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Editor’s note: This article is a response to a four-part series on the financial problems at the Hawaii Public Employees’ Retirement System by actuary George Berish. To read that series:

• Hawaii’s Retirement System — A Danger Demanding Sunshine
• A Danger Demanding Sunshine — The Consequences of Hawaii’s Public Pension Shortfall
• The Why and What Of ‘Retirement Systems’
• A Way To Save Hawaii’s Government Employees’ Retirement System

Civil Beat is also publishing a response from the chairman of the system’s Board of Trustees and its top administrator, “Fixing Hawaii’s Public Employees’ Pension Plan.”

If you ignore George Berish’s misleading implications and innuendo, he makes a number of valid and important points in his series on retirement benefits for Hawaii public workers. First, examples of the irrelevant and misleading.

Mr. Berish more than once makes comparisons of the Employee Retirement System’s financial shortfalls to the cost of constructing Honolulu’s rail system. The cost of the City’s rail system is completely irrelevant to the problems faced by the ERS. Why not compare the shortfall to the State’s budget? One year of State general fund spending is roughly equivalent to the cost to build rail ($5.5 billion for rail, $5.7 billion in general fund spending proposed for fiscal year 2012).

Also troubling is his poor arithmetic. He claims that the ERS is “almost two rail system’s worth” in the hole. Two rail systems would be $11 billion. The ERS’ current unfunded actuarial accrued liability (UAAL) is $7.1 billion,¹ a difference of $3.9 billion. By any standard, $3.9 billion does not fit the definition of “almost.”

Mr. Berish insinuates that the Legislature and the ERS board have somehow hidden the extent of the ERS’ UAAL. This is false. The problem has been commonly known for years. ERS reports are public record. Hearings at legislative committees are published the same way hearings on any other topic are announced.

Mr. Berish correctly states that with a defined benefit plan, as the ERS currently employs, investment risk is entirely with the State and counties. What he does not mention are the financial challenges inherent in switching from a defined benefits plan to a defined contribution system. With the ERS $7.1 billion in arrears, switching to a defined contribution plan will cut off the flow of new money into the old system, but will not relieve any of the liability the State and counties have already accrued. The only time it is financially easy to switch from a defined benefit to a defined contribution plan is when the defined benefit plan is fully funded.

Mr. Berish is also correct in saying that in the private sector, “[s]tockholder liability is limited to assets in the corporation” and that in the government context the full faith and credit of the State is pledged to pay the benefits. That is true as far as it goes, but it is not the whole story. Corporations with defined benefits plans can dump their liabilities on the federal government. Currently, the Pension Benefit Guaranty Corporation (PBGC) insures the pensions of 33.8 million workers from 28,000 private sector defined benefit pension plans.

Bankruptcy routinely results in private sector employees losing their defined benefit plans and having them replaced with defined contribution plans on emergence from bankruptcy with the PBGC covering the liabilities of the defunct defined benefits plan. There is no option like that for the State.

As the Chair of the Labor and Public Employment Committee in the State House, much of my attention this session has been focused on addressing the valid issues raised by Mr. Berish and others. Either of two companion bills (Senate Bill 1341 or House Bill 1038), if passed, will drastically alter the terms of retirement and the benefits of future public employees.

The changes include: raising the retirement age, increasing the vesting time, raising both employee and employer contribution rates and lengthening the pension calculation period from the highest three years of compensation to the highest five years (to make it more difficult to inflate pensions by working overtime in the last years before retirement).

According to the ERS, the changes in these bills will reduce the ERS’ UAAL by $440 million in the first five years alone. But of course, these savings will grow as more and more of the government workforce is hired under the new system.

About the author: Karl Rhoads represents District 28 in the State House (Palama, Chinatown, Downtown, Lower Makiki & Sheridan) and chairs the Committee on Labor and Public Employment.