The public pension system for state and county workers would have been about 95 percent funded had the state not diverted money from the fund in decades past, the pension administrator said this week.

The state and counties pulled out $1.687 billion in investment returns from the public pension fund through the past decades to use for such things as pay raises, social programs and various projects.

If that money had not been used for other state government expenses, the Hawaii Employees’ Retirement System pension fund would not have a deficit of $8.4 billion today, ERS Administrator Wes Machida said.

"Had we been able to keep those excess earnings, we’d be at least 95 percent funded, according to our actuary," said Machida.

Instead the state is having to play catch-up by contributing more to the fund each year, asking new employees to pay a greater share of their income into the fund, bumping up the age at which they can get benefits and making them work longer before they are eligible for benefits.

The state and counties also have been forbidden from skimming money from the pension fund to pay for other programs.

Even with those changes, the fund’s shortfall will get worse before it gets better. The gap will grow to $9.95 billion by 2024, according to a new actuary report from the Dallas-based firm of Gabriel Roeder Smith & Co. That report said it will take 30 years, or until 2042, before the pension fund becomes whole.

To reach that point in 30 years, the ERS needs to earn an average 7.75 percent return, receive the expected increase in contributions from employers and employees, and maintain an average life expectancy of 83 years among beneficiaries. In addition, there can be no benefit enhancements until the system is 100 percent funded, according to the new reform measures.

In 2005 the ERS board and Gov. Linda Lingle initiated a statutory change in the Legislature to eliminate the law that allowed the state to divert ERS earnings for other purposes.

"That change in the law gives us the ability to sustain the system for the future by allowing us to keep the excess earnings," Machida said. "That, along with the reforms that were done over the last two or three years, go a long way in getting the retirement system on track to sustainability."

The reforms, which were enacted in the 2011 Legislature, include gradually increasing contributions from public employers to as much as 25 percent of payroll by 2015. They also require new employees in the most common pension plan to contribute 8 percent of their gross earnings compared with 6 percent for employees hired before July 1.

The pension eligibility requirements are much more stringent now with fewer benefits. For example, an employee who started working before July 1 would need just five years of service and be age 62 to be eligible to receive pension benefits under the most common plan. An employee hired after that date now needs 10 years of service and is required to be age 65 to be eligible to receive pension benefits.

"I am satisfied that we’ve gotten a number of pension reform measures through the Legislature over the last two years that have reduced, revised, and curtailed pension benefits for employees hired into the system after June 30, 2012," Gov. Neil Abercrombie said Thursday in an email. "These reform measures mean that new employees will have to work longer before vesting into the system, they will have to work to a later age in order to retire, and they and their employer will have to pay more into the system for their retirement benefit."

"The reform also eliminated pension spiking from these new employees and required employers of any employees, who retire after June 30, 2012 that were determined to have spiked their pension, to pay what is the portion of that retiree’s unfunded liability," Abercrombie said.

Since ERS pension benefits are calculated on an employee’s highest three years of compensation, some employees work a lot of overtime toward the end of their career to spike their pension.

The practice of skimming earnings from the ERS to fund other programs began in 1966 and continued to 2003. During that time, when the ERS earned more on its investments than the target it set, the excess would be diverted to other uses. For example, if the ERS set a target of 4 percent and earned 5 percent, all the earnings exceeding 4 percent could be used for other programs.

The ERS receives an average of $550 million a year from state and county governments, Machida said. Under the old law, if the fund earned $300 million more than the target, the employers would only contribute $250 million rather than the whole $550 million.

Lingle, who worked to end the practice of skimming ERS earnings, said the practice was one of three reasons the fund developed the huge deficit.

"The ERS annual report at the time highlighted three main reasons for underfunding/low funded ratio — increased retiree life expectancies, increased pay to active members and past diversion of ERS investment earnings used to balance state and county budgets," Lingle said in an email Thursday. "The ERS rightly recommended and we proposed to the Legislature eliminating the excess earnings provision. Today’s ERS actuarial reports contain recommendations for further adjustments that deserve review and consideration to ensure the system’s long-term health."