Hawaii taxpayers have a $10 billion bill coming due — and it could get bigger.

That’s how much extra money experts estimate it will take to pay for health benefits of state and county retirees in coming years. Now, the plan can barely pay for itself. It’s had to impose giant increases in premiums just to stay afloat.

The problem is things are only expected to get worse, because the state is committed to providing benefits but only has the money to meet its current obligations because it hasn’t put away money for the future. Hawaii’s retiree health bill is one of the worst in the nation on a per-capita basis.

The issue of so-called unfunded liability is only starting to make headlines because of recent accounting requirements that states and municipal governments tally what they’ll owe to retirees.

The state Hawaii Employer-Union Health Benefits Trust Fund (EUTF) has started to report the liability on its annual reports. What those reports have revealed is that the unfunded liability for retiree health care is much greater than the more-talked-about funding shortfall in public worker pensions at the Hawaii Employees Retirement System.

The most recent estimate of the EUTF’s unfunded liability is $10.3 billion for the year ended July 1, 2007, according to a September 2008 report prepared by Aon Consulting. That compares to the $6.2 billion unfunded liability at the ERS.

“We have time to work out a plan, but it is a huge number we have to come up with,” said Lowell Kalapa, president of the Tax Foundation of Hawaii, a nonpartisan group that provides research on government spending and taxation.

Kalapa notes that unfunded liability for public workers in the state now totals more than $16 billion.

The million — or billion — dollar question is how will it come up with the money. Related to that is the question of what level of benefits should be given to public employees, and whether they’re overly generous today, Kalapa said.

“This is where the legislature has been negligent in shaking its finger at the unions,” Kalapa said. “They haven’t been saying ‘we can’t afford to give pay increases because we have to pay for retirement benefits.’ ”

Complex Subject

The issue of health benefit costs for public worker retirees is not easily understood. It requires a team of actuaries looking at discount rates, life expectancies and expected medical inflation to arrive at an estimate of unfunded accrued liability.

The problem starts with the decades-long practice of government employers offering a generous package of benefits because, at least initially, they couldn’t afford to be competitive with salaries and hourly pay for workers in the private sector.

State and county workers have defined-benefit pension plans — where the government promises a level payment based on years of service and salary — where most private sector workers don’t.

In retiree health benefits, the public sector generally holds an edge, too. Retirees can get healthcare insurance, prescription drug plans, dental and vision plans through the EUTF.

Depending on hiring date and years of service, some retirees can get 100 percent of their health insurance premiums paid by the EUTF and get premium reimbursements for Medicare Part B, the program covering doctor visits, tests and some other medical costs. In the 2008 fiscal year, the EUTF reimbursed $40.9 million in Medicare costs to retirees.

The coverage also extends to spouses and dependent children, up to age 19 and some older full-time college students.

As of October 2009, a total of 169,708 public workers, retirees and dependents received health coverage through the EUTF. Of those, 38,504 were retirees and 18,759 were retiree dependents.

Pay As You Go

The bills for these benefits have been paid as they are presented to the EUTF, or on a pay-as-you-go basis. But it appears that bill is going to grow enormously in coming years and become a bigger part of the state budget. A projection prepared by an EUTF consultant estimates that annual benefit payments will jump from 2008’s $276.1 million to $692.8 million in 2022.

Most state, county and city governments have followed the same approach to this issue and until recently didn’t report how these costs would affect them in the future.

But that changed in the past decade, when something called the Governmental Accounting Standards Board, took notice of the issue and said more transparency was needed on the costs.

In effect the board – a body that sets requirements for government accounting – said not enough was known about how the costs were piling up. A state employer could make promises to workers that would prove costly to taxpayers a generation from now. So in 2004 a provision known as GASB 45 went into effect. It required government accountants to produce an actuarial statement on what’s known as Other Post Employment Benefit Costs – a category that’s primarily retiree health insurance expenses.

GASB 45 asked that governments tally up the OPEB costs that had been accrued by current workers, along with an estimate of what it would take to fund these costs over a 30-year period. The EUTF last issued its cost estimate two years ago, with another actuarial update coming this year.

“The last OPEB was significant enough,” said Barbara Annis, deputy director of the state Department of Budget and Finance and an EUTF trustee. “If two years has passed you know it actually has to be greater.”

Wake-up Call

The Center for State & Local Government Excellence looked at the unfunded liability problem nationwide recently and reported not all states had a problem with the expense. But it noted Hawaii was one of the states where a major fiscal challenge existed. Hawaii’s 2006 unfunded liability of $9.68 billion was 360 percent of annual payroll, ranking Hawaii first among states in this measure. It also had the second-highest level of unfunded liability per capita at $7,636 per person.

States with Highest Unfunded Liability per Capita

State Per-Capita Rate Coverage synopsis
New Jersey $7,951 Retired teachers pay no premium; retired state employees pay 2 percent of health insurance
Hawaii (2006 value) $7,636 If hired before 1996, state pays between 50 percent and 100 percent of coverage.
For retirees hired after 1996, state pays between 0 percent and 100 percent.
Connecticut $6,219 For retirees after 1997, some plans require 3 percent contribution.
Alaska $4,689 Pays for recipients hired before 7/1/1986. Those hired after that date with 5 years of service
pay full premium if under age 60 and less than 30 years of service; no premium cost over age 60.
Louisiana $4,362 Retirees pay a scaled portion of the premium

States with Lowest Unfunded Liability per Capita

State Per-Capita Rate Coverage Synopsis
Nebraska N/A State says retiree medical plan liability too small to justify producing a report
North Dakota $49 Partially subsidized; contributions are required for retiree and dependent coverage
Indiana $71 Implicit subsidy only
Oregon $73 Under 8 years of service, no explicit subsidy; 8-9 years 50 percent subsidy; 100 percent
explicit subsidy for 30 years of service.
Arizona $74 Retirees over age 65 in a separate risk pool and pay full premium. No explicit subsidy.


“In states and localities with generous plans, retiree health plans represent an expanding problem for the fiscal health of the states and cities,” said the report prepared by Robert L. Clark, an economics and management professor at North Carolina State University.

“GASB 45 statements in these states represent a wake-up call for policy makers to consider their options in how to deal with these liabilities.”


A Government Accounting Office study late last year totaled up the unfunded liability for state and county governments for public worker retiree health care. The combined bill came to more than $530 billion. 

Only about one-third of states have begun what’s known as pre-funding, or contributing toward what’s owed in the future. For now there is no legal or accounting requirement that they set aside money.

In Hawaii, only the counties have started making payments toward this, the the figure remains tiny in comparison to the overall unfunded liability.

However, some states are starting to move toward pre-funding. There’s been debate whether a large liability will affect state bond ratings in the future and raise the cost of borrowing. One school of thought is that that bond analysts are aware of the liabilities and have already factored them into overall credit assessments.

“The analysts certainly are aware of it, but to my knowledge at least until recently that has not had an impact on our bond rating,” said Annis. “I think it’s because so many states are in the same boat.”

Less Generous

The Center for State & Local Government Excellence report also included calculations on what it would cost the state if it started a trust into which it would make pre-funding payments for OPEB over a 30-year period.

The annual tab for the pre-funding along with the regular contributions for health care for employees and their dependents would amount to $752 million. That’s more than the individual operating budgets of 14 state departments, according to state projections.

Rep. Karl Rhoads, head of the House Labor Committee, noted the state has been able to fund the costs on a pay-as-you-go basis, and that there are questions about whether the state can afford pre-funding given recent budget shortfalls.

More worrisome to him is if healthcare costs keep accelerating, raising the costs for providing coverage further.
“The part that frightens me is that medical care just gets more and more expensive,” Rhoads said.

Kalapa said the state and counties may have to take a look at lowering health benefits for retirees. A variety of options exist for plans wanting to cut costs, including raising deductibles and member co-payments, though a March Hawaii Supreme Court opinion on retiree benefits equaling active employee benefits may have some bearing.

A politically tricky move would be to raise taxes to cover the costs. Kalapa typically doesn’t favor tax increases and says other changes such as altering benefits need to be considered.

“I think we’ve kind of come to the gates of Armageddon,” said Kalapa. “We need to recognize we need to make some changes.”