The state employees’ retirement system is now expected to be fully funded one year earlier than anticipated.

Steps taken in the past three years by the pension plan’s trustees, Gov. Neil Abercrombie and the state Legislature helped increase the fund so as of June 30 it was at 60 percent of where it needs to be to pay all the pensions promised, according to an independent actuarial report by Gabriel, Roeder, Smith & Co., based in Dallas. That’s up from 59.2 percent as of June, 30, 2012.

The retirement system is now expected to be 100 percent funded by June 30, 2041, rather than June 30, 2042, as was estimated last year, according to the actuary’s report approved Monday by the ERS trustees.

However, the unfunded liability rose slightly to $8.49 billion at the end of fiscal 2013 from $8.44 billion a year earlier because of carryover investment losses from past years that are still being recognized.

Still, the state’s largest public pension fund is moving in the right direction, according to Kalbert Young, the state’s director of finance.

"This is an indication that although the progress is still early, the pension system is on the early and correct path for resolving its unfunded liability and total liability issue and moving toward a more solvent and stabile pension system," he said.

The ERS fund provides retirement, disability and survivor benefits to 115,350 active, retired and inactive state and county employees.

Among the pension reforms implemented were lowering the level of overall benefits for new members after June 30, 2012, extending the vesting period for those members and increasing the amount that both the member and employer must contribute to the system for those employees’ pension benefits. The Legislature also passed measures that eliminated and reduced, for new members, the availability of pension spiking, a practice in which employees would work a lot of overtime toward the end of their careers to significantly boost their retirement benefits. For an existing member, an employer will have to pay for pension spiking in the year after the employee retires. In addition, a moratorium was placed on any enhanced pension benefits until the system is 100 percent funded.

Such moves should help Hawaii avoid the dilemma faced by Detroit, which is in bankruptcy with $18.5 billion in debt and is cutting pensions as part of the city’s restructuring, or the quagmire faced by Illinois, which approved a landmark pension reform package that would cut retirement benefits for teachers, nurses and other retired and current state workers that lawmakers say will save $160 billion over the next three decades and help fill the state’s $100 billion pension shortfall.

"A lot of these measures that Hawaii has done and the administration and the pension system trustees have done over the last three years were moves made early in the process that have staved off detrimental structural programs that are being exhibited in these other jurisdictions, like Detroit and like Illinois," Young said. "I think the likelihood of Hawaii experiencing similar collapse issues has been really minimized due to our efforts over the last three years."

The pension fund had a market value of $12.36 billion as of June 30, according to the annual report. The market value of the pension fund was $12.9 billion as of the end of the July-September quarter. The market value on June 30, 2012, was $11.3 billion.

"We are pleased that the funded ratio … is going in a positive direction after several years of trending downward," ERS Administrator Wes Machida said. "These reforms, along with the recent positive investment results, are beginning to take traction to better deal with the increasing pension liabilities. Although we are not out of the woods yet, we will continue to closely monitor the ERS’ liabilities and funding situation to ensure the ERS’ future sustainability."

The unfunded liability is derived from the total pension liability minus the assets that the ERS has in its portfolio. If the pension liability continues to grow at a higher rate than the assets, then the unfunded liability will grow as well.

"The unfunded liability will probably go in the other direction in the next few years," Machida said. "There’s still carryover investment losses that need to be absorbed. We have about $391 million that needs to be carried over from previous years, and any time we don’t make our investment return rate assumption of 7.75 percent, anything we make that’s lower than that we have to make up because we’re expected to make 7.75 percent every year."

On Friday, Gov. Neil Abercrombie announced that the state posted a record $844 million budget surplus at the close of the fiscal year in June and that his administration intends to use the opportunity to replenish emergency reserves and pay down the unfunded liability in the public worker health care fund.

Young said that the state surplus will "not directly" go toward the pension shortfall.

"For the last two fiscal years, the Hawaii Revised Statutes has already been increasing the amount that employers must contribute to the pension system, and that will continue for the next two years," Young said.

"So that increase has already been factored into the budget. For the next two years, employers like the state will be contributing each year more than the previous year to the pension system."