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Thom Williams is watching out for the financial well-being of one out of every 10 adults you encounter in Hawaii.
That’s because he’s responsible for the Hawaii Employees’ Retirement System.
If you’re a public employee, you know your future depends on the system’s success. If you’re not, you may not know much about it at all, unless you’re familiar with the system’s multibillion-dollar shortfall. This unfunded liability resulted from the promises made in collective bargaining agreements with public employees over the years.
Fulfilling those promises is the responsibility of all Hawaii taxpayers, so you could say that everyone has a stake in how Williams does his job.
The system works like this: Employees make contributions that are deducted from their pay and collect in a large fund. The fund is invested, and returns compound over time. When employees retire, they receive pension checks paid from the fund.
The ERS is a “defined benefit” public pension plan. This means the amount of each pension check is based on the employee’s length of employment and salary history. Crucially, the state has a constitutional obligation to pay out accrued benefits, regardless how the fund performs.
The ERS serves nearly 140,000 members statewide. Nearly one in 10 adults you meet is a beneficiary, including teachers, professors, police officers, firefighters, public hospital workers, correctional officers, judiciary employees, judges and elected officials. In other words, public servants.
Williams is also a public servant. A busy one.
As executive director of the ERS, he oversees an investment fund with $17 billion under its management.
“Between 60 and 70 percent of every dollar paid out comes from investment earnings,” he says.
These dollars feed into the local economy, as pensioners provide for their families. Williams estimates that nearly a third of Hawaii’s population live in a household with an ERS beneficiary.
“Everyone has a stake,” he says. “If you’re a taxpayer or citizen, you should be interested in this program. It’s a source of significant expenditures, but also a source of significant revenue.”
Williams previously served as executive director of the Wyoming Retirement System. After that, he took a year off and considered retirement, but decided he wasn’t ready. He took his current post in 2015.
“The needs of the system aligned with my interests and experience,” says the dedicated fly-fisherman.
In the midst of the legislative session, his job entails advocating for the ERS budget at the Capitol. At other times, he attends ERS board and committee meetings.
Right now, his main focus is on investment manager selection for the portfolio. In this work, he collaborates with the system’s new chief investment officer, Elizabeth Burton.
Investment is a risky business, and protecting the portfolio value has become more difficult over time, exposing the state to more risk.
To mitigate this risk, the team keeps the portfolio diversified. And each year, they use stress tests to gauge the health of the plan. I asked Williams to explain how the plan would fare in the worst-case scenario of a prolonged global recession.
His response was a bit … technical.
“We have a crisis risk offset strategy to minimize drawdown in prolonged down markets,” he says. “Soon we’ll have 20 percent invested in a combination of systematic trend-following instruments, long-term treasuries and alternative risk capture investments.”
Translated, that means the portfolio should survive a bad market, though he admits, “We can’t predict everything.”
Williams keeps his daily focus on improving returns. Increasing the value of the fund while markets are ripe will mitigate the risk when markets turn sour.
“To the extent that we can be best in class at producing returns, we can reduce the burden on contribution and decrease the risk.”
Unlike other state agencies, the ERS does not draw from the general fund; it operates based on investment earnings. But the ERS is still constrained by the Legislature which retains control over budgeting and the creation of new positions.
Williams argues it should be run less like a state agency and more like a business.
“The success of the ERS depends on the ability to compete in a global investment marketplace,” he says. “We are in competition with large investors and other pension funds for the best investments. We need human and technical resources to beat average returns and lower costs for the state.”
The ERS employs six full-time professional investment staffers. In other words, one for each $2.8 billion in assets. This session, Williams is asking the Legislature for three additional staff for the next fiscal year: one investment officer and two retirement claims examiners.
Williams says that increasing the staff would “improve our odds of investment success and lower our investment and operational risk.”
Rep. Aaron Ling Johanson is chair of the House Labor and Public Employment Committee. He supports the request for more personnel, noting that “the pension represents security and stability after a lifetime of work.”
House Bill 1187, which Johanson introduced, is still alive, having advanced through House and Senate committee hearings.
“I think it’s critical to have the right mix of staff,” Johanson says. “If the ERS does not produce returns, that means pensioners potentially lose out.”
As would all Hawaii taxpayers, because there’s no going back on that promise to their public servants.
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