Why is the state retirement and health system so underfunded?
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Although most taxpayers are immersed in the daily struggle of trying to make ends meet in a sluggish economy, one of the biggest fears of government observers in Hawaii is the looming elephant in the room which is the unfunded liabilities of the state and county retirement system and the related health benefits for current and future public employee retirees.
The combined unfunded liabilities of both systems could reach as high as $20 billion, not millions but billions of dollars. That is more than the state’s biennial budget and the number will grow larger as more and more benefits are accrued by the state’s and counties’ active employees. But why, you may ask, is the state retirement and health system way underfunded?
Indeed there are a variety of reasons for the chasm that exists between a sound and healthy retirement and health system for public employees and what is lurking in the shadows as the current state of affairs. The problem has its genesis in the fact that when the state constitution was amended, collective bargaining was granted to public employees permitting public employees to bargain for compensation on par with their private sector counterparts. However, the retirement benefits, including health care, were not adjusted to be on par with those granted private sector employees. Instead, the generous benefits granted public employees insofar as retirement benefits were continued even after collective bargaining was granted.
The problem was that the retirement benefit plan was predicated on the much lower salaries that were afforded to public employees prior to collective bargaining. Thus, when new base salaries were negotiated under the collective bargaining law, they rivaled, if not bettered, those salaries paid to their private sector counterparts. As a result, those more generous salaries then were used to calculate the retirement benefits of public employees which utilized the number of years worked and the highest three years of pay in the formula to calculate the retirement benefit. It soon became evident that if the formula was not changed, the rising salary base would outstrip the projected earnings of the state retirement system.
As a result, lawmakers were asked in the early 1980’s to change the state retirement system from a “contributory” to “non-contributory” system allowing the change in the multiplier of the formula that was used to determine retirement benefits.
Although any person joining the public sector workforce after July 1, 1984 is a non-contributory member of the state’s retirement system, the bulk of the baby-boomers in the public workforce are now beginning to retire, putting a strain on the benefits and causing alarm that the unfunded liabilities will soon come due. Everyone who watches state government acknowledges that sooner or later, the state must begin paying down those unfunded liabilities.
Realizing that lawmakers haven’t had the political will to either reduce benefits for current or future public retirees nor have the willingness to set aside annual contributions, one lawmaker has proposed a constitutional amendment that would require that in any one year when there is surplus of general funds at the end of the fiscal year, that the surplus amount be paid to offset these unfunded liabilities of the state retirement system and health benefits.
At first blush, this seems like a prudent approach to the problem, taking any surplus funds left over in the till and using those funds to pay down this looming debt. But wait, what that constitutional amendment is saying is that these unfunded liabilities are of such a low priority that they should be paid only if there is left over money, money that is available after all other state programs and services are paid for in the state budget. It is somewhat akin to having one’s credit card company tell you that, oh by the way, if you have any money left over after you pay all your household bills, you should pay off your credit card balance.
Of course, in the case of the credit card company, they just charge you interest if you don’t pay off the balance, but in the case of the state’s retirement system and retiree health benefits, those will have to be paid regardless of whether or not there is a surplus at the end of the fiscal year. Before we reach the bottom of the barrel, taxpayers should expect lawmakers to fully fund those liabilities as a regular part of the state’s budget and not just when there are some funds leftover. To do otherwise is irresponsible and totally unacceptable.
About the author:Lowell Kalapa is the President of the Tax Foundation of Hawaii.
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