Hawaii’s public employee pension fund is now underfunded by a record $14 billion, with the funded ration set at about 55%. According to the latest actuary report, if projections hold, the Employees’ Retirement System (ERS), which now serves nearly 125,600 beneficiaries, will rebound to the 100%-funded mark in the year 2045.
Despite that expected 25-year climb from shortfall, ERS Executive Director Thom Williams said last week “We are not alarmed by this year’s results. … Our plan is stable and on track.” Given the long-term nature of retirement benefits, there’s no reason for the current set of retirees to worry about getting their pensions and health care benefits.
However, when this unfunded liability is weighed with looming big-ticket state spending in two other areas — needed infrastructure upgrades and maintenance, and mitigation to brace for climate change — alarm bells should be ringing.
Over the next three decades, the price tag for all three could exceed $88 billion, likely straining the state’s fiscal capacity, according to a report released in October by the Hawaii Executive Conference, a forum of CEOs and “thought leaders” representing various nonprofits and academia.
“Troubled Waters: Charting A New Fiscal Course for Hawaii,” pegs the current unfunded liability for retiree pension and health care benefits combined at upwards of $25.7 billion. Add to that $47.2 billion for shoring up infrastructure, and $15.3 billion for prep tied to climate change and natural disaster. Balancing the three areas of spending will be challenging.
According to state projections, by 2022, slightly over half of the annual general fund will be reserved for funding retiree pensions and health care, debt service payments and Medicaid.
If tax revenues do not increase enough, these obligations — protected by state Constitution — will increasingly gobble up funding, leaving less for current infrastructure and future-focused climate change/disaster needs, ranging from upgrades in school and correctional facilities, to protection or relocation of coastal highways vulnerable to expected sea-level rise.
In the interest of avoiding financial dire straits, state policymakers in tandem with the ERS, must seek viable ways now to help pay down state public employee pension liability.
A step in that direction was taken in 2012 with the introduction of a level of retiree benefits that requires newer employees to work longer to vest benefits; sets a lower rate for annual automatic cost-of-living increases added to pension payment; sets higher employee contribution rates; and prohibits the use of overtime in retirement benefit calculation.
Also worth exploring today is a ban on the use of overtime in calculating anything related to pension, as it has spurred a shady — and increasingly expensive — practice known as pension spiking.
Elsewhere, some states grappling with pension funding woes are offering options such as a 401(k)-type of defined-contribution plan, where benefits are based on retirement fund contributions — with no guaranteed minimum or maximum benefits — rather than a guaranteed monthly income based on years of service and salary. That’s worthy of study, as is a buyout option.
Illinois and Missouri have new pension buyout plans that allow workers to give up future benefits in exchange for a lump sum payment equal to 70% and 60%, respectively, of what they would have gotten. Such a move could be a win-win, for workers preferring early access to the benefit while lifting the long-term liability from government.
More effective strategies here would enable further pay down of pension liability for the sake of Hawaii’s fiscal health — perhaps even in ways that would be welcome by employees for choice and flexibility.
