Troubled over the long-term viability of the Employees’ Retirement System, state lawmakers hope to make significant structural changes to reduce benefit costs for new public workers and stabilize the system over the next generation.

Lawmakers would not alter benefits for current public workers, but, starting for workers hired in July 2012, would delay the retirement age, require workers and the state and counties to contribute more toward retirement costs, and lower the retirement allowance.

Lawmakers would also reduce the retirement system’s projected investment yield, which has fallen below target, and allow the system’s board of trustees to set the investment return rate going forward.

The bill could save $440 million over the next five years and help address the system’s $7.1 billion unfunded liability over 30 years.

The state administration has made the bill a priority — one of the structural changes Gov. Neil Aber­crom­bie talked about during his campaign last year — and House and Senate leaders have endorsed the components.

But the bill — House Bill 1038 — was one of dozens left on the table Friday night when conference committee talks collapsed after disagreements on tax policy.

Lawmakers have floor sessions tomorrow and Thursday to salvage the bills before the 60-day session is scheduled to adjourn.

While lawmakers would consider it a missed opportunity if the retirement system bill were to fail because of procedural reasons, several of the other bills at risk, though smaller in scope, could cause real practical and political heartburn.

Lawmakers have not finished a bill to pay legal claims against the state, including more than $980,000 worth of civil settlements and judgments against several state departments and $1.1 million to cover civil claims over highways.

Despite a personal appeal from Lt. Gov. Brian Schatz, conferees did not advance a bill to pay state security costs for the Asia-Pacific Economic Cooperation meeting in Hono­lulu this fall. The state attorney general’s office has asked for $2 million to help state law enforcement secure harbors and airports and protect President Ba­rack Obama and other dignitaries from potential protesters and terrorists.

The request includes money for computers and software to do facial recognition screening in crowds.

Lawmakers did not move a bill that would extend the ability of the University of Hawaii John A. Burns School of Medicine to use a portion of its share of tobacco settlement money to pay for operating expenses through June 2015.

In what could be the most politically sensitive issue, conferees did not agree on a bill to extend 5 percent pay cuts for lawmakers, the governor, the lieutenant governor, department directors, judges and other officials set to expire in June. House and Senate leaders might find it difficult to explain that they failed to act because of procedural deadlines, since it would result in pay raises after a session when lawmakers eliminated tax breaks and cut spending on state programs to balance the budget.

If lawmakers were able to rescue the retirement system bill, it would likely be considered one of the top achievements of the session.

House Speaker Calvin Say (D, St. Louis Heights-Wilhelmina Rise-Palolo Valley), at the expense of his relationship with public-sector labor unions, has for the past few years called for structural changes to protect the long-term viability of the retirement system.

This year, Say had an ally in Aber­crom­bie, a loyal soldier for labor who nonetheless believes the retirement system needs to be restructured or it will implode.

State and county workers contribute 7.8 percent of their monthly gross salaries to the retirement system, while the state and counties contribute 15 percent. Police and firefighters contribute 12.2 percent, while the state and counties contribute 19.7 percent.

Under the bill, new hires starting in July 2012 would pay 9.8 percent, while the state and counties would pick up 15.5 percent and then gradually bump up to 17 percent. Police and firefighters would pay 14.2 percent, while the state and counties would cover 22 percent and eventually bump up to 25 percent.

The retirement age for new hires would increase to 60 years old, up from 55, and workers would have to have 10 years of service to qualify, up from five years. New hires would also receive smaller allowances than current workers when they retire.

The bill would also reduce the retirement system’s investment return rate to 7.75 percent this fiscal year, down from 8 percent, and give the system’s board of trustees the ability to set the rate in the future based on recommendations from an actuary.

Wesley Machida, the retirement system’s administrator, told lawmakers that the return on the system’s investment portfolio has averaged about 3 percent over the past 10 years. He said it would be extremely difficult to achieve an 8 percent return over the next decade.

"The bill represents a new way of defining civil service employees going forward," said state Sen. Clayton Hee (D, Kahuku-Kaneohe), lead Senate negotiator on the bill. "And, by doing so, it also addresses the unfunded liability.

"It could have been perhaps a little better, but that could be said about virtually every bill that we work on in session."

State Rep. Karl Rhoads (D, Chinatown-Downtown), the lead House negotiator, said the House would likely accept the latest Senate draft of the bill rather than try to work out the technical flaws that sent the bill to conference committee.

"If you’re hired after June 30, 2012, your retirement benefits will not be anywhere near as generous," he said, adding that the real savings will come when the new crop of public workers retire in 25 years.

"It’s huge," he said.

The Abercrombie administration and lawmakers acknowledge that the bill will differentiate public workers based on their hire date — essentially creating two classes of workers — but believe the changes are necessary to prevent the retirement system from collapsing.

Randy Perreira, executive director of the Hawaii Government Employees Association, the state’s largest public-sector union, said new hires would be paying more for less of a benefit.

"Obviously, they come in with eyes open, but for the long term we’re concerned that it’s really diminishing the value and the attractiveness of government work," he said. "But, at the same time, we recognize that some changes have to be made long term. We’ve got to. If not, you run that risk that things continue to go sour and the plan isn’t viable."