Hawaii unfunded liabilities: Unpredictable tsunami or government-made disaster?

HONOLULU — It’s not uncommon for civil defense to order Hawaii residents off shorelines after a tsunami warning.

But is Hawaii about to be hit by a tsunami of a different kind — one of the financial variety that lacks a save haven — because of its unfunded liabilities?

While some analysts have compared the state’s growing unfunded pension and retirement benefit liabilities as a “tsunami,” overwhelming state taxpayers with an enormous debt, the comparison isn’t valid, says a new Senate Minority report.

The report outlines several reforms to address more than $20 billion in unfunded liabilities from the Employer Retirement System and Employer Union Trust Fund, and it says lawmakers will recognize the point in which the state will become overwhelmed by its massive liabilities.

“Rather than portraying the current pension crisis as a tsunami, which depicts the problem as an unpredictable and overwhelming event, it should be approached from a systematic long-term perspective,” said Paul Harleman, State Senate Minority budget director, who wrote the report.

Truth in Accounting lists Hawaii as one of its top three “sinkhole” states, with residents, per capita, owing more than $9,800. That’s more than any other state.

The Senate Minority attributes this, in part, to state constitutional debt-limits that fail to include restraints on the amount of liability Hawaii can accrue over time.

In addition, the state has a constitutionally mandated “balanced budget requirement,” but that’s based on “an outdated cash-based accounting model that recognizes expenses when they are paid instead of when they are incurred.”

The Legislature recently approved a “balanced,” albeit record, $24 billion state biennium operating and capital budget for fiscal 2014 and 2015.

“As in prior years, the Legislature passed a ‘balanced’ budget, but it does not account for the fiscal reality of the unfunded pension and OPEB liabilities,” said Sheila Weinberg, founder of Truth in Accounting.

Kalbert Young, director of the state Department of Budget and Finance, said a large part of the unfunded liabilities is due to the Employee Union Trust Fund, which, to be fully funded, requires $18 billion.

During the 2013 session, which ended May 2, lawmakers set aside $217 million over two years for the Employee Union Trust Fund and implemented other legislation to ensure future payments. At this rate, it would take more than 100 years to satisfy the liability.

“The amount the state needs to contribute each year is over $500 million based on the last actuarial study. And, the state would have to do so for the next 30 years. “One-hundred million dollars is only about 20 percent of what is required,” said Young, who would like to see legislation requiring the Legislature to pay $500 million a year for 30 years to wipe out the debt.

The legislation also establishes a trust fund task force; requires the annual public employer contribution to be determined by an actuary, not the Legislature, beginning in fiscal 2018-19; and will take revenue from state general excise and hotel taxes.

Senate Minority Leader Sam Slom, R-Hawaii Kai-Diamond Head, supported legislation to start paying down the unfunded liability on an annual basis. The Senate Minority also produced its own alternative two-year biennium budget, which included a $500 million payment each year to pay down the unfunded liabilities.

But that budget never received a hearing from the majority party, which controls 24 of 25 Senate seats.

“The ambitious plan to pay $500 million a year for 30 years is unfortunately not going to happen,” Slom said. “The Legislature is not going to appropriate that kind of money because they want to continue excessive spending, initiate new government programs and fund union pay raises instead. In addition, Hawaii state law prohibits one Legislature from passing laws that encumbers a future Legislature.”

Besides the health-care costs, the Employee Retirement System is funded about 59 percent. With $12 billion in assets, the ERS needs another $9 billion to be considered fully funded. Young said the ERS will be funded at 100 percent in 27 years because of reforms passed by the Legislature in 2011 and 2012.

Taxpayer watchdogs, such as Lowell Kalapa of the Tax Foundation of Hawaii, say too little is being done to address looming debt, and they are concerned overly generous benefits promised to thousands of public employees in influential public labor unions could eventually bankrupt the state.

“We cannot drain the public purse to provide benefits for public employees that no one else has,” Kalapa said.

The public unions – including Hawaii Government Employees Association, the United Public Workers union and the Hawaii State Teachers Association – have blocked much-needed reforms in part because they have successfully elected candidates to the majority party in the House and Senate.

While the Legislature two years ago passed the first step in reform — lowering the benefits of incoming public employees — Slom called it “half hearted,” because the benefits are not significantly lower.

“Hawaii still has the most generous health and retirement benefits for public employees — both active and retired — of any state in the nation,” Slom said. He called the lopsided Legislature, supported by unions, “a perfect quid pro quo.”

Slom said the labor unions also have tremendous power because Hawaii has a large number of public employees, per capita.

“The father and mother and oldest son are working for the government,” he said. “So when we talk to the public about unfunded liabilities, they understand the problem and the reforms that are necessary, but then they realize that is going to impact their paycheck, and they don’t support the candidates that want true reform.”

Still, the Senate Minority report argues for expanding the public pension debate to include reforming bargaining rules.

“While the private sector union membership has declined in recent decades, the state and local government unions have grown substantially,” the report said. “Public sector unions lobby for higher pay and government spending on activities that benefit them, regardless of the state’s ability to sustain their demands.”

The Senate Minority report notes, because there is no “restraint” on liabilities that the state could accrue, and the state cannot declare bankruptcy under the federal bankruptcy code, the power and influence of public sector unions remains unchecked and unbalanced.

“Without a clear regulatory framework that demands fiscally responsible decisions from our lawmakers, taxpayers in Hawaii will continue to be saddled with more debt,” the Senate Minority report said. “Why aren’t we looking into the legislative process and ensure that the fundamental American principles of ‘checks and balances’ also apply to the decision-making process with respect to public pensions and retirement benefits?”

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