State must cover ERS shortfall of $93 million

By Deborah Adamson
Advertiser Staff Writer

Hawai'i state and local governments will need to pump about an additional $93 million into the Employees' Retirement System next year to keep obligations to pensioners on track.

If an improved economy doesn't boost tax revenues enough or there isn't a jump in the $8.5 billion pension fund's performance, residents could face either tax increases or reductions in government spending to pay the pension bill.

"The cost for the retirement system is increasing," said Sen. Brian Taniguchi, chairman of the Senate Ways and Means Committee. "We'll strive to meet the payments ... hopefully without having to raise taxes or cut spending."

This year, state and local governments put $235.7 million into the Employees' Retirement System, or 6.5 percent of Hawai'i's $3.6 billion state budget.

For fiscal 2005, the projected contribution needed from the government is $328.7 million, according to the state Department of Budget and Finance. That's $93 million more than this year.

In 2006, the contribution is expected to rise to more than $400 million.

State law mandates that the ERS be fully funded by 2029, meaning by that year there must be enough money to pay for all current and future retirement benefits. As of the end of 2003, ERS was only 71 percent funded.

The shortfall is a problem more for the employer — state and local governments — than workers. The employer has a contractual obligation to provide set retirement benefits to employees, pensioners and their beneficiaries.

"Maybe the ERS is being mismanaged," said Mike Morita, a 55-year-old ERS member and trumpet player for the Royal Hawaiian Band. "They should have higher returns, so we don't have to put in another $100 million."

ERS Administrator David Shimabukuro said the need for higher contributions resulted from three factors:

• A stock market that hasn't fully recovered from the bear market;

• An increase in active pension members; 2,216 were added in 2002 for a total of 62,208;

• The $346.9 million in ERS gains on investments that the state Legislature diverted from 2000 to 2002 to cover the budget, including public-employee pay raises.

The pension fund joined a class-action lawsuit against Hawai'i state and local governments two years ago, arguing that diverting ERS portfolio gains to pay for other state programs was unconstitutional. Last year a Circuit Court judge ruled against the pension fund and co-plaintiff State of Hawaii Organization of Police Officers. The case is on appeal.

Lawmakers are hoping to improve the financial health of the ERS with three bills that await the governor's signature. The first would bring the state in line with federal rules capping benefits for high-salaried public employees, such as University of Hawai'i football coach June Jones.

The second creates a new pension plan in which public workers contribute 6 percent of pay but the vesting period would be cut in half.

The third bill would change the timing of government contributions so they are no longer allowed to pay three years after an initial projection of obligations.

Under that bill, the government would pay a set percentage of workers' payroll — 13.75 percent with reviews every five years — instead of a lump sum based on actuarial calculations. That means pension contributions would be more predictable in the future, Taniguchi said.

As of June 30, 2003, the ERS had $7.7 billion in assets and it had future liabilities of $11.9 billion or enough money to cover 64 percent of liabilities, according to a study by Wilshire Associates in Los Angeles.

That puts Hawai'i in the bottom fourth of 123 government pensions nationwide when it comes to the percentage of liabilities it can currently pay.

Nationally, 93 percent of state pensions were underfunded last year compared with 51 percent in 2001, the Wilshire study said. State pensions, on average, have enough money to pay 77 percent of their liabilities.

ERS administrator Shimabukuro said the fund's assets grew in the last half of 2003 and as of Dec. 31 it had enough to cover 71 percent of liabilities.

"The market is coming back," Shimabukuro said. "The board has a long-term investment strategy. We're staying the course."

Over the past decade, the pension's funded ratio has swung from a low of 64 percent to 95 percent at the bull market peak in 1999, he said. The ERS has never been 100 percent funded since its launch in 1926.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.