Hawaii taxpayers may be on the hook for nearly $300 million over the next four years to help restore the sorely underfunded Hawaii Employees’ Retirement System, which covers pensions for state and county workers.

That’s one proposal that advanced through the House Committee on Labor and Public Employment on Tuesday. Another bill would allow the Legislature to direct excess general fund revenues toward the pension fund, which covers 39,400 retirees. (No mention of where the excess would come from given the $800 million shortfall.)

Lawmakers heard testimony on a total of six bills that aim to address the fund’s $9 billion unfunded liability — and advanced all six.

The measures had the support of ERS trustees, most public labor unions and the state Department of Budget and Finance. Here’s a rundown of the bills, which still need to be heard by the House Judiciary and Finance Committees.

Similar Senate versions of these bills are scheduled to be heard on Friday by the Senate Committee on Judiciary and Labor.

House Bill 1037

What it Does: Increases employer contributions to the Employees’ Retirement System over the next four years.

Contributions are based on a percentage of payroll, and current rates are 19.7 percent for police officers, firefighters and corrections officers, and 15 percent for all other employees.

The proposed increases are:

  • 2012-2013: 22 percent for police officers, firefighters and corrections officers, 15.5 percent for all other employees.
  • 2013-2014: 23 percent for police officers, firefighters and corrections officers, 16 percent for all other employees.
  • 2014-2015: 24 percent for police officers, firefighters and corrections officers, 16.5 percent for all other employees.
  • 2015-2016: 25 percent for police officers, firefighters and corrections officers, 17 percent for all other employees.

Each percentage point represents approximately $40 million annually, according to ERS Administrator Wesley Machida. The state’s share of the costs are about 75 percent, while the counties share the remaining 25 percent. That means the proposed increase of 5.3 percentage points for police officers, firefighters and corrections officers would cost a total of $212 million over the next four years. The proposed increase of 2 percentage points for all other employees would cost a total of $80 million over the four years.

Machida testified in support of the bill, describing the proposed increases as “moderate” and “reasonable.” He said that without the gradual increases, an actuarial report recommends an immediate increase in the employer contribution rate to 28 percent for police, firefighters and corrections officers, 19 percent for all other employees to ensure the ERS is totally funded within 30 years.

Budget and Finance Director Kalbert Young also testified in support, saying the administration “recognizes it will result in higher rates, but we do feel it’s necessary to ensure the long-term viability of the system.”

HB 1037 has also been referred to the House Finance Committee, which has not yet scheduled a hearing.

House Bill 1038

What it does: Increases employee contributions to the Employees’ Retirement System for new hires after June 30, 2012.

Under current law, firefighters, police officers, corrections officers, investigators of the departments of the prosecuting attorney and of the attorney general, narcotics enforcement investigators and water safety officers contribute 12.2 percent of their compensation to the annuity savings fund. All other employees contribute 7.8 percent.

Under HB 1038, employees hired after June 30, 2012 would contribute 9.8 percent of their compensation. Firefighters, police officers, corrections officers, investigators of the departments of the prosecuting attorney and of the attorney general, narcotics enforcement investigators, water safety officers hired after that date would contribute 14.2 percent of their compensation.

Budget Director Young testified in support, saying the measure would help stabilize the fund and reduce its long-term liability. Mike Hansen, director of the City and County of Honolulu’s Department of Budget and Fiscal Services, also testified in support. The Hawaii Fire Fighters Association and the University of Hawaii Professional Assembly opposed the measure, saying it would affect recruiting efforts.

Rep. Karl Rhoads asked ERS Administrator Machida why the bill wouldn’t take effect sooner than July 2012 given “the enormity of the problem.” Machida cited operational issues, saying ERS would need to change its computer system and update new-hire materials.

The bill has also been referred to the House Finance Committee, which has not yet scheduled a hearing.

House Bill 1142

What it Does: Changes the retirement age for state and county employees hired after June 30, 2012.

Currently, state employees can retire at age 55 after five years of service, while some county employees (including police officers) can retire at any age after 25 years of service to be eligible for pension benefits.

Under HB 1142, new hires after June 30, 2012 would have to reach age 60 to retire after five years of service. New hires who put in at least 25 years of service would have to reach age 55 to be eligible for retirement benefits.

Machida said ERS trustees support the measure as a means to reduce long-term costs. Union representatives for the Hawaii Fire Fighters Association and the University of Hawaii Professional Assembly opposed the measure, saying it would affect recruiting efforts.

During the hearing, Rep. George Fontaine, who voted with reservations, said “the retirement age for police and firefighters was due to the nature of the work, and being able to serve 25 years and get out at any age.” He recommended considering an exemption for these employees, saying, “many are burned out by 25 years.”

The measure has also been referred to the House Finance Committee, which has not yet scheduled a hearing.

House Bill 835

What it Does: Allows the Legislature to deposit excess general fund revenues into a fund to fund pension benefits and other post-employment benefits for state employees.

Under current law, whenever the state’s general fund balance or surplus exceeds 5 percent of the revenues taken in during the previous fiscal year for two consecutive years, the next Legislature must pay out tax refunds or credits.

Under HB 835, if the general fund’s balance is expected to exceed the previous year by 7 percent or more, the excess would be put toward the ERS “to reduce unfunded liabilities for pension benefits and other post-employment benefits for employees of the state.”

Reps. Fontaine and Roy Takumi voted against the measure. Fontaine said he felt it would set a bad precedence. “If we take in too much, we should give it back to the people,” he said.

In response, Rep. Rhoads, who introduced the measure, said any recent surpluses have been “manini,” and given the state’s budget deficit, it’s unlikely the state would see a surplus soon. “Anything above 7 percent would have to go to the ERS until it’s fully funded,” he said. “Taking everything above 7 percent would leave less at the 5 percent level, but the Legislature would have choice, and these two options should work alongside each other.”

Budget Director Young testified in support of the bill, but recommended that funds be a standard budget appropriation to help address the shortfall.

The bill has also been referred to the House Judiciary and Finance Committees, neither of which have scheduled a hearing yet.

House Bill 1143

What it Does: Reduces the investment return yield rate assumption for ERS for the current fiscal year ending June 30, 2011, from 8 percent to 7.75 percent. Authorizes the ERS trustees to set the rate in following years independently of the Legislature, based on recommendations of the actuary.

Machida testified in support, noting that over last 10 years, the fund’s performance has been averaging 3 percent. He said that having the rate set by statute means the funding level can be understated or overstated.

The bill has also been referred to the House Judiciary and Finance Committees, neither of which has scheduled a hearing yet.

House Bill 1036

What it Does: Maintains the fund’s federal tax exempt status.

HB 1143 has also been referred to the House Finance Committee, which has not yet scheduled a hearing.

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