State pension's appetite balloons

By John Duchemin
Advertiser Staff Writer

Hawai'i's state and county governments will have to pay hundreds of millions of dollars more per year to maintain the public employee pension fund as increasing numbers of retirees demand more and more money.

Annual government contributions to the Employees' Retirement System are expected to balloon to $500 million — almost triple current levels — by 2009, according to a report by Callan Associates, the pension fund's investment advisor.

The increase will put more pressure on a budget already hammered by fiscal and economic problems. Legislators and Gov. Ben Cayetano are trying to grapple with a projected $300 million revenue shortfall over the next two years resulting from the post-Sept. 11 economic decline.

State officials also must cover hundreds of millions of dollars in union wage increases and court-ordered improvements for special education at public schools.

The $8.4 billion ERS investment portfolio has lost more than $1 billion in recent years from poor stock market performance.

The fund will not be able to keep pace with obligations to retirees without increased government payments, said Ronald Peyton, president and chief executive of Callan, in a report to pension trustees yesterday.

"Your costs are catching up with you," Peyton said. "These forces are very powerful."

ERS trustees blamed the fund's problems not only on the drop in stock prices since early 2000, but also on an earlier decision by Hawai'i elected officials to pay less into the fund and skim income from it during the late 1990s as the stock market soared.

"This is the result of the state's failure to fund the system," said Colbert M. Matsumoto, ERS trustee.

Meanwhile, Callan advisor Jay Kloepfer said, the fund is steadily "maturing:" the number of pensioners is expected to rise from more than 30,000 this year to more than 40,000 by decade's end. Current pensioners already are consuming 6 percent — almost $500 million — of the fund's assets per year, well above typical pension levels.

"That percent of assets out the door is very high," Kloepfer said. "This is a mature plan, and it's getting more mature every day."

The government contribution, which stands at $170 million for this fiscal year, is expected to increase steadily for the next several years, reaching $270 million by fiscal 2003-04 and $370 million two years later, according to the Callan Associates report.

Pension officials plan to present Callan's conclusions to the state Legislature in an effort to increase the state's contribution, said ERS administrator David Shimabukuro.

Elected officials in recent years have dealt blows to ERS efforts to reduce the fund's unfunded liability — the gap between its assets and expected payments.

By the late 1990s, ERS had lowered that liability to less than $500 million.

But since 1998, the Legislature, with Cayetano's approval, has cut pension appropriations, and in fiscal 2000 and 2001 skimmed the portfolio of all investment returns above 10 percent.

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