No longer content to hide from the obligation, the state Legislature passed a bill early this month that would for the first time commit the state and counties to a payment schedule to address the $16 billion unfunded liability in the Employer-Union Health Benefits Trust Fund.
The bill would require increasingly larger annual contributions over five years until the state and counties reach the targets financial experts believe are necessary. Starting in fiscal year 2018, the state budget director would be empowered to divert general excise tax money and hotel room tax revenue if the state and counties fail to make adequate annual contributions.
The state alone would eventually have to pay more than $500 million a year to fulfill an obligation that has so far been neglected.
While policy analysts agree that the state must cope with the unfunded liability, the counties and the Tax Foundation of Hawaii have cautioned that the bill could intensify pressure to raise taxes or cut programs to satisfy the mandate, elevating health care benefits for about 64,800 state and county employees and 41,750 retirees over other public needs.
Kalbert Young, the state’s budget director, said the distinction is that while most government programs are discretionary, paying for public-worker health care benefits is not.
"What those concerns and issues don’t address is the fact that these are obligations," he said. "They are not discretionary. They are obligations that have been previously promised and must be paid for."
Under Article XVI, Section 2, of the Hawaii Constitution, pension benefits earned by public workers are part of a contractual relationship that the state cannot diminish. The state Supreme Court, in Everson v. State in 2010, ruled that health care benefits for retired public workers are also protected by the state Constitution.
The state can, as it has with the Employees’ Retirement System, reduce benefits for newly hired public workers, but the state and counties are unable to touch the benefits that have already been earned.
Government accounting standards require the state and counties to report the full cost of public-worker pension and health care benefits to show the nature and size of long-term financial obligations. The greater transparency — imposed on pensions in 1994 and on health care benefits in 2004 — has revealed massive unfunded liability that if left unchecked could threaten the solvency of state and county governments nationwide over the next few decades.
In Hawaii the state alone already pays about $475 million a year for health insurance premiums for active and retired public workers, but financial experts say the state should be paying an additional $520 million a year toward the state’s $13.5 billion unfunded liability for future retirees, or $994.9 million in total.
The state, unlike the counties, has not devoted any money toward the unfunded liability. But lawmakers have added $100 million in fiscal year 2014 and $117 million in fiscal year 2015 for unfunded liability in the state budget pending before Gov. Neil Abercrombie.
Separately, House Bill 546 would put the state and counties on a payment schedule to achieve targeted annual contribution goals by fiscal year 2018. Young says the bill, if approved by Abercrombie, likely would make Hawaii the first state to commit to a payment schedule in law.
"Putting it in statute, it makes all of the employers have a very explicit funding strategy and path," Young said.
But county budget and finance analysts counter that counties should have the flexibility to decide how — and when — to address their share of the public-worker health care fund’s $16 billion burden. Counties argue that there is no reason for the state to manage county contributions.
Honolulu city officials warned state lawmakers in April that the payment schedule in the bill would create a mandate that might make it difficult to meet other obligations and could "compel the city to raise property taxes."
The city has been making partial payments toward its $1.7 billion share of the unfunded liability since fiscal year 2008, which city budget analysts say demonstrates the city’s commitment while also showing the need to balance the annual contributions against other pressing budget needs.
Nancy Crawford, Hawaii County’s finance director, said the county has contributed more than $61 million toward the county’s $332 million share of the unfunded liability since 2008 but has not made payments for the past two years because of other budget demands. She said the bill would basically make the annual contributions "the No. 1 priority over anything else in the budget."
She added, "Hopefully, we will be able to get back to full funding every year in the future, but if we should hit a crisis where that’s not possible, I think that we — and the taxpayers — would all come through it much better if we had the option to make a partial payment or make that decision so that we can continue to operate the county effectively, instead of sort of a draconian measure, which is to take a significant portion of our operating revenue (the hotel room tax) and just put it straight to" the unfunded liability.
Under the bill, as a guarantee that adequate annual contributions would be made by fiscal year 2018, the state budget director would be able to tap general excise tax money — if the state falls short — or hotel room tax revenue — if the counties fall short — to make up the difference.
State law currently gives the budget director the power to take hotel room tax revenue if counties fail to make required annual contributions to the pension fund.
The Tax Foundation of Hawaii has told lawmakers that "earmarking tax receipts, as this bill does, is an abdication of responsibility that, no doubt, will lead to pressure to raise additional revenues by raising taxes or enacting new revenue enhancements."
State Sen. David Ige (D, Pearl Harbor-Pearl City-Aiea), chairman of the Senate Ways and Means Committee, said the Legislature is making a policy statement with the bill that after the state and counties pay for pension contributions, "the unfunded liability for the health fund should be the second payment that any employer would make."
Ige said there likely would be more pressure to raise taxes the longer the state waits to address the unfunded liability.
"To me we’re just making the policy follow what the Constitution says," he said.
The bill would place the annual contributions for unfunded liability into a separate employee-union trust fund that could not be raided for other purposes, with separate accounts for the state and counties. An actuary retained by the fund’s board would determine the adequate annual required contributions.
State Rep. Sylvia Luke (D, Punchbowl-Pauoa-Nuuanu), chairwoman of the House Finance Committee, said she and Ige agree that, given the improving economy, it is the right time to make a financial commitment to the unfunded liability.
But Luke also said the bill, if it becomes law, could be tweaked in response to some of the issues raised by the counties.
"I think we need to have a more thorough discussion with the counties on what to do with this problem," she said. "What we don’t want to do is — as the statute requires — that if the counties can’t do it, we’re going to take it out of the (hotel room tax) portion.
"I think that was good conceptually, but that may not be workable. So it’s something that we need to kind of look at. There needs to be some flexibility, both with the counties and the state."
