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The Honolulu Advertiser
Posted on: Tuesday, December 10, 2002

ERS fund may need $500 million annually

By John Duchemin
Advertiser Staff Writer

The state Employees' Retirement System is projected to need yearly contributions of $500 million by late 2006 from state and county governments, more than double the current contribution levels and caused in part by the pension fund's steep losses in the stock market over the past two years.

The increased payments to the $7.7 billion fund will be needed to maintain current and future benefits of more than 90,000 public employees, retirees and beneficiaries, a financial consultant to the ERS board said yesterday. Government employers currently contribute about $200 million per year.

"This is not a pretty picture," said Michael Carter, an actuary with consulting firm Gabriel, Roeder, Smith and Co., which prepared the study for the pension fund.

The need for increased payments puts immediate pressure on Gov. Linda Lingle as she prepares her first state budget in a fiscal environment already made grim by estimated tax shortfalls of $300 million over two years. Lingle could not be reached for comment last night.

The projected increases also put pressure on the counties, which will see their contributions surge by millions of dollars a year. The Honolulu government, already facing a budget crisis, will have to pay a $33.3 million ERS bill for fiscal 2003-04 — and a $47.6 million bill the next year, Carter's report stated. Earlier data for Honolulu contributions was not immediately available.

"When I go on my road show (presenting the report to government officials), I'm going to have to wear armored plating," Carter said.

The report comes after ERS' financial position worsened this year. An actuarial report in February also forecast troubles ahead, but said the fund would only require $500 million per year in contributions by 2009 or 2010 — several years later than yesterday's forecast.

Carter said foul stock market conditions this year have hurt public pension funds across the nation. ERS logged a 5.9 percent loss in fiscal 2002 as its assets continued to sink from a peak of $10 billion in 2000.

Meanwhile, annual contributions from state and county governments have lagged payouts to retirees, so the pension fund has suffered hundreds of millions of dollars in negative cash flow as its assets have deteriorated on the stock market.

The fund's financial hardships were exacerbated in 1999 and 2000 when elected officials voted to take hundreds of millions of dollars in ERS profits to balance the state budget. That move led the state police union to sue the state earlier this year, seeking the return of $350 million to the fund.

But Carter said yesterday that the removal of profits has already caused the fund to fall $1.2 billion behind where it would have been.

That has led the ERS' unfunded liability — the amount owed to future retirees in excess of current assets — to grow to $1.8 billion, up from $1 billion last year.

The pension fund's unfunded liability is projected to increase to $4 billion by 2007, yesterday's report showed. More than half of the future contributions will go toward reducing that unfunded balance, which in essence is a debt to future retirees.

"This is a very significant hill to climb," Carter said.

Extremely good performance on the stock market is the only factor that could reduce the future payments, he said.

"It would be very beneficial to the retirement system, and to the state, if the markets start to recover," he said.

ERS trustees reacted with concern to Carter's report yesterday, saying it provides further proof that the state's taking of pension fund profits during good years left the fund vulnerable for the future.

"Obviously there can't be any more skimming," ERS trustee Rick Humphries said. "The reason we're in this predicament is that there's no rainy-day fund to fall back on."

Reach John Duchemin at jduchemin@honoluluadvertiser.com or 525-8062.