Story updated 5 p.m., 4/21/2015
Led by Rep. Romy Cachola, House lawmakers have pushed forward a plan that critics say would effectively undo a law passed in 2013 that forces Hawaii to finally get serious about paying down its massive unfunded liability in retiree health care benefits promised to thousands of public workers.
But Gov. David Ige and his former colleagues in the Senate are not too fond of the idea, setting up a tense next couple of weeks as legislators try to negotiate a deal before the session ends May 7.
“Every time that I’ve talked to the money committees, I’ve made them aware that I have no intention of pulling the plug on prefunding,” Ige told Civil Beat in an interview earlier this month.
House Bill 1356, introduced in January, says the state and counties just can’t afford to fully pre-fund Other Post-Employment Benefits.
The state, which is responsible for roughly three-fourths of the $18 billion OPEB liability, has put down $217 million over the past two years and plans to ramp up to an estimated $500 million annual pre-funding payment over the next three years. Between pre-funding payments and the pay-as-you-go payments, the state will be paying more than $1 billion a year in health benefits for retired public workers.
The House legislation proposes just taking a pay-as-you-go approach once the state has saved up $2 billion by pre-funding. It also also calls for putting the investment income interest from that account — projected at $140 million annually — into a new rate stabilization fund to cover any shortfalls and prevent frequent increases in premium contributions.
Cachola insists that his proposal does not amount to “pulling the plug” on the 2013 law. He told Civil Beat that the plan would continue the pay-as-you-go approach and pre-funding until the $2 billion stabilization fund is created at which point the pre-funding would stop.
“These savings could be used to fund the Employees Retirement System, public and charter schools, the Hawaii Health Systems Corporation, or other funding needs of the state and counties, including rail transit,” according to the draft of the bill the House passed last month in a 43-8 vote.
The Senate gutted and replaced the bill’s contents over the course of two committee hearings and sent it back to the House on Tuesday.
The legislation, in its new form, just allows the Hawaii Employer-Union Health Benefits Trust Fund to invest money with the same degree of flexibility as the ERS.
In January 2014, the EUTF board increased its projected return on investment from 6.5 percent to 7 percent, based on the presumption that the Legislature would pass a bill letting it take on a bit more risk while diversifying the investment portfolio, according to Sandra Yahiro, the health fund administrator.
If the EUTF can’t invest in new asset classes, it may have to bump its expected return back down, she said. That would add hundreds of millions of dollars to the unfunded liability and extra years to pay it off.
Conferees from each chamber were appointed Monday to serve on a joint committee tasked with resolving the differences between the two versions of the bill.
The lead negotiators are Cachola for the House and Sen. Jill Tokuda, who chairs the Ways and Means Committee, and Sen. Gil Keith-Agaran, who chairs Judiciary and Labory. The other conferees are Reps. Scott Nishimoto and Feki Pouha and Sens. Will Espero, Ron Kouchi and Sam Slom.
The House and Senate appear to be on different wavelengths when it comes to this bill.
Luke didn’t make any changes to the original draft when it came to her committee in early March, whereas Tokuda removed what was left of the original contents when Ways and Means heard it two weeks ago.
Cachola submitted written testimony in support of the bill when the House Finance Committee heard it, a rare move for state lawmakers in Hawaii.
“My inspiration and motivation for coming up with this bill,” he said, “begins with my grandchildren by asking this question, ‘What will their future be with this heavy burden?’”
Cachola said Hawaii residents who are homeowners may get hit twice by tax increases to pay for the pre-funding requirement, something he pointed out doesn’t have to be done under general accounting standards.
He foresees the state having to raise the general excise tax and the counties having to increase property taxes, something Honolulu has said it may have to do if required to pre-fund the health benefits.
The House draft of the bill says raising taxes for the health care needs of state and county employees places an unfair burden on the state’s general population.
“Raising the general excise tax would be a regressive policy that would disproportionately impact those who can least afford it,” the legislation says. “Raising property taxes at the county level would unfairly target property owners and landlords, the costs of which would likely pass down to property renters.”
The governor and his budget director, Wes Machida, have encouraged lawmakers to look farther down the road.
“If we talk about big picture, as we stand up that program and we begin to create that trust fund and accumulate resources — it’ll be over $200 million by the end of this fiscal year and it will grow to almost $1 billion by the time we get to the fifth year — then you begin to improve bond ratings and hopefully reduce the cost of borrowing to the state, which would have significant long-term impact,” Ige said.
Roughly 75 percent of the money Ige asked for in his proposed spending plan for the next two years above the current biennium budget goes toward pension and health benefit costs for some 120,000 public workers.
Ige was head of the Senate Ways and Means Committee when the Legislature passed the bill in 2013 that requires the state and all four counties to be making their full annual required contributions to the health fund starting in 2018.
Then-Gov. Neil Abercrombie signed it into law as Act 268. He told Civil Beat last July that it was the “single most significant change in the EUTF liability during my administration.”
Yahiro said implementing Act 268 is one of the most, if not the most, important ways to reduce the unfunded liability,
“It is likely that credit rating agencies will look very unfavorably on such a ‘repeal’ of Act 268,” she added.
The Tax Foundation of Hawaii, headed by Tom Yamachika, said Cachola’s proposal tosses away the fiscal discipline of Act 268.
“The bill proposes to deal with the unfunded liabilities problem by denying that it’s a problem,” Yamachika said in his testimony. “‘Don’t worry,’ it’s telling everyone. ‘We can pay the current year’s costs of the post-employment benefit programs we created. There won’t be any rainy day. So just go about your business.’”
Most of the support for the bill comes from the adult care home industry. Many care home operators live in Cachola’s district, which includes Kalihi, Kapalama, Mokuauea and Sand Island.
Twenty caregivers, nurse aides, foster home owners and others sent in the same piece of testimony, much of it taken verbatim from Cachola’s own testimoy.
“We have come to understand that the State Unfunded Liability is estimated to reach $18B by 2016 and that Act 268 from 2013 mandated that the State and Counties contribute to pre-fund both the Other Post-Employment Benefits (OPEB) as well as the Monthly Premiums on an increasing schedule from $100M to $500M by 2019 and then for 30 years thereafter,” the letter says. “This is too heavy of a burden to pass along to our children.”
The House officially disagreed with the Senate amendments Thursday, paving the way for the bill to go to conference committee.
• 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.