Long Road Ahead for Reform of Public Employee Compensation

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BY LOWELL L. KALAPA – As the governor learned earlier this month, it isn’t as easy as it seems trying to rein in the cost of government especially when it comes to public employee retirement benefits.  While it doesn’t come as shock to some of us, but it has long been known that the benefits of being a public employee in Hawaii are substantial and for retirees, overly generous.

Although some reform has been enacted for future retirees, health care coverage for those public employees who are currently retired is far more generous than anything that can be found in the private sector.  It includes full medical coverage for the public retiree for the rest of his or her life and full coverage for their spouses.  On top of that as the public recently learned, public retirees are reimbursed for the Medicare premium that Social Security deducts from the retiree’s Social Security benefit payment.


Although the governor has proposed eliminating this perk, the legal beagles have pointed out that the state constitution probably prohibits that repeal as these are viewed as “accrued benefits” that cannot be diminished.  So much for that option to help balance the state budget.  However, that does not mean that the state has to be on the hook for future retirees who have yet to join the public workforce.  While that option will be a long time in coming, policymakers need to begin now to set that change in motion.

So as lawmakers approach the midpoint in this year’s legislative session, the options to balance the budget become slimmer and slimmer.  Outraged seniors railed against the administration’s proposal to tax pensions while middle and higher-income taxpayers rue the thought of losing the ability to deduct their state income tax liability.

Meanwhile, the public employee unions have been tight lipped about their upcoming collective bargaining negotiations and the possibility that the administration may offer them a pay cut rather than a pay raise.  While it is doubtful that this administration will re-institute a “furlough Friday” program with the advent of the new fiscal year, there obviously has to be some concession on pay levels and work hours.

So what is still on the table?  Both sides of the legislative aisle have heard bills that would repeal special funds although the constituencies of those special funds have cried foul, digging in their heels and refusing to give up what they believe to be “their money.”  As the measures were heard, lawmakers inquired just how much in cash balances these funds contain and just how many funds there were.  What became obvious is that aside from those special funds which legally could not be repealed, like the transportation special funds, bond funds which hold the money for bond holders and a few others mandated by federal law, there are a lot of special funds sitting on cash balances even as recently as the beginning of this year.

It is estimated that at the end of fiscal year 2010, there was more than $1.2 billion in cash balances in these funds with about half of that amount sitting in the transportation special funds and bond reserve funds which cannot be touched.  That means there is a possibility that there could be about a half billion dollars that could be tapped to help address that $850 million general fund budget shortfall.

So the ball is in the legislative court now that the administration has presented its budget game plan.  If lawmakers can’t take back the Medicare reimbursement for public retirees or are not willing to tax the pension income of retirees, either a hike in taxes or reclaiming of the money in the special funds may be the only options left other than cutting spending.  The latter option also seems highly unpopular as constituents of the various programs claim disaster will occur.

Even the governor seems to be leaving the door open to a possible tax increase saying through his spokesperson that if a general excise tax increase is presented to him by the legislature, he will take it “as the will of the people.”  But as veteran lawmakers know, such a broad-based tax increase would enrage the taxpaying public and, election year or no election year, those lawmakers will be targets for legislative “wannabes.”

Even back door tax increases like eliminating the deduction of state income taxes or last year’s proposal to tax currently exempt general excise transactions will not sit well with taxpayers if little effort is made to reduce spending and right-size state government, something that the private sector has had to do.