The Health Fund’s Quest for Solvency

If coming up with the money to pay public employee pensions gives Hawaii state and local governments fiscal indigestion, providing additional benefits such as health, life, dental and even chiropractic care to retirees is causing a multi-billion-dollar budgetary migraine.

Since lawmakers created the Hawaii Employer-Union Health Benefits Trust Fund (EUTF) in 2001 as a single statewide system for providing the so-called Other Post-Employment Benefits (OPEB) to working and retired employees, public officials have been more concerned with how to pay the current bills.

Hawaii has given so little attention to future costs, now estimated at a minimum of $25.5 billion, that some lawmakers and union leaders are wondering if the system should just be scrapped.

“In my view, the EUTF is something of a failed experiment,” said Randy Perreira, the head of the state’s largest public-worker union, the 44,000-member Hawaii Government Employees Association. 

City Financial Tower 2

City Financial Tower, the Hawaii Employer-Union Health Benefits Trust Fund’s headquarters, is seen here May 28, 2014, in downtown Honolulu.

PF Bentley/Civil Beat

Pre-2000, the unions were allowed to offer health plans that effectively competed with the plans the state was offering, he said.

“We felt that was a good thing because that competition … was intended to ensure that there would be some balance and really some sanity to the cost of healthcare for the employers, i.e. for the taxpayers,” Perreira said. 

But legislators felt the state could control cost more if they eliminated the union plans and forced everyone that was interested into a state-sponsored plan.

“It’s pretty much a one-size-fits-all, take it or leave it,” Perreira said. “There is no competition. The trustees are pretty much bound to bargain with the major carriers — HMSA and Kaiser — on the carriers’ terms.”

As a result, he said, all the state sees is a steady escalation in premiums for both the employers and the employees.

Working and retired public employees have a dizzying array of EUTF insurance choices today. Their share depends upon the type and scope of coverage. What the government pays is largely dictated by collective bargaining agreements with Hawaii’s four public employee labor unions. 

These contracts require state and local government to cover from 48 percent to 79 percent of the insurance premiums for working employees — and up to 100 percent for retirees based upon their hire date and the number of years worked. Retirees covered by Medicare are reimbursed separately for their Part B supplemental coverage.

In 2013 the EUTF paid $872.9 million to provide healthcare coverage to nearly 189,000 current or former public employees and their families – roughly 68,000 active employees, 43,100 retirees and 77,800 dependents, together some 13 percent of the state’s population.

State and local government paid $636 million as its share of the costs while working employees and retirees kicked in $233.3 million. Only $54.8 million was paid into the system to cover future OPEB costs and therein lies the problem.

House Speaker Emeritus Calvin Say

Speaker Emeritus Calvin Say speaks on the House floor, May 1, 2014.

PF Bentley/Civil Beat

Like many state and local governments strapped for cash, Hawaii historically handled healthcare expenses for working employees and OPEB costs for retirees on a pay-as-you-go basis — budgeting only the amount required to cover current expenses. By ignoring future OPEB obligations public officials merely kicked the can down the road, a practice now proving to have been an expensive mistake.

When it became apparent this procrastination was endemic across the country, in 2004 the Governmental Accounting Standards Board — an independent organization that establishes accounting and financial reporting standards for state and local governments — issued rules mandating detailed disclosures of current OPEB outlays and the long-term liabilities they would create.

Hawaii’s unfunded liability for OPEB is one of the largest in the U.S.

Just like earlier requirements for reporting pension costs, GASB outlined procedures for amortizing — or paying off — outstanding OPEB debt over a 30-year period by requiring the calculation of an annual payment that would include an amount to pay down the unfunded portion of future anticipated OPEB costs. The GASB rationale in changing its accounting rules was the belief that OPEB benefits were actually deferred compensation that should be identified on financial statements at the time it was earned by employees instead of when it was paid out years later.

In 2007 when the GASB rules became effective, taxpayers got their first detailed look at the explosive growth in the cost of providing OPEB benefits solely to current and future retirees, expenditures that are separate from pensions and do not include the additional cost of benefits provided to working public employees.

In Hawaii, and elsewhere, this new transparency was eye-opening. The disclosures revealed that while Hawaii’s state and local governments were dutifully paying the current costs of OPEB benefits, they had been fudging when it came to making their full share of additional payments needed to reduce the outstanding liabilities accumulating each year.

Hawaii Has a Big Problem

At last tally Hawaii’s outstanding — or unfunded — OPEB debt was more than $18 billion. This makes it one of the largest in the U.S., exceeded only by states such as California, New York and Texas with 20 or 30 times the population and four to 17 times the number of public employees. Paying off the accumulated OPEB debt today would cost every Hawaii resident almost $13,000.

By postponing annual OPEB payments in an effort to balance budgets and avoid politically unpalatable reductions in public services and other community programs — or higher taxes — state and local governments exacerbated their financial problems, allowing costs to grow exponentially while taking virtually no action to reduce or eliminate them.

Former House Speaker Calvin Say, who championed efforts to reform the pension system, said a continued failure to respond to the growing unfunded liabilities threatened to bankrupt the state and the counties.

“Every year we’ve got to work on it further and further so the unfunded liability can be decreased to a point where we don’t have to worry about not having the funds available for future retirees,” he said.

Lawmakers focused first on reforming the pension fund, spending several years in the early 2000s on getting the Hawaii Employees’ Retirement System’s $8.5 billion unfunded liability on a 30-year path toward solvency.

With that agency’s course corrected, the Legislature has turned its attention to the EUTF, which has more than twice the debt for future liabilities plus much harder to predict variables like escalating healthcare costs.

HMSA Center

HMSA Center in Honolulu.

Daniel Ramirez/Flickr

Over the objections from county governments, state lawmakers passed landmark legislation in 2013 that Gov. Neil Abercrombie signed into law as Act 268.

The law requires all government employers to make annual contributions that include the full amount of what it costs for providing current OPEB benefits. This includes an amount designed to pay off the EUTF’s unfunded OPEB liabilities by 2039. 

If full contributions can’t be made every year, the law requires shortages to be paid from general excise taxes if it’s the state that falls short or from hotel tax revenues if it’s the counties not making their payments.

The law also required EUTF trustees to establish a separate trust fund into which all contributions made to pay down — or pre-fund — the long-term OPEB debt must be deposited. That fund was created last July. The law also creates an EUTF Task Force to study the unfunded OPEB liability and examine EUTF operations; the state set aside $185,750 to put toward that effort.

EUTF Administrator Sandi Yahiro has not responded to repeated requests for an interview.

Say acknowledged the stress the measure places on the counties in particular, but maintains that it is critical to move away from deferring future obligations.

The Legislature gave state and local governments a breather though. Full payments on OPEB debt will not have to be made for five years, beginning with the 2019 fiscal year. Until then the amount of annual contributions will be phased in, beginning with payments of 20 percent during the current fiscal year, increasing to 80 percent during the year ending June 30, 2018.

The Legislature has also appropriated $217 million over the next two fiscal years to begin pre-funding the state employer contributions for OPEB, with the goal of working up to its full annual required contribution of $500 million in the future.

Impact Still Unknown

How the new law and its grace period for full government payments will impact state and local budgets — and ultimately, taxpayers — won’t be known for years. Besides accruing interest on the unpaid contributions there is no way to predict whether future revenues will be sufficient to cover the required contributions or whether excise and hotel tax income will have to be tapped.

By the time full annual payments begin, state government alone will have accumulated an additional $943 million in OPEB liabilities, having paid just $882 million of the $1.8 billion that should have been paid if the state had begun making its full share of contributions immediately.

The Hawaii Department of Budget and Finance estimates that between fiscal year 2015, which begins July 1, and 2039, the state will pay $22.6 billion toward OPEB.

As the largest public employer, the state will bear the lion’s share of OPEB debt because it has the most retirees and their beneficiaries — almost 32,000 at last count.

Including the University of Hawaii, last year the state’s annual OPEB cost was slightly over $1 billion but it paid only $277.9 million, increasing long-term obligations by $732.3 million.

Since 2010 the state has paid $985.1 million toward OPEB – just 25 percent of the required $3.9 billion in annual payments for that period. On June 30, the state reported its share of the total unfunded OPEB liability was $13.7 billion, with the rest of the more than $18 billion debt coming from county governments.

And the EUTF itself? Last year it paid just $159,000 of its $571,000 required annual contribution on behalf of its own employees and reported a $1.5 million unfunded OPEB liability.

EUTF Administrator Sandi Yahiro has not responded to repeated requests for an interview.

Higher Taxes Ahead?

Local government, too, will be facing huge OPEB demands on their finances.

For example, the City and County of Honolulu, according to its latest financial report, last year paid just $106.6 million of its $143.6 million required annual OPEB contribution, increasing its OPEB liability by another $37 million. Over the past four years Honolulu has paid just $329.6 million of the $570.5 million it owed.

By deferring these payments, the city has been saddled with millions in interest on these unpaid obligations. As of last July, Honolulu’s total unfunded OPEB liability was $1.7 billion, more than five times the city’s general fund balance. The amount in the city’s OPEB Reserve Fund: zero.

Carolee Kubo, director of Honolulu’s Department of Human Resources, told lawmakers last year that their proposed changes to the law were too much for the counties to bear. She said the city might have to raise property taxes if it is unable to cover its obligations.

The most recent financial reports show the counties of Hawaii, Maui and Kauai incurred $75.6 million in OPEB costs during their 2013 fiscal year, with only one, Kauai, paying its full annual contribution. Collectively, as of last July 1, the three neighbor-island counties had unfunded OPEB liabilities of at least $268.8 million.

Honolulu has deferred OPEB contributions, saddling city taxpayers with millions in interest on these unpaid obligations.

Kauai County Council Chair Jay Furfaro said 2014 marked the first time since he’s been on the council that the county has not funded 100 percent of its liability, deferring 10 percent. 

He blamed the state for not giving the counties a bigger share of the transient accommodations tax revenue. The county was expecting to receive $23 million in TAT money but got $14.9 million instead as the state struggled to meet its other budget demands and chose to not remove the cap on the counties’ share of hotel tax revenue.

Furfaro expects a recently approved bump in county property tax revenues for resorts and other tax and fee increases to help Kauai meet its full obligation in future years.

Testing the Limits of the Law

Another factor that will affect future OPEB costs is the outcome of two pending class-action lawsuits working their way slowly through the courts — one filed by government retirees eight years ago and the other by teachers in 2010. Both challenged the disparity between the types and cost of insurance coverage offered to retirees and active employees.

Every working employee and retiree must pay a share of the premiums for healthcare coverage. These costs vary – in some cases by several hundred dollars a month – depending upon the medical plan and what it provides. 

Retirees have a dual premium structure depending upon whether they are also covered by Medicare. State law requires all retirees eligible for Medicare to be enrolled in Part B before they can qualify for any EUTF coverage. The EUTF, in turn, reimburses retirees for the cost of their Part B coverage, last year paying back $55.1 million.

Retirees pay more for their healthcare coverage than working employees and the EUTF picks up between zero and 100 percent of those premiums depending upon the number of years worked and the date-of-hire. The government’s share of health insurance premiums for active employees is established by union contracts and ranges from 48 to 79 percent.

For example, general retirees hired between 1996 and 2001 who worked for 10 years but were not covered by Medicare would pay about $576 per month for medical, dental and vision coverage for themselves and their spouse. The EUTF would pay $742. That same retiree who was covered by Medicare would pay $282 per month and EUTF would kick in $525, plus reimburse the retiree for their Part B premium, which is $104.90 per month in 2014. The EUTF pays all costs for retirees hired before 1996 who worked 10 years or more.

In contrast, active employees in most Hawaii Government Employees Association bargaining units pay $154 per month for themselves and their spouse for basically the same coverage. The EUTF share is $549 – or about 78 percent of the total premium. Active employees, however, enjoy a wider range of coverage choices for which premiums, and the attendant EUTF contributions, are higher.

In 2006 retirees sued the EUTF along with state and county governments claiming Hawaii’s constitution and state law guaranteed retirees and their dependents OPEB benefits “substantially equal to those [benefits] provided to active employees and their dependents.”

EUTF board meeting

The Hawaii Employer-Union Health Benefits Trust Fund meets in 2014.

Nathan Eagle/Civil Beat

Retirees maintained the state’s old Public Employees Health Fund — created in 1961 and abolished in favor of the EUTF — treated active employees and retirees equally. But under the EUTF, retirees claimed they were offered inferior benefits and paid more for them. Following seven years of motions and appeals both sides are awaiting a decision on the state’s request to dismiss the case.

Teachers – both retired and active – are also upset about the benefits they receive under the EUTF and four years ago sued the state alleging the EUTF had “diminished and impaired accrued health benefits” they had enjoyed under a previous benefits program operated separately from the EUTF.

In 2005 state lawmakers authorized the creation of the Hawaii State Teachers Association Voluntary Employees’ Beneficiary Trust to provide health benefits for active and retired teachers. The law gave retired teachers then participating in the EUTF the option of transferring to the VEBA, but required all HSTA members retiring after March 1, 2006, to enroll in the VEBA. About 1,400 retired teachers transferred from the EUTF to the VEBA. However, due to a “sunset” clause in the law establishing the VEBA, in January 2011, the state transferred about 12,500 active union members and some 2,500 retirees then participating in the VEBA to the EUTF.

“If unions were still able to offer competing plans, I think we’d be in a much better place today.” — Randy Perreira

A few months before the transfer, in September 2010, two union members and the VEBA trust sued the state alleging that by transferring participants to the EUTF, and simultaneously taking nearly $4 million in surplus funds from the VEBA trust, it had “diminished or impaired” the accrued health benefits of former VEBA members. That case, too, is pending.

Colbert Matsumoto, an ERS trustee, said the legal question of whether public-worker health benefits are constitutionally protected is something states across the mainland are dealing with.

He said government employers in Hawaii still have a lot of heartburn over the court’s decision that basically characterizes the EUTF health benefit as being the equivalent of a pension benefit for purposes of constitutional protection.

“That’s going to be an area that as pressures to scale back benefits increase, there’s going to be more questions raised as to what are the limits of the Legislature’s ability to make changes without violating constitutional limitations,” Matsumoto said.

Searching for Solutions

Say questioned whether Hawaii should continue offering a defined-benefit package where the state cannot control the cost. He said a defined-contribution plan, where the employer and employee pay for healthcare premiums, may be the better route.

“At some point in time the Legislature, if we have the courage, will have to determine if we want to do what we call a defined contribution or a defined benefit,” he said.

Perreira, the head of HGEA, said he doesn’t see any relief from escalating premiums unless there is systemic change within the EUTF.

“If unions were still able to offer competing plans, I think we’d be in a much better place today,” he said.

HSTA Vice President Joan Lewis said it may be time for the state to look at more comprehensive reform than that — like universal healthcare coverage.

Lewis, one of the EUTF’s original trustees, said ultimately it’s a health fund for public employees and their dependents. She said the challenge is that the trust — which serves the state and counties as employers and the beneficiaries — has no clear master. 

“When push comes to shove, which of those trumps the other?” Lewis said, adding that in her view it’s obviously the beneficiaries.

But for all its problems, Lewis cuts the EUTF some slack as an “adolescent” agency going through growing pains.

“I don’t know that when the ERS was that old that there wouldn’t be people saying, ‘I’m not so sure about this,’” she said. “But it might not be a bad time for the state to look at the EUTF and see if there might not be a better way.”

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