The state’s acting budget director says the government will have to do more to shore up the long-term health of the Hawaii Employees’ Retirement System now that a leading bond rating agency is including unfunded pensions in the way it calculates state debt loads.

The ERS has been falling behind over the past decade in what it projects it will need to pay retirement benefits for future state and county retirees. The so-called unfunded liability grew to $7.14 billion at the close of fiscal year 2010, up 14 percent from $6.24 billion from the previous fiscal year.

Moody’s Investors Service, concerned about the growing unfunded liability problem in Hawaii and other states, said recently that combining pension figures with traditional measurements of debt will give investors a clearer picture of the risks they are taking on when they buy state bonds. Moody’s did not indicate whether states’ ratings would rise or fall as a result of the change.

"Yes, there is pressure to bring down the unfunded liability," said Kalbert Young, state budget director. "Going forward, states like Hawaii will have to be more formative in dealing with it at the legislative and executive levels," he said.

Possible fixes could include increasing the amount the state pays into the fund, reducing benefits to retirees or increasing the retirement age.

Moody’s rating for Hawaii’s state-issued debt is "Aa1," one notch below its top rating of "Aaa." Moody’s has a negative outlook on Hawaii’s rating, which means it could be subject to downgrades in the future.

Although it is "too early" to say whether Hawaii’s rating will be affected by the change in Moody’s methodology, "you also have to remember that every other state is dealing with a similar situation," Young said. "All states are being looked at under the same metric."

The unfunded liability is a top priority of Gov. Neil Abercrombie, who said in his State of the State address last month that his administration would introduce a bill to "modernize" the ERS pension fund, which he said was in "crisis."

"Absent action in this regard, the retirement system itself is in jeopardy," Abercrombie said.

According to the Moody’s report, Hawaii’s debt burden, including future pension obligations for state and county workers, is the highest in the nation as a percentage of the state gross domestic product. Total debt issuance and unfunded pension liabilities amount to 16.2 percent of state GDP, Moody’s reported. Hawaii ranked second on a per capita basis with debt of $7,987 for every man, woman and child, according to the report.

Young noted that Hawaii’s bond debt traditionally has been higher than in other states because capital improvement projects in the schools here are financed through the issuance of state bonds. In most other school districts, projects are paid for by local governments.

"These are projects that bulk up our overall amount of debt. This isn’t consistent with other jurisdictions," Young said.

Although Moody’s and bond investors are generally aware of this fact, state officials will make it "explicitly clear" in the future when they conduct presentations on state bond offerings, he said.