Hawaii’s largest public workers union is lobbying lawmakers for severance payments and special retirement bonuses for employees at the state-run Maui and Lanai hospitals that could cost the state $40 million or more if Gov. David Ige’s administration succeeds in privatizing those hospital operations.

Under Senate Bill 2077, the hospital workers would be able to choose between a severance payment or a retirement bonus to boost their state retirements. The Hawaii Government Employees Association is advocating for severance payments of up to half of the annual salaries of Maui and Lanai hospital workers whose positions are privatized.

Kaiser Permanente is scheduled to take control of Maui Memorial Medical Center, Kula Hospital and Lanai Community Hospital on July 1 in the largest privatization initiative in state history.

Ige in January announced he had signed an agreement to have Kaiser operate the three hospitals, a step he predicted will save the state $260 million in hospital subsidies over the next decade.

However, it is still uncertain whether the hospital deal will actually close as scheduled. The United Public Workers union has sued in federal court to try to block the takeover, and that case is awaiting a decision by the 9th Circuit Court of Appeals.

Under the agreement signed by Ige, the state would continue to own the hospitals, but Kaiser would operate them under a 30-year lease. Kaiser, which is the state’s largest health maintenance organization, has committed to spending $100 million to upgrade and operate the hospitals during the agreement.

The deal has been resisted by the public workers unions, which represent about 1,400 employees at the hospitals. Many or most of those employees are expected to continue to work at the hospitals for Kaiser, but they will no longer be state employees.

Many of those hospital workers who are not yet vested in the state retirement system would be unable to claim state retirement and health care benefits even though they might have worked for years for the state.

The House on Tuesday approved SB 2077, which would essentially provide new options of severance pay or a special retirement benefit for the unionized hospital employees when Kaiser takes over and their state employment ends, said Randy Perreira, executive director of HGEA. The Senate passed a similar bill last month.

“Through no fault of their own, a number of employees that currently work in the Maui hospitals will see their state employment terminate on June 30, and they’ll be converted to private status,” Perreira said. “A number of them had invested their entire careers in government.

“This is an effort to recognize the fact that if not for this privatization of the public service, these people would have continued as government employees” and would have eventually received the “retirement benefit that they have been earning,” he said. “At this point, for many of them the benefit is being cut off at the knees, because they’re not going to be able to finish their employment.”

Under state reduction-in-force provisions, many of the more senior Maui and Lanai hospital employees could use their seniority in the state system to “bump” other state workers out of positions at other government facilities, clearing the way for the hospital workers to take those other state jobs when Kaiser takes over the hospitals.

The bill would provide two other options, including a cash severance payment equal to 5 percent of the employee’s salary for each year of service up to a maximum of 50 percent of the worker’s annual salary.

Another option would be a one-time “special retirement benefit” that would help some employees who are close to qualifying for retirement benefits to vest in the state system.

Employees who accept either of those options would surrender their rights to bump other workers under the state’s reduction-in-force provisions, Perreira said.

“Without such assistance, employees may face economic hardship that will be permanent through no fault of their own,” Perreira said in written testimony to lawmakers. “We cannot allow that to occur.”

The state has offered retirement incentives in the past, but this measure is opposed by Wesley Machida, director of the state Department of Budget and Finance.

The Employees Retirement System is trying to cope with billions of dollars in unfunded liabilities, and the retirement system in 2011 imposed a moratorium on new benefits to try to control costs, Machida said. SB 2077 would essentially puncture that moratorium.

“While I understand the desire to help employees in this situation, I am extremely concerned about the precedent that this would set, and its future impact on the sustainability of the ERS’ defined benefit structure for the 118,000 members,” Machida said.

Machida said the ERS estimated the combined cost of the severance and retirement incentive at $40 million or more, which assumes all of the current Maui hospital workers would choose one option or the other.

He added that “any time you have decision like this being made where you give special incentive retirement benefits, then it adds costs, and it really takes away from the plan that’s in place” to reduce the unfunded liability, Machida said. Added and enhanced benefits “jeopardize the future sustainability of the system,” he said.

SB 2077 will now go to conference committee, where lawmakers will try to resolve differences between the House and Senate versions of the measure before the legislative session ends May 5.