Two national studies have recently questioned the health of Hawaii’s state pension fund. But top fund administrators told Civil Beat that the authors of those studies never spoke with them, and refuted their claims that the pension system is in trouble.

“We are playing catch up. But we have taken the steps to catch up,” David Shimabukuro, the Employees’ Retirement System’s top administrator, told Civil Beat in a wide-ranging, two-hour interview at the fund’s downtown Honolulu headquarters before he retired at the end of June. (Read an edited transcript of the interview.)

While Shimabukuro acknowledged that the latest numbers show the fund has a $6.2 billion unfunded liability and is only 64.4 percent funded, he said that the rate of contributions has been raised enough to make up the gap. He put the blame for the system’s problems on past decisions by the state and county governments.

“This problem was caused by the employer,” Shimabukuro said.

From 1967 to 2005, he said, the state and counties didn’t contribute about $1.7 billion to the system, claiming that “excess” earnings made the money unnecessary. The Legislature and Gov. Linda Lingle put a stop to governments shirking their responsibility in 2005. If that money had been put into the fund over the years, they said, the state wouldn’t be in its current fix. At one point, that missing money alone was valued at $4.5 billion.

The result of the governments’ failure to live up to their earlier obligation, however, is that the rate of contributions for pensions today is higher. The employer contribution is 15 percent of a general employee’s salary, and 19.7 for police and firefighters. The employee contributes 6 percent or 7.8 percent, depending on the plan they choose. Firefighters and police put in 12.2 percent, because they can retire earlier.

To give a sense of the cost to Hawaii taxpayers of being underfunded, they said the employer contribution rate would be 6 percent, instead of 15, if the pension system were fully funded.

Two studies recently targeted the state. The Pew Center on the States identified Hawaii as a state of “serious concern.” The same study also said Hawaii was among the states “lacking progress with taking the necessary steps to ensure their pension plans are financially secure.” A report from Joshua Rauh, a professor at Northwestern University, suggested that Hawaii’s fund would run out of money by 2020.

The administrators disputed both claims. They said the studies were based on faulty assumptions. They pointed out that over the past 43 years, since the governments began withholding their share of pension funds, ERS has averaged returns of more than 8 percent a year, its current target. That occurred through seven recessions, they said.

At the same time, they were careful to say that they’re not discounting the challenge they face.

“This problem is not going to go away,” Shimabukuro said. “We don’t want to dream. We want to be realistic.”

Among the other key points they made in the interview:

  • Payouts from the fund to retirees and beneficiaries are an economic driver for the state. Last year the fund distributed about $840,000,000 to 37,00 retirees and beneficiaries, with 90 percent of it going to people living in Hawaii. They said the payments “help to sustain the state economy and maintain jobs in the public and private sector.” The fund has 111,000 members.
  • The state stepped up in 2005 and did the right thing by raising contributions and stopping the practice, which would not have been allowed if carried out by a private firm, of not making its payments when investment returns exceeded targets. The state has also held the line on increasing benefits for the past 13 years.
  • While some may complain that the government contribution rate is now too high, and they acknowledge that it is high, they said that in the past “the taxpayer has benefited from the ERS’ good investment performance” while employees have paid their share.

Shimabukuro left office at the end of June confident that the state will have the money necessary to meet its pension obligations. His assistant administrator, Wesley Machida, was appointed by the board to be the next administrator. Machida and ERS Chief Investment Officer Rod June sat down with Civil Beat together with Shimabukuro.