The state’s decision to privatize three neighbor island hospitals is having some unexpected fiscal fallout, with experts in the public-employee pension system estimating that privatizing Maui Memorial Medical Center and two other facilities will add $213 million to the unfunded liability of the public-employees pension fund.

Trustees of the Employees’ Retirement System are also concerned about a measure approved by lawmakers this month to provide severance payments or extra pension bonuses to outgoing Maui and Lanai hospital workers who will lose their state jobs because of privatization.

That bill could cost the state an additional $40 million in the form of severance payments and retirement bonuses, according to ERS estimates, with the retirement fund likely to bear a significant portion of that cost. Senate Bill 2077, which provides severance and retirement benefits to those workers, is now pending before Gov. David Ige, who will decide in the weeks ahead whether to approve it or veto the measure.

Thomas Williams, executive director of the pension fund, said ERS officials might have to ask lawmakers and Ige’s administration to make extra contributions into the pension fund in the years ahead to offset the increased unfunded liability for the pension fund because of the privatization effort.

The privatization of about 1,400 state hospital jobs on Maui and Lanai is expected to increase the ERS’ unfunded liability because the system had expected those workers to pay into the retirement system for many years to come.

The ERS estimates it will forgo $11 million to $15 million in employee contributions into the pension fund in the first year after the hospitals are privatized. Those workers would have contributed about $213 million into the pension system in the decades ahead.

About 630 of those outgoing hospital workers are already vested in the retirement system, which means they will draw state pension benefits when they reach retirement age, ERS officials said. However, those vested hospital workers will not make any further contributions into the state pension fund after their jobs are privatized.

“Just this disassociation, this privatization, however they like to characterize it, really creates a challenge for the system, and it might mean that we’re going to have to increase contribution rates for the remaining employers to make up for that difference or that we’ve got to keep higher contribution rates in effect for a longer period of time,” Williams said.

“The board is very concerned about that because its focus has been on stability of the system, trying to close the unfunded liability, and anything that increases that is contrary to what our focus has been, quite frankly,” he said.

The $14 billion Hawaii public pension fund serves both state and county workers, and its unfunded liability was estimated to be $8.77 billion as of June 30.

Kaiser Permanente, the state’s largest health maintenance organization, is scheduled to take control of Maui Memorial, Kula Hospital and Lanai Community Hospital on July 1 in the largest privatization initiative in state history.

Ige in January announced he had signed an agreement to have Kaiser operate the three hospitals, a step he predicted will save the state $260 million in hospital subsidies over the next decade.

Under the agreement signed by Ige, the state would continue to own the hospitals, but Kaiser would operate them under a 30-year lease. Maui Health Systems, a limited-liability corporation formed by Kaiser, then signed an agreement in April to lease the three facilities from the state.

Many or most of the employees at Maui Memorial, Kula and Lanai are expected to continue to work at the hospitals for Kaiser, but they will no longer be state employees.

It is still not certain that the hospital deal will close as scheduled July 1 because it continues to face resistance from the public-worker unions. The United Public Workers union has sued in federal court to try to block the takeover, and that case is awaiting a decision by the 9th U.S. Circuit Court of Appeals.

In addition to the impact from the planned “disassociation” of those hospital workers from the public pension fund, ERS trustees are also concerned about the cost to the system from separate severance and retirement benefits provided in SB 2077.

That bill would allow hospital workers to choose between a severance payment or a retirement bonus to boost their state retirements. The Hawaii Government Employees Association lobbied lawmakers to approve severance payments of up to half of the annual salaries of Maui and Lanai hospital workers whose positions are privatized, or a retirement bonus. Employees would be required to choose either the severance payment or the bonus.

Williams said the severance benefits will likely cost the state $25 million to $28 million, and the retirement bonus would cost the state $17 million to $18 million. It isn’t clear how the severance benefit would be funded, but the expense of the retirement bonuses would be carried by the pension fund.

The bill proposes to amortize the cost of the special retirement benefit over five years but does not provide any money to begin funding the benefit, Williams said.

The ERS has imposed a moratorium on new retirement benefits until the system is fully funded, and the retirement bonus would puncture that moratorium.

Williams stopped short of arguing for a veto of the measure, saying the ERS has not yet been asked to submit comments on the bill to the governor, “but I think we have an obligation to express our strong concerns.”

He acknowledged the “strong sentiment” among lawmakers to try to help workers who could lose retirement benefits because of the privatization effort. “However, our primary responsibility is to focus on the strength and stability of the system.”

A spokeswoman for Ige said last week there was no one available from the Governor’s Office to discuss the pension fund concerns about the disassociation of workers from the retirement system, and said SB 2077 is still undergoing review by the administration to determine whether Ige will sign the bill.

HGEA Executive Director Randy Perreira was also unavailable for comment last week.