Story updated 12:30 p.m., 12/11/2014

Reform measures and high returns on investments in recent years have helped Hawaii start to crawl out of its $20 billion hole in retirement benefits promised to thousands of public workers.

But the state still has a long way to go — 26 years to be exact, based on the latest actuarial report for the Hawaii Employees’ Retirement System. And it’ll take even longer — until 2045 if everything goes as hoped — to make the Employer-Union Health Benefits Trust Fund solvent.

State senators heard more about the financial status and valuation of the public pension system Thursday morning during a legislative briefing at the Capitol. Actuaries from Gabriel Roeder Smith and Company, the state’s consultant, went over just how much is owed in unfunded liabilities, how new laws may affect the system and what to expect from investments over the next 30 years.

Hawaii State Capitol with lawn PF

Hawaii lawmakers are receiving updates at the Capitol this week on the state pension system.

PF Bentley/Civil Beat

House representatives heard a similar presentation Tuesday. Lawmakers who attended the two-hour briefing said it stressed the positives but didn’t dig much into the assumptions that the actuaries rely on to make their projections.

Rep. Cindy Evans said she is looking forward to the next comprehensive annual financial report to drill down into the numbers and gain a better understanding of the pension system’s overall health.

But the briefing did spur her to consider drafting legislation to introduce next session, which convenes Jan. 22, to address efficiency. She said she’s concerned that the state is sending out pension checks to people after they die because death notices aren’t timely, opening up an uncertain collection process.

‘We Can’t Play Politics’

Rep. Takashi Ohno told Civil Beat on Wednesday that it’s important that the state honor the promises it has made to public workers.

“We can’t play politics or games with their twilight years after they finish their service to the state,” he said.

The ERS is expected to be fully funded by 2040, according to the actuary’s report. That’s a year sooner than the consultants projected last year.

The major reason for the gain is the 2014 return on investments was 17.8 percent, the second positive year in a row. In 2013, the return was 12.3 percent.

ERS Executive Director Wes Machida told Civil Beat on Wednesday that shaving a year translates to roughly $600 million in today’s dollars.

“Every year we can do this, it saves money,” he said.

The assumed rate of return is 7.75 percent. However, the ERS Board of Trustees in September voted to drop the assumed return to 7.5 percent by 2017, making gradual steps each year until then.

So while the projected funding period is 26 years for the 2014 valuation, using the 7.75 percent assumption, the consultants expect it to take a few years longer for the system to become solvent if the estimated rate of return is lowered to 7.5 percent.

The consultants project that in 2017, using the 7.5 percent assumption, it’d take 25 years for the ERS to be fully funded from that point in time.

Assumption rates ERS

In September, the ERS Board voted to gradually lower the assumed rate of return on investments from 7.75 percent to 7.5 percent. Source: Gabriel Roeder Smith & Company

The rate was lowered based on information from investment consultants and from the actuaries, Machida said.

He said those extra years could be offset, however, if other assumptions don’t hold true, such as those involving life expectancies. The current assumption is that public workers in Hawaii, the state with the longest life expectancy in the nation, will live to be 80-83 on average, he said.

Joseph Newton, the actuary from Gabriel Roeder Smith & Company who did most of the talking Thursday, said Hawaii should be commended for the changes its made in the law over the past few years to put the state on course to be fully funded. Without those changes, he said the ERS would remain just 60 percent funded through 2060.

Hawaii is one of the few states — if not the only — to lay out in law a plan to require all government employers to pay their full share to the health fund, Newton said. A point that Young touted too.

Newton said not fully funding the health fund is admitting that the program will be changed somewhere down the line, essentially breaking promises to provide certain benefits because they are no longer affordable.

“Advance funding it is the only way to sustain the program,” he said.

‘It’s All About Education’

Gov. David Ige has appointed Machida to replace Kalbert Young as head the Department of Budget and Finance, which the ERS falls under. Machida starts his new job Dec. 26. His deputy will be filling his shoes on an interim basis until the board hires a new director.

Ige, who headed the Senate money committee before winning the gubernatorial election last month, has been keen to tackle the state’s unfunded liabilities problem. He included money in the budget that was in line with that requested by Gov. Neil Abercrombie, who made the issue one of his administration’s top priorities.

Both Young and Machida were at the briefing Thursday, fielding questions from lawmakers and adding points to give the issue greater context, like the fact that the ERS serves over 118,000 people statewide.

The ERS is now 61.4 percent funded, up from 60 percent in 2013, according to the consultants’ report. The unfunded liability grew slightly, rising to $8.58 billion from $8.49 billion over the same time period.

The Employer-Union Health Benefits Trust Fund is another story. The unfunded liabilities for Other Post-Employment Benefits totaled $11.2 billion in 2013, the last time the actuaries valued the fund. The EUTF’s assumed rate of return on investments is 7 percent.

State lawmakers have started pumping a planned $200-plus million into the fund over a two-year period to start righting the ship. They also passed a landmark law in 2013, called Act 268, that requires the state and county employers to start pre-funding the system, moving away from the pay-as-you-go approach. Full funding is required by 2019, with gradual 20 percent increases working up to it over the next five years.

EUTF actuary projections

The law Hawaii passed in 2013, known as Act 268, is expected to have long-term benefits if the state and counties make their annual required contributions. Source: Gabriel Roeder Smith & Company

The state’s annual required OPEB contribution is $718 million for June 30, 2015. Of that, the projected pay-as-you-go portion is $303 million, which means Hawaii would have to put in another $415 million to make the full payment.

Under the new law, the state has to put in at least 20 percent, $83 million, of the pre-funding amount for 2015 and at least 40 percent, $164 million, for 2016. The state budget exceeds the first year payment, but later years will be more of a strain.

By 2019, when full funding is required under the law, the estimated contribution will be $500 million — just for the pre-funding portion for the state.

The county employers will have to meet the new requirements too, but they are in better shape than the state because they have already been putting money aside for pre-funding. So while the state’s funded ratio is just a sliver over zero percent, Honolulu is at 7 percent; Hawaii County is at 16 percent; Maui is at 7 percent and Kauai is at 22 percent.

The actuaries recognized the challenges that pre-funding will place on the state and counties, but pointed at the long-term savings. Over the next 30 years, the additional cost of pre-funding is $12.9 billion but by 2046 pre-funding is expected to more than halve the percent of payroll that goes toward it, reducing the unfunded liability by several billion dollars.

State Finance Director Kalbert Young told senators Thursday that the state is “two steps into a 1,000-mile journey,” recognizing that the $100 million payment the state made last year is “like drops of water in the ocean.”

This is the first year the legislative briefing has included both the ERS and EUTF, Machida said.

“For me it’s all about education,” he said. “It’s about understanding where we are at a particular point in time and understanding where we need to be in the future to ensure the sustainability of the system.”

Here are the reports the actuaries presented Thursday to lawmakers.

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