Hawaii taxpayers could pay $5 billion more than expected for state retiree health benefits, a study finds
POSTED: 1:30 a.m. HST, Jun 5, 2011
The price future generations of taxpayers will pay for retiree health benefits for an aging public work force has grown by more than $5 billion to an estimated $14.5 billion in a matter of two years, according to a consultant's study of the Hawaii Employer-Union Health Benefits Trust Fund.
An Aon Hewitt report released in May by the EUTF with a July 2009 valuation date showed a much higher so-called unfunded actuarial accrued liability — or the cost taxpayers will eventually pay for state and county retiree health benefits. A previous report valuated two years earlier pegged that number at $9.2 billion. The annual cost of the long-term liability is estimated at $1.1 billion compared with $684 million in the 2007 report.
"The sheer magnitude of the liability we're talking about will require the state as well as the counties to begin to identify and evaluate structural changes to the EUTF plan to manage this liability," said Dean Hirata, chairman of the EUTF board of trustees.
The estimated taxpayer cost for retired public workers, including teachers, whose benefits were merged this year under the EUTF, is $17 billion. The future unfunded liability is an actuarial projection based on medical inflation, life expectancies and discount rates.
The state has been criticized for not setting aside funds for the massive liability that has grown over the years because of health care inflation, changes in long-term projected market conditions, and participants continuing to earn benefits. The counties and other government entities have saved some money to pre-fund the future costs — $150 million to date — although it is not required by law to do so.
Currently, the EUTF, which covers about 200,000 active and retired public workers and their dependents, is on a pay-as-you-go system, with annual benefit payments estimated at $390.2 million this fiscal year, up from $336.8 million in fiscal 2010, according to the latest report.
"The state is supposed to be making annual contributions … knowing there is a future liability," said Lowell Kalapa, president of the Tax Foundation of Hawaii. "They haven't been willing to put aside enough to make the system stand on its own — to be self-sufficient — because they always figure it's subject to the market. I don't care if the market goes up; if you don't tithe regularly you're not going to amass the capital you need to cover future benefits."
But EUTF Administrator Barbara Coriell questions whether pre-funding the future obligation would be the best use of state money.
"In order to invest it, you have to collect it from taxpayers. That means the state pulling in additional taxes to set up a fund so they can receive interest on it," she said. "To me it seems like the money is better served in the economy."
The state has failed in recent attempts to lower the liability through cost-cutting structural changes to the public-worker health system. Lawmakers earlier this year axed a proposal to end Medicare Part B premium reimbursements for retired government workers and their spouses — a measure the administration said would have saved the state more than $40 million in the next fiscal year.
While Social Security deducts the premium costs for public-worker retirees in Medicare Part B — which covers doctor visits, outpatient care and home health services — the state reimburses the premium costs in quarterly checks to about 30,000 retirees and their spouses.
"These are the types of structural changes the administration believes needs to be made to ensure the long-term viability of the EUTF plan," Hirata said, adding that medical premiums are likely to rise in the upcoming year.
The EUTF hiked premium rates by an average 11 percent in March and 24 percent in 2009. There were no rate increases in 2010.
A dispute exists over whether benefit packages are too generous for public-sector workers, whose retiree health bill is among the highest per capita in the nation.
"Unless there's reform, future state taxpayers are going to have to pay for these generous benefits," Kalapa said. "The question is, How much can the economy as a whole represented by taxpayers afford to pay? If we reach the limit of raising taxes, there's no wiggle room to raise additional funds without destroying the economy."
Alewa Heights resident Jack Katahira, 70, a retired University of Hawaii administrator, said all stakeholders need to do their part to ensure the system remains viable, whether it's through higher deductibles and co-payments or larger employer contributions.
"Rather than having the mindset that it's my right (and that) I should be able to get it (health benefits) for free, that mentality will have to change because the system just isn't going to be able to sustain itself," he said. "I hope I don't see the day benefits are all going to terminate because we can't afford it."
The EUTF has targeted a July board meeting to decide on a new health plan contractor, Coriell said. Medical premium rates are scheduled to change on Jan. 1.
"Quite frankly, the cost of health care is a scary number; that's why so many employers have been taking a very hard look at health care plans," she said. "We're focusing in on projected costs. It is a scary number."