The state’s largest public pension fund is in its worst shape since at least 1980 with an $8.4 billion shortfall, and a new report estimates that accumulating enough money in the system to pay all benefits due qualified recipients would take 30 years.

Steps taken in the past two years by the pension plan’s trustees, Gov. Neil Abercrombie and the Legislature are expected to rectify the unfunded liability in 30 years if certain assumptions are met, said Wes Machida, the administrator of the state Employees’ Retirement System.

Those assumptions include the fund receiving an increase in employer and new employee contributions, the investment portfolio returning an average of 7.75 percent annually, and people not living longer than 83 years of age.

"If all those things hold true, we should be able to pay down the unfunded liability over a 30-year period," Machida said.

"Had the board not done what it did over the last two or three years, we would have been one major event away from not ever being able to recover to 100 percent funding. It could have meant that at some point down the road, and it might not have been for the current retirees, there might not have been enough money to pay current hires or future hires over their lifetime."

The ERS pension fund — which provides retirement, disability and survivor benefits to 113,282 active, retired and inactive state and county employees — had a funded ratio of 59.2 percent at the end of its fiscal year on June 30, according to a recent actuarial report prepared by the independent Dallas-based firm of Gabriel Roeder Smith & Co. The funded ratio, which measures the percent that the plan is fully funded, was the lowest since the ERS began tracking ratios around 1980. The funded ratio places the state’s pension fund in the bottom quarter among public pension funds nationwide.

"Over the past two years, the board of trustees has initiated actions to deal with the growing pension and unfunded liabilities and also to increase employer and employee contributions," Machida said. "For this (legislative) session, they’re trying to build up the investment office so the investment office can better monitor the investment activities and control the investments costs, which all have an impact on the unfunded liability."

The pension fund had an actuarial value of $12.2 billion as of June 30 and a market value of $11.3 billion, according to the annual report. The actuarial value is higher because it includes a four-year-smoothing technique that doesn’t recognize all of the investment losses in any one year. On Monday, the ERS reported the market value of the fund through Dec. 31 had increased to a record $11.9 billion.

To help address the pension shortfall, the 2011 Legislature passed a number of changes that increase contributions from employers (i.e. taxpayers) and new employees. Those changes that went into effect on July 1 include gradually increasing the employer contribution for police and fire employees to 25 percent of payroll on July 1, 2015, from the 22 percent it is at now, and for all other employees, such as teachers, to 17 percent from 15.5 percent through the same period.

Since ERS pension benefits are calculated on an employee’s highest three years of compensation, employees who work a lot of overtime toward the end of their careers can significantly boost their retirement benefits. That practice, known as "pension spiking," has helped swell the unfunded liability.

The ERS adopted a new rule on July 1 to help reduce pension spiking. The employer will now have to pay into the fund extra money needed due to an employee spiking a pension by the next fiscal year. Before the change, the employer could contribute the extra money over the employee’s lifetime.

Machida said the fund’s condition worsened through the years for several other reasons. One was that excess earnings above whatever the targeted return was at the time were credited to employers over a 36-year period from 1967 to 2003.

That law has since changed so that the fund now retains all its investment earnings.

"Recently, we’ve been averaging $550 million a year from employers," he said. "As an example, say the excess was $300 million, then (under the old law) the employers would only give us $250 million rather than the whole $550 million."

In 1967 the targeted return for the fund was 4 percent before changing to 7 percent in the 1970s and 8 percent in the 1980s, Machida said. It became 7.75 percent after fiscal 2011. The fund spreads investments through domestic and international stocks and bonds, as well as private equity; real estate; inflation-adjusted returns linked to bonds and timber; and covered option calls, which are equities with downside protection.

Machida said other factors that have influenced the asset level of the pension fund are changes in mortality tables because people are living longer, and increased volatility in the markets during a similar period of time.