Kamehameha Schools' spending on educational programs has remained flat in recent years as its endowment grew by more than $3 billion, exposing the estate to criticisms that it is hoarding its assets, according to a court-appointed overseer.

The value of Kamehameha Schools' endowment climbed from about $5.5 billion in 2003 to $7.7 billion in 2006 and $9.1 billion in 2007.

Meanwhile, the estate's spending on its educational programs has remained relatively constant at about $220 million for most of that period, although the trust did increase its spending to $250 million last year.

"The significant revenue and spending variances might expose the trust to criticism for possibly 'hoarding' and correspondingly not adequately expanding its reach to assist Princess Pauahi's intended beneficiaries," wrote David Fairbanks, a Honolulu lawyer serving as the appointed "master" who must review Kamehameha's financial filings for the Probate Court.

Trust officials denied that they are hoarding income and said that spending on educational programs actually increased by nearly $30 million last year.

Kamehameha Schools spokeswoman Ann Botticelli said the trust's spending on education was up 13 percent to $250 million during its 2007 fiscal year. She added that the trust expects to increase its spending further in 2008.

Last year, the trust served more than 35,000 Native Hawaiian students and families, a 27 percent increase from the year-earlier period.

"We are absolutely not hoarding income," Botticelli said.

Fairbanks' 97-page report, which will be the subject of a Probate Court hearing tomorrow, comes as Congress may be looking to require wealthy schools and universities to spend more of their endowments each year.

Under a Probate Court-approved spending policy, Kamehameha Schools spends between 2.5 percent and 6.5 percent of its assets each year, although the actual spending amounts have been slightly less than 4 percent, Fairbanks said. By contrast, charitable foundations are required to spend 5 percent of their holdings each year.

Botticelli said the trust's educational spending policy is pegged to a five-year rolling average of the endowment's fair market value and is not just a one-year valuation.

The trust's average value for those five years was $6.1 billion, not $9.1 billion, and the $250 million the trust spent on education in 2007 represents about 4.1 percent of the $6.1 billion average, she said.

She added that much of the increase in the value of Kamehameha Schools' endowment was in the form of unrealized stock market gains, not income.

"Our endowment group has done a great job in a bull market. But as you can see by the headlines of late, markets change," Botticelli said.

"We can't incur costs in good times unless we're certain we can continue to carry those costs in bad times."

Founded under the 1884 will of Princess Bernice Pauahi Bishop, the Kamehameha Schools is a tax-exempt trust that educates children of Hawaiian ancestry. It's one of the nation's wealthiest charities and is the state's largest private landowner.

Fairbanks' report also raised concerns about the estate's budgeting process. In 2006, Kamehameha Schools spent $308 million on educational services and other programs, which was $39 million less than its initial budget. In 2005, the trust spent $306 million, or $20 million less than what it had budgeted.

Botticelli said the unspent money isn't hoarded but remains in the endowment and is used for future projects.

BETTER MANAGEMENT

Overall, Fairbanks' report, which was filed last week, noted that the trust has made much progress in improving its CEO-based management system. That system was put in place in response to the late-1990s trust scandal, which resulted in the ouster or resignation of former board members Henry Peters, Richard "Dickie" Wong, Lokelani Lindsey, Gerard Jervis and Oswald Stender.

Fairbanks also complimented the trust for reaching out to more orphans and indigent students.

The percentage of indigent and orphaned students at Kamehameha's Kapalama Heights campus was 19 percent during the 2005-06 fiscal year, which was up from 14 percent during the 2002-03 year.

He also praised the quality of education at Kamehameha campuses, in which 97 percent of the graduates would go on to four-year universities, community colleges or technical schools.

SHOULD MORE BE DONE?

Roy Benham, a 1941 graduate and former president of the Kamehameha Schools Alumni Association, said the school is reaching more students than it ever has but could do more, given its resources.

"I still think they should look for more inventive ways of reaching our children," he said.

Deputy Attorney General Hugh Jones, whose office serves as a legal advocate for the estate, believes that Fairbanks' remarks are important when viewed in the context of past practices by the estate.

In a 1998 report, attorney Colbert Matsumoto, the court-appointed master for Kamehameha Schools' 1994-96 fiscal years, concluded that the estate's former trustees secretly accumulated $335 million in income that should have been spent on educating Hawaiian children.

The accumulation was one of the key reasons for the removal of then-trustees Peters and Wong, Jones said.

"The foregoing historical context, and the significant growth in the trust's endowment ... and significant variance in budgeted and actual expenditures re-emphasized the importance of the master's statement," Jones said.

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.