BY MALIA ZIMMERMAN – The Hawaii state legislative auditor has released the 2010 Comprehensive Annual Financial Report (CAFR), which is a series of audited government statements that detail the financial condition of the state government.
Sheila Weinberg, founder and CEO of the Institute for Truth in Accounting, called the state’s liability in the report “shocking”, particularly when it comes to the increase in costs for medical services for state employees.
For example, the 2009 CAFR shows an unfunded liability for the Employees Union Trust Fund of $7.2 billion and for the Hawaii State Teachers Association’s Voluntary Employees’ Beneficiary Association (VEBA) of $1.6 billion for a total of $8.8 billion (for July 1, 2007, even though the CAFR is for June 30, 2009).
Whereas the 2010 CAFR details unfunded liability for the EUTF of $11.5 billion and for the Hawaii State Teachers Association’s VEBA of $2.5 billion for a total of $14.0 billion. (These numbers are for July 1, 2009.).
Weinberg points out that this is an increase of $5.2 billion in just two years – or almost 60 percent.
“Note that the EUTF liability per the 2009 CAFR was 4 times the amount of covered payroll. Per the 2010 CAFR the liability is now up to 8 times covered payroll. In other words, to have enough money to pay the EUTF benefits employees have already earned, the state would have to take all of the money they are using to pay employees for eight years and put it in the EUTF,” Weinberg said.
Weinberg uses other comparative numbers to give the liabilities perspective.
“The state’s 2010 total revenue was reported to be $9.9 billion. Therefore it would take all of the state’s annual revenues plus $2 billion more to have enough money to pay these benefits. The state’s reported liabilities as of June 30, 2010 totaled $10.5 billion. Therefore the liabilities for retirees’ health care benefits that employees have already earned, but the state has not set aside money to pay, is more than all of the other liabilities the state has. And this does not include pension benefits,” Weinberg said.
Part of the reason for the spike in costs is because the state has among the most generous health benefits in the nation. The EUTF web site said that the state offers eligible employees a choice of health insurance plans, which includes medical, drug, chiropractic, dental, and vision, and employees, their spouses or equivalent and children up to 24 are eligible for these benefits.
Budget & Finance Director Kalbert Young, who manages the state budget, shares the concerns outlined by Weinberg and the two state credit agencies, Moodys and Standard & Poors. Both agencies recently downgraded Hawaii citing the large unfunded liability in the EUTF as one of the four top reasons for the downgrade and they also cited that the liability is growing.
“I believe given the statistics on Hawaii’s liability relative to other states, Hawaii could be faced with future credit action if we do not pro-actively begin to address this matter,” Young said in an earlier interview with Hawaii Reporter. “Credit downgrades impact taxpayers because they translate to higher interest rates and borrowing costs. As a result, taxpayers will have to pay more for government or they will have to accept a larger portion of their taxes going towards debt.”
Young told lawmakers during that October financial briefing, which Weinberg attended, that some changes are being made to improve the state’s financial conditions, but more changes are needed.
Young explained: “The State and taxpayers have not been paying into the EUTF to fund up its future liabilities. Instead, the State and taxpayers have been content to pay only the yearly premium costs and expenses. Well, the cost of this coverage continues to increase at a rate faster than revenue is projected to increase. Since the liability is not being met, the liability is recorded on the State’s financial statements, which reduce our asset position. In the end, the State and taxpayers will either have reduced services to fund growing health insurance premiums, or to begin funding the liability, or taxes and revenues will have to be increased to pay for either.”
The Administration has already begun trying to address what many analyst say is a dire situation, Young said, including introducing a bill that would have stopped the practice of reimbursing retirees for Medicare Part B, which amounts to approximately $40 million a year in FY11 and is projected to grow to $47+ million in FY12.
“The public and the legislature argued against reducing this benefit for government retirees. If benefits can not be reduced for current retirees or current employees when they retire, then we are only left with changing this benefit for future not-yet-hired employees. This will reduce the unfunded liability in time – decades decades from now. It’s a start. The Administration intends to continue pressing for reform that will slow the growth in the liability and eventually address it. I don’t know what the legislature collectively would offer towards this problem,” Young said.
House Minority Leader Gene Ward, who sponsored the recent legislative hearing with Weinberg and Young, said the recent CAFR report reaffirms the serious government debt situation highlighted by the recent hearings that he chaired.
“The State report shows that health liabilities for the state have grown by an estimated 60% in only 2 years rising from $8.8 billion to $14 billion. This mean’s Hawaii’s per capita debt burden is closer to $40,000 for every man, woman and child in this state. This is a terrible weigh to hang around the necks of our citizens. This crushing debt is unsustainable and means we will have no money left to fix roads, staff our public hospitals, or keep our senior centers open. The Legislature needs to take immediate steps to adopt proposals advanced by the Republican Caucus to report “Truth in Accounting” reports that clearly reveal what the state owes. We also need to place a price tag on every bill being proposed so that lawmakers and the community know the real costs of enacting more laws.”
Senate Minority Leader Sam Slom (R-8), who has annually sponsored legislation for fiscal notes, alternative budgeting, reform for health care and changes for the public Employee Retirement System said, “The Administration is content with lame efforts to ‘slow the growth of the deficit,’ and the lop-sided Democrat Legislature has thus far been unwilling to seriously confront this problem. We are running out of time and we must act aggressively and decisively to change direction to save what is left of economic security for the taxpaying families we represent. If you are diagnosed with terminal cancer, you can’t settle for slowing the growth; you must get rid of the cancer. We have had several options to deal with this problem but have not had the political back bone to do it. It is clear that the trend is devastating. The 2011 CAFR will be worse than 2010 and so on until we are unable to act. Taxpayers must hold the 2012 legislature’s feet to the fire and be directly involved in next November’s election to remove those elected officials unwilling or unable to stop this fiscal cancer.”
Sen. David Ige, Ways and Means chair, did not respond to repeated emails requesting comment.