A worrisome financial trend for the state's largest pension plan was reversed in the past year, with the amount needed to fund the Employees' Retirement System's future benefits payouts declining for the first time in seven years.

The so-called "unfunded liability" declined to $5.11 billion in the year ended June 30, actuaries told ERS trustees yesterday. That was a decline from the $5.13 billion unfunded estimate a year earlier.

"Your outlook is so much better today then five years ago under the old financing scheme," said W. Michael Carter of Gabriel, Roeder, Smith and Co., the ERS' actuarial consultant.

"It's a much more comfortable position than we've been in."

The ERS' investments have a market value of more than $11.4 billion and there is no problem paying retirees' and beneficiaries' current pensions. But the amount needed to pay future benefits has been growing, along with the gap between what the state and counties have set aside and the amount needed. From 2000 to the middle of this year, the liability has grown tenfold.

During that time, the amount of the liability that was funded dropped from about 95 percent to about 68 percent, one of the lower funding ratios among state pension plans in the country. Much of the problem was caused during a 35-year period when state and counties diverted more than $1.69 billion owed to the pension fund into other programs as legislators grappled with budgetary shortfalls.

The Legislature has since stopped that practice and made changes to provide more money for the unfunded liability problem.

Carter, addressing trustees yesterday, said the state and counties are to be credited for stepping up their commitment. During this fiscal year, it's estimated the state and counties will pay $489 million, or almost 14 percent of their worker payroll, into the fund. During the next fiscal year Gabriel, Roeder estimates the funding will increase to at least $561 million.

Carter said the recent fiscal year's improvement was primarily the result of good investment returns, including a 16.9 percent gain last year. He said if funds had not been diverted in the 1990s and earlier this decade, state and county governments would only be paying about 5.1 percent of worker payroll to the ERS this year.

"Today and tomorrow's taxpayer in this state are being significantly impacted by the decision through 2001 to divert so much of the calculated contribution amount to other needs," Carter said.

He also warned that trustees and legislators need to be vigilant because the problem could easily flare if investment returns fall below the ERS' 8 percent target and if negotiators grant big pay raises to public workers in coming years. Such pay increases increase the amount that's required to be paid into the ERS.

The ERS currently pays benefits to 35,324 retirees, survivors and beneficiaries. It has another 65,251 members who work for the state, counties and Board of Water Supply.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.