State pension fund shortfall rises to $12.95 billion

Hawaii’s public pension fund continues to play catch-up and it could take a decade before increased contributions begin to cut into its growing deficit.

The shortfall in the state Employees’ Retirement System pension fund rose slightly to $12.95 billion in fiscal 2017 and is expected to keep rising until additional taxpayer contributions that went into effect in July begin to have a meaningful effect.

A preliminary report presented Monday by an independent actuary to ERS trustees showed the deficit in the fund widened from last year’s $12.44 billion, but the funded ratio — what is needed to meet future obligations — improved to 54.8 percent from 54.7 percent.

“Even though we’ve had a spectacular year, a 13.7 percent increase in our asset value as of June 30, 2017, the liabilities have continued to grow as we’ve experienced higher-than-expected salary increases,” ERS Executive Director Thom Williams said. “Those salary increases directly impact the liabilities and the benefits that we pay. We had actually fully anticipated that for the next five, eight, almost 10 years that our liabilities would continue to increase until the new contribution rates have a meaningful effect and the liabilities would gradually decline and our funding ratio would increase proportionately.”

Williams has said that the increased shortfall in the pension fund has been due to the ERS lowering its investment target (it is now 7 percent to reflect actual market conditions), ERS members living longer and higher-than-expected salary increases across the board. The lower investment target — it previously was 7.5 percent and even higher before that — has meant that the ERS needs more money from contributions to make up for what it is unable to earn in investments.

The pension fund, which had a market value of $15.6 billion in assets as of June 30, provides retirement, disability and survivor benefits to more than 135,000 active, retired and vested former state, city and county employees. As of Sept. 30, which was the first quarter of the new fiscal year, the assets in the fund had grown to $16.3 billion.

Williams said there are steps underway to make sure there is money available when it comes time for the recipients to draw upon their funds.

“There’s a plan in place to address that unfunded liability,” he said. “The contribution increases that have been appropriated by the Legislature will reduce that over time. Also, the strengthening of our investment team will help reduce the risk profile of the overall plan. The actuarial evaluation and test we do around that valuation illustrates very clearly that our plan is sustainable even in a low-return environment. I would suggest to the members and stakeholders that while there’s understandable angst over an unfunded liability, it should be mitigated by the fact that a plan is in place that will address it.”

Wes Machida, an ERS trustee and the state director of finance, said the actuary report showed that total employer contributions are estimated to exceed $2 billion annually in 20 years or less.

“The increased contributions through Act 17, which enables the ERS to pay off its unfunded liability within a 30-year period, is highly determinant upon the state, city and counties to budget and make those contribution payments,” Machida said. “With the significant future payments projected, the question becomes whether the employers, who get those contributions from taxpayers, will have sufficient funds without taxes having to be raised.”

The contribution increases approved in May by the Legislature for the fiscal 2018 year that began July 1 raised the employer contribution rate for general employees to 24 percent of the employee’s pay by fiscal year 2021 from the 17 percent contribution level in the just-concluded fiscal year. That rate increases in fiscal year 2018 and fiscal year 2019 by 1 percentage point each year, increases by 3 percentage points in fiscal year 2020 and goes up by 2 percentage points in fiscal year 2021.

The employer contributions for police and fire employees will rise to 41 percent by fiscal 2021 from the 25 percent level in the fiscal year that just ended. It will increase 3 percentage points in both fiscal years 2018 and 2019, and then 5 percentage points in both fiscal years 2020 and 2021.

The added money from taxpayers will raise an additional $34.6 million in fiscal 2018, $70.7 million in fiscal 2019, $176 million in 2020 and $252 million in 2021.

Actuary Gabriel Roeder Smith & Co. now projects it will take 26 years, or until June 30, 2043, for the pension fund to become whole. Without the increases, the actuary said in its fiscal 2016 report that it would take 66 years, or until 2082, for the fund to become fully funded.