City officials, still grappling with how to pay the soaring costs of the Honolulu rail project, face another looming budgetary chasm.

Honolulu is short more than $1.4 billion in what it must pay to cover future public-employee retirement benefits. And, according to city financial reports, Mayor Kirk Caldwell’s administration has not set aside any money to cover that shortfall in Honolulu’s account at the Hawaii Employees’ Retirement System.

Catching up on those required pension payments could force the city to make big budget cuts elsewhere, or raise fees or taxes.

"Pensions," written in the sand on Oahu's Makapuu Beach.
A new accounting rule forces the city to record its pension liability directly on its balance sheet. PF Bentley/Civil Beat

Honolulu’s Department of Budget and Fiscal Services told Civil Beat that the $1.4 billion shortfall, stated in its 2015 financial report, is based on retirement system calculations from 2014. That total is expected to climb another $100 million or more when the department adjusts pension liabilities in its 2016 report, based on more recent retirement system calculations.

A year ago, in June, Honolulu’s unfunded pension liability was estimated at $1.52 billion, very close to what the newest adjusted total is expected to be.

The city’s share represents just under one-fifth of the total statewide retirement system’s unfunded liability of $8.7 billion.

Out Of Sight, But Not Secret

The magnitude of this growing long-term debt has been no secret at Honolulu Hale; it has been footnoted, often obscurely, deep inside Honolulu’s annual financial reports. Until this year, the required disclosure of pension liabilities has been minimal and hasn’t presented a clear picture of what taxpayers will be expected to pay.

But a new government accounting rule has forced city officials to record that liability directly on the balance sheet, where everybody can see just how much these retirement benefits are expected to cost taxpayers.

The city now faces the challenge of coming up with enough money to make its full annual required contribution to the retirement system. That contribution includes the cost of pension payments to current retirees, plus a share of the unfunded liability that will be paid off over 30 years, in a manner similar to mortgage payments on a home.

For Honolulu, this will mean adding millions of dollars to its budget every year. Just how much can’t be projected accurately, because returns on investments in the retirement system fluctuate. But for years the city has failed to contribute enough to cover its actual pension expense. Last fiscal year, the city paid $139 million in pension contributions, $24 million less than was required to meet its basic annual payment on the unfunded balance.


The city did make payments into the retirement system. These included reimbursements to Oahu Transit Services, for pension payments it makes to the Western Conference of Teamsters Pension Plan on behalf of its bus drivers and other union employees. Last year Oahu Transit made $4.2 million in pension contributions. Its share of the city’s total unfunded liability was estimated to be about $15.8 million.

City payments also included retirement benefits for City Council members and staff. Last year the city reported paying $3.4 million for City Council retirement and health benefits.

Overall, the new accounting rules added more than $1.5 billion to the liability section of the city’s statement of net assets. Although this appeared to result in a deficit of $933 million in general fund assets, the Budget Department said that deficit won’t have to be paid in one year, but over the next 25 to 30 years.

Budget officials told Civil Beat in a statement that the new rules were implemented “to provide management, the (City Council), municipal bond analysts, taxpayers and others with useful information for their decision-making process. Expenses are being reported when incurred rather than paid.”

That means from now on, the city will report future pension payments as employees earn the benefits, rather than when an employee actually retires and starts receiving monthly checks.

Credit Ratings Unaffected

Credit-ratings companies said the sudden appearance of $1.5 billion in additional debt shouldn’t significantly affect Honolulu’s credit rating or its ability to borrow money in the municipal bond market, something that will certainly be required to defray Honolulu Authority for Rapid Transportation construction costs.

“It’s no surprise for us; the liabilities have been reported in the footnotes, and we’ve been reading the footnotes all along,” said Douglas Offerman, senior director at Fitch Ratings, which last year gave Honolulu an AA+ rating on $888.6 million in general obligation bonds the city sold.

“Now (the liabilities) are just organized in a different way. We’re seeing new information that’s interesting for us to see,” Offerman said. “Governments will have to pay the liabilities, but there’s no expectation that will happen right away. There’s a lot more to any rating than just liabilities.”

The Government Finance Officers Association, an international organization of federal, state and local government financial management professionals, seems to agree.

A Problem, Not A Crisis

The notion that big net pension liabilities indicate a government faces an impending financial crisis is a misconception, Stephen Gauthier, GFOA’s manager of technical services, told Civil Beat.

“Financial statement users should always take seriously a large net pension liability,” he said. “However, that is not to say a government is facing, or will face, serious financial difficulties.”

Pensions are the “500-pound gorilla in the room and taxpayers have to feed the beast,” said Tom Yamachika, president of the Tax Foundation of Hawaii.

“The obligations have always been there; it’s an obligation that must be paid, and the new accounting rule is just a way for people to be aware of future liability. It moves issues like this front and center,” said Yamachika. “With this type of disclosure the taxpayer has a better idea of what’s going on.

“It’s not a cause for panic, at this point,” he said.

Civil Beat published a four-part series in 2014 on Hawaii’s multi-billion-dollar pension problem. The series found that the magnitude of Hawaii’s growing pension obligations poses the very real possibility that state and local governments could be forced to reduce services or increase property and other taxes.

Over the years, as the Employees’ Retirement System crossed its fingers on investments, public officials failed to make their full share of payments toward pensions, choosing to procrastinate instead, which exacerbated the problem.

Other Debts

As startling as the pension numbers may seem, within the next two years the city, along with the state and other municipal governments, will be required to disclose even larger liabilities for the unfunded share of what are called Other Post-Employment Benefits, such as health, dental and vision care for retirees and their families.

Accounting rules have required more detailed OPEB disclosures in the footnotes for several years. But beginning with the fiscal year ending in 2018, these additional liabilities, like those for pensions, will move from the footnotes to the balance sheet.

For Honolulu, this means adding yet another $1.8 billion or so to the city’s long-term debt.

According to the most recent report by the Employer-Union Health Benefits Trust Fund, which dispenses OPEB statewide, at the end of June 2015, Honolulu’s share of the $11.8 billion in unfunded liabilities came to $1.86 billion – including $86.3 million for the Board of Water Supply and $4.5 million for HART.

During 2015, the city and HART contributed a total of $111.9 million to OPEB, some $35.7 million less than required to meet its full annual payment on the unfunded liability. The Board of Water Supply, however, made $10.75 million in OPEB contributions, about $2.2 million more than required.

The city also reimbursed $300,000 to Oahu Transit for OPEB payments the company made to the Hawaii Teamsters Health & Welfare Plan. Oahu Transit’s total OPEB costs last year came to $1.5 million.

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