Actually Actuarial

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BY MALIA HILL – If you’re like me, one of the challenges in examining the Hawaii pension crisis is that it quickly descends into charts and terms like “actuarial valuations” and “accrued benefits,” and before long, you desperately wish for a Cliff’s Notes or comic book version to make sense of the numbers and legalese that comes flying at you.

Fortunately, George Berish, a contributor to Honolulu Civil Beat, has written a three-part series that examines and explains where the Hawaii Employees’ Retirement System (HERS) went off track and why we’re looking at a funding crisis for state employee pensions.


In Part One, he lays out the problem, with an examination of the accounting methods used by the State that have contributed to the gap between the estimated and the actual:

It’s a dangerously large liability, and doubly so, because governments use “cash accounting”, instead of “accrual accounting”. That means the AAL isn’t recorded on a government balance sheet as a liability, and that leaves the taxpayer money needed to pay the AAL tomorrow in the hands of politicians to spend on something else today. So, 85 years ago, Hawaii’s lawmakers created a “retirement system” as a separate arm of Hawaii’s government, and required politicians to “earmark” assets equal to the AAL, i.e. transfer assets equal to the HERS as it grew. And that removed them from the politicians’ spending pot as effectively as recording the AAL as a balance sheet liability.

“Accepted Actuarial Funding Methods” are used to calculate the annual amount needed to get, and keep, earmarked assets equal to the AAL, and for its first 80 years PL-88 required a transfer calculated by an actuary using such method. So as of June 30, 2000, earmarked taxpayer assets equaled the taxpayer’s AAL, i.e. the AAL was “fully funded”. (False allegations of 90’s skimming will be addressed later.)

Had lawmakers left PL-88 unchanged, and the HERS board earned 8 percent on the assets it invests, earmarked assets and the AAL would still be approximately equal. But neither did. The HERS board averaged less than 5 percent for the 8 years ending June 30, 2008 (prior to Fannie Mae’s melt down), and less than 3 percent for the 10 years ending June 30, 2010. Lawmakers replaced annual transfers calculated by an actuarial funding method with a lower amount written into the law by “fiat”. So earmarked assets fell almost $9 Billion short of the taxpayer’s AAL, and a 100 percent funded AAL is now barely 50 percent funded.