An Oahu Circuit Court judge issued a temporary restraining order Monday to bar state officials from implementing a new law that would provide severance pay and retirement bonuses to state workers whose jobs are being privatized.

The Hawaii Employees’ Retirement System filed a lawsuit Aug. 9 to block the new law, which would affect about 1,500 Maui County hospital workers.

Those workers at Maui Memorial Medical Center, Kula Hospital and Lanai Community Hospital will lose their state jobs when Kaiser Permanente takes control of those facilities later this year in what will be the largest privatization of public facilities in state history.

Kaiser will retain those workers at least through the end of 2017, and many are expected to remain after the transition is complete. However, they will no longer be state employees.

State lawmakers approved Senate Bill 2077 this year to provide either a lump sum cash payment or early retirement to workers who lose their state jobs, regardless of whether they later go to work for Kaiser.

Gov. David Ige vetoed the bill, warning that the measure could threaten the federal tax-exempt status of the Employees’ Retirement System. Ige also cited concerns that lawmakers had not provided funding for the hospital workers’ severance payments.

The Legislature overrode the governor’s veto last month, and the ERS promptly sued to have the new law blocked. The ERS said the severance pay and retirement bonus package could be “catastrophic” because it threatened the tax-exempt status of the retirement fund.

On Monday, Circuit Judge Jeannette Castagnetti issued a temporary retraining order preventing the state from implementing the new law until the court can consider an ERS request for a preliminary injunction in the case.

The ERS contends the new law violates the state Constitution by giving certain state employees an improper choice between either a cash severance payment or special early retirement benefits. It says the U.S. Internal Revenue Code does not allow the state to offer employees such a choice, and the new law could prompt the IRS to disqualify the ERS as a tax-exempt entity.

Castagnetti ruled that the public interest “supported the issuance of a (temporary restraining order) as it is in the public interest to maintain the ERS’s tax-qualified status and to avoid any impairment of benefits to the ERS’s members,” according to a statement from the ERS.

The temporary stay delays implementation of the severance pay and retirement bonus package so that the ERS can seek guidance from the IRS on what the potential impact of the new law might be, according to the ERS.

Thomas Williams, executive director for the ERS, said in a written statement, “We are pleased that the court took action (Monday) and look forward to getting a response from the IRS as soon as possible. As we have maintained all along, our sole objective is to protect the State and county employees’ retirement benefits.”

The ERS is the retirement fund for 120,000 current and former state and county employees, and the fund currently has an unfunded liability of about $8.8 billion.

The severance payments for the hospital workers are not expected to affect the unfunded liability because the ERS does not expect it will have to fund those payments. However, the retirement bonuses would add to the ERS’ unfunded liability unless lawmakers provide money to cover the cost of those bonuses, ERS officials said.

Randy Perreira, executive director of the Hawaii Government Employees Association, issued a written statement Tuesday saying the union “will continue to advocate for fairness for our members.” HGEA represents about 900 employees at the medical facilities.

The HGEA staged an all-out lobbying effort at the state Legislature this year to persuade lawmakers to approve the severance and retirement bonus package for the hospital workers, which is known as Act 1. Perreira said the package lawmakers approved is “the most fair for the members — severance and early retirement options are fairly common business practices.”

“We do not agree with the ERS position but now the courts will decide regarding Act 1,” Perreira said in the statement. He said the union asked all parties involved, including the ERS, to review the bill for potential legal problems before it passed, and the union believed the measure was “clean” and would pass legal muster.

“HGEA is currently in discussions with the state that will hopefully lead to a fair resolution for our members and that will facilitate a smooth transition from the state to Kaiser Permanente,” Perreira said.

The restraining order will not have an impact on the pending transfer of the three Maui County medical facilities, which has been strongly resisted by the public worker unions. The transfer is scheduled to be completed as early as Nov. 6.