‘Skimming’ the Hawaii State Employees’ Retirement System-Special from Small Business Hawaii News

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I’d like to offer a voice that is missing from the public discussion of Employees’ Retirement System (ERS) asset “skimming” – that of a pension actuary whose financial interests are aligned with citizens and taxpayers (i.e. the State) vs. ones that are engaged by plaintiffs to sue us, or by ERS trustees who publicly declare our interests are adverse to those of its members’ interests, and disavow any obligation to us.

I am also a 36-year Fellow of the Society of Actuaries with credentials and knowledge of ERS history that equals, or exceeds, the other two.


My advice is that the court’s opinion is bad law base on false assumptions about the ERS that unfortunately are universally believed. Those assumptions produce a squabble over non-existent skimming that distracts from the real problem, and I suspect the court opinion will next invite a bigger more successful law suit:

First, let me illustrate the false assumptions with 3 questions whose answers may surprise you:

*1. ERS benefit payments depend on (a) ERS fund assets or (b) unlimited access to taxpayer check books?

*2. The people who have a financial stake in the ERS fund are (a) ERS members or (b) Hawaii’s taxpayers have?

*3. ERS Trustees have a “fiduciary” responsibility to (a) ERS members or (b) Hawaii’s taxpayers?

All (a)s are false. All (b)s are true. Here’s why.

Question 1 is (b), because ERS benefits are guaranteed by the “Full Faith and Credit” pledge of Hawaii’s taxpayers. Just note. If ERS trustees lost half the assets, no participant would lose one penny of benefits (or the right to today’s benefit formula for life). But, Taxpayers would have $5.5 Billon added to the contributions they already make.

Question 2 is (b), because the purpose of the fund created by advanced funding is to impose discipline on legislators, not protect ERS benefits. That’s because it takes a generation for the ultimate cost of a benefit increase to emerge. So, without advanced funding legislators could grant excessive benefit increases today and know they’d be long gone before future voters know their cost. However, advanced funding tells legislators the ultimate cost today in terms they understand – put money here now! That benefits taxpayers while it forces member-requested increases to greater scrutiny.

Question 3 is (b), because of the difference between “fiduciary” and. “ad ministerial” duties. Fiduciaries have discretion to do what they decide is best for the people affected by their decisions. Administrators only do what law or regulations direct them to do. That means calculating and paying benefits, over which ERS trustees have no discretion, is an ad ministerial duty owed participants, but investing fund assets, over which trustees have broad discretion, is a fiduciary duty owed to taxpayers alone (Member interests aren’t involved, because the taxpayers’ full faith and credit pledge eliminates all member investment risk.)

So, squabbling over “skimming” is silly, because citizens and taxpayers (i.e. the State) cannot skim from themselves. The real issue is why is the ERS that was fully funded in 2000 now over $5 billion under-funded — the cost of a new rail system.

Now I worry the court inadvertently made the current funding law (adopted as of 2005) illegal too, because that law arbitrarily sets government contributions below those required by the generally accepted actuarial cost method it replaced. If they did, it will likely soon spawn another, bigger and more successful law suit over 2005 and later.

Please keep in mind that a fully funded ERS (2000) is now $5 billion underfunded. That is $5,000 per infant, child, woman and man – and enough to build a new rail system.

This subject desperately needs a more balanced public discussion.

”’George Berish has been a pension actuary (Fellow of the Society of Actuaries) for 36 years. For 26 he managed an office in Honolulu for international actuarial consulting firms. For most of those years I was the actuary for three West Pacific Nation Social Security Systems and a fourth Government Employee Retirement system. Also, to many of Hawaii’s biggest employers – going back to PRI and the Big-5 before all but A&B’s headquarters moved from HI. He was engaged to do an audit of the ERS in the 80’s that warned it of the error it was making in the way it split costs among the State and Counties. Ignored until Honolulu sued the ERS for that mistake – and won. Contact him at: mailto:g@america-3.org”’