COMING UP SHORT: Hawaii’s employee retirement system is $8.5 billion underfunded
By Malia Zimmerman | Watchdog.org
HONOLULU — A new report from State Budget Solutions, a national nonprofit organization focusing on states’ fiscal responsibility, warns it’s time for newly elected state officials in Hawaii and throughout the country to address unfunded liabilities in the retirement system.
The share of Hawaii’s $30-billion unfunded liability per resident is $21,852, the seventh highest in the nation, said Joe Luppino-Esposito, the study’s author.
He said Hawaii’s Employees’ Retirement System is only 29 percent funded because the state isn’t putting enough money into the system to pay future promised benefits. The unfunded liability amounts to 41 percent of the state’s gross domestic product.
State officials paint a different — if still grim — picture, showing the pension system as 60 percent funded.
The translation in real dollars is $8.5 billion. That’s a major discrepancy from the SBS $30 billion estimate.
The main difference, Luppino-Esposito said, is the discount rate used. That’s the rate that determines how much money is needed today to have enough revenues in the future to meet obligations to retirees.
Hawaii uses a 7.75 percent discount rate, assuming the plan will average 7.75 percent investment growth over time, a number Luppino-Esposito said “is far too high.”
“Hawaii should use a risk-free rate instead, ensuring that state employees will actually get the pension they were promised,” Luppino-Esposito said.
Hawaii is far from alone. The SBS report, which reviewed 250 plans, documents state governments are in a $4.7 trillion hole. Liabilities have increased roughly $600 billion since last year. The average state public pension plan is only 36 percent funded, the report said.
Wes Machida, executive director of Hawaii’s Employees’ Retirement System, acknowledged there are some elements in the study to which the state should pay attention.
“There are concerns about employers being able to make those kinds of contributions,” Machida said. The “employers” he is referring to are state and local governments.
“At some point down the road, this will likely be an issue for Hawaii. The requirements will be so high as to outgrow what is available in the general fund. That is a possibility if we don’t do something to help with the situation,” Machida said.
Pension reforms implemented by the Legislature in the past four years should help, he said.
Machida and the Employees’ Retirement System Board of Trustees hope Hawaii’s newly elected governor, David Ige, will push additional reforms to further reduce benefits for new hires. The next legislative session begins in January.
Lawmakers in 2011 and 2012 approved legislation that reduced retirement benefits for new state employees who entered the system as of June 30, 2012. Another change in 2012 prevents workers from accruing benefits from overtime, bonuses, lump sum salary and allowances.
In 2011, legislation increased the employer and employee contribution rates. Employees pay between 6 to 14.2 percent of their pay into the fund. Employer contributions are steadily increasing until 2016, when the contribution rate will stabilize at 17 percent of pay for all employees except police officers and firefighters. Those agencies will contribute 25 percent of their employees’ pay.
Other changes include doubling from five to 10 the number of years it takes to become vested in the system.
Machida said the Board of Trustees lowered the anticipated rate of return for next year on investments. The rate will be reduced gradually over the next three years to 7.5 percent, and will be reviewed annually by the board, Machida said.
According to state figures, the retirement fund is at $13.9 billion as of Sept. 30, but because markets have grown, Machida said the fund is probably around $14 billion now.
Another $8.5 billion is needed to cover unfunded liabilities or future payments owed to the more than 115,000 people in the system, including all retirement income, death and termination benefits, but the state won’t be able to cover that amount for decades.
To put it in perspective, the state’s biennium operating and capital budgets are $24 billion during the next two fiscal years.
The state’s financial plan will pay off the retirement system’s unfunded liabilities within 26 years.
“The most important thing is we need to monitor what is going on with the fund and how the investment markets are impacting us. That also includes how the membership has changed and what their retirement needs are,” Machida said.
“If more people start to retire earlier, we will need more payouts, and that will require us to liquidate more funds. If members start living longer, we will need more benefit payouts. There are many different areas to monitor to make sure the fund is properly funded,” Machida added.
Between 2,000 to 2,500 state and county employees retire each year in Hawaii, adding to the $1.1 billion annual payout already made to 67,000 retirees in the plan, which has additional challenges not necessarily encountered in the rest of the country. The average life expectancy for members in Hawaii is 82 to 83 years of age, much greater than the national average, Machida said.