State public funds’ shortfall hits $25B

The two public funds designed to meet the future pension and health care needs of government employees and retirees are a combined $25 billion in the hole with a growing shortfall.

But the independent actuary for the state Employees’ Retirement System and the Hawaii Employer-Union Health Benefits Trust Fund has calculated that plans in place to stop the bleeding are projected to make those funds whole within the next three decades, according to separate reports issued earlier this month by Dallas- based Gabriel Roeder Smith & Co.

The deficit in the ERS pension fund rose to $12.93 billion in the fiscal year ended June 30 from $12.44 billion in the previous fiscal year, according to one of the reports. The funded ratio — what is needed to meet future obligations — improved slightly to 54.9 percent from 54.7 percent a year earlier.

Similarly, the EUTF shortfall for all employers rose to $12.15 billion in fiscal 2017 from $11.78 billion in fiscal 2015, the last year it was reported. Its funded ratio improved to 12.8 percent from 6.7 percent because the cost of health care didn’t grow as fast as had been anticipated and because employers made more contributions to pay down the unfunded liability than required. The EUTF report has been coming out every two years but will be switching to an annual format for the current fiscal year.

There have been steps taken in the Legislature to close those funding shortfalls that were created partly due to people living longer and investments not meeting projected returns. Consequently, contributions by employers — who get their money from taxpayers — will be increasing.

The pension fund, which had a market value of $15.7 billion in assets as of June 30, provides retirement, disability and survivor benefits to 122,079 active, retired and vested former state, city and county employees. The reduced 7 percent investment target that the ERS fund uses now matches its annualized investment return for the fund over the past 15 years. The fund, which had an investment return of 13.6 percent in fiscal 2017, hit a peak over that 15-year period of 20.9 percent in fiscal 2011 and a low of minus 18 percent in fiscal 2009.

Gabriel Roeder Smith projects it will take 26 years, or until June 30, 2043, for the pension fund to become whole because employers began increasing their percentage of contributions of an employee’s pay starting on July 1. The increases will be phased in over four years for general, police and fire employees.

Also playing catch-up will be the EUTF, which provides medical, chiropractic, prescription drug, dental, vision and life insurance benefits to nearly 200,000 state, city and county employees, retirees and dependents.

If employers had been pre-funding 100 percent of the amounts earned by employees for the retiree health benefit costs each year, and all the actuarial assumptions had held up — such as mortality tables — then there would be no unfunded liability. However, since employers were paying only annual retiree pay-as-you-go premiums, they are now forced to play catch-up to pay down the unfunded liability.

The Act 268 law of 2013 switches the EUTF from a pay-as-you-go model to a pre-funding model. The pay-as-you-go amounts were used to pay retiree premiums, so nothing was set aside for the long-term liability. Act 268 will require employers starting July 1 to pay 100 percent of the annual required contribution that pre-funds the EUTF and pays down the unfunded liability over a period of 30 years. That is up from 80 percent in fiscal 2018 and 60 percent in fiscal 2017.

The EUTF, which like the ERS has a 7 percent annual investment target, had a 9.5 percent investment return in fiscal 2017 and a 2.6 percent return in fiscal 2016.

The actuary said employer contributions are expected to exceed the benefit payments for the next 27 years due to employers contributing an additional $10.6 billion over that period. After 27 years the plan is projected to be 99.5 percent funded with the assets forecast to have grown from $1.8 billion as of June 30 to $44.9 billion.