Hawai'i pension fund is stealth debt for us
By Cliff Slater
My June 27 column dealt with Hawai'i's general excise tax as a dishonest tax — a stealth tax — that poses as a sales tax, but that actually collects two to three times the revenue that a pure sales tax would yield.
We also have stealth debt. This is debt that is owed and backed by the "full faith and credit" of the county and state governments but which does not appear on the books.
Very quietly, with little fanfare, the taxpayers of Hawai'i have acquired another $3 billion debt in the last five years, with most taxpayers being unaware of it.
The culprit is the unfunded pension liability of the Hawai'i Employee Retirement System.
Each year the ERS pension fund actuaries calculate the future pension assets and liabilities of the state and counties. They take into account:
If the prospective assets are considered insufficient to meet these future pension obligations, then the fund is declared to have an "unfunded pension liability."
As of the end of fiscal year 2004, the "unfunded" amount was $3.5 billion, up from only $500 million just five years earlier — a $3 billion increase.
This unfunded liability is the amount that taxpayers will have to make up in future years since the pension fund is guaranteed by the "full faith and credit" of the state and county governments. Since these governments' only income of any substance is what it gets from you, the taxpayer, it means that, sooner or later, you have to make up the difference.
To put the $3.5 billion in another perspective, it amounts to about $2,600 for each man, woman and child resident in Hawai'i, most of which has been incurred during the past five years. How did we get in that state?
The problem has been that the fund has been managed too aggressively and none too competently. For example, the law requires that four of the eight trustees be union members and the others be "citizens of the state." It turns out that none of these trustees has been in the public eye and, almost by definition, that makes them incapable of doing a great job of handling $10 billion.
The losses from the fund are primarily responsible for the unfunded liability.
In addition, because retirees live longer, actuaries must allow for continually escalating future pension liabilities. This past year, the state was required to pay $330 million into the fund under a method used since 1933. Under this plan, when the system was unfunded, the state was required to pay in an amount that would make the fund whole over a 25-year period. State officials seem to have found even that too onerous and changed the law two years ago to a simple percentage of payroll.
According to independent actuary George Berish, had the old system been in place this fiscal year, the state would have had to contribute $444 million; the change in contribution method will reduce the state's contribution to about $370 million.
We need to bear in mind that using the state's projection of inflation, the fund has to earn, or taxpayers contribute, $417 million this year just to allow for inflation erosion of the fund.
Pension fund problems, including those associated with pensioners living longer, are why most private companies have switched to 401k plans. They can no longer afford the older defined-benefit pension plans. Only taxpayers can afford them, it would seem.
However, like Social Security, Medicare and other such plans, our children, or even grandchildren, will be burdened with the problem as long as our elected officials continue kicking these cans down the street to avoid dealing with them.
Cliff Slater is a regular columnist whose footnoted columns are at www.lava.net/cslater.
