Come July 1, any overtime earned by new hires in state and county government will not count toward their pension benefits.

The change — part of Senate Bill 1269 — is expected to save the Hawaii Employees’ Retirement System millions of dollars over the next few decades and cut down on the public pension system’s massive unfunded liability, which has swelled to more than $8 billion.

That figure represents the gap between the pension benefits promised to Hawaii’s public workers and the money set aside to pay for them. The ERS has approximately 111,000 members, including 65,000 active employees statewide.

“To get this through was really a good accomplishment for us from a liability standpoint,” ERS Administrator Wes Machida said. “It helps us curtail the liability going forward.”

The elimination of overtime for pension purposes goes further than what the ERS board of trustees had been lobbying for during the session. The board had pushed for a cap on how much overtime could count toward pensions.

The controversial move to eliminate overtime for new hires — which labor unions strongly opposed — is awaiting final approval by Gov. Neil Abercrombie.

It targets the practice known as spiking, where employees “spike” their pay through things like overtime in the years just before retirement to help boost their pension benefits. Bonuses and most other added compensation also won’t be counted for new hires.

Employers On the Hook

“Employers and employees contribute to the ERS amounts equal to a percentage of compensation; however, when employees’ compensations are spiked just prior to retirement, pension benefits are enhanced beyond a rate of what either the employer or employee have contributed to the ERS,” state Budget and Finance Director Kalbert Young testified in support of the bill.

Legislators also approved House Bill 2487, which would require employers — be it the state or the counties — to pay for any unfunded portion of an employee’s spiked pension. A complex formula would be used to determine whether an employee’s compensation has been spiked in the years just before retirement.

It’s unclear how much the state and counties would be liable for, but in 2010, pension spiking accounted for $12.3 million in unfunded liabilities statewide, according to the ERS.

Because overtime work must be approved by employers, the measure was seen as a way to force departments to rein in excessive overtime costs.

To illustrate, a city audit of Honolulu’s Emergency Medical Services Division uncovered excessive overtime, where, in some cases, workers earned between 200 percent and 350 percent of their regular salaries in overtime.

An ERS study found 10 of the emergency services employees are expected to increase the system’s unfunded liability by about $4 million. Under HB 2487, the employer would be on the hook for the unfunded portion.

Public worker unions strongly opposed both bills, including the State of Hawaii Police Officers Union, University of Hawaii Professional Assembly, Hawaii Government Employees Association and United Public Workers union. Union leaders argued the changes would make public service less attractive and negatively impact recruiting efforts.

The Honolulu Police Department, Honolulu Fire Department and Maui Department of Fire & Public Safety also opposed the measure. The City and County of Honolulu’s budget office said it had serious concerns about the bill.

Priority Bills for Abercrombie

Abercrombie spokeswoman Donalyn Dela Cruz said the two bills were priority measures for the administration. She said the governor is reviewing the final versions of the measures to ensure they still align with the original intent.

Abercrombie had touted the measures in a legislative wrap-up, saying: “Prospectively, these bills will help to curb the future incursion of additional liability while not affecting current employees and their accrued rights and benefit,” the governor said in a statement.

Nationally, at least 14 states have revamped their pension systems in the past five years to prevent employees from “spiking” their pay to pad retirement benefits.

If approved, Hawaii’s reforms will kick in on July 1 — the same time new pension benefit rules approved last year take effect.

Lawmakers last year, at the urging of the ERS, approved legislation that will scale down benefits for new hires. Those hired after June 30 will have to work longer to earn retirement benefits, chip in more toward their plans and receive smaller pensions compared to existing employees.

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