The state and counties wouldn't be facing a $4.07 billion bill for the Employees' Retirement System's unfunded liability if they hadn't diverted money owed the pension plan to other programs during a 35-year period.

That was the conclusion of an ERS actuary who found the state and counties withheld $1.6 billion of funding between 1967 and 2002. If the ERS had received the money and invested it, the plan wouldn't have the unfunded problem, according to a report given to the ERS by adviser Gabriel, Roeder, Smith & Co.

The state and counties until recently were allowed to reduce the amount they paid each year if the pension plan's investments returned more than 8 percent annually. That helped governments make ends meet during lean economic years, though resulted in a growing unfunded liability when investment returns cratered between 2001 and 2003 and the state and counties could boost contributions.

The liability doesn't mean that ERS retiree pensions are at risk, since they are guaranteed by the state constitution. The state and counties would have to pay them in the extremely unlikely event the ERS failed.

But the liability indirectly affects residents as the state and counties devote more of their budgets to paying it off.

Gov. Linda Lingle's administration and the Legislature have made a commitment to pay down the liability over a 25-year period by paying 13.95 percent of employees' payroll to the ERS. The liability most likely will go down this year and could disappear faster if investment returns surpass expectations. The contribution rate could also decline.

"As long as everyone maintains their fiscal discipline, we'll be fine," said ERS Administrator David Shimabukuro.

Of the more than $400 million paid by the state and counties this year, more than $200 million will go to paying off the liability.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.