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Reining in Hawaii’s labor costs

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While other states have clashed loudly over public employee benefits and pension plans that have gone underfunded because of the economy, Hawaii’s Legislature has quietly approved a long-range plan aimed at fixing the system.

The legislation that awaits Gov. Neil Abercrombie’s signature would raise the retirement age, lower retirement benefits and make employees contribute more to the pension system. The most radical changes would affect new hires. The changes are expected to save the state $440 million over the next five years.

Most public employee unions stepped aside on the issue of changes to the Employees’ Retirement System (ERS), which includes state and county employees — and unlike other venues, Hawaii legislators heard little public anger about the state of the system.

"People here are more accepting and understanding, I think, of the changes that need to be made, and they’re more realistic," said Honolulu labor mediator Michael F. Nauyokas. "We’re not going to the extremes that they’ve gone to in, for instance, Wisconsin."

Anger about the cost of the retirement system in Wisconsin has led to an attempt to deny state employees the right to organize. In Illinois, which also is embroiled in debate on the issue, the pension fund is only 45 percent paid for. Budget and pension accounting in Illinois would "make Enron blush," said Microsoft founder Bill Gates.

Thomas A. Kochan, professor of work and employment relations at Massachusetts Institute of Technology, told the Star-Advertiser editorial board recently that public employee unions have entered a period in which they must accept changes to adapt to new circumstances. An example of that seems to have occurred Friday, when Connecticut Gov. Dannel P. Malloy gained agreement for 45,000 unionized state employees to accept givebacks in health care, wages and pension benefits.

In recent years, the funded portion of assets of Hawaii’s ERS has declined from 95 percent to 61 percent — or $11 billion of the $18 billion that would be in the system if it were fully funded. The Pew Center on the States reported last year that Hawaii was among 21 states where public employee pension plans had funding levels below the 80 percent mark in fiscal year 2008.

The changes enacted in this year’s legislative session were proposed by the ERS’s board of trustees. The only opposition by organized labor came from the University of Hawaii Professional Assembly union, whose associate executive director, Kristeen Hanselman, warned that it would "impede the recruitment and retention of future faculty." Other unions did not testify about the changes, a likely indication of their acceptance.

Labor opposition successfully defeated a proposal by Abercrombie to end state reimbursements to retirees for the 20 percent that individuals are required to pay for Medicare’s Part B care, which includes doctors’ services, outpatient care and other services not included in general coverage. The state deducts the premium costs for about 30,000 retirees and their spouses.

The issue of Medicare Part B reimbursement for current recipients was questioned on legal terms after state Attorney General David Louie advised senators that it might be challenged as unconstitutional. The state Supreme Court ruled last year that health benefits for retired state and county workers are accrued benefits that are protected by the state Constitution. The proposal was amended — to eliminate Medicare Part B reimbursement for new hires — but even that watered-down initiative died when legislators lost the resolve to pass it.

Legislators also rejected Abercrombie’s call for eliminating overtime pay in the last recent years prior to retirement from the equation for pension benefits — a cost-cutting change that would have mirrored the federal pension system, which uses only base wages in determining pension benefits.

The governor testified that the change would have saved the state $13 million and the counties $19 million in payment of pension benefits while decreasing unfunded liability by $500 million. Abuses have been reported in some states and counties, with employees in their final years on the job submitting huge amounts of overtime for the sole purpose of increasing their pension benefits.

"I think that’s coming," Nauyokas said of the proposal. "It’s got to have some correlation to the base salary."

He doubts that abuses are widespread in Hawaii, where overtime has resulted more from fewer employees on the job because of the economy. "Yes, I think that happens," he said of abuses. "I don’t think it’s widespread, but it’s certainly out there, and sometimes the supervisors are complicit."

Matsumoto acknowledged that there have been, "anecdotally, instances of abuse of the pension benefit formula." He pointed out that labor unions contend "that the employer has the ability to manage overtime and payroll, and so it really should be a management issue."

Asked if there is a different perspective about overtime in the private and public sectors, Matsumoto, who is president and chief executive officer of Island Insurance Co., said, "I think that you would think that the employer should be motivated on the public side also, because ultimately it starts to potentially create a huge liability.

"I think that this recent focus on public pensions has really created a heightened awareness of the ramifications involved," he added, "both enhancing benefits as well as the consequences of abuses of the pension funding formula."

As the controversy has become nationwide, some critics have suggested that states and counties follow the trend of private employers in dropping pension plans and instead making contributions to employees’ 401(k) plans.

Mediator Nauyokas said some states, including Hawaii, may someday move in that direction. "It’s possible," he said. "It depends on how the ERS does with the law changes as we go. If it continues to be underfunded and we have huge liabilities, yes, there’s going to be a trend toward making significant changes."

Kochan said he expects unions to fight such a change because 401(k) plans are an unacceptable substitute for pensions. As executed, he said, they fail to provide levels of retirement income needed to effectively bolster Social Security benefits.

Matsumoto said he doubts that the change to 401(k) ever will happen in Hawaii, where the need to "entice qualified people" to work in state or local government is paramount. "The pension is not just an inducement to work for government," he said, "but it’s also a glue that helps people stay on the payroll."

Meanwhile, he said, the Legislature "enacted some significant changes that will help secure the financial integrity of the pension plan going forward. … It’s going to take many years."

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