BY MALIA ZIMMERMAN – HONOLULU – Hawaii lawmakers took modest steps to address the state’s record $25-billion in unfunded liabilities during the 2012 and 2013 legislative sessions.
But taxpayer watchdogs are critical that not enough is being done to address looming debts and are concerned that overly generous benefits promised to thousands of public employees in influential public labor unions could eventually bankrupt the state.
“We cannot drain the public purse to provide benefits for public employees that no one else has,” said Lowell Kalapa, president of the Tax Foundation of Hawaii.
However, attempting to curb public union benefits has proven risky for politicians, since it is the public unions, including the Hawaii Government Employees Association, the United Public Workers union, and the Hawaii State Teachers Association, that guarantee a heavy Democratic majority party dominance in both Houses of the Legislature.
Guaranteeing health care for life
A majority of Hawaii’s public employees receive health care coverage for themselves and their families courtesy of the taxpayers. After they retire, public employees and their spouses retain their health care coverage for life.
Hawaii’s public employee health care benefits are managed through the Employee Union Trust Fund, which has just about $300 million in assets. However, much more money is needed to cover health care costs for government workers, retirees and their families.
Kalbert Young, director of the state Department of Budget and Finance, said the Employee Union Trust Fund total unfunded liability exceeds $18 billion.
To put it in perspective, the state’s biennium operating and capital budgets are $24 billion during the next two fiscal years.
Hawaii is responsible for covering $15 billion of the debt to the EUTF. The remaining $3 billion is owed by the four counties and the University of Hawaii.
During the 2013 session, which ended May 2, lawmakers set aside $217 million over two years to fund the Employee Union Trust Fund and set up other legislation to ensure future payments.
Kalapa of the Tax Foundation of Hawaii is critical of lawmakers and HB 546 CD1, and said the legislation could be bad news for taxpayers.
“This is this an automatic license to increase state taxes,” Kalapa said.
If lawmakers are serious about paying down the debt, they should do that, Kalapa said.
The $217 million barely makes a dent in the debt. It would take more than 100 years to satisfy the liability at that rate.
“The amount the state needs to contribute each year is over $500 million based on the last actuarial study. And, the state would have to do so for the next 30 years. $100 million is only about 20 percent of what is required,” Young said.
Besides allocating $217 million for the next two years to the EUTF, the legislation establishes a trust fund task force; requires the annual public employer contribution to be determined by an actuary, not the legislature, beginning in FY 2018-2019; and will take revenue from state General Excise Taxes and hotel room taxes.
Unlike Kalapa, Young said the legislation is a good start.
“The Legislature should be commended for agreeing with my proposal to fund, even if it’s not the amount that will yet fix the problem,” Young said.
But Kalapa is not convinced.
“The problem with this legislation is the legislators are just inserting a default,” Kalapa said. “What if we go through another recession? Is the EUTF the first claim and everything else gets cut? I don’t think lawmakers really thought this legislation through. There are other demands for the state’s General Excise Tax and Transient Accommodation Tax revenues.”
Part of the discussion should be about changing health and pension benefits for the future, not for those on the payroll, because they have been promised these benefits, but moving forward, Kalapa said.
Public employee health benefits were set up in the territorial days when people didn’t live until they are 100 years old. Hawaii also reimburses public employees for their Medicare contributions.
Kalapa maintains that like in the private sector, public employees should not have health care for themselves and their spouses once they retire.
Employee Retirement System nearly three decades from full funding
While health care for public employees is the largest unfunded financial burden state taxpayers face, the Employee Retirement System also has its challenges.
The state and county, as employers, contribute a percentage of payroll each year to the ERS.
About $12 billion in assets are under management, but the ERS needs another $9 billion to be considered fully funded.
Young said the ERS is funded at about 59 percent, but will be funded at 100 percent in 27 years because of reform measures passed by the Legislature in 2011 and 2012.
A point of contention nationally is what the rate of return for ERS investments should be.
In Hawaii, it is the Legislature, not financial experts, who set the expected rate of return at 7.75 percent. Up until 2011, it was 8 percent, but the Legislature agreed to lower the figure to 7.75 percent at the request of the ERS, Young said.
While some national reports and experts suggest the rate of return for public pensions should be around 3 or 4 percent, not 7 or 8 percent, Young said the rate needs to be realistic and based on the asset and investment mix as well as the outlook for financial markets.
“The ERS board does agree that the rate of return assumption should be considered lower over time,” Young said. “However, you cannot lower the rate of return assumption too fast, because it will spike unfunded liability calculation too drastically.”
Under Hawaii’s law, if the funding duration extends beyond 30 years, the Legislature must consider increasing the contribution by county and state employers.
This was the case in 2010, and why the Legislature increased the contribution rates for employers in 2011, Young said.
Hawaii’s ERS also was depleted by lawmakers who used the fund to pay for projects and programs for decades until the practice was stopped by then-Gov. Linda Lingle in 2006.
“Lawmakers should have caught up on these payments 20 years ago, but instead they raided these funds so they could keep their favorite programs funded,” Kalapa said.
Hawaii’s unfunded liabilities got the attention of Sheila Weinberg, founder of the Washington DC-based watchdog group, Institute for Truth in Accounting.
Hawaii was ranked by her organization as the third worst “sinkhole state” because of its debt.
Weinberg has also traveled to the 50th state to meet with lawmakers about Hawaii’s unfunded liabilities problem and what should be done to address it.
She warns Hawaii’s liability could increase further under the new pension accounting rules that will require the unfunded portion of the liability to be calculated using the municipal bond rate. The impact will be reported in the 2014 financial report, she said.
Weinberg maintains that although Hawaii has a balanced budget requirement, the budget is not truly balanced if there are unfunded liabilities. She compares lawmakers’ action to paying the minimum due on a credit card instead of paying the whole balance.
Contact Malia Zimmerman at firstname.lastname@example.org