The public pension problem

State leaders finally have drawn a crucial line in Hawaii’s fiscal sand. Now what?
By Colbert Matsumoto

The unfunded liabilities of the Employees Retirement System (ERS) and the Employer-Union Trust Fund (EUTF) represent the most serious fiscal challenge facing the state and the counties. Fortunately, policymakers recognized that kicking the can down the road was no longer sustainable and chose to confront the problem head-on.

When Gov. Neil Abercrombie recently signed Act 168 into law, the Legislature drew a line in the sand and set a firm deadline by which public employers must prefund promised retiree health benefits with annual required contributions (ARC).

The implications of the new law are considerable. By 2018, the state and the counties must contribute 100 percent of the actuarially determined ARC to pay down the EUTF’s unfunded liability. In today’s dollars, that amount will exceed $900 million — equivalent to 25 percent of the total public employee payroll base.

Richard Borreca’s July 28 column ("S&P loves state’s debt plan, but it might not be enough," On Politics, Star-Advertiser) points out that as well intended as Act 168 may be, its burden on state and county budgets will be enormous. This is particularly so since payment of the ARC will be a priority expense over which the public employers will have no control.

So how will the state and the counties finance the statutorily mandated payment and wedge it into their budgets? The answers may involve cuts in existing programs, new tax increases and serious ongoing fiscal discipline. But taxing and cutting are hardly recipes for prosperity. The best solution lies in growing our tax base by restoring Hawaii’s economic vitality. Of course, that is easier said than done.

Hawaii has recently begun to show encouraging signs of economic recovery with record tourism numbers, declining unemployment and rising tax revenues.

But recent history shows that these positive economic cycles are short-lived. Data from the state Department of Business, Economic Development and Tourism reveals that during the 25-year period from 1965 to 1990, Hawaii enjoyed annual GDP growth of 10.2 percent. That rate of growth fell precipitously during the most recent 21-year period from 1991 to 2012 to a lackluster 3.6 percent.

Accounting for inflation, the real rate of growth was only 1.1 percent. The data depicts two starkly contrasting periods that suggest something is misfiring in our state’s economic engine during the last two decades.

During the 30 years following statehood in 1959, we saw private investments flourish with large-scale resort developments, new residential subdivisions and construction of major retail centers. These developments paralleled bold public investments in infra- structure like our interstate highway system, modern harbor terminal facilities, new transpacific airports on each island and an expanded statewide university system.

The economic prosperity of that period enabled major social advances such as the first prepaid health care law in the U.S.; a residential lease reform law that gave thousands of homeowners the opportunity to own their homes in fee simple; and building a public education system that offered quality facilities and educational opportunities to every community in Hawaii. It was no surprise that our GDP realized double-digit growth.

The same cannot be said for the decades since 1991. It is a struggle to identify similar examples of successes during that period. Instead, the economic landscape is littered with failed investment projects of scale and a continued flight of capital from Hawaii. Our low, single-digit GDP growth rate is an alarm calling for action.

We need to undertake economic initiatives that will better ensure that Hawaii’s economy will grow at a robust rate. That will require willingness to change and boldness in investing in the infrastructure of our future. If we fail to do so, then we will be victims of our own neglect and see our accumulated liabilities and past obligations swallow up our future potential.

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Growing our research economy will help finance huge wave of public retiree costs
By Allen B. Uyeda

There’s a growing realization across the state that if we want Hawaii to succeed, we need to do things differently. We cannot rely solely on the two traditional pillars of our economy, tourism and military, to spur the growth we need to compete in the global marketplace and tackle the state and local governments’ $25 billion unfunded liability for future pension and retiree health benefits.

Even with these industries’ important and sizeable contribution to our economy, Hawaii has accumulated a massive debt. To move forward, we need to grow the pie. We need to build a third leg of our economy.

Hawaii isn’t alone. Cities and states across the U.S. whose economies have depended too heavily on one or two industries have been forced to reinvent themselves or face dire economic straits. Many of the cities that have spearheaded successful economic transformations have done so by building up a thriving research industry.

Leaders in San Diego who contributed to that city’s successful growth into a three-sector economy including tourism, military and technology, emphasize that working with your university system is key to boosting research and innovation and developing a workforce with 21st century skills.

Fortunately, Hawaii has a running start in this area. Over the past decade, the University of Hawaii has built a flourishing research sector worth about $450 million in research awards.

Working with the community and business groups, the goal of UH’s Innovation Initiative or HI2 is to double this amount to $1 billion over the next decade.

Cutting-edge research is already happening across the UH system. Scientists at UH’s new Cancer Research Center in Kakaako are leading the fight against cancer on several fronts, from developing new anti-cancer drugs to advancing new technologies that allow doctors to detect cancer earlier.

As part of a multidisciplinary project managed by UH’s Space Flight Laboratory, UH is on its way to becoming one of the only universities in the world with rocket launch capability.

These are just a couple of examples. Countless more advances and discoveries are being made continually in astronomy, energy, ocean sciences, medical research and other fields.

Further developing UH as a world-class research facility makes sense for Hawaii because the return on investment is wide-reaching.

An established researcher can bring federal grants to Hawaii in the millions of dollars. This grant money translates into jobs. In fact, UH anticipates that reaching $1 billion in research grants could create 5,000 direct new research jobs for the people of Hawaii, which doesn’t take into account the support service jobs or spinoffs generated by a robust research industry.

Leading-edge research creates opportunities for new businesses that employ skilled, high-tech workers. The revenue research institutions and new businesses create goes back into the economy, social services, education and the arts.

Researchers also contribute to the education of our next generation of doctors, scientists, entrepreneurs, nonprofit leaders and cultural experts by injecting new knowledge and teaching talent into our university, community colleges, and baccalaureate institutions. The plan isn’t only to create jobs, but to develop a pipeline of local talent to fill these jobs.

Although Hawaii faces enormous fiscal challenges, the good news is we have the assets to create a better society, including a strong research sector and a well-conceived roadmap to leverage this strength into future prosperity for our state.

We just need to be willing to use these assets. By joining together in support of UH’s Innovation Initiative and building a thriving research industry in our state, all of Hawaii stands to gain.