Gov. David Ige’s administration plans to propose changes in the public employees pension fund next year as part of a larger effort to reduce the unfunded liabilities in the pension and health funds.
The state has an unfunded liability of more than $9 billion for the Hawaii Employer-Union Health Benefits Trust Fund, which provides health benefits to public workers, retirees and their families, and has a separate unfunded liability of about $6.2 billion for the public workers’ pension fund.
One of the changes planned by the administration would provide a greater benefit to the state if it accelerates its payments into the Employees Retirement System pension fund, which now manages total assets of about $14.5 billion.
Another proposal would establish new procedures and requirements for the state to follow during “disassociation,” when public facilities or services are privatized and large numbers of workers sever their connections to the public pension fund.
Lawmakers last year authorized the privatization of Maui Memorial Medical Center, Kula Hospital &Clinic and Lanai Community Hospital, and the state reached an agreement in January to have Kaiser Permanente operate all three facilities. It would be the largest privatization in state history, and Ige has said it would serve as a model for similar hospital transfers on Hawaii island.
The first proposal would encourage the state to pay down its pension obligations more quickly. That proposal would allow the state to calculate the pension system’s unfunded liability in a new way that separates the state pension obligations from the obligations of the three counties.
State Budget Director Wes Machida said the Employees Retirement System currently is a multi-employer plan with pooled funds, which means the state’s and counties’ pension obligations are calculated as a whole.
If the state were to increase its payments into the fund to more rapidly pay down its pension obligations, the counties would see their obligations reduced as well, even if they did not make similar accelerated payments, Machida said.
“Anytime anybody makes a contribution, it goes to credit everybody, so if you wanted to make additional contributions beyond … what’s required, that contribution that goes in would be divvied up amongst all employers,” Machida said. “One employer might pay for it, but it would be credited to all employers.”
The Ige administration has already accelerated state payments into the Employer-Union Trust Fund. The pension fund proposal can be seen as a strong hint that the state also plans to step up its payments into the pension fund, Machida said.
“When opportunities exist, yes, there will be attempts to try,” Machida said. He said he does not know whether the accelerated payments will begin in the next fiscal year, or how much they might be. “That still is yet to be determined,” he said.
The second proposal, dealing with “disassociation” during privatization, would establish new ground rules for the state to follow when government operations are privatized, as the state is now attempting to do on Maui.
The transfer of the Maui County hospitals to Kaiser is scheduled to take place July 1, and Ige has predicted the changeover will save the state $260 million in hospital subsidies over the next decade.
However, one challenge facing the Maui privatization effort is that many of the hospital workers are vested in the public retirement system and entitled to pensions.
Those workers will stop making contributions into the system as soon as the hospitals are privatized. That is expected to cost the public pension system about $200 million in lost employee contributions over the next 25 years.
Details were not available on the disassociation proposal, but Machida said it might involve requiring the state to make a lump sum payment to offset the loss to the pension fund from any privatization, or might require that the state make larger annual payments over time to offset the cost to the pension fund.
“The goal is to better fund the ERS when there are agencies that are departing in some fashion or another from the state, and the (unfunded) liability remains,” Machida said. “Some form of it would be doable, and the goal is to make the ERS better funded.”
Previous administrations have imposed a number of changes in the pension fund to try to limit or reduce the unfunded liability. Those changes included a new, less generous retiree benefit structure for employees hired after June 30, 2012, and higher contribution rates for employers.
