Hawaii lawmakers are set to open the 2017 session on Jan. 18 with millions of dollars in projects and services on their respective wish lists. But the budget is getting whacked before they even begin.

They learned last week that the state is expecting to collect roughly $155 million less in tax revenues than expected.

And this week they found out that the state pension system, which covers more than 120,000 public employees and retirees, is not coming close to meeting its financial goals.

Hawaii’s public pension fund shortfall hit $12.4 billion in 2016. PF Bentley/Civil Beat

It would require hundreds of millions of dollars extra each year to get the Employees’ Retirement System back on track, largely due to weak investment earnings and people living longer in Hawaii.

The ERS Board of Trustees had expected 7.65 percent returns from its market investments in 2016. Instead, the investments lost 1.2 percent, the worst showing since 2009. The system averaged 5.7 percent over the past 15 years, according to a report released Monday by the state’s independent actuarial consultant, Gabriel Roeder Smith & Company.

“This amount of time would push significant costs into several future generations, and does not allow for any future adverse experience that may arise.” — Gabriel Roeder Smith & Company actuaries

The market value of the system’s assets is $14.1 billion. It’s deferring $929 million in losses from 2016, whereas the previous year it had $42 million in gains.

Meanwhile, life expectancy is steadily increasing, which means more years — and more money — for government employers to pay the retirement benefits promised to public workers.

Hawaii residents are living 81.3 years on average; they are among the nation’s longest-living.

All this means it’s expected to take the state twice as long to eliminate its unfunded liability, which stretched to $12.4 billion in 2016 from $8.8 billion the prior year.

The actuary determined it would take 66 years instead to make the system solvent. The funded ratio dropped to 54.7 percent, calculated by dividing the value of the assets by the liabilities.

Gabriel Roeder Smith & Company, the state’s independent actuarial consultant, projects the unfunded actuarial accrued liability to top $12 billion based on new assumptions, including longer life expectancy and lower investment returns. Courtesy: GRS

In a letter Monday to the ERS Board of Trustees, the actuarial consultants said, “66 years is an inappropriate amount of time to allow for amortizing” the current unfunded actuarial accrued liability.

“This amount of time would push significant costs into several future generations, and does not allow for any future adverse experience that may arise,” wrote Joseph Newton, Lewis Ward and Linna Ye.

“In fact, a 66 year funding period would push funding for the current membership well past the point in which a large majority of them would have died. We recommend the contribution rates be increased to bring the funding period into a more appropriate range, with a target of 25 years.”

The Legislature reformed the pension system in 2011 for employees hired in 2012, which is expected to have a significant impact on future liabilities but not offer much relief in the near term. 

The Board of Trustees has changed its assumptions, dropping the expected investment return to 7 percent. That, combined with changes in mortality assumptions, was a big reason the actuary said it would now take 66 years to address the unfunded liability. It would have been 27 years based on the old assumptions that are no longer deemed realistic.

Read Civil Beat’s past coverage of the state’s pension system here.

Read the consultant’s presentation to the ERS Board of Trustees below.

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