The Retirement System That Ate Honolulu’s Rail

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BY GEORGE BERISH – I am sorry, but the Hawaii Public Employees’ Retirement System (HERS) just released its FY2009 (6/30) Actuarial Valuation Report, and it says, the HERS ate your Rail System.

It seems while Honolulu dawdled, the HERS harnessed us taxpayers to $8.8 billion of new debt. The first $5.7 billion from FY2000 to FY2008 — before the 2008 Fannie Mae meltdown.  Another $3.1 billion in FY2009, and the report warns FY2010 could end – next week – with still more.  I mean the money already taken from us isn’t enough to keep both schools and City offices open all week, so how can we afford another $5 billion for Rail, on top of that $8.8 billion?


We can pretend the HERS is State, and Rail is County, but you, I and bond raters know there’s only one set of taxpayer pockets for anyone to tapp, and the HERS got there first, because it has a higher legal claim on my pocket than Rail bond buyers will have.  Heck, when bond raters read the just released report, I’m sure they’ll rate Rail bonds lower than your “experts” predicted.  And that will make us pay more interest than they predicted.  And then a barely affordable Rail project will become truly unaffordable.

But even aside from eating your Rail System, you need to take more interest in the HERS, because it could be your problem soon.  So to help you prepare, here’s the HERS basics everyone should know:

— Public Law-88 grants retirement benefits to government employees based on their service and pay.  It created the HERS to calculate and pay them.  And it pledged the “Full Faith & Credit” of Hawaii taxpayers to guarantee them.  As of FY2009 taxpayers owed government employees $17.6 Billion for benefits earned to date. ($58,000 per 2-child family).

— To prudently budget for that liability, PL-88 requires that State assets (i.e. taxpayer assets) be earmarked in advanced in a separate account.  It gives the HERS board discretionary investment control over them.

—  Under PL-88, the HERS board consists of 4 union members and 3 political appointees.

(A retired government employee, a public school teacher, two general employees – who are invariably on leave as Union officials — and one of the other 3 must be a local bank official.)

— Here’s some 6/30 benchmark comparisons between the “to date” market value of earmarked assets and taxpayer liability:

2000:  $0.3 billion excess. (HERS was over 100% funded).

2004: $3.7 billion shortfall.

2008:  $5.7 billion shortfall.

The Fannie Mae meltdown occurred – Sept 2008.

2009:  $8.8 billion shortfall.

2010:  Unavailable until after 6/30/2010.

— Earmarked assets do not affect the amount of benefit – only individual pay and service does.  Earmarked assets do not guarantee their payment – only taxpayer “Full Faith and Credit” does.  Example:   If the HERS board lost every penny of earmarked assets, no government employee would lose one penny of benefits: i) owed to retirees, ii) owed to terminated vested employees, iii) owed to current employees for service to date, iv) and, according to Hawaii’s Supreme Court, that will be owed to current employees for benefits earned under the current formula until retirement.  Only taxpayers lose, because only they must make up the loss.

— Taxpayers bear 100% of the investment risk, because their “Full Faith & Credit” guarantees 100% of the benefits.  Yet, the HERS board claims its actuary and investment consultants have an exclusive fiduciary duty to government employees that prohibits them from considering taxpayer risks and interests.

— Neither the Governor, nor the Legislature engages an independent actuary or investment consultant.  Both depend exclusively on information relayed by the HERS from its advisors.

— The actuary “assumed” the HERS board will earn 8% indefinitely.  If he “assumed” less, say 6%, it would add billions to the above liabilities.  Yet, under PL-88, he has no responsibility for the prudence of “assuming” 8%, when for the 8‑years ending FY2008 (pre-Fannie Mae meltdown) the board averaged less than 5%, and 9-years ending FY2009 less than 2%.

— From inception (1925) until 2005, PL-88 required government contributions be calculated using an Accepted Actuarial Funding Method (AAFM), and the State honored it (including the years falsely labeled “skimming”*).  Effective 2005, lawmakers removed that requirement.  Now PL-88 declares a lower amount by fiat.  That hides the funding collapse from the public by eliminating the cost escalation an AAFM would produce as a warning.

Mayor, please help me get Hawaii’s lawmakers to pay more attention.  PL-88 must reinstitute contributions calculated using an AAFM, because continuing to hide the problem will tempt the HERS board to bet the ranch that taking more risk will let them earn enough more than 8% to win back their staggering losses before anyone notices, and I don’t believe gambling on that is a safe bet today.  Do you?