One of the biggest challenges facing Hawaii’s next governor is one that’s virtually unavoidable and rarely discussed outside of government circles: the ongoing challenge of covering pensions and medical care for tens of thousands of retired government workers.
With more than 45,000 retirees and beneficiaries drawing benefits and some 65,000 more still actively working and bound to collect benefits down the line, the state of the Hawaii Employees’ Retirement System and Employer-Union Health Benefits Trust Fund face massive looming bills.
The Legislature has reined in the liability somewhat, thanks to hard decisions made over the last several years, starting with measures sponsored by former Gov. Neil Abercrombie. But the retirement benefits remain a massive cost that taxpayers must cover before even thinking about essential services like education and transportation.
And the governor ultimately is supposed to craft a budget to make it all work.
As of June 2016, the liabilities totaled $40.7 billion. And although the programs had accumulated about $16 billion to cover the benefits, more than $24.6 billion was unfunded. The result: state and county governments must funnel enormous amounts of tax revenue into the systems to keep the unfunded liabilities from ballooning out of control.
Unfunded retirement liabilities are extraordinarily complex to calculate because they involve not only varying return rates on fund investments, but also variables like life expectancy for beneficiaries and fluctuations in health care costs. As a result, budget and finance experts are quick to point out that estimates may change quickly.
Still the magnitude of the liabilities and costs to taxpayers is undisputed. Payments are hovering around $1 billion annually for each program. According to the Department of Budget and Finance, the state has budgeted $1.43 billion for its 2019 contribution alone.
The massive payments give the state little wiggle room when it comes to setting budget priorities, government finance experts say. The health fund payments must be paid as a matter of statute, said Sen. Donovan Dela Cruz, chairman of the Senate Ways and Means Committee. That means less money for things like education, prisons and land and natural resources.
“How do you do all those things when you’ve got so much tied up in fixed costs?” Dela Cruz asked. “The more we’ve got tied into fixed costs, the less creative we can be when trying certain projects, when trying new things, when things change.”
And they are only expected to grow bigger. According to one forecast by the Department of Budget and Finance, by 2040, taxpayers are projected to be paying about $2 billion a year into each program, or about $4 billion in total.
The Hawaii Constitution essentially bars policymakers from cutting accrued benefits from current employees, although there’s nothing preventing the government from cutting benefits for new hires. A major question for the next governor is how to deal with this ongoing expense.
Here is what candidates had to say about the issue. Hanabusa was the only candidate who refused to be interviewed for this story.
None of the candidates have more experience addressing the pension and health care liabilities than David Ige.
He was chairman of the Senate Ways and Means Committee when the Legislature passed several measures that reformed the pension and health care programs and established payment plans for the programs. The bills did things like put a lid on increases in pension benefits until the system was fully funded; increased the retirement age and amounts employees had to contribute; and closed a loophole that employees used to boost their pensions by accruing overtime pay as retirement neared, among other things. Another bill effectively eliminated a practice known as pension spiking, which allows employees to game the system to boost their pensions.
Ige himself crafted legislation, enacted through a committee amendment, requiring government employers to pay the full amount of their health care benefit liability every year to get it under control.
Before the changes, the state was “one significant event” away from having liabilities that would be “unsustainable,” said Wes Machida, Ige’s former budget director and a former executive director of the pension fund.
The result benefits the state beyond insuring it can pay its obligation to retired government workers. Credit rating agencies have cited the measures when upgrading Hawaii’s credit rating, which allows the state to borrow money at a lower interest rate, and thus save money.
Several measures were introduced in the House by others as part of a package sponsored by then-Gov. Neil Abercrombie, and the former governor told Civil Beat that Ige does not deserve credit for them. Still, the bills needed to go through Ige’s Ways and Means Committee. And Ige has been in charge of implementing the changes.
Machida also noted that Ige, as Ways and Means chair, was the main author of the legislation that helped get the health fund under control. Machida was running the pension system at the time, and Ige called Machida to his WAM office and picked his brain on how to get the woefully under-financed health plan caught up.
“I’m not telling you this because he (Ige) later made me part of his administration,” Machida said. “I’m telling you this because it’s a fact.”
Ige acknowledged that keeping up the payments will be a challenge down the line, when they are projected to grow to some $4 billion annually combined. But he said the improved credit rating will reduce borrowing costs, which will save money over the long run. The normally self-effacing governor doesn’t hesitate to take credit for what he describes as a major policy accomplishment that he helped adopt and execute.
”You know I’m proud of the fact that we have implemented and had a significant part in assuring passage of the legislation as a Ways and Means chair over my time,” Ige said.
Hanabusa’s campaign declined repeated interview requests; however, from her record as a state legislator and from recent campaign statements, it appears that grappling with the state’s unfunded liabilities for government retirees has not been a priority.
Hanabusa played no part in the reforms to the pension and health benefits programs, for example. The Legislature began to make those changes in 2011, after Hanabusa stepped down as Senate President in 2010. Nor does Hanabusa’s campaign website identify getting a handle on the fiscal implications of government retirement programs as a priority.
If anything, Hanabusa seems inclined to expand health benefits for government workers.
The Hawaii Government Employees Association, the state’s largest public worker union, has endorsed Hanabusa. And in a video posted on the union’s website, Hanabusa vows to “safeguard public sector jobs, pensions, health benefits and collective bargaining.”
Although Hanabusa said she initially supported the health care trust fund 18 years ago, she questioned whether workers should have to contribute as much as they now do for coverage.
“Now I realize the cost for you is too high,” she says in the video. “I am committed to negotiating a better resolution so you can keep more of your hard-earned dollars.
The perennial Republican candidate’s platform includes sharp cuts for government workers.
John Carroll’s position on government worker pensions and health benefits is fairly simple: he wants to staunch the state’s liability by cutting 25 percent of workers from the government payroll during what he says will be the one term he would serve in office. To implement the change, the 88-year-old Carroll said he will survey all state government jobs to identify and cull unnecessary workers.
That would not reduce benefits that had already accrued, under the Hawaii Constitution, but could prevent the state from racking up more liabilities.
In addition, there’s the practical challenge of axing workers protected by civil service rules and union contracts. Carroll acknowledged those challenges but said his administration could look at non-union government jobs and that he would be willing to fight the unions.
“The HGEA is not going to like me, I can tell you that,” he said.
A self-described conservative, Carroll frames the issue as one of a bloated government that’s being paid for largely through general excise taxes, which disproportionately burden lower income people.
“It’s coming out of the pockets of the poorest people,” he said.
Republican candidate Ray L’Heureux calls the unfunded liabilities “one of the critical vulnerabilities of the government presently, and one of the vulnerabilities of the government going forward.”
The $24 billion unfunded liability, he said, is “a staggeringly large number for such a small state.”
“It’s an elephant in the room that I believe Hawaii’s political leaders ignore because of the symbiotic relationship the unions have with government,” he added.
A retired Marine lieutenant colonel and former assistant schools superintendent for the Hawaii Department of Education, L’Heureux said the state needs to amend government employee contracts so that benefits more closely mirror those provided by private sector employers.
While government employees earn pensions that provide a set monthly payment for life, private employers generally have quit offering such benefits and instead merely help employees save money through savings plans. In addition, unlike Hawaii, private employers generally don’t provide health care coverage for retirees.
In addition, L’Heureux said, the state should consider reducing the size a government that he says is “too centralized” and “bloated.”
“It overtaxes, over-regulates and plays political favorites,” he said.
L’Heureux questioned whether Hawaii’s tourism-based economy will be able to cover the costs 20 years down the line, when the cost of retiree benefits is supposed to swell to about $4 billion.
“We’re only one natural event away from an economy that collapses,” he said.
Republican Andria Republican says it important to have “an honest conversation” about the liability the state faces. She said the looming $4 billion annual payment is alarming, which could be more pronounced if the economy dips.
“I can tell you what happens,” she said. “In the city and county of San Jose, they actually filed for bankruptcy. They had to close all of their libraries, they had to close the parks.”
Regardless of whether Hawaii becomes insolvent, Tupola said the state needs to take a hard look at the retirement liabilities.
“You have to make a very clear plan,” Tupola said.
Steps could include raising the amount employees can invest in their retirement pans, Tupola said. She also said the retirement plans might be able to do a better job growing the money it has by investing better.
But the key, she said, was to let government workers know the position the state was in and to not continue to promise money the taxpayers could not afford to pay.
“We have to stop promising things we can’t give,” she said. “When people get lied to, they get even madder.”
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