Hawaii has a public employee pension plan it can no longer afford.

The most compelling evidence of this is the decline in the funded ratio of the Employees Retirement System (ERS) from 95 percent to 61 percent during the 10 years since 2000. If the pension plan liabilities of the ERS were fully funded, it would have assets in excess of $18 billion. Instead, it has $11 billion in assets, leaving a gaping $7 billion hole. To put this in perspective, our distressingly low-funded ratio puts the ERS in the bottom 25 percent of all public pension funds in the United States.

Not to cause any alarm — there is little risk that the ERS will be unable to meet its obligations to its beneficiaries over the next few decades. Nevertheless, until the gap in the funded ratio is closed, the current fiscal impact on both the state and the counties will be considerable and extremely burdensome for decades to come.

If the ERS was fully funded, the public employers would need to contribute only the "normal cost" of approximately 6 percent of payroll to fund presently accruing pension benefits. Because of the unfunded liability, they instead are required to make a much higher annual required contribution (ARC) to close the deficit. The ARC is currently 15 percent of payroll for general employees and 20 percent for police and fire employees. The differences in the ARC and the "normal cost" of between 9 percent and 14 percent represent the catch-up payments aimed at covering the $7 billion unfunded liability over the next 30 years.

The catch-up payments are analogous to installment payments on a $7 billion promissory note taken out by the state and the counties to finance the pension benefits owed to employees for past services rendered. It means that future generations will be saddled with the burden of paying for services they did not receive.

Many factors caused this funding deficit. They include public employers "skimming" investment returns by "shorting" the ARC; investment performance failing to meet targeted returns; unfunded benefit enhancements; salary increases exceeding growth assumptions; unanticipated increases in life expectancies; abuses of the pension benefit formula by rogue employees; and the sale of investments to meet current benefit payments.

The result is the ERS will need to seek an increase of the ARC in fiscal year 2012 to 19.5 percent for general employees and 28.5 percent for police and fire employees.

This situation is not sustainable. Our pension benefit plan made sense during a time when Hawaii was experiencing rapid economic expansion. Today, even the most optimistic economic projections do not envision annual economic growth of greater than 4 percent. With an inflation rate of 2.5 percent, at best we might enjoy a 1.5 percent real rate of economic growth.

This is why the ERS’s board of trustees has proposed pension-benefit reforms be enacted by the Legislature. The proposed reforms would affect new employees of the state and counties by reducing their pension benefits below those provided to current and past employees. However, because the reforms would only affect new employees, the fiscal relief they would provide is relatively slight in the near term. Despite their limitations, they are necessary first steps to get our house in order.

—— Editor’s note: In addition to chairing the Employees Retirement System’s board of trustees, Colbert Matsumoto is on the board of Oahu Publications Inc. (the Star-Advertiser’s parent company), which is separate from this newspaper’s editorial board.