Anyone who has ever worked for the government in Hawaii or pays taxes here has a stake in the Hawaii Employees’ Retirement System. The pension program covers more than 108,000 current and former state employees.
As of February 2010, the program held roughly $10.3 billion in assets but was 64.6 percent funded. The total unfunded liability was $6.2 billion. States across the country are facing similar challenges in funding state workers’ retirement plans amid budget cuts.
The Pew Research Center recently cited Hawaii’s pension program as one with “serious concerns.” In May, a Northwestern study predicted that Hawaii’s pension plan would run out of money by 2020. Could this all be true? Civil Beat sat down with Rep. Karl Rhoads, chair of the Labor and Public Employee Committee. Rep. Rhoads provided an inside look at some of the biggest challenges facing the program – and the taxpayers – today. Here are excerpts from the conversation:
CIVIL BEAT: What have been some of the big legislative issues regarding Hawaii’s Employee Retirement System (ERS)?
REP. KARL RHOADS: It’s probably obvious, but the big issue has been the funding hole, and it’s been that way for quite some time. The temptation is – and not just in Hawaii, but everywhere – that we have this pile of money just sitting there that is committed. But it’s not actually being spent right now because it’s for retirement. The temptation is to take it for something else and say, “Oh, we’ll just pay it back later.”
In 2007, I was in the Legislature, but I wasn’t the committee chair. The State of Hawaii Organization of Police Officers and the ERS scored a big win when the Hawaii State Supreme Court ruled that the Act 100 was in violation of the Hawaii State Constitution. Act 100 diverted almost $347 million [from the pension fund] to help fund other public needs back in 1999.
So by the time I became chair it was pretty much, “OK, we can’t do that anymore.” We were already way, way behind in terms of the unfunded liability. All I’ve tried to do is stay on the course of not making it worse — although we did pass a bill this session that makes it slightly worse. It was HB 1929, which amends the definition of sewer worker. It expands the liability, but it only affects seven people. So it was a pretty minor glitch going the other way.
But, in general, the idea at this point is just to catch up. We’re way behind.
I saw that we’re about 64.4 percent percent funded.
Compared to other states, we’re not horrible, but we’re below average anyway.
There’s a recent study by a professor at Northwestern who said that according to his formula, states like Hawaii were going to run out pension money by 2020. Could this happen?
I don’t think so. The ERS continually looks at how much is coming in, and they have a pretty good idea of what their liability is, based on the demographics of the current work force and the retirees.
But there is a real possibility that in the next couple years the state’s contribution to the ERS will have to go up. So, we’re covered in terms of the actual mechanism. But it’s going to cost us more money, which of course puts pressure on the rest of the budget. It also puts pressure on public workers to accept less generous retirement plans in the future.
You’ve listed some of the big challenges for the pension program. In your view, what are the big concerns on the horizon?
A big question is, are the health care and retirement benefits we’re giving out sustainable or not? Is the professor you cited right and are benefits going to bankrupt all the states?
It all comes down to demographics. People are living longer than they did when they first started these kinds of plans. We have, of course, made pretty major adjustments. We went from a non-contributory system to a contributory system. That puts more of the burden on the employee. So there have been moves to try to address people’s longer lifespans.
Given those concerns, what are the potential solutions that your committee and others are thinking about? How proactive are we in figuring out if this is sustainable? What can we do to make it more sustainable?
You can either reduce benefits or increase taxes and keep the benefits the same. The broader picture is that there are already certain types of government employees we have a hard time keeping because we don’t pay them as much as they make in the private sector.
Representing a district that is about half condos, the example that comes to mind is elevator inspectors. We have very few elevator inspectors left in the state. Part of that is a conscious policy on the administration’s part to scale back government activity.
But part of it, especially when economic times are good, is that you can make so much more money going to the private sector and working on elevator construction. [The state] can’t inspect things, if no one is willing to work for you.
The other unanswered question is: If the retirement benefits and health benefits are cut back substantially and salaries essentially stay where they are, adjusted for inflation, a) is anyone going to work for the state at all? And b) if they do, what kind of quality of people are you getting? Because the usual laws of supply and demand are in operation with the state employees, too. If you pay people crap, you’re not going to get the best employees.
There’s the whole other aspect of, can we afford not to pay out good retirement benefits? Good governance is really important. I don’t think the solution is to make a poorly functioning government a self-fulfilling prophesy, saying, if it doesn’t work, let’s just cut it and cut it and cut it. That means it won’t work because it won’t have the resources to function.
When it comes down to the ERS, what’s necessary to keep good employees? What’s necessary to recruit new ones? In general, people have made it pretty clear that they don’t want their taxes increased, at least on a permanent basis. Then we have to decide as a government, this is the constraint that our constituents have put on us. How are we going to handle those constraints?
By the time we realize that the system is not sustainable, is there a possibility that it could be too late?
I think it’s unlikely that there’s going to be a liquidity crisis, like the one that Medicare is facing right now. I don’t think we’re going to get to that kind of spot.
What is upcoming legislation you see for the ERS?
We are going to have to take a look again at whether we need to increase the payments(to the pension fund). It’s probably primarily going to be from the state because we actually cockroached quite a bit. $1.6 billion in ERS investments was diverted from ERS returns from the ’60s.
If we had all that money in there the whole time, and we’re making an average of 8 to 10 percent in there, we wouldn’t be $6.2 billion behind. We still might be $3 billion behind or $2.5 billion. It’s hard to blame the ERS system or the employees when the Legislature diverted the funds for other stuff. And it’s not a small number. It’s big bucks.
Legally, the state is on the hook for all that, and any changes have to be prospective. And, of course, it takes a long time for that to kick in. It’s the proverbial changing the course of the super tanker. It takes a little time.
This sounds like something that will affect all of us. But is it out of the everyday person’s hands?
It’s a democracy, so it’s not out of their hands. Most people probably don’t pay that much attention to it because if you’re not a government employee, it doesn’t feel like it directly affects you – although it certainly does in terms of the taxes you pay.
Is there sense of urgency in the Legislature about the ERS program?
I don’t think so. I consider it pretty important because it has such big effects on the budget – and the people who are in leadership on the financial end of things think so, too.
But, just rank and file, you have to spend so much time to figure out how the system works, most people don’t have or don’t take the time. Or, if they’re not on the committee, there’s no particular reason. I don’t want to give excuses for people, but the pension system is not front burner. It’s not front burner.