Years ago, as a lawmaker, Gov. David Ige insisted the state pay down its huge financial obligation to provide health care to the state’s unionized public workers and retirees. Now it falls to him as governor to walk the talk.
When Ige unveils his administration’s supplemental budget on Monday, the possibilities for exciting new programs or projects will be limited by Act 268, a groundbreaking law he helped craft in 2013.
The new law requires the state and counties to bank hundreds of millions of dollars each year to pay for future public worker and retiree health benefits. The law’s impact on the state budget has already been substantial, and will increase in coming years.
In the fiscal year beginning July 1, Act 268 requires the state to set aside $245.8 million to provide health coverage to public worker retirees and some of their spouses in the decades ahead. That is in addition to about $360 million the state will have to pay to provide health coverage next year to public workers and their families, and retirees and their spouses.
The combined cost to the state for health coverage and for the set-aside for future health coverage obligations will continue to grow in the years ahead. According to a 2013 report by a state actuary, the combined cost of about $600 million next fiscal year will increase to about $720 million the following year, and to about $850 million the year after that.
Those annual state health care costs are expected to top $1 billion in fiscal year 2024, and will be a financial burden for a long time. The law Ige helped to pass requires the state and counties to make extra payments each year for decades until Hawaii governments have finally stashed enough money to cover almost all of their future obligations to provide health care to public workers and retirees.
Some state lawmakers contend the cost of Act 268 will be too great, and it will effectively strip funding away from other pressing state needs, such as social services and schools. But Ige was a driving force behind the passage of Act 268 when he was in the state Senate, and said he is determined to stick with it.
“We are committed to dealing with the unfunded liability of the health fund,” Ige said earlier this month. “Hawaii is today the only state that has a plan to deal with the unfunded liability for health fund, and I’m committed to implementing that as quickly as possible.”
But Ige has also begun to sketch out an ambitious agenda for his administration, and most of his initiatives will require cash.
Homelessness and housing are among his top priorities, and he hinted that a new effort to modernize one or more of the state’s correctional facilities may be highlighted in his State of the State address to lawmakers next month.
He mentioned improvements he wants to make in the state’s mental health systems and said he plans to increase funding under the weighted student formula to boost the budget for public schools.
He stressed the importance of modernizing the computer system that serves the state Department of Taxation. The state has already committed $32 million to the latest tax system computer modernization effort, and the department says it needs another $27 million.
Ige also wants a new financial management system for the state Department of Accounting and General Services, calling it a “very high priority” because it is needed for critical tasks such as tracking federal grants. That system is expected to cost $15 million.
In addition, he has to cope with perennial issues such as the urgent requests for help from the state’s network of public hospitals. The Hawaii Health Systems Corporation often requires state subsidies of $100 million per year to cover its losses, which the hospitals say they need to continue operating.
It all costs money, and covering future health benefits for public workers will make it increasingly difficult to cover ongoing expenses while launching the kinds of new initiatives Ige wants.
The pressure will likely intensify in the years ahead as the state’s public worker unions negotiate for new raises, and it could become critical when the state’s bustling economy begins to slow. A recession or economic slowdown will reduce state tax collections, meaning less money will be available for all state operations ranging from prisons to schools.
Some believe Act 268 is costing state and county governments too much. State Rep. Romy Cachola last year proposed a new law that would allow the state and counties to stop banking money when the cash reserves set aside for future health benefits tops $2 billion. That is a relatively modest goal, since the reserves topped $1 billion earlier this year.
In testimony to his fellow lawmakers last year, Cachola argued the Act 268 requirement that the state and counties bank $500 million per year or more “is not sustainable and places a heavy burden on future generations.”
“My inspiration and motivation for coming up with this bill begins with my grandchildren by asking this question, ‘What will their future be with this heavy burden?’ ” Cachola said in testimony submitted to the House Finance Committee. Versions of Cachola’s bill were approved by the state House and Senate but stalled at the end of the session; lawmakers may consider it again next year.
Cachola’s bill was strongly opposed by the Ige administration. Wesley K. Machida, director of the state Department of Budget and Finance, said state and counties need to pre-fund their health coverage obligations now to avoid even larger costs in the future.
Setting aside money now and investing it will dramatically reduce the annual payments the state and counties will have to make in the years ahead to buy the health coverage they are obligated to provide to retirees, administration officials say.
“In terms of pre-funding, if we don’t continue to pre-fund, the situation becomes worse,” Machida said. “Under the pay-as-you-go system, the dollar amount that you would contribute for any one year would far exceed the pre-funded amount down the road.”
House Majority Leader Scott Saiki said the governor knows Act 268 will somewhat limit his options for new projects or programs, but predicted Ige “will deal with the numbers, and see what fits.”
“I suspect that his primary goal is to put the state back on sound fiscal footing, even if it means that he cannot put forward splashy or big projects,” Saiki said. “He’s more concerned about the long-term fiscal stability of the state government, and the entire state.”
HEALTH COVERAGE BREAKDOWN
The Hawaii Employer-Union Health Benefits Trust Fund provides health coverage for state, city and county employees, along with coverage for retirees and some of their spouses. The obligation to provide coverage for future retirees and their spouses has created an $11.7 billion unfunded liability for the fund. Act 268 requires the state and counties to pre-pay those future health benefits and reduce the unfunded liability.
Unfunded Liabilities, Hawaii Employer-Union Health Benefits Trust Fund, 2015
>> State of Hawaii: $9.066 billion
>> City & County of Honolulu: $1.771 billion
>> Hawaii County: $375 million
>> Maui County: $297 million
>> Kauai County: $150 million
Source: Gabriel Roeder Smith & Co.,
