ALAMEDA, Calif. — Hawaii and Citi have announced a legal settlement that will allow the state to exit from its $869 million auction-rate securities portfolio within five years.

The settlement was announced last week by Attorney General Mark Bennett.

The state owned more than $1 billion of student loan-backed auction-rate securities at the time the ARS market froze during the financial crisis of 2008, according to a report published in March by the state auditor, Marion Higa. That stasis left Hawaii unable to access almost 30% of its $3.8 billion treasury, which is supposed to be invested with an eye to liquidity, according to the report, which was highly critical of the Department of Budget and Finance’s investment choices.

Hawaii still holds $868 million in its Morgan Stanley Smith Barney brokerage account, though it has liquidated about $200 million of its ARS holdings at par.

“The state will essentially get back what it paid for these securities, plus interest collected on them,” Bennett said in a statement. “The alternative — lengthy, expensive litigation — would have provided no certainty. And might, in the end, have been unsuccessful.”

Citi admits no wrongdoing in the settlement, but agreed to purchase the securities at par value by June 2015. It also agreed, starting in 2012, to provide Hawaii with interim liquidity of up to $150 million, supported by the ARS portfolio.

“We’re pleased to provide this liquidity solution to the state,” Citi spokesman Alexander Samuelson said in a statement.

Hawaii’s ARS holdings have maturities as long as 2045, and state finance officials have said they would have held them to maturity rather than sell them at a loss.

“Our goal in these negotiations has been to assure that our taxpayers will not receive less than par on these ­investments, and this agreement provides for that,” the state budget ­director, Georgina Kawamura, said in a statement.

Bennett said the state and Citi negotiated for several months since developing basic deal parameters in July. The attorney general will be leaving office soon.

Bennett was appointed by Republican Gov. Linda Lingle. Her term ends Dec. 6, when Democrat Neil Abercrombie will be sworn in as the new governor.

Higa’s March criticism of the state finance department included the doubled state ARS holdings the year before the market collapsed.

The report noted that the state’s ­investment policies have not been reviewed since 1999 and were not ­followed. The result was a portfolio with a higher-than-permissible percentage of ARS and ARS holdings that violated the five-year maximum ­maturity limit specified in state investment ­policies.

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