ERS pension plan shortfall rises to $8.77B
STAR-ADVERTISER FILE
The governor’s chief of staff, Mike McCartney, and Wes Machida, Director of Finance and the head of the Department of Budget and Finance, chat during a news conference where Governor David Ige unveiled his first state budget in the governor’s office at the State Capitol.
Hawaii’s largest public pension plan, dragged down during the 2015 fiscal year by a 3.6 percent return in its investment portfolio, saw its shortfall swell to $8.77 billion despite steps that have been implemented to shore up the Employees’ Retirement System.
The pension plan remains 26 years away from being fully funded — the same as last year, according to a new report by independent Dallas-based actuary Gabriel Roeder Smith & Co.
But former ERS Executive Director Wes Machida, who became the state finance director on Dec. 27, 2014, said the effect of legislative changes and steps taken over the past five years by the pension plan’s trustees, former Gov. Neil Abercrombie and Gov. David Ige will begin to be felt within the next decade.
“A number of the initiatives or actions that have been taken will take time to feel the full effects of everything that has been done,” said Machida, who is one of eight ERS trustees. “It takes decades for the full impact to kick in.
“The important thing to remember is that we should stick to the plan. The actions that have been taken thus far will benefit the system as long as we stay the course and as long as we can get as close to all the (actuarial) assumptions as possible.”
Machida said Gabriel Roeder Smith’s 30-year projection in the report shows that Hawaii’s unfunded liability in its pension plan is expected to increase but will start to decrease after nine years.
“By that time, a significant portion of the pension reforms should be impacting the retirement system’s pension liability because you have a lot more of the new employees under the reform benefit structure,” Machida said.
The ERS pension plan, which provides retirement, disability and survivor benefits to 118,993 active, retired and inactive state and county employees, had a market value $14.5 billion as of the end of the fiscal year on June 30, 2015. That’s up from $14.2 billion in fiscal 2014, $12.4 billion in fiscal 2013 and $11.3 billion in fiscal 2012.
Even with its increasing assets, the pension system’s unfunded liability, or shortfall, has continued to grow. It was $8.58 billion in fiscal 2014, $8.49 billion in fiscal 2013 and $8.44 billion in fiscal 2012. 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.
But there is a silver lining in that the pension system’s funded ratio improved in the fiscal year ended June 30 to 62.2 percent of where it needs to be to pay all the pensions promised. That’s up from 61.4 percent in June 2014, 60 percent in June 2013 and 59.2 percent in June 2012.
Despite the improvement, Hawaii’s funded ratio remains among the worst in the country.
In a July study by The Pew Charitable Trusts of the nation’s state-run retirement systems, Hawaii’s funded ratio was ranked in a tie for the ninth worst in the country with a 60 percent funded ratio that was based on 2013 data for all the states. Only two states, South Dakota and Wisconsin, were 100 percent fully funded. Illinois (39 percent) and Kentucky (44 percent) were the worst.
Thom Williams, the former executive director of the Wyoming Retirement System who took over a similar post at the Hawaii ERS on Nov. 2, is confident the pension fund is on track to sustainability.
“The ERS’ unfunded liabilities, while substantial, are quite manageable,” Williams said. “Lower benefit commitments to new hires and increased employer contributions will slow growth in our liabilities and eventually reduce them. Forecasts show our liabilities growing moderately over the next few years followed by a gradual but increasing decline as we progress toward full funding.”
Williams said it will take “patience and a best-in-class governance structure (implementing best practices) and investment program” to become fully funded.
“We must be allowed to realize our potential as a sophisticated financial services and investment organization, and be afforded the operational flexibility necessary to do so,” he said.
Machida said the reason the pension plan’s unfunded liability, or shortfall, worsened in fiscal 2015 while the funding ratio improved is because the ERS trustees reduced the assumed rate of investment return for future years from 7.75 percent in fiscal 2015 to 7.65 percent in fiscal 2016 to 7.55 percent in fiscal 2017 and then to 7.50 percent in fiscal 2018 and beyond. The decision by the ERS trustees to reduce the targeted returns was made based on reports from Gabriel Roeder Smith and the ERS’ investment consultant, Portland, Ore.-based Pension Consulting Alliance Inc.
“Instead of the assets growing at 7.75 percent, it’s projected at 7.50 percent,” Machida said. “The assets aren’t going to grow as expected originally while the liability is still going to grow at the regular pace. It’s like if you have to pay a certain amount for your mortgage and get a reduction in pay from your job, you’re not going to have as much money to pay it off.”
Besides the pension reforms that have been implemented, a carryover from 2014 investment gains helped improve the funded ratio this past fiscal year to 62.2 percent. That’s because any investment return above 7.75 percent — or whatever the targeted rate is for that year — is carried over as part of a smoothing process over the subsequent three years.
In fiscal 2015, the pension plan finished with just a 3.6 percent investment gain after a robust 17.8 percent return in the fiscal year ended June 30, 2014, and a 12.3 percent gain the previous year.
“The funded ratio improved because of the carryover investment gains from the 2014 year as well as — to a lesser degree — some of the reforms that are kicking in,” Machida said. “While we were hoping we could meet the investment return rate assumption (7.75 percent), compared with other public funds our 3.6 percent was better than most of the funds, according to our investment consultant’s quarterly report.”
Despite the improved funded ratio, the actuary calculated that it now will take an additional year before the pension fund is fully funded. That is because of the lower assumed rates of return that are now targeted for future years. The actuary now expects the ERS fund to be 100 percent funded by June 30, 2041, rather than June 30, 2040, as was estimated last year. So it still will take 26 more years — the same as last year.
“We are remaining cautious with respect to the funding of the retirement system and we will continue to look at alternatives such as purchase-of-service legislation that was passed in the 2015 legislative session that helps to properly fund the retirement system and better ensures its sustainability going forward,” Machida said.
Purchase of service, probably the most significant pension reform during the 2015 legislative session, changes the way that a person who left the state system and then returns can purchase back months or years of service.
“There was an old methodology that was used that was significantly underfunding the system,” Machida said. “Now there’s an actuarial calculation to determine the purchase amount that would more accurately determine what needs to be in the fund to pay for those years of service.”
In addition, previous pension reforms adopted to combat the pension shortfall called for the level of overall benefits to be lowered for new members after June 30, 2012. The vesting period was extended for those members, and the amount that both the members and employers must contribute to the system was increased. The employer contribution for police and fire employees was increased to 25 percent of payroll as of July 1, 2015, from 22 percent on July 1, 2012, and for all other employees, such as teachers, it was boosted to 17 percent from 15.5 percent during that same period. For most new members, employee contributions increased to 8 percent from 6 percent. But for police and fire, it increased to 14.2 percent from 12.2 percent.
The Legislature also previously 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 the ERS for pension spiking in the year after the employee retires. That is accomplished by paying the difference between what was funded at the lower salary and what should be funded as a result of the pension spiking at the higher salary. In addition, a moratorium was placed on any enhanced pension benefits until the system is 100 percent funded.
While the state’s largest public pension fund is facing an upward battle, the state’s general fund is in better shape. The Ige administration said it had an $828.1 million budget surplus in fiscal 2015, according to the governor’s six-year financial plan. That’s higher than the $664.8 million budget surplus in fiscal 2014.
TRACKING THE MONEY
The Hawaii Employees’ Retirement System unfunded liability worsened in fiscal year 2015 even as the actuarial funded ratio improved:
| 2014* | 2013* | 2012* | 2015* | |
| Unfunded liability | $8.77B | $8.58B | $8.49B | $8.44B |
| Actuarial funded ratio | 62.2% | 61.4% | 60.0% | 59.2% |
| Funding period in years** | 26 | 26 | 28 | 30 |
| Pension plan market value: | $14.5B | $14.2B | $12.4B | $11.3B |
* Fiscal years end June 30 of each year ** The number of years to become fully funded that is based on open group projection, recognizing new benefits for members hired after June 30, 2012, and increasing contribution patterns for future fiscal years Source: Gabriel Roeder Smith & Co.
56 responses to “ERS pension plan shortfall rises to $8.77B”
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“Despite the improvement, Hawaii’s funded ratio remains among the worst in the country.” So, of course, the State decides to put the person who was in charge of this mess, in charge of the entire State budget. More dem insiders in over their heads. Then they wonder why things go South so quickly in this one party state.
he didn’t create this mess..he took steps to make sure that it will be fully funded in the long run..it was the legislature that stole the money from the fund
It’s going to get worse before it gets better .
the solution is simple – transfer the pension to the federal government to manage and stop the pension plan. This is what the private industry has done…
1local – Nice try but states cannot do this as they have the power to raise taxes to pay bills.
You do understand when a pension is transferred to the federal Pension Benefit Guaranty Corporation (PBGC) retirees do not receive their full pension. It is not funded with federal tax dollars. Retirees receive only basic benefits, a fraction of what they are owed. Less before age 65, more after age 65.
http://www.investopedia.com/articles/retirement/06/pbgc.asp
Taxpayers should not be made to pay for the shortfall. Taxpayers have paid their fair share. Government squandered, mismanaged, and pissed away the money through no fault of taxpayers.
No, what this state should do is what virtually all of private industry has done, move away from defined benefit plans into defined contribution plans. Defined contribution plans are far less expensive to administer and there is no responsibility for plan earnings. Why should state employees receive significantly better benefits than the average taxpayer? BTW, this article didn’t even mention the larger unfunded benefit, retiree medical. Note that politicians almost never talk about either of these liabilities.
Actually, Ige was young in politics when this whole thing started. At least, he’s looking for a solution.
Sometimes that would be called a “common denominator.”
They were all part of the party that caused this and they vote straight down the party line.
Changing your story now?
Nope.
That’s right – The legislature in the past has been skimming funds from the ers, above and beyond earnings of a certain percentage. I believe that has stopped but the damage has already been done and yes 7.75 rate of return although an average is unrealistic. The “new normal” for the next several years is far less which will make attaining 100% stretching further into the future. Expect benefits for new hires to be further “trimmed”.
Yep, the legislature skimmed more than once just like congress raided social security several times.
Gov. Cayetano and Hanabusa were the principal thieves.
Wes Machida was the one to actually come up with a plan to turn this around. The guy before (won’t mention his name) knew of the problem but seemed powerless to do anything about it.
Wrong. Machida helped with the reforms while he was head of the ERS. These are the reforms that were talked about in the article that are going to pay off in the future.
That’s exactly what I mean, when he was the head of ERS. Sorry that it wasn’t clear. Actually I wish he had stayed at ERS to see this through.
The “person” who are responsible for this mess are all the elected officials who underfunded the ERS intentionally so they could use the money for other purposes. They should fully pay their obligations as they come due.
The tragedy for young families and for Hawaii’s dismal future is that for too long a corrupt monopoly party overpromised benefits in return for votes. Now the bill is coming due. Young families looking for funds for preschool, k-12 education, state infrastructure improvements, progressive legislation, public housing, programs for the homeless and poor, etc. will be turned away as the state will keep paying these benefits at the expense of all. Now way around it. This will make the rail scam look pale by comparison. Go back and see who did this to you deCADES AGO.
Interestingly, the “short-fall” figure is analogous to the ultimate cost of THE RAIL…(?)
Oh, please. You no more nothing for do except try to make this about the rail?
They should hire Henry Haalio Peters to manage the fund. After all, he did make a great deal of money for The Bishop Estate…
Record number of tourists in Hawaii, and we are still broke.
Let’s help those in Hawaii who have not worked for this pension, first.
The money taken from the system by the Democrat Governors and Legislature, belongs to the workers who put their money into it. This does not belong to anyone else. This “borrowed” money benefited all people. This is nice, but its like someone using your rent money so the guy next door doesn’t have to pay.
Your insight is right on.
Spineless leaders in Hawaii will yield to anyone who has knee pads.
Um, what? What does this have to do with anything? With all your one-line posts today….you feeling okay, Buckwheat?
I don’t trust my government pension, neither. So I socked away my five million just in case.
OK, high roller. And you’re the one who tells us to wait till nightfall so as to get discounted food at the supermarkets. Always bragging about nothing and your foolish one liners.
What a JOKE !
Members were sold a union Ponzi scheme and blindly wanted to believe it works. They should suffer the same consequences as every other Ponzi scheme gullible victim. WHO ever thought that putting in a sliver of your income for 25 years should ALLOW you to DRAW OUT the MAJORITY of your income for OVER 25 years when you retire and live to 80 yrs old, would work out mathematically?
So true. The only way they got the math to support their Ponzi scheme is by assuming there would be 8 percent returns for eternity. How long does it take them to wake up from their dream world and realize 8 percent isn’t happening?
You two wouldn’t not say that if you actually know how a true Ponzi works. Please refrain from making comments that you know nothing about. Read my writing, the problem is not in the Ponzi characteristics, the problem was the legislators and previous govs got their hands in the cookies jar too often. It has nothing with the 8% return and Ponzi scheme. 8% return or not, if the pension was suppose to be funded as promised and without the dirty politicians getting their dirty hands on them then the Hawaii’s ERS would be just fine. Do you two even know what is the return on the market for the last 40 years? Yep, that right, it’s > 8%. Now you two should go back and do your math and tell me why it wouldn’t work.
Sounds like you know a little about how the State took the ERS for a ride for a long time.
I know what a ponzi scheme is, and I know that this is technically not a ponzi scheme, but this is a comment section and you are taking our comments too literally. We are conveying that this fiasco has the stink of a ponzi scheme.
Where does all the money go????
Government spends money they don’t have, and this is the bill.
These “reforms” will only work if the Legislature can resist from “borrowing” from the system when times are bad.
The ERS appears to be a balloon that is about to burst.
Expected rate of return of 7.5% is too high. I suspect HRS will show a negative return for 1st half of FY 2016. A 60/40 portfolio expected return stands at about 5% expected rate of return for next few years IMO. If they lower the ERR to a realistic value, the plan will be significantly more underfunded.
Current methods to try and fix the ERS are about as effective as screen doors on a submarine.
If city/state bureaucrats had a pair back in the early 80s when the 401k plan started, all new hires would have been moved to this retirement plan. Fast Forward to today, all those under the 401k would have a retirement plan totally immune from bureaucratic raiding and under the Roth 401k, free from federal taxes. ERS debt would be a fraction of what it is now, easily managed.
When you add the ERS debt to city/state’s crumbling infrastructure repair/maintain debt, to the endless UH Manoa debt, to our ever growing educational debt, growing bills to give city and state workers more pay raises and benefits, and to our newest and ever growing money pit – rail, taxpayers see nothing but the “Dark Side.” Knowing their elected bureaucrats are basically all utterly incompetent is solving the Nei’s problems. Just adding to them.
Our children and grandchildren will realize their parent’s failure to be fiscally responsible and realize the only choice they have to live will is to leave the Nei for the mainland. Sad but true.
Unfortunately, no politician currently elected would risk his/her office to propose such a thing. Politicians will do anything/everything to get re-elected because, no matter what they tell us, it’s their career not a desire to serve the public. As such they would never buck the public employee unions with such a proposal, never. As much as we’d all like to blame one political party or the other, I believe this is a political problem not a party problem. The US political system is broken. The greater question is, how bad will it have to get before meaningful changes are made?
Be prepared to support your parents as they have supported you. If not, try hari kari.
Democrat rule + public unions + free sh*t = misery, ruin & bankruptcy
I’m glad the state is finally fixing the issue with pension spiking. I’m sure there are cases where State employees would either transfer to other jobs or ask/work overtime during their last three years to pad their ‘high three’ salary to increase their pension. In many cases, retirees would net more in retirement compensation than if they continued to work.
bnc_connection, your envy clouds your logic. I see nothing wrong with any employee, government or private industry, strive for higher job positions or working overtime during their last three years or their last 30 years. Heck, as a new employee in a large business, I was bent on climbing the promotion ladder and/or working as much overtime as possible. I did that for over 30 years, because I wanted a fat monthly paycheck and a fat pension. In the few years before retirement, I worked like a demon, like the last round in a 15-round boxing match. That wasn’t hard, because all my coworkers were being asked and sometimes mandated to work late. Your last statement “In many cases, retirees would net more in retirement compensation than if they continued to work.” is false. A State employee would have to work for 51 years under the 10-year-old Hybrid plan to net a larger pension benefit than their old paycheck. Ooooh! Yes! That happens if you consider their FREE! lifetime retirement medical plan($300) ANDDD!!! their Social Security retirement benefits! bnc_connection, you’re just green with envy, that’s all. I’m a State employee; I didn’t negotiate my retirement benefits for my private industry job or my government job. I will gladly spend my pension$ to stimulate Hawaii’s economy. When I retire this time, I’ll find another “hobby job” to busy myself. And don’t give me any flak about depriving a worthy prospect of a job. If you want my job, apply for it. There are many vacancies in the State roster. If it makes you feel better, I won’t apply for a Federal government job, and I’ll donate the bulk of my paycheck to charity….. Feel better now?
I hear you!
I wasn’t referring to the new system. I was referring to the old system. Under the old system, you didn’t by ave to work 51 years too net more. Remember that when you retire, you won’t pay FICA or union dues or pay into the retirement system. Did you take that into account?
bnc, that retirement system became obsolete 15 years ago. Employees under that plan have long retired. Under the noncontributory system offered over 10 years ago, it’d take 81 years of service to match net pay. Under the present Hybrid system, employees pay 6% of their gross pay into retirement. FICA and union dues amount to 8.85% of gross pay. It’d take almost 40 years of service for a retiree’s pension to match their net paycheck. Pensions were meant to augment retirement income, not replace their paycheck dollar-for-dollar.
I believe in playing by the rules and I don’t blame anyone who played the rules to their advantage. However, I know of several individuals who have retired from state positions, who played by the rules, but I think at a disservice to taxpayers. Remember, somebody has to pay for this. In several of the situations that I know of the employees were promoted to positions they had no skills in so they end up doing almost no work for 3 years on top of building their retirement. They got these positions as a “reward” and obviously to pad their high-3. I don’t think that the system was set up with this in mind but it is what it is.
eliminating overtime earnings from pension calculations should be balanced by allowing workers the option to decline overtime assignments.
most first responders who work overtime during emergencies, hurricanes or other disasters would rather go home and check on their own family and homes. the workers and their families are punished during times of emergencies and forced overtime and punished again when they retire and are not able to benefit financially from their sacrifices during the times of emergencies.
Typical of our current society. State workers are given a contract dependent on the employer funding it. The employer does not do its job and the contractually obligated funds are not provided for…for years! Typical of our elected leaders at the federal, state, and municipal level. At what point does the public wake up and realize the elected leaders are not capable of leading and running the government. Fascism is coming, friends. Be sure to be on the right side when it does.
Currently, state employees must contribute to their retirement fund.
In the future, whose funds will be raided?