We must deal quickly with underfunded retiree health fund liability

There is an elephant in the room and no one wants to acknowledge its presence.

The problem is that it won’t go away anytime soon.

That elephant is the rapidly rising retirement health care liability for state and county employees, which is administered by the Employer-Union Trust Fund (EUTF).

In 2007, the EUTF was determined to be underfunded by $10.3 billion. By 2009, the underfunding grew to $14.7 billion.

The EUTF has not released the most recent actuarial analysis but that deferred liability is likely to have grown by several billion dollars. In the meantime, the public employers (the state in particular) have not taken steps to fix the problem by adequately prefunding the liability.

Prefunding the cost of retirement health care benefits is the fiscally prudent step to undertake. It helps ensure that there are sufficient funds to meet future liabilities when they come due. It also ensures that the true costs of services provided by employees are paid currently.

Prefunding will save future generations from having to shoulder the burden of a liability for services from an earlier generation that would otherwise deprive them of the financial resources to expend on more current needs.

In other words, without prefunding, our children and grandchildren will foot the bill tomorrow for the promise our generation made to past and current public employees to reward them with health care benefits during their retirement.

To retire the EUTF’s unfunded liability, its actuary has previously calculated that at least $1.1 billion annually should be contributed to a trust account for the next 30 years.

That amount is more than 20 percent of the current general fund budget of the state and clearly unaffordable.

Unable to finance such a large contribution, the public employers instead ignore the elephant in the room and attempt to meet their retiree health benefit obligations with pay-as-you go contributions. In fiscal year 2011, that amount totaled $390 million.

The annual pay-as-you-go contribution will do nothing to rein in the growing unfunded liability, and will mushroom into staggering amounts for the state and the counties as the number of baby-boomer retirees rapidly rises in the next several years.

Although the state and the counties may lack the fiscal capacity to annually contribute the required amount to prudently meet the EUTF’s retiree health fund liability, they should make a more earnest effort to set aside some level of funding to begin to chip away at the problem.

The elephant is just too big to sweep under the carpet or ignore. It must be acknowledged and dealt with one step at a time.

Today it may seem too overwhelming a task, but step by step and in due course we can get that pachyderm out of the picture. But it has to begin with a resolution and commitment today to begin to prefund the liability over time.

Public employees and taxpayers should ask the Legislature to begin the process of prefunding the retirement health care liability of the public employers through annual contributions to a trust fund that over time should become routine.

Editor’s note: In addition to chairing the Employees Retirement System, 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.

Colbert Matsumoto is the chairman of the Employees Retirement System of the state of Hawaii.