A national public pensions expert says the changes Hawaii lawmakers approved for new state and county employees are in line with what other states are doing to reduce their pension liability.

Starting next summer, new hires will have to work longer to earn the same retirement benefits, chip in more toward their plans and receive smaller pensions. Existing employees and current retirees will not be impacted.

In an op-ed for Civil Beat, House Speaker Calvin Say referred to the new pension rules as “the most important measure passed by the 2011 Legislature” in his view. He said it “represents a significant pivot point in the future of Hawaii” and will help Hawaii avoid public employee pension crises such as those in California and other states.

Ron Snell, a senior fellow at the National Conference of State Legislatures, says that while the changes aren’t radical, he agrees they represent a move in the right direction. Snell, who tracks pension-related legislation for the organization, said other states have made similar changes to their public pension funds this year, and, in some cases, Hawaii has gone further than other states.

“These are appropriate changes that move Hawaii in the correct direction,” Snell told Civil Beat. He said to date, 13 states including Hawaii have increased employee contributions to retirement plans. Eight states counting Hawaii also have increased age and service requirements for retirees.

“After that, it’s more scattered as to (which state) did what,” Snell said. “As for really sweeping structural change? Not this year. It’s been exactly the kinds of things the Hawaii Legislature did. Nobody has done something like issue bonds to pay off their liability, or anything in a sense out of the mainstream.”

Baby Steps, No Sweeping Changes

Snell did note that lawmakers in Utah and Michigan last year approved broad changes to their public pension systems.

In Michigan, the state revamped retirement benefits for its public school system, including creating an early retirement incentive, requiring active employees to contribute toward retiree health insurance costs, and creating a benefits plan that is part pension and part defined contribution 401(k). The state also increased its retirement age requirements and prohibited the purchase of service credit to meet service requirements.

Utah replaced its defined-benefit pensions with a 401(k)-type plan for new hires. Under the change, the state contributes 10 percent of an employee’s salary. New hires can choose a defined-benefit plan, but the state contribution is capped at 10 percent.

(Note: Defined-contribution plans are dependent on the returns of the investments that are chosen within them. Defined-benefit plans offer guaranteed automatic payouts in retirement based on a formula that usually takes into account salary and years of service.)

In Hawaii, lawmakers earlier this month approved House Bill 1038, which lays out new retirement rules for state and county employees hired after June 30, 2012.

Snell said the moves may appear like baby steps, but will have an effect over time.

“Though the problems are very serious, and they deserve serious attention, there’s really no way to do much about them immediately as far as paying off the unfunded liability,” Snell said. “You make a wide range of changes that over time will increase revenues and cut costs. If you get the mix right — which is hard to know because you’re looking 20, 30 years into the future — they are a move in the correct direction.”

New Rules To Save $440M in 5 Years

The changes are expected to save the Hawaii Employees’ Retirement System $440 million in the first five years of implementation and help address an estimated $9 billion unfunded liability. The ERS has about 111,000 members, including 39,400 retirees and beneficiaries.

Say, who sponsored the bill, said he’s proud of the state taking “a much more proactive approach to keeping the pension fund solvent, ensuring there will be funds available for future retirees.”

He said benefits for active employees and current retirees are off limits, citing a Hawaii Supreme Court decision last year that ruled it unconstitutional to “impair or diminish” accrued benefits.

Say broke down the new pension rules into the following four parts.

Proposed Pension Rules

Part 1: Six changes for new employees hired after June 30, 2012.

  • Increase employee contributions
  • Increase length of service required for vesting
  • Increase the minimum length of service and age for full retirement benefits
  • Decrease retirement allowance
  • Increase period for Average Final Compensation from three years to five years
  • Decrease post retirement allowance for new employees

Part 2: Increase the state and counties’ contribution rates gradually between fiscal 2012-2015

Part 3: Lower the interest paid for new employees hired after June 30, 2012. Retirement accounts will be credited 2 percent interest compounded annually, compared to 4.5 percent for current employees.

Part 4: Decrease the investment yield assumption for the ERS to 7.75 percent from 8 percent. (Note: the ERS fund has averaged 3 percent the past decade.)

Actuary Sees Changes as Temporary Fix

George Berish, a fellow of the Society of Actuaries, contends the proposed changes to the ERS are temporary fixes, and that lawmakers need to look at ways to make costs more predictable.

Berish has written an extensive series about the pension fund’s financial woes for Civil Beat.

In one of his articles — “Only Changes to Design of Hawaii Public Employees Pension System Can Fix It” — Berish notes that the bulk of the ERS fund’s deterioration occurred between June 2000 and June 2008 — before the financial meltdown.

“That means this is a systemic problem, not a one-time problem, and therefore, only changes to the system’s design can fix it,” he said. “Throwing more money at it, tinkering with a few benefit provisions, and creating a 4th class of less valuable benefits are Band-Aids that will, as they have in the past, hide the problem as it keeps growing in in the dark.”

Some lawmakers expressed concern over the impact the pension changes could have on recruiting and retaining public workers. But Say disagreed it would be an issue.

“I don’t believe it will be a detriment because we still have a generous benefit package compared to the private sector,” Say said.

About the Author