in U.S. large cap stocks, 23.9 percent in fixed income and 10.7 percent in absolute return alternatives. About 8.6 percent is in real estate, 6.5 percent in private equity, 4.5 percent in cash and 2.75 percent in high yield.

OHA's stock investments are actually placed into two portfolios — $157.5 million in Goldman Sachs equity and fixed-income funds, and $162.8 million in Russell Investments' Russell Real Estate Equity Fund.

BEST TO ASSUME WORST

Stender said the agency needs to start considering cuts for the second year of its biennial budget as well as future budgets.

"Everybody's saying it'll take at least a year for (the economy) to stabilize, and then another year to catch up," he said. "We cannot assume it's going to get any better. It's better for us to assume it's going to get worse."

Stender's committee recommends policies for the management of the agency's investment portfolio, and deals with all other OHA fiscal and budgetary matters.

OHA was established by the 1978 state Constitutional Convention in part to oversee funding for programs and policies designed to improve and maintain the well-being of Native Hawaiians.

Earlier this month, the value of the Employees' Retirement System portfolio dropped $974 million to $9.87 billion, a loss of about 8.5 percent. By comparison, over the past 12 months the retirement fund for Hawai'i's state and county employees lost nearly $1.8 billion in value.