Billions of dollars in the hole, Hawaii lawmakers are searching for ways to afford the health and retirement benefits promised to thousands of public employees.

The unfunded liabilities problem — as unsexy as it might seem — has far-reaching implications.

As an ever-increasing percentage of the state’s overall $12 billion budget goes toward paying public workers’ health and retirement benefits, fewer resources are left to maintain current government services, not to mention start new programs like universal preschool.

Finance Director Wes Machida sits in on ways and means hearing about REIT.  18 feb 2015. photograph Cory Lum/Civil Beat

Gov. David Ige’s finance director, Wes Machida, is hoping to convince lawmakers that more reforms are necessary to bring down the state’s unfunded liabilities.

Cory Lum/Civil Beat

While recent reforms have helped Hawaii find better footing, the shortfalls are so severe that significant cuts, tax increases or a combination thereof may soon be necessary to make ends meet, especially as Hawaii’s sizable surplus dries up over the next few years.

Wide-ranging proposals have swirled through the Legislature this session — some extreme, some bite-sized.

Democratic leaders in the House pitched a plan to end health care benefits for retirees. Other lawmakers want to triple the use tax paid by wholesalers. Drastic measures like those are so politically unpalatable that the bills haven’t received so much as a hearing.

Other legislative tweaks are moving forward though. The measures stand to save state taxpayers hundreds of millions of dollars by making small changes, like adjusting how much retirement credit employees can get for accumulated sick leave.

But even those more narrowly targeted efforts are having a tough time gaining traction due to strong union opposition.

“All of us in the labor movement are concerned because we want the state to be in a sustainable position,” said Randy Perreira, executive director of the Hawaii Government Employees Association, which represents roughly 43,000 state and county workers.

“But really, this is a matter policymakers have to figure out.”

Hawaii started to right its ship on the pension side of the equation five years ago but has significant work to do on the health-fund side. The unfunded liabilities for the Employer-Union Health Benefits Trust Fund, which manages Other Post-Employment Benefits, is roughly double that of the Employees’ Retirement System.

The ERS has reduced its unfunded liability to $8.58 billion after significant reforms, which included increasing the retirement age, reducing benefits for new employees and placing a moratorium on benefit enhancements.

HGEA Executive Director Randy Perreira

Randy Perreira, HGEA executive director.

Civil Beat file photo

But the pension system is still an estimated 26 years away from being solvent. And if the most recent report on investment earnings is any indication, it could be much longer.

The target return is 7.75 percent, but gains came in at just 1.7 percent last quarter — up just 0.7 percent this fiscal year, which started July 1.

The ERS isn’t too concerned though because the 7.75 percent represents a long-term average, said Kanoe Margol, interim executive director.

The markets have been volatile, especially with the sharp drop in oil prices, she said. But Hawaii has built up a cushion, averaging a 12.5 percent return over the past three years.

Still, the ERS board decided in September to gradually lower the target to 7.5 percent over the next three years to help meet the goal, which is used to determine how long it will take to make up the shortfall.

Margol took the reins at ERS after Wes Machida stepped down to serve as Gov. David Ige’s budget director. Margol and Machida have been pushing legislation that Ige included in his package of bills.

One measure, Senate Bill 1088, would cut in half the amount of retirement credit for accumulated sick leave for public employees who join the ERS after June 30.

It would trim the amortization period by up to 18 months, saving an estimated $581 million. But unions are fighting it because it would create a tiered system of employees, presenting a fairness issue.

“This continued, piecemeal and haphazard policy approach is destructive to morale and recruitment.” — HGEA President Randy Perreira

“An office could potentially hire three employees within the past few years, performing identical duties, but each of the three with significantly different retirement packages,” Perreira said. “This continued, piecemeal and haphazard policy approach is destructive to morale and recruitment.”

The problem isn’t unions, Perreira said; it’s the Legislature skimming investment earnings for decades instead of fully funding the benefits the state was promising its workers.

“That’s the past though and this is where we are,” he said. “To address the problem, we need to take a comprehensive look at what we’re offering public employees.”

As far as concessions go, Perreira envisioned discussions about areas where fewer employees might be hired due to improvements in technology or because certain services should be phased out because they’re no longer needed.

Machida said it wasn’t the state’s desire to reform the pension system bit by bit. Addressing concerns with sick leave and other issues were part of a whole package developed in 2010, but strategically, it was thought that only certain things could get through.

“That’s why some of these proposals are still being introduced because more needs to be done to ensure there’s sufficient money for all programs,” he said.

The Senate Judiciary and Labor Committee, chaired by Gil Keith-Agaran, passed Senate Bill 1088 last week. He noted concerns in the committee report about creating a tiered system of benefits while acknowledging that the legislation addresses a situation where certain employees, upon retirement, receive additional benefits without making additional contributions.

Governor David Ige enters press conference held at his office.  12 feb 2015. photograph Cory Lum/Civil Beat

Gov. David Ige talks with reporters Feb. 12.

Cory Lum/Civil Beat

The committee also passed two other measures that would reduce the unfunded liabilities, but they all await an uncertain fate in the Senate Ways and Means Committee, chaired by Jill Tokuda.

Senate Bill 1089 could help ERS make more money off its investments by requiring employees to pay more to acquire membership service credit for previous service, military service and unpaid leave. The cost is currently based on their salary, instead of an actuarially neutral calculation.

As an example, Machida pointed to an employee who purchased two years of service for less than $2,000. This increased their pension by $500 a month, costing the state an extra $150,000 if they live to life expectancy.

The bill would require the payments to be based on actuarial cost instead of the employee’s salary, which in that example would have been around $60,000.

This is the first time the ERS has tried to address this issue, Machida said, a result of conversations he had with actuaries about what more the state could do to lower the unfunded liabilities.

“It’s important to continue to address it because the further it gets pushed out the harder the costs will be,” he said. “It doesn’t just impact public employees and retirees. It impacts everyone in Hawaii.”

The bill also requires those employees to buy that credit for previous service in a more timely fashion instead of waiting until right before they retire. This would give the ERS the money sooner, allowing it to be invested and produce a bigger return.

“As a result of payments that are insufficient to cover the actual cost of the increased benefits and that do not allow the system to realize investment returns over time to defray the cost of the increased benefits, the increase in the member’s retirement benefits are borne by the employers and current and future members of the Employees’ Retirement System,” Margol told the Senate Judiciary and Labor Committee.

Senate Bill 133 would let the ERS suspend payments to people convicted of felonies during the course of their employment. For instance, someone caught embezzling money from a state agency would no longer get their pension check.

These are among the few bills concerning the unfunded liabilities that are moving forward. The vast majority have not had so much as a hearing, including House Bill 669, which would end retirement health benefits for employees hired after June 30.

“It doesn’t just impact public employees and retirees. It impacts everyone in Hawaii.” — State budget director Wes Machida

The fact that bill was even drafted, let alone sponsored by five high-ranking Democratic reps — Mark Nakashima, Della Au Belatti, Sylvia Luke, Scott Nishimoto and Scott Saiki — is an indication of how serious the issue is.

Nakashima, who chairs the Labor Committee, never scheduled the legislation for a hearing, effectively killing it. But the measure still put the idea out there.

Perreira he wasn’t surprised the bill was introduced given the ongoing concern over unfunded liabilities. But he also wasn’t surprised it didn’t get a hearing.

“There’s no impetus at this time,” he said, noting the significant reforms made over the past several years.

Perreira also underscored the importance of preserving good benefits for public workers, something that helps attract quality employees who would otherwise go to the private sector.

“You don’t want to be stuck just recruiting the scrubs into public service,” he said.

In 2013, Gov. Neil Abercrombie signed a law that requires all government employers to make annual contributions that include the full amount of what it costs for providing current Other Post-Employment Benefits.

The law phases in the requirement over the next four years. The payments would pay off the EUTF’s unfunded OPEB liabilities by 2039.

A recent study ranked Hawaii No. 7 in the country when it comes to fair market valuation of the unfunded liability per capita. That means every resident would have to pay $21,852 to make the system solvent, according to State Budget Solutions.

Ige, a former state senator who chaired the Senate money committee, said the legislative changes made over the past five years have put the pension system and health fund on a path to sustainability.

“There’s still a lot more work we need to do,” he said. “The unions do recognize that the unfunded liabilities is something of a concern even for their members because they don’t want to get into a situation where the government goes bankrupt and then everything falls apart.”

Ige added three positions and $308,000 to his proposed state budget for the next two years to help the ERS meets its needs.

The governor’s budget adds $65.5 million in 2016 and $99.8 million in 2017 for retirement benefits payments. It also seeks $87.4 million in 2016 and $216.3 million in 2017 for health premium payments and OPEB pre-funding.

Of the money Ige asked for in his budget above the base, roughly 75 percent of it over the next two years goes toward pension and health benefit costs for some 120,000 public workers.

• Read “Pension Promises,” Civil Beat’s special report on Hawaii’s pension and retiree heath care systems, the financial problems they face and how that affects everyone in the state.

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