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Hawaii’s $27 billion unfunded liability — the amount it would cost to pay all the health and retirement benefits that the state and counties have promised to thousands of public workers — is a problem of enormous consequence.

It’s important not only to the families counting on that money to see them through their golden years, but to private citizens who depend on government services like education, transportation and other things that could be cut in order to pay down this incredible debt over the next 30 years. Or there’s another option: raise taxes.

The complexity of the Employees’ Retirement System (ERS), Employer-Union Health Benefits Trust Fund (EUTF) and Other Post-Employment Benefits (OPEB) is part of the reason elected officials have been able to skim investments to put toward unrelated programs. They’ve kicked the problem down the road for decades without fear of political retribution. It’s simply a tough issue for the average person to get their head around and find reason to care about.

From left, gubernatorial candidates Gov. Neil Abercrombie, state Sen. David Ige and former Lt. Gov. Duke Aiona.

PF Bentley/Civil Beat

The situation has started to improve with concessions from public-worker unions and the passage of laws over the past several years that have curbed abuse and mandated a pre-funding approach instead of pay-as-you-go. But big structural questions loom and there’s uncertainty over the ability of government employers to meet the financial demands of strict new pay schedules.

Gov. Neil Abercrombie thinks he’s the man to continue tackling the state’s unfunded liability problem and he wants another four-year term to prove it.

But his chief opponent in the Democratic primary Aug. 9, state Sen. David Ige, believes Hawaii would be in far worse shape on this front if it weren’t for moves he made in the Legislature. 

The expected Republican challenger in the Nov. 4 general election, former Lt. Gov. Duke Aiona, maintains that he is the one to steer the state retirement system back to solvency.

Civil Beat, which published a three-part series on the state pension system in June, talked to the three gubernatorial candidates about the soaring unfunded liabilities. A spokesman for Hawaii Independent Party candidate Mufi Hannemann said the candidate couldn’t fit in an interview, and questions submitted to the campaign were not answered.

“We have over the last four years really put the policy structure together so both the pension system and health fund is viable and sustainable long term.”
— State Sen. David Ige

There’s a general consensus that the ERS ship has been set to a better course in recent years thanks to some fairly drastic legislation and political chutzpah. It’s the EUTF, which has roughly twice the unfunded liability, that officials just started getting serious about fixing.

The Legislature in 2013 passed , which the governor signed into law as Act 268, that requires the state and all four counties to make their full annual required contributions to the health fund by 2018. The law mandates escalating payments to be phased in over the next five years, meaning the search is on to find hundreds of millions of extra dollars to make up for a long policy of deferring these costs.

Aiona faulted the state for not putting more money down sooner to boost returns quicker.

“We’re not going to catch up tomorrow,” he said, but added that he doesn’t like this plan either where it’s 2039 before the system is expected to be fully funded.

With Ige and Abercrombie, the question is more about who deserves the most credit.

Ige, who chairs the powerful Senate Ways and Means Committee, pointed at Act 268 having originated in the Legislature as opposed to coming in a legislative package from the governor’s office. He said a similar proposal from Abercrombie’s administration, which would have required setting aside a fixed dollar amount, got no traction.

The senator acknowledged the support the legislation received from the Department of Budget and Finance, but said, “the executive jumped on that band wagon.”

“We must change the paradigm to include providing retiree benefits and taking care of retiree health.”
— Gov. Neil Abercrombie

“We have over the last four years really put the policy structure together so both the pension system and health fund is viable and sustainable long term,” Ige said.

Abercrombie told Civil Beat that he was proud to sign the bill after his administration tried for years to pass similar measures. He called it the “single most significant change in the EUTF liability during my administration.”

“This measure places Hawaii at the forefront as one of the first states to make significant contributions to address its OPEB liability,” he said in an email. “We need to be committed to this funding principle to ensure the system remains solvent for every retiree.”

Abercrombie also noted that three bills that were pivotal to improving the ERS and lowering the unfunded liability for new employees came from his administration in 2011 and 2012.

The state, which is responsible for roughly three-fourths of the OPEB liability, put down $100 million this year and plans to pay $117 million next year before it has to ramp up to an estimated $500 million annual payment by 2018.

Abercrombie said securing that first $100 million payment two years ago resulted in a 36 percent decrease in the EUTF’s unfunded liability, shaving $5 billion off the $13.5 billion owed.

The $100 million played a role in the lowered liability, but not nearly as directly as the governor says. Using a different discount rate in the projections — 7 percent instead of 4 percent — and the overall policy change were the primary drivers.

“The public needs to understand the severity and complexity of the problem.” — Lt. Gov. Duke Aiona

When asked, Abercrombie’s campaign clarified that it wasn’t the $100 million alone but also the change in policy by Hawaii from a pay-as-you-go to a pre-funding state that resulted in actuaries adjusting the state’s OPEB liability down to $8.5 billion this year.

“That $100 million was the first time in Hawaii history that state government paid into the EUTF, helping to kick start a clear commitment to capitalize this heretofore unfunded liability,” Shane Peters, Abercrombie’s campaign press secretary, said.

Ige said the next big policy question that needs to be addressed is deciding whether the state should continue to have two separate trust funds or if the ERS and EUTF boards might operate better as a single entity. A task force was created to study it and report back to the Legislature before the next session starts in January. 

Abercrombie said the EUTF also needs to direct more attention to kupuna health. 

“We must change the paradigm to include providing retiree benefits and taking care of retiree health,” he said.

From an outside perspective, the reality seems to be that the Legislature worked well with the administration to pass several meaningful laws in recent years. But being campaign season, it’s about Democrats with similar values trying to set themselves apart.

Public Understanding?

Aiona said the state should have never have amassed such a giant debt in the first place. He said he doubts the average citizen in Hawaii realizes that a few mainland cities have had to file bankruptcy over this issue alone.

“The public needs to understand the severity and complexity of the problem,” he said. “It’s a liability that needs everyone’s attention. It’s serious and it’s got to be dealt with immediately.”

One of the challenges the public faces in gaining a better understanding of the issue is access. Large portions of the ERS and EUTF board meetings are held behind closed doors.

Abercrombie said the EUTF often deals with personal health information protected by law.

“We do need to exercise some caution, as we are dealing with serious financial issues,” he said, noting that the ERS is subject to IRS and SEC regulations.

Ige explained that the boards have sensitive policy discussions, whether it’s personal health information or making drastic reductions to employee benefits in order to reduce the unfunded liability.

If the board is just brainstorming, he said, it serves the public better to have an executive session so the members can fully explore dramatic ideas that often aren’t pursued. When there’s general agreement on a more sensible plan, he said, then it’s time to give the public an opportunity to weigh in.

“The more aggressive proposals might have presented more anxiety than it would have been worth,” Ige said. “That’s the challenge with access.”

Aiona said he was not familiar enough with the individual meetings and reasons the board members entered executive session each time to comment on it in specifics.

He said he believes in transparency and openness, but questioned how many members of the public would actually attend a board meeting. 

“It’s about perception though, and I’m going to emphasize that we don’t add to that secretness,” Aiona said.

The candidates for governor have much to gain — or lose — with elderly voters in Hawaii, a rapidly graying state, on the issue of pension benefits.

With the multitude of interests competing for a slice of the state’s $11 billion spending pie, it comes down to priorities. An attempt to help preserve retirement benefits for aging public workers by investing more in the state pension system could mean cuts to kupuna programs.