The Lingle administration left a fine fiscal mess for the new Governor and his team to clean up. Years of bumbling and mismanagement will be fixed only through painful measures. There is no other way, and we need to take that bitter medicine like adults.

That said, it is important to distinguish merely painful measures from illegal ones that violate the Hawai‘i Constitution. Senate Bill 1268, which calls for cutting retired employees’ Medicare reimbursements, falls clearly in the latter category. Instead of pursuing it further, the Administration should look elsewhere for savings because eliminating reimbursements for workers whose rights have already accrued is, without question, legally impossible.

Last year, the Hawai‘i Supreme Court held that “health benefits for retired state and county employees constitute ‘accrued benefits’ pursuant to article XVI section 2 of the Hawai`i Constitution.” Everson v. State, 122 Hawai‘i 402, 419, 228 P.3d 282, 299 (Haw. 2010). This means the Hawai‘i Constitution prohibits the Legislature from passing any bill that diminishes or impairs retirees’ health or pension benefits already earned. See Article XVI, Section 2. SB 1268 does both.

Before the EUTF was created, all workers were entitled, by law, to the same State or County-funded health benefits package, regardless of age. That changed in 2001, around the same time that the EUTF came into existence. The EUTF began to provide retirees with inferior benefits. For example, the 2009 EUTF health plans provided:

  • $2,000 worth of dental benefit per year for active workers, but only half that amount for retirees;
  • Chiropractic benefits for active employees but none for retirees;
  • a maximum out-of-pocket limit of $1,500 (individual) /$4,500 (family) for active employees versus $ 2,500 / $7,500 for retirees; and
  • a 10% co-payment active workers who needed radiation and chemotherapy but double that for retirees.

This sort of discrimination is illegal insofar as it applies to people whose rights vested before the discrimination began. The Supreme Court has made clear that the legislature can “reduce benefits as to . . . persons already in the system [insofar] as their future services were concerned,’ but it cannot “reduce the benefits attributable to past services.”” Everson, 122 Hawai‘i at 409, 228 P.3d at 289 quoting Kaho‘ohanohano v. State, 114 Hawai`i 302, 342 162 P.23d 696, 736 (2007) (quoting Comm. of the Whole Rep. No. 18 in 1 Proceedings of the Constitutional Convention of Hawai‘i of 1950 at 330 (1960) (emphasis added).

Under Senate Bill 1268, the Administration proposes to do away with Medicare Part B reimbursement for current retirees and employees, which is prescribed by HRS § 87A-23(2). Since this bill will reduce benefits attributable to the workers’ past services, it is unconstitutional.

This reimbursement scheme was not always part of Hawai`i law. When the EUTF was created, Retirees were required by HRS chapter 87A to enroll in Part B at state expense (through the reimbursement program). If the State and Counties no longer reimburse Part B enrollment premiums, all retirees who obtained vested rights under the current system — which include every living retiree and long-time government employees whose rights are already vested — will suffer an immediate and significant diminishment of their retirement health benefits. This violates Article XVI, Section 2 of the Hawaii Constitution.

SB 1268 is not the only proposed legislation that relates to Medicare Part B reimbursements. House Bill 1041 would deny Part B reimbursement to employees who are hired after June 30, 2011. This is consistent with other statutes in the EUTF chapter which have reduced health benefits for future employees, not the current retirees and employees whose rights are already protected under the Constitution.

The solution to the State’s financial crisis is not to reduce benefits owed to those who already earned them. The benefits of the “retirement system” are part of “a sacred trust” between the state and its employees. Everson, 122 Hawai‘i at 409, 228 P.3d at 289 quoting Kaho‘ohanohano, 114 Hawai‘i at 340, 162 P.23d at 734.

The State must keep its promises and comply with the Hawaii Constitution. No one should waste more time talking about SB 1268. It is unconstitutional. Let’s get on with discussing solutions to the financial crises that are not illegal.

About the author: Paul Alston is the lead counsel for the retirees and beneficiaries in the Everson Case he describes above. Alston is a director of Alston, Hunt Floyd & Ing, a Honolulu law corporation.