Hawaii Zinged by Two National Reports on State’s Growing Liabilities

article top
Photo: Emily Metcalf

BY MALIA ZIMMERMAN – Hawaii has made national news in recent days because of two national reports shining the light on Hawaii’s growing state liabilities.

The Institute for Truth in Accounting released its second annual report on June 13 on all 50 states’ assets and liabilities, including pension and retirement healthcare obligations, which said “states have more than $900 billion in off-balance sheet liabilities, and the taxpayer burdens in most states continue to grow due to poor budgeting rules and outdated accounting principles.” (See the report at https://truthinaccounting.org)


Hawaii came in third worst in terms of its financial obligation and for the second year in a row was named one of five ‘sinkhole states.’

Hawaii taxpayers owe $32,700 each to the state treasury to pay off all liabilities, which include a state retirement pension liability of $5.1 billion and a retiree healthcare liability of $11.9 billion. Institute founder and CEO Sheila Weinberg called these kinds of numbers “craziness.”

Connecticut taxpayers would have to pay $49,000 per taxpayer and New Jersey taxpayers owe $35,800 each, putting these states first and second worst in terms of debt obligations. Illinois came in fourth place with a $31,600 per taxpayer burden and Kentucky in fifth with a $23,500 per taxpayer debt.

Hawaii is also one of four ‘sinkhole states’ to have a larger per-taxpayer burden compared to last year’s report.

Weinberg notes Hawaii’s per taxpayer burden went up by $7,000, primarily for two reasons: The state retirees healthcare liability increased by almost $3 billion over a two-year period; and despite a budget balanced requirement, Hawaii’s audited income statement prepared by the comptroller is showing the state budget is not balanced and in fact has a deficit of $1 billion.

The states with financial troubles are using “antiquated government budgeting rules and accounting standards” and only paying what is due during the current budget year rather than taking into account true long term obligations on their balance sheets, Weinberg said.

Both Hawaii and Connecticut are at the bottom in terms of management of their healthcare payments for retirees. The states would need to layoff all employees for 8 years and put all that money into the state healthcare system to catch up to the total debt owed, Weinberg said.

Hawaii lawmakers and governor also have a mandate to balance the state budget, but it is not balanced, Weinberg said, according to the State’s audited CAFR, which lists Hawaii with a $1 billion deficit.

Weinberg notes Hawaii lawmakers also are basing multi-billion dollar decisions on outdated financial information. The 2010 CAFR, which lawmakers are supposed to use in the annual budgeting process, was released 469 days after the fiscal year ends in October 12, 2011. Most states release their reports within 180 days, she said. In addition, the retirees’ health fund’s financial report is only released every other year. The most recent report Weinberg could obtain is from July 1, 2009.

“These are billions of dollars – wouldn’t you want that information when making budget decisions? Hawaii lawmakers don’t know the financial condition of the state or whether showed a loss or profit in 2011,” Weinberg said. “The legislature operating without a 2011 CAFR is like trying to figure out your personal budget without having any bank statements or credit card statements available.”

The second report to zing Hawaii came June 19 from PEW.

The report, which offered nationwide analysis of state pension and retiree health care funding, said Hawaii’s state retirement system had a liability of $32.5 billion, but the fund is short $21 billion. (See report at https://www.pewtrusts.org/our_work_report_detail.aspx?id=85899398866)

Hawaii received Pew’s worst rating with the organization reporting Hawaii’s management of its long-term liabilities for pensions and retiree health care is “cause for serious concern.”

Pew noted Hawaii’s system was just 61 percent funded in fiscal year 2010 when most experts say the system should be at least 80 percent funded.

Hawaii lawmakers did address the issue in the 2011 legislative session, approving pension benefit cuts for newly hired employees in 2011, increasing employee and taxpayer contributions and trimming cost-of-living increases for retirees. Lawmakers also changed the retirement age for employees hired after July 1, 2012.

But the changes were not bold enough to help Hawaii catch up to its obligation to state and county workers.

Kalbert Young, the state director of Budget and Finance, said the PEW report gives a good comparison of how states are faring addressing their pension and retiree health benefit liabilities.

“Clearly, the vast majority of states are in serious conditions and battling to resolve their liabilities,” Young said.

For Hawaii, Young said the report accurately depicts the pension condition – at least, through 2011.  But he said recent legislation should help address further pension liabilities in the future.

“Two bills passed by Legislature in 2012 and awaiting signature by the Governor, will prove to be significant measures to further reform Hawaii’s public pension system program. One bill will eliminate non-base pay from the calculation of pension benefits for employees hired after June 30, 2012. Another bill will require employers to pay the unfunded liability (in full) for every employee who retires after June 30, 2012 who is deemed to have “spiked” their retirement compensation by more than 20 percent,” Young said.

“The Legislature also changed the investment performance assumption for the ERS from 8% to 7.75% which will increase the total liability from an accounting standpoint, but lowering the investment return assumption is much more prudent and realistic considering average market returns over the last 5-, 10-, or even 20+ years.”

Young said in regards to the liability for retiree health benefits, the PEW report “accurately reflects that Hawaii continues to demonstrate an inability to pro-actively address the long term liability by either failing to contribute funding to the annual required contribution (ARC) or to reduce promised benefits to employees/retirees that are more realistic and sustainable for taxpayers.”

“The Administration has tried each of the last two legislative session to propose strategies that could get on a proactive path, but thus far, we have not had Legislative agreement, Young said.
”There was a proposal in the budget that the Legislature considered all the way up to the final hours of the session that would have funded 10% of the ARC for one year ($50M), but that proposal did not survive the session.”

Weinberg from The Institute for Truth in Accounting said Hawaii has to do more to tackle its financial problems, and while the legislation that was passed will help in the future, it will do nothing to pay down the current deficit created by the healthcare and retirement funds.

“It is like paying only the minimum amount due on your credit card, and doing nothing to pay down the full balance,” Weinberg said. “The state is pushing these debt obligations onto future taxpayers who will not benefit from the services these state workers perform.”