Law mandates unfunded liabilities be paid

Published On: Mar 17 2014 06:37:37 PM HST   Updated On: Mar 17 2014 07:41:26 PM HST

A little known law passed by state lawmakers last year and signed by Gov. Neil Abercrombie will take an increasingly larger bite out of state and county budgets to help fund health benefits for government workers.

Click here to watch Andrew Pereira's story.

Known as Act 268, the law requires payments to be spread out over 30 years until the Hawaii Employer-Union Health Benefits Trust Fund is fully solvent.

"Act 268 will actually put all governmental employers on that course starting in 2019," said state budget director Kalbert Young, who led a presentation about the state's unfunded liabilities Monday at the Pacific Club. The presentation was hosted by the Grassroot Institute of Hawaii, a nonprofit public policy group with conservative leanings.

According to the parameters of Act 268, state and county governments must pay 20 percent of the annual amount needed to fund health benefits for current and retired workers and their families by fiscal year 2015, which begins July 1. Every subsequent fiscal year is then followed by another 20 percent increase until the amount reaches the 100 percent funding level in FY-2019. Once the high mark is reached, payments will continue for the next 30 years.   

"There's very little alleviation from it, so it's regardless of economic cycles," said Young.

For state government, the maximum amount of annual contributions is expected to reach $500 million, which will place a tremendous strain on competing programs and initiatives.

"It's not just the initial measures that will work, it's the fortitude, or the political will of our leaders to keep going in the right direction and reducing the unfunded liabilities," said Grassroot Institute president Kelii Akina.

According to the latest EUTF estimates available in June, 2012 the health fund has an unfunded liability of $18.1 billion, which is backed by Hawaii taxpayers under the state Constitution.   

"This is an expenditure that we're going to have to pay for eventually and at some point," said Young. "So in terms of how can we afford new programs, that's the lens in which legislators and executive branch administrators should think about."

Hawaii lawmakers have begun funding Act 268 by setting aside $100 million in the current fiscal year, and another $117 million in FY-2015.  

Meanwhile, Honolulu alone carries an unfunded liability of $1.7 billion; however that amount encompasses health and pension benefits for county workers. Currently, the county pays $262 million toward employee benefits costs, but by 2020 that amount is expected to skyrocket to $394.3 million, largely due to Act 268.

"We are obligated to address this unfunded liability," Mayor Kirk Caldwell told KITV4 last week. "It's the absolute right thing to do by the way, in terms of sustainability."

Meanwhile, the Hawaii Employees' Retirement System doesn't face quite the same situation as the EUTF since workers also contribute money, but is still underfunded by $8.4 billion, according to estimates provided last June.  

In the wake of the Great Recession at the end of 2007, state lawmakers reformed the level of benefits provided by the EUTF and ERS. However, the changes only impact government employees hired after July 1, 2012.  

"Both of those systems were on a trajectory that could've meant that they would implode, or collapse under their own weight of benefits," said Young. "If these reform measures were not put into play, there really was no hope of them improving."

Young said if the ERS or EUTF reached a level where benefits could not be paid, state taxpayers would be liable for the full amount that's due every year. Excluding any payments toward unfunded liabilities, annual funding for both systems total about $6 billion per year.


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