State pension system shortchanging retirees
By John Duchemin
Advertiser Staff Writer
The state agency charged with calculating pension benefits for more than 30,000 state retirees has been systematically underpaying many of them for as long as two years.
Plagued by a host of administrative difficulties, the Employees' Retirement System has fallen significantly behind schedule in calculating retirees' final benefits. Because of the backlog, ERS says, it generally uses low estimates when issuing pension checks to new retirees — forcing most to go without hundreds, even thousands, of dollars in income during the first couple of years of retirement.
Raymond Sokugawa is one victim of the delays. When he retired in early 2000 after 30 years of civil service, ERS began paying him $1,688 each month. When the state finally mailed Sokugawa his official benefit statement earlier this year, the 59-year-old found out he should have been getting about $1,900 a month.
The state, slow to finalize the calculations on Sokugawa's pension, had temporarily cost him more than $5,000 in income.
ERS officials say they are trying to fix the problem, caused by staff shortage, tardy reporting by other state departments, a recent wave of retirements, an obsolete computer system the agency has been struggling to replace, and pension calculation rules that are among the nation's most complex.
But to make matters worse, ERS officials say an unusually large number of state employees is set to retire in the next couple of years, a move that would flood the already clogged system. In the past year, ERS has prepared more than 5,200 retirement benefit estimates for state employees, who usually request an estimate within six months to a year of retirement.
"Fixing the backlog is our top priority," ERS administrator David Shimabukuro said Friday.
Shimabukuro said the pension system has begun introducing an array of improvements in an effort to speed benefit calculations, including additional employees and streamlined rules.
While the problems facing Hawai'i's public pension fund are similar to those faced by pension funds nationwide, fund managers in several Western states say ERS' two-year delay in final benefit calculations is extremely unusual.
"It's probably pretty standard for someone to be paid off of an estimate when they retire, but usually the fund will have the right amount within a month or two," said Alan Winkle, executive director of the Public Employee Retirement System of Idaho.
The Hawai'i delay is "extreme," said Terry Slattery, executive director of the New Mexico Public Employees' Retirement Association. In New Mexico, the state pension fund also has computer problems and must manually audit and calculate benefits. But the system manages to figure the correct pension amounts within 60 days — and without resorting to a temporary estimate, Slattery said.
An estimate of the total amount of underpayments to state retirees is not known, and ERS eventually pays pensioners the full amount they are owed — including any retroactive payments that are required — but retirees like Sokugawa say the delay not only deprives pensioners of precious cash that they could be earning interest on or using to pay bills, but also prevents accurate retirement planning.
Public employee union officials, who say they have heard many complaints from members, have been pressing ERS to deal with the problem.
"The main complaint we hear is, 'It's so hard to live on fixed income, and why is it taking them such a long time to get us what we're owed?' " said Randy Perreira, deputy executive director of the Hawai'i Government Employees Association, which represents more than 20,000 state government workers.
How it happened
Shimabukuro said the local ERS backlog started in the mid-1990s when the state, attempting to trim its work force, encouraged government employees to retire early. About 4,000 workers retired within a 14-month period between 1994 and 1995 — swamping the pension system and its seven-member staff of benefit examiners, who at that time handled about 1,000 retirements a year.
The logjam was aggravated in 1998 when the Hawaii Supreme Court upheld a 1996 ruling by a Circuit Court judge that said ERS had been miscalculating retirement benefits for public school principals, vice principals and teachers. That meant ERS was forced to recompute benefits for thousands of retired principals, vice principals and teachers going back to 1970.
Meanwhile, the government work force was not only growing — from 74,000 in 1992 to 93,000 this year — but also aging. That meant the number of retirees was increasing each year, swelling to about 1,600 last year. But a tight state budget meant the number of pension-benefit examiners remained the same.
By last year, the backlog had stretched to two years.
"A lot of it, I think, is demographic," Shimabukuro said. "The staff is working hard, but we have more people retiring and requiring counseling."
At the same time, the ERS' 16-year-old Wang computer system has proven unable to quickly calculate benefits, and a $13 million upgrade has recently bogged down in a legal battle with the main contractor.
Complex pension calculation
Shimabukuro said further delays are caused by the intricate way the system must calculate retirees' benefits.
Many states base pensions on a multiyear stretch of a retiree's salary and little else. The Hawai'i system calculates pensions based on a complex combination of average highest pay, unspent sick leave, years of service, vacation pay and type of job.
Much of that information must be gathered from other state agencies that, faced with their own problems, can be less than prompt in responding to ERS requests. Shimabukuro said the Department of Education, for example, has sometimes taken two or three years to get ERS the sick leave information it needs to calculate pension benefits for retired teachers.
Faced with these problems, ERS has been forced to calculate an "estimated benefit" for new retirees, based on three main factors: salary, job and years of service.
Shimabukuro says ERS' initial estimates are usually within 98 percent of the final amount. But the discrepancy has often been quite large, according to state documents.
Nearly all retirees underpaid
State auditor Marion Higa found in 1999 that inaccurate benefit estimates caused ERS to underpay 99 percent of recent retirees. The underpayments usually ranged between $100 and $3,000, but one retiree was underpaid by $15,870, Higa found.
Pension managers in New Mexico, Arizona and Idaho, who said they have faced some of the same problems as Hawai'i's system, say new computer systems and more aggressive policies have helped.
The retirement systems in Arizona and Idaho recently bought new computer hardware and software and have eliminated all backlogs, officials said. The new systems allow near-instant benefit calculations.
"When our retirees start getting their first checks, it's pretty much a done deal," said Leroy Gilbertson, executive director of the Arizona State Retirement System. "But if we weren't automated, we'd be having the same problems."
Idaho has gotten more aggressive and proactive in hunting down missing information from other state agencies. Winkle says Idaho tries to have a final benefit calculated for each retiree within days of retirement, and will pester laggardly officials until they cough up relevant documents.
What's being done
Shimabukuro says ERS is taking such efforts to heart after eight years of dealing with the backlog. The system has created a full-time working group to tackle the backlog, and already has scored some victories such as convincing the state Legislature to approve six new positions for benefit examiners that could be filled within a year.
ERS also pushed through a series of changes to its statutory requirements that Shimabukuro says will smooth the benefit calculations, including monthly pension payments for new retirees, instead of twice monthly, to reduce paperwork; a 150-day post-retirement filing period for new retirees, up from the current 90 days, which gives employees more time to get their paperwork in order; simplified death-benefit calculations; and authority to finalize benefits without waiting for the last bits of miscellaneous paperwork from other state departments.
"A plan is there, and it's being executed," Shimabukuro said. "It's just going to take time to grind it out."
