The price tag for public employee and retiree health benefits has ballooned to $14 billion over the next three decades — and Hawaii taxpayers can expect to pay more taxes to cover the burden.

Kalbert Young, the state’s budget director, says he’s taking seriously the Hawaii Employer-Union Health Benefits Trust Fund‘s unfunded liability — which has risen nearly $4 billion in two years.

“Taxpayers have to be realistic that these liabilities are very, very large — and the public hasn’t even begun to pay for them yet,” said Kalbert Young, director of the Department of Budget and Finance, referring to both EUTF and public pensions.

He’s ramping up an “intelligence program” to educate lawmakers on what needs to be done. Young says he didn’t have enough time to research options and educate lawmakers this past legislative session. He was appointed by Gov. Neil Abercrombie in November.

The unfunded liability represents the long-term bill the state and counties owe for health benefits for active and retired government employees and their dependents. The bulk of that is for retirees, who don’t contribute to the fund after retiring. Active employees cover about 50 percent of their premium costs.

To put that number in perspective: $14 billion amounts to more than $10,000 for every man, woman and child in Hawaii1.

“It’s important for taxpayers to be cognizant that whatever concepts are proposed in the near future, some of them will likely entail actual expense, meaning that you’re going to have to pay more taxes,” Young said. “Or, a bigger part of state government will have to be put toward the unfunded liability — and that will come at the expense of other government programs.”

Liability Up $4 Billion in Two Years

The EUTF liability swelled from $10.3 billion in mid-2007 to $14.1 billion as of July 2009, according to an actuarial report [pdf] released last month. A new report for the trust fund, which covers approximately 200,000 active and retired government workers, will be due for the year ending June 30, 2011.

The counties together — Honolulu, Maui, Hawaii Island, Kauai — represent less than one-third of the overall liability, Young said, while the state makes up the rest.

For benefits payments alone — not considering the liability — lawmakers have approved a $502.5 million budget for the EUTF for the 2012 fiscal year. That’s up 7 percent, or $33 million, over this year.

Eliminating Medicare Part B Refunds

Young said the issue couldn’t be fully addressed this past legislative session because he didn’t have ample time to research options and educate lawmakers.

The only piece of legislation that tried to address the health fund’s liability was shot down by lawmakers after strong opposition by retirees and labor unions. The Abercrombie administration had introduced a bill that would have eliminated Medicare Part B refunds for all current and future government retirees and their spouses, affecting a total of 30,140 current pensioners and their spouses.

“It would not have been the method to eliminate the liability, but it would have taken a huge chunk out of it,” Young said. It would have saved the state $42 million in fiscal 2012 and about $50 million the following year.

Before the measure stalled, lawmakers tweaked the bill so that only employees hired after July 1 would be affected. Employees with less than a decade of service would get a percentage of reimbursements up to 90 percent. Under the weaker version, the state would not have seen any savings until employees hired after July retired.

‘Intelligence Program’ in the Works

Young said it’s too early to say what types of reform could be proposed to address the liability. But he shared that part of his so-called “intelligence program” involves looking at what other states have done within last five years and what kinds of impact those reforms have had.

“We’re also looking at academic articles and what think tanks nationally have hypothesized are the best routes, and trying to marry up that with what’s more in line with what culturally Hawaii would accept,” he said.

While House Speaker Calvin Say said reforming pension benefits for future hires was “the most important measure passed by the 2011 Legislature,” he told Civil Beat he’s leaving it up to the EUTF board of trustees to recommend ways to address the EUTF liability.

But Young says the board — made up of state and county representatives and labor union executives — has been more focused on current costs and managing the system on a year-to-year basis. He hopes the trustees will be engaged in the process.

“I don’t think they’ve had the time to focus on the long-term unfunded liability,” Young said. “I think that’s changing. I would expect they would become more engaged about what to do for the unfunded liability. They, like the (Hawaii Employees’ Retirement System) board, have to be very much engaged.”

The fund’s administrator, Barbara Coriell, declined to comment on whether the EUTF has plans to begin addressing the liability and what that could mean for existing and future members. In an email to Civil Beat, she said “the EUTF will be working with the legislature and Budget and Finance on this issue,” but deferred comment to Dean Hirata, chairman of the EUTF board of trustees.

‘Status Quo Not an Option’

Hirata told Civil Beat that “the sheer magnitude of the $14 billion unfunded liability will require the state and the counties to identify, evaluate and implement structural changes to the EUTF plan to ensure the long-term viability of the plan.”

He, too, said it’s too early to detail what kinds of “reform” could be in store, but stressed that “change is coming and the status quo is not an option.” Hirata, who also is deputy director of the state Department of Budget and Finance, said he expects changes along the lines of the proposal to end Medicare Part B refunds.

Retirees, Dependents Get Coverage

Some retired government employees can receive full health coverage from the state and counties based on when they were hired and the number of years worked.

According to a benefits summary from the state’s Department of Human Resources, employees hired before July 1, 2001 will receive health coverage for themselves and their dependents when they retire.

Here’s a chart of the coverage retirees are eligible for through the EUTF. The percentages are how much the state covers.

Years Worked Hired Before
Hired Between
7/1/1996 – 6/30/2001
Hired on or
After 7/1/2001
5 but less than 10 50 percent Zero Zero
10 but less than 15 100 percent 50 percent 50 percent
15 but less than 25 100 percent 75 percent 75 percent
25 or more years 100 percent 100 percent 100 percent

Note: The base monthly contribution is based on a statutory cap which is adjusted each year depending on changes to the Medicare Part B premiums. If the actual health plan premiums are greater than the base monthly contribution, the retiree will be required to pay the difference.

Credit Rating Affected

On top of direct costs, the liability could cost taxpayers more money when the state floats bonds to pay for projects.

Hawaii’s unfunded liabilities for both its health-benefits trust fund and pension system have triggered lower credit ratings. The latest was in June, when Fitch followed Moody’s Investors Service and downgraded Hawaii’s general obligation bond rating. Moody’s cited the state’s “strained” finances, including the unfunded liabilities.

The downgrade could translate into higher borrowing costs for the state, meaning higher costs for taxpayers.

1.Based on population of 1.36 million, according to the 2010 Census.

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