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The Honolulu Advertiser

Posted on: Monday, May 21, 2001

State pension fund takes hit

By Kevin Dayton
Advertiser Capitol Bureau Chief

Assets of the public employees' pension fund plummeted by $1.2 billion over the past nine months as the fund lost money in the sagging stock market and paid out record amounts in retiree benefits.

David Shimabukuro, administrator of the Employees Retirement System, stressed the pension fund is sound, and pensioners benefits are safe.

However, the fund's investment losses could ripple out to cause more financial troubles for the state and counties starting in 2004 unless the fund can recoup much of the lost money before the fiscal year ends June 30.

So far this year, the fund has paid out a record $405 million in retiree benefits, he said. The state and counties are required to contribute to the fund each year according to a formula that accounts for factors such as the number of government employees, how much those employees are paid and how well the fund fared on its investments. The calculation is tied the fund's performance as of June 30 each year. There is also a lag time built into the calculation, so the fund's performance in 2001 affects state and county contributions in 2004.

The pension fund has about 90,000 members, including 29,000 retirees.

Apart from losses in the stock market, the fund was also affected by a law the Legislature passed in 1999 that reduced the state and counties' contributions to the fund for last year and this year. The law reduced the amount the state and counties were scheduled to contribute this year alone from $164 million to $8 million, Shimabukuro said.

While that law helped the state and counties to balance their budgets, the pension fund had to withdraw money from its portfolio to pay pensioners benefits, Shimabukuro said.

The fund began the fiscal year last July 1 with $9.9 billion in assets. A consultant's report submitted to the ERS trustees this week showed those assets shrank to $8.7 billion as of March 31.

ERS lost 9.7 percent on its investments in the first three quarters of the fiscal year, but Shimabukuro said the trustees have done a good job of selecting investment managers. Those who haven't been performing have been terminated, including five who were axed the last year, he said.

The ERS portfolio lost about 6.5 percent last quarter, but Shimabukuro said the stock market as a whole lost almost 13 percent.

State Director of Finance Neal Miyahira, who is also one of eight pension fund trustees, said the fund is well-run and well-diversified, but all pension funds took a hit this year.

"Overall, if the market is doing poorly, the pension funds — unless they're only into bonds and CDs — are all looking at red numbers," he said.

As for the potential effect on the state budget, "anytime costs increase, it's a cause for alarm," Miyahira said.

The losses this year come on the heels of years of solid growth for the fund, including a 7.5 percent return on investments last year, Shimabukuro said. Even including the first nine months of this fiscal year, the average return for the fund over the past five years was 8.7 percent, he said.

"We're long-term investors. These past nine months have been tough, but the fund is still doing well," Shimabukuro said. "We know that there's going to be ups and downs. That's to be expected."