Hawaii’s retirement system tackles $8.5 billion shortfall

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Photo: Emily Metcalf

BY MALIA ZIMMERMAN – HONOLULU — About 2,000 state and county employees retire each year, but will there be enough money to pay their retirement, disability and other benefits?

Wes Machida, administrator of Hawaii’s Employees’ Retirement System and Lewis Ward, a representative from the actuarial firm, Gabriel, Roeder, Smith & Company, briefed lawmakers Thursday about that issue at a joint hearing between the Senate Judiciary and Labor Committee and the Senate Ways and Means Committee.


The Hawaii’s ERS, which has about $12 billion in assets, last fiscal year required $1.1 billion to cover its annual payouts to 41,812 state and county retirees.

Another $8.5 billion is needed to cover the 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 current financial plan will pay off the retirement system’s unfunded liabilities within 29 to 35 years, or between the years 2043 and 2048.

The success and timing of that plan, Machida and Ward said, depends on three sources of income for the Hawaii state retirement system: return on investments (and whether the investments outperform the 7.75 percent assumed return on investment), the amount of payouts to employees and employees’ contributions.

The largest risks for the ERS going forward, Ward and Machida said, are payroll growth, investment performance, actual contributions and mortality.

If the state or counties give pay increases to public employees, the employees’ contributions to the fund would also rise.

Hawaii’s assumed rate-of-return on investments was previously set at 8 percent, but the Legislature agreed to lower the figure to 7.75 percent at the request of the ERS, and also gave the ERS board the power to make that decision in the future.

The rate of return on investment assumptions is controversial. Many financial experts maintain the 7.75 rate is unrealistically high because of volatile investment returns and interest rates, and should be 3 percent to 4 percent, as unmet assumed high rates of return have caused massive pension shortfalls across the United States.

Most states set the rate at 7.75 percent t0 8 percent, Ward said. Hawaii’s ERS board of directors re-evaluates the rate annually, Machida said.

Over the last five years, Hawaii has exceeded the 7.75 percent return on investment three times, Machida said, but it’s been a roller coaster ride. The returns over recent fiscal years:

  • 2009 — 18.5 percent loss
  • 2010 — 11.5 percent gain
  • 2011 — 20.9 percent gain
  • 2012 — 0.6 percent loss
  • 2013 — 12.3 percent gain
  • 2014 — 5.3 percent gain to date

Mortality rates also impact the fund, especially in Hawaii, the state with the longest life expectancy. If retirees or their spouses live longer, payouts continue longer, further depleting the fund.

Actuaries assume a life expectancy in Hawaii of about 87 to 88 years old, Ward said, and women live longer than men. Teachers and professors live the longest of all state employees. A Hawaii public school teacher that retires at 65 lives on average until 90, statistics show.

Experts who advise states on pensions recommend they have at least an 80 percent funding level. The ERS is funded at about 59 percent, but will likely be funded at 100 percent in 27 years because of reform major measures passed by the Legislature in 2011 and 2012, according to Kalbert Young, director of the state Department of Budget and Finance and a member of the ERS board of directors.

ERS chart HawaiiLawmakers 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 made to help shore up the system 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. Other changes include doubling from 5 to 10 the number of years it takes to become vested in the system.

Machida said if the Legislature sticks to the broad reform measures it passed in 2011 and 2012, reducing benefits and increasing contributions, the state should be on track to pay the $8.5 billion, plus its annual payouts, on schedule.

While Hawaii has a plan and reforms in place to pay down its ERS unfunded liability, just looking at the ERS debt doesn’t paint an accurate picture, argues a state financial watchdog group.

Hawaii has about $18.9 billion in total unfunded liabilities, including the ERS and Employee Union Trust Fund, the public employees’ health fund, said Sheila Weinberg, founder of the Chicago-based watchdog group Truth in Accounting.

“Our analysis of the state’s latest financial report as of June 30, 2012, indicated the state needed more than $18.9 billion to cover its outstanding bills even after available assets are used,” Weinberg said.

In 2012, Hawaii’s actuaries recommended the state contribute more than $1.4 billion into the state’s pension and retirees’ health plans, Weinberg said, but the state instead contributed less than $700 million.

Last week, Gov. Neil Abercrombie held a joint press conference with Young and the Chamber of Commerce of Hawaii to announce the state has built up an $844 million surplus.

Weinberg countered that the state cannot truly have a surplus when it still has those massive debts.

“Did the state contribute what the actuaries recommended in 2013 or was the state’s $844 million positive fund balance a result of the state shorting the retirement plans by more than $700 million, like they did in 2012?” Weinberg asked. “Past history has proven the financial conditions touted by elected officials can be very different than the financial conditions reported in the state’s audited financial reports and retirement plans’ actuarial reports.”

The state’s latest financial report from June 30 is not available, Weinberg said, so her organization can’t determine whether the state’s overall financial condition has improved or deteriorated.

“Declaring a positive fund balance and not funding the retirement plans properly is like claiming a person touting an increase in their checking account balance while not paying the minimum payments on your credit cards,” Weinberg said.





  1. Hawaii politicians want to Hawaii to be the Detroit of the Pacific, we already have the worst busniness friendly climate in the USA, no doubt Hawaii politicians are satisfied with that, they want to go full Detroit

  2. Just ONE of 2500 state and local government retirement systems run across the USA.
    Pennsylvania runs a whopping 900 government retirement systems, California 61

    Like the Hawaii retirement system, the other 2500 represent the government running
    tax-free investment businesses…..all invested in the hated big corporations which are busy churning out pension dollars for government retirees

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