The Hawaii Employees’ Retirement System provides retirement, disability and survivor benefits for all state and county employees. As of June 2017 the system had 120,624 members including retirees and beneficiaries. Hawaii’s pension program — like those of many other states — is severely underfunded.
In an audit done by Gabriel Roeder Smith & Co. the unfunded actuarial accrued liability (UAAL) was expected to increase from the prior year. In addition, the system had a liability loss caused by individual salary increases. The system also experienced a less than expected return on its investments.As a result, the unfunded liability grew to $12.4 billion or 54.7 % of the total required.
“We have determined that the funding period for paying off the UAAL of the system (in aggregate) is 66 years. Because this period exceeds 30 years, the objectives set in State statute are currently not being realized,” the auditors reported. (Hawaii Revised Statutes §88122(e)(1) state that the employer contribution rates are subject to adjustment when the funding period is in excess of 30 years.)
“The system also experienced a loss on its investments. As a result,” the report said, “the UAAL grew based on this actuarial valuation as of June 30, 2016, ERS’s underfunded status as measured by the UAAL is now $12.441billion.”
Because of the less favorable investment performance in FY2016, the system is now deferring $929 million in investment losses (compared with $42 million in deferred gains last year), the report said. “If there are no significant investment gains or other actuarial gains over the next three years, the funded status of the system would be expected to decrease, as the remaining deferred investment losses are recognized.”
The ERS portfolio of investments had a total value of $14.99 billion in 2016 an increase of about 5.6 percent over 2015. The amount invested in FY2016 was $13.6 billion and returned $357 million or about $2.6%.
Hawaii’s funded ratio has steadily declined from a high of 95 percent in 2000. As of June 30, 2016 the ERS was 54.7 percent funded compared to 59.2 percent as of June 30, 2015.
The ERS provides retirement and survivor benefits for most state and county employees. The system includes some 120, 624 members, including 67,377 active members, 45,506 retirees and beneficiaries, and 7,741 inactive, vested members.
Because about 90 percent of the retirees stay in Hawaii, the pension program is a significant economic driver in the islands.
Since the 2008 economic downturn, the board of directors has taken action to put risk management at the center of its investing strategy, according to the board’s report for 2015. The report said this will help it weather downturns in the future.
During FY2015, ERS paid out $1.81 billion in benefits, an increase over the previous year. The program’s net assets were roughly $14.5 billion as of June 30, 2015. The ERS Board of Trustees invests these assets with a goal of a 7 percent annual return.
The Legislature established the ERS in 1926.
Pension administrators blame the program’s financial woes on decisions between 1967 and 2005 to divert $1.687 billion of excess investment earnings from the pension program to fund other public programs.
In 1999, the Legislature enacted Act 100, which diverted $346.9 million from ERS investment earnings to help balance the state and county budgets. In 2007, the Hawaii State Supreme Court ruled that Act 100 was unconstitutional.
In 2005, the administration and Legislature halted the diversion of investment earnings, and none of the excess earnings have been diverted since.
In 2008 and 2009, as the result of the global financial crisis, ERS suffered a combined investment loss of $2.4 billion, and like many public retirements funds in the United States, has been struggling to recover.
The pension program offers three plans: Contributory, Noncontributory and Hybrid.
In an effort to save money, the 2011 Legislature passed new retirement rules for incoming employees hired after June 30, 2012.
Read about the new rules and changes to members’ plans.
ERS members also can find information on their plans on the ERS website, and use an online benefits calculator to figure out their pension benefits.
2016 Actuarial Valuation Report
2015 Actuarial Valuation Report
The ERS is administratively attached to the Department of Budget and Finance.
The program is overseen by a board of trustees comprised of eight members. Every decision the board makes requires at least five votes. The trustees are not paid for their service.
Colbert M. Matsumoto
Wesley K. Machida
Deputy Executive Director
Vijoy (Paul) Chattergy
Chief Investment Officer
Information Technology Manager
Staff Services Assistant