Just like the runaway costs of Honolulu’s rail system, the state’s runaway unfunded liabilities for public employee and retiree health care benefits could wreak havoc on its beneficiaries and Hawaii taxpayers if action isn’t taken soon.

An unfortunate consequence of Hawaii’s crippling debt is that it is crowding out other services, such as homeless aid, affordable housing and park maintenance. Hawaii taxpayers may soon be paying more but getting less.

The state Employer-Union Health Benefits Trust Fund (EUTF), the source of the unfunded liabilities, provides medical and life insurance benefits to approximately 70,000 state and county employees, and 45,000 county employees and retirees plus their dependents.

Capitol Building 2018.

Unless Hawaii’s leaders act on unfunded liabilities, taxpayers could face a fiscal disaster.

Cory Lum/Civil Beat

These are desirable, albeit it expensive, benefits for our state and county workers. But the EUTF’s unfunded liabilities as of July 1, 2017, exceeded $12.1 billion, compared with $11.7 billion as of July 1, 2015, with increased health care costs and longer lifespans being cited by as the main reasons for the increase.

According to an actuarial valuation report released last month, the EUTF is only 12.8 percent funded. Thanks to legislative reforms and rosier projections, this was a vast improvement over two years earlier, when the ratio stood at just 6.7 percent, but the trust fund is not out of the woods yet.

Some of the improvement could be attributed to lowered health care cost predictions. The report lowered the HMSA inflation rate from 9 percent to 6.6 percent for the next two years. Last year, HMSA’s premiums for large employers increased by an average of 9.3 percent.

The lowered assumption affects the unfunded liability calculations significantly. For example, a 1 percent change in the assumption leads to an 18 percent change in the unfunded liability. However, the report doesn’t provide an explanation about why the assumption was lowered.

Among the legislative reforms that affected the EUTF, Act 268, approved by the Legislature in 2013, required that the state and counties make gradually increased payments into the fund, going from $882 million in fiscal 2018 to $1.1 billion in fiscal year 2020.

The state’s annual contribution alone is set to increase to $787 million in fiscal 2019, up from $616 million in fiscal 2018.

Honolulu County taxpayers will be on the hook for $177 million to fund the EUTF in fiscal 2019, up from $133 million in fiscal 2018. All other counties will experience similar jumps in required contributions.

From fiscal 2018 to fiscal 2019, contributions will increase for taxpayers in Maui County from $26 million to $34 million; Kauai County from $13 million to $16 million; and Hawaii County from $30 million to $39 million.

The state Employees’ Retirement System (ERS) faces a similar shortfall of $12.9 billion. The ERS also will require a similar ramp-up in taxpayer contributions to fill up the fund, which is currently only 54 percent funded.

When the ERS and EUTF required tax contributions are combined, this punches a hole in the budgets of the state and counties. Combined required contributions for the ERS and EUTF will rise by 42 percent from 2017 to 2019, with higher contributions to follow in future years.

Adding the $12.1 billion EUTF debt with the $12.9 billion unfunded liabilities of the state Employees’ Retirement System, Hawaii taxpayers now are on the hook for $25 billion to make good on the state’s obligations to current and retired employees and their dependents.

The rising payments will eat further into county budgets this year. For example, the required contributions into the ERS and EUTF will make up 14 percent of Kauai’s $201 million operating budget this year, up from 12 percent last year.

In fiscal 2017, the rising payments will make up 9 percent of the state’s $14.1 billion operating budget, up from 7 percent in fiscal 2017. For Honolulu County, the payments will rise to 11.5 percent of the $2.4 billion operating budget, up from 9 percent.

Maui County’s payments will rise to 11 percent of the $563 million operating budget, up from 9 percent. For Hawaii County, the payments will rise to 13.6 percent of the $490 million operating budget, up from 12 percent the year before.

Better financial management is going to take the cooperation of government employees, lawmakers and taxpayers. No one can afford to ignore the state’s runaway unfunded liability costs any longer.

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About the Author

  • Joe Kent
    Joe Kent is the Vice President of Research and Development for the Grassroot Institute of Hawaii, a non-partisan public-policy think tank which focuses on limited and accountable government in Hawaii. He grew up in Hilo, Hawaii, and spent seven years as a public school teacher in the Department of Education, teaching in both Minnesota, and in Lahaina, Maui.