State, county retirement system needs reform

LIHUE — Benefits for retired county employees may be falling down, unless legislative reforms can raise them up.

The Employees Retirement System of Hawaii applies to all qualified state and county employees. As of June 2016, the most recent data available, the system consisted of 135,178 members (67,377 active employees, 45,506 retirees and beneficiaries, and 22,295 non-vested members), according to Thomas Williams, ERS executive director, who spoke at the recent Kauai County Council Budget and Finance Committee meeting.

ERS’s annual pension payouts for the 2016 fiscal year were $1.25 billion, estimated to increase to more than $3.5 billion in the next 30 years. The average annual pension is $27,108, and nearly 14,000 active employees are eligible to retire today.

Data provided by Williams indicated that accrued liabilities during its previous fiscal year were $27.44 billion, while funded assets (invested in stocks, bonds, real estate, private equity and cash) totaled just $15 billion, a shortfall of $12.44 billion.

“If your balance sheet is sort of out of whack, it’s a perilous situation,” Williams said. “The closer you get to full funding, the less risk you are faced with.”

The ERS’s level of pre-funded monies that are available to take care of current and future benefits is in the bottom quarter among public pension plans.

“It’s pretty depressing to hear the reality of the ERS,” said Ross Kagawa, council vice chair. “I don’t think the ship is sinking; I think the ship has sunk.”

For FY2016, employer contributions totaled $756.5 million, and as of July 2017, police/fire made up 42 percent of the yearly total, while all others made up 18 percent.

In 2015, the annual salary increase for police and fire department employees was nearly 15 percent, while salaries rose 5 percent for general employees and 3 percent for teachers.

The ERS’s total expected pensionable payroll for FY2018 is about $4.3 billion, with police/fire making up $493 million. A proposed 1 percent increase in contribution rate could bring an additional $43.5 million increase.

Excess county costs due to pension spiking reached nearly $900,000 in FY2017, with 12 spiking retirees. Pension spiking occurs when salaries are inflated close to retirement to boost pension amounts.

“Over time we’ve fell behind, so now they’re expecting the taxpayers to catch up because of the poor management of the ERS,” said Council Chair Mel Rapozo. “I don’t think it’s fair.”

Possible pension reforms could include lower benefit multipliers, higher vesting and age requirements, higher member contributions, lower post-retirement benefits, employer payments for spiking, and no overtime in compensation, according to Williams.

Potential legislative proposals include separating accounts for employer advance contribution payments, retaining unclaimed member benefits, exempting ERS investment professionals, implementing Hawaii Domestic Relations Orders after July 2020, and other technical amendments.