The state Legislature is taking aim at an investment practice that resulted in the state treasury being left with about $1 billion of securities that it largely has been unable to sell.

The pending measure would restrict the state's further buying of so-called auction rate securities as a short-term investment.

Only in cases where the securities mature in less than five years would the purchases be allowed, ruling out most of the investments made in these vehicles.

The proposed law comes in the wake of relevations that the state had $1.1 billion tied up in the market at the time of its collapse in February 2008.

Since that time the state has been unable to sell most of the securities and may have to wait until they mature over the next several decades to get its money out.

The controversy has resulted in a legislative hearing and a review of the Department of Budget and Finance by the state auditor.

The pending bill, SB 2825, also came out of the controversy.

It adds wording to the current law governing what kinds of investments the state can make, to clear up any lingering questions about the maturity dates of auction rate securities.

"This is all about short-term investments," said Rep. Karl Rhoads, D-28th (Palama, Downtown, Lower Makiki), who authored the House version of the bill and asked that a duplicate measure be introduced in the Senate.

The measures, while slightly different in wording, would correct an ambiguity in the law that relates to state purchases of the auction-rate securities and the way the complex investments are structured.

The issuers of the securities were able to offer higher interest rates because they are actually long-term obligations that have been chopped into chunks that were resold every seven to 49 days via auctions.

The market came to a standstill 26 months ago when buyers pulled back from the auctions because of the credit crunch.

State auditor Marion Higa's report slammed the state's purchases of the auction-rate securities, questioning whether the Department of Budget and Finance had adequate oversight of the purchases, and saying it may have failed to do risk assessments and may have broken its own guidelines on amount of certain holdings.

Higa also criticized the state for breaking a law requiring investments to have shorter maturity dates. The underlying obligations for the auction rate securities have maturities that in some cases are almost 40 years out.

Gov. Linda Lingle's administration has disputed Higa's report and said the law allowed the purchases because the auctions were held regularly until the freezing of the market.

Rhoads said the pending legislative bill is an effort to remove any ambiguity.

Under it, the state would be banned from buying investments where the underlying obligations have maturities that are longer than five years.

The bill has passed both the House and Senate with slightly different wording and has been sent to a conference committee to resolve differences.