Photo: Emily Metcalf
Photo: Emily Metcalf

BY GEORGE L. BERISH – A temporary market high in September brought assets of the Hawaii Government Workers Retirement System back to where they were five years ago.  However, that hardly qualifies as “strengthened” given the System’s massive, ongoing, defunding since 2000. Here is the rest of the story:

 

1.            While assets went nowhere, the Public’s liability for benefits already earned by Hawaii’s Government workers has grown relentlessly:

As Of

Public Liability

Separate Fund Market Value

%  Funded

6/30/00

$9.7

$9.9

103%

6/30/03

$12.0

$7.7

64%

6/30/07

$15.7

$11.5

73%

6/30/09

$17.6

$8.8

50%

6/30/11

$20.1

$11.6

58%

6/30/12

Unavailable

9/30/12

Unavailable

$11.7

                Amounts in billions.  Years shown are turning points in total assets.

 

2.            Assets went nowhere despite Public and government worker contribution of over $700 Million per year (2007-2011).  And the Public’s share of that cost is scheduled to increase, even though it’s already at levels unheard of for non-government workers:

 

Public Contribution

(% or each government worker’s pay)

As of July 1

Police, Firefighters

Other

Government

Workers

2007

15.75%

13.75%

2008-2011

19.70%

15.00%

2012

22.00%

15.50%

2013

23.00%

16.00%

2014

24.00%

16.50%

2015

25.00%

17.00%

 

3.            Government worker benefits are guaranteed by the Public’s Full Faith and Credit.  That means:

*     System assets are a Separate Fund, not a trust,

*    Assets are earmarked in a Separate Fund to protect the Public, not government workers, and

*    The Public bears 100% of the investment risk, while government workers bear none.

Quite literally — If the Board lost all the assets, no government worker would lose one penny of any benefit: not any being paid, not any earned to date by those still working, or under a Hawaii-court-only definition of “Accrued” that includes the future, not even of any that might be earned in the future at the current rate.  The Public would be liable to make up the loss while still paying for ongoing cost of new benefits earned each year.

 

4.            The $20 billion liability above is the actuary’s liability – over a year ago.  The real liability was higher then and is much higher now.  The actuary’s liability “assumes” the Board will earn 7.75% for the next 30 years or so.  The real liability includes the fact that if the Board doesn’t earn it, the Public has to make up the difference, because the Public guarantees what the actuary “assumes”, not vice versa.

 

That’s why the Public has gone from all paid up to $8.5 Billion short since 2000.  From 2000-2011, the actuary “assumed” the Board would earn 8% while the Board earned about $8.5 billion less than that.   Now the Public now has to make up.  As of 2011, the actuary “reduced” his “assumption” to 7.75%, but that seems a difference without a distinction.  Do you really believe a layman board consisting of 4 union members and 3 political appointees will earn 7.75% in the next 30 years or so?

 

5.            The actuary’s 2010 Experience Report included a consensus of Capital Asset Models maintained by several well recognized investment advisors.  The consensus was our Board has LESS THAN a 50% chance of earning 7.75%.  The actuary recommended 7.75% anyway.

 

6.            Form the article:  The ERS has about 70% percent of its investments in high-risk assets and 30 percent in low-risk assets”.

 

That sounds like a Board gambling it can win back its past losses before anyone takes serious notice – like bond rating agencies and the lenders Rail supporters hope will buy billions of Rail bonds.

 

It’s likely that 70% in high risk would be criminally imprudent for anyone having a fiduciary duty to a beneficiary as unable to safely assume more risk as Hawaii’s Public is today (except politicians of course who are exempt from those laws).  However, the Board claims (incorrectly in my opinion) it and it’s actuary, investment advisors, etc. have an exclusive fiduciary duty is to government workers, not the Public, and that also means they are have obligation to ignore the Public’s interest in making its investment decisions.

 

SUMMAY:  This is bad.  You need to take it seriously.

 

2011’s $8.5 billion shortfall is at least $7,500 per infant, child, adolescent and adult.  Just add that up to see how much of it belongs to your family.

 

I’d say “write to your lawmakers” but they already know, but since this happened on their watch, it’s not surprising their first instinct has been to hide, not fix it.

 

If you want a solution, follow the example of America’s Founders made.  They didn’t try to reform an corrupt moribund declining old Monarchy.  The created a new nation fro scratch.  In this case it would be to start Another Political Party (not another silly 3rd Party), from scratch.  It is the only way to recruit a better class of candidates, i.e. candidates who would be free of the need to protect the entrenched perquisites, power and egos of the old guard that owns both old parties.  Those would be candidates with backgrounds other than political “science” who have done more with their life than “politics” … often it seems since the we children in high school.

 

They key to solving large problems is replacing those who caused the mess, not relying on them to fix it:  But you can’t replace today’s political class until you can find better candidates to replace them … and for that there is not alternative to Another Party.

 

George L. Berish is a Hawaii resident and member of The American Political Party

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