A $100 million payment proposed for next year’s state budget to fund future public worker retiree health benefits pales in comparison with the total liability of $18.2 billion.
"The $100 millionis more symbolic than it is substantive," said Randy Perreira, executive director of the Hawaii Government Employees Association, representing more than 29,000 state and countyworkers. "It’s not going to get us anywhere near meeting theobligation in the long haul."
The liability comes from the promise made to state and county employees to pay as much as 100 percent of their health insurance premiums in retirement, including the premiums for their spouses and dependents. Last year the state and counties paid an average $9,134 to 41,754 retirees. The total came to $381.4 million and is projected to grow to more than $1 billion by 2026.
The state has always paid the retiree health benefits out of the general fund. Until now it hasn’t set aside funds for the future obligation to retirees.
The state House this month approved Gov. Neil Abercrombie’s budget request to devote $100 million in fiscal year 2014 and $105 million in fiscal year 2015 to address the growing retiree health insurance liability. If passed, House Bill 200 would be the first time the state has contributed to the unfunded costs. The counties have contributed more than $200 million since 2008 to pre-fund their portion of the debt.
The $100 million is seen as a start even though it is far from what is actually needed to cover the entire liability. The state would need to contribute $520 million annually for 30 years to eliminate the full liability, according to the most recent consultant report by Aon Hewitt released June 30.
Paying $520 million would be the equivalent of 8.5 percent of the state’s proposed $6.1 billion general fund budget for fiscal 2014.
"This is a problem that has existed for decades … and because it’s decades in the making, the resources that it would take to address this problem now is significant," said Kalbert Young, director of the state Department of Budget and Finance.
Paying $100 million now "is prudent financially," Young said. "If you don’t pre-fund … the pay-as-you-go amount will grow to the point that it will consume larger and larger portions of tax dollars, leaving less money to be spent on government services and programs."
In addition to the governor’s budget proposal, Senate Bill 946 advancing in the Legislature would require the state to increase contributions over five years, eventually reaching $520 million to pre-fund the future costs. The bill also would create an investment mechanism to invest trust-fund dollars.
"Up until this point conversations have been sporadic in trying to tackle unfunded liabilities," said Sen. David Ige, who sponsored the bill. "The liability is real, and a lot of it is already accrued by retirees. The state will have to make good on those benefits. We’re trying to ensure that the fiscal requirements of meeting the unfunded liability is a priority rather than an afterthought."
While there is general consensus that the state needs to begin pre-funding the liability, questions remain as to whether substantial government dollars could be better used to improve schools and roads or diversify the economy with investments in high technology and alternative energy that could possibly generate higher tax revenue to cover the cost of retiree health benefits.
"In a very tight budget, certainly an issue like this isgoing to be scrutinized greatly," HGEA’s Perreira said. "There are other issuesout there, certainly other needs. There’s also this concern about theimpact of the federal cuts. It’s tough for me to judge whether that amount is appropriategiven the other needs that we face."
The state’s portion of the $18.2 billion liability is $13.5 billion, with the counties responsible for the remainder. The public worker retiree health benefits are managed by the Hawaii Employer-Union Health Benefits Trust Fund, or EUTF.
Barbara Coriell, former administrator of the EUTF, said the billions in unfunded liability weighing on the state affects its credit rating and ability to borrow money at lower rates, and potentially threatens the medical benefits of more than 112,000 current and future retirees and their dependents.
"This issue isn’t just about billions of dollars; it’s about access to health care for tens of thousands of retirees in Hawaii," Coriell said. "The retiree liability is like a low-interest credit card. As long as you can continue to make the payments, you can carry a balance. But if you keep on charging without regard to the ever-increasing total and you just make the minimum payment, sooner or later you’ll have a real problem. The sky isn’t falling yet, but it’s probably time to gather all the parties who are concerned about this and come up with a plan design and funding mechanism that makes sense for Hawaii."
In the private sector it’s rare for an employer to pay retirees’ health insurance premiums.
The state and counties have tightened the eligibility for the benefit. An employee hired before 1996 was able to get 100 percent of his or her retired health insurance premium, including spouse and dependents, after working just 10 years.
The benefit has been reduced in steps. Employees hired after July 2001 have to work 25 years before they get 100 percent of their retirement health premium paid, and it doesn’t include a spouse or dependents.
The retirees also must use Medicare first and then state-paid health insurance. Medicare reduces the cost to the state, but not by as much as one might imagine: The monthly premium the state pays for a non-Medicare retiree with a spouse and dependents is $2,070, while the monthly premium paid by the state for the same person with Medicare is $1,459.
One reason the state offers the retiree health benefit is to compensate for the relatively large share of health insurance premiums paid by active state and county workers. Active workers pay half their medical premiums.
Public workers are fearful that their retiree health benefits could be jeopardized if the state does not have the money to pay.
"It’s very, very discouraging and disheartening. It scares me," said Yolanda Keehne, a 58-year-old secretary for the University of Hawaii-Hilo Natural Sciences Division. "It’s about survival. You’ve invested all this time in a job that is supposed to provide that as a benefit, and you just don’t know if it’s really going to be there."
"They have to take steps now to make it a more viable system," said Jack Katahira, 72, a former UH director of administrative services who retired in 2000. "There’s always that chance that the benefits we enjoy today may be quite different if they’re not prudent or things don’t work out the way we hope. As much as you’d like to think that you’re protected, nothing is given."
