A state budgetary surplus is certainly better news than the alternative. Just ask former Gov. Neil Abercrombie, who came into office in the wake of a global economic crisis and a recessionary budget.
When a few years later there was a surplus of $844 million, that felt like the opportunity to pursue an agenda that included Housing First programs and universal preschool. It sounds like a lot of money, but the state’s burning fiscal liabilities have a way of evaporating even that much, and quickly.
Fast forward to today, and Gov. David Ige is not counting on much from the $893 million surplus logged at the end of the fiscal year, June 30.
From a political standpoint, it surely would be tempting to pursue a spending plan in advance of a re-election campaign, but Ige seems to want to constrain expectations.
That would be the wisest course. If there’s any new initiative to pursue in the 2018 legislative session, it would be taking another crack at civil service reform to continue shrinking the state’s retirement fund indebtedness.
One approach should be to crack down on a practice within the state workforce known as “pension spiking,” which will only add to the burden taxpayers will bear.
First, here’s a review of the current conditions. Preliminary estimates by state Director of Finance Wesley Machida put the surplus just below where it was last year, a record-breaking $1.03 billion. Even that didn’t go far: A lot of outstretched hands at the opening of the last Legislature had to withdraw empty when further revenue projections were revised downward.
So Job One appears to be to squirrel away enough to cover scheduled employee raises as well as retiree obligations for pensions and health care.
Lawmakers should maintain the governor’s policy of making payments into the Employees’ Retirement System (ERS) and the Hawaii Employer-Union Health Benefits Trust Fund at the beginning of each fiscal year, an early investment that increases the benefit to the state, long term. This will be challenging, given that wage and fringe benefit costs for the coming year also are increasing.
The unfunded liability totaled $12.44 billion for ERS as of June 30, 2016, and $11.7 billion for the health fund in 2015. Keeping the debt from growing further remains a crucial part of the picture.
There have been past efforts to address the unfunded liability: raising the retirement age and contribution rates, increasing the length of time for becoming vested.
These changes generally affected new employees. Though that is important, management of practices by current employees is in need of a critical adjustment, one that has been forestalled for too long.
In a commentary published Sunday, Machida and Colbert Matsumoto, a fellow trustee of the ERS, described “pension spiking.” For employees hired before July 1, 2012, pensions are based on their three highest years of earnings — including overtime.
This means an employee with a $60,000 annual base salary could accrue OT earnings that boost the basis for pension calculation, resulting in an annual pension twice as much as base pay, they wrote. This paralleled an actual ERS situation — and multiplied on the scale of the state’s large labor pool, can represent a crushing fiscal burden.
It is within the control of management to crack down on unwarranted overtime pay, they added, but more steps are needed. Lawmakers must enact an amendment to exclude overtime from pension calculations for a larger sector of current employees.
The current surplus was produced in part by an administrative 10 percent restriction on discretionary spending. But solving the ongoing fiscal crisis will require more than a gesture toward frugality.
It will take some resolve by administration management, and by lawmakers, to hold the line on some of the more egregious spending practices of the state workforce.