Do Some Benefits For State Retirees Still Make Sense?

by Tom Yamachika, President, Tax Foundation Hawaii

In Hawaii, we think it is very important to “take care of” our state workers, especially those who have been with the government for a long time.

So we long ago agreed to pay “other post-employment benefits,” or OPEB, to state workers. The Employees’ Retirement System represents the retirement benefits. The Employer-Union Health Benefits Trust Fund represents the medical benefits.

The “unfunded actuarial accrued liability” of either plan represents the present amount of what we taxpayers owe for these future benefits, over and above what we already have set aside to pay them.

A study on the unfunded status of OPEB plans for public employees has been published by the American Legislative Exchange Council. Here is how we fared when compared to 2014 numbers set forth in a prior study.

In 2014, Hawaii’s OPEB plans had a total unfunded liability of about $30.7 billion. That meant about 29 percent of the plan liability was funded (this is called the “funding ratio”), and the unfunded liability translated to a little less than $22,000 per capita.

In 2016, Hawaii ranked 40th among the states with a funding ratio of 29.2 percent, pretty much the same as two years ago. The total unfunded liability was about $35.1 billion, which was 14th in the nation. However, we ranked 44th – close to rock bottom – with about $24,500 in per capita unfunded liabilities.

And it’s not like we didn’t try to push the numbers down. In 2013 we passed a law requiring our state and county governments to make meaningful contributions every year to the OPEB plans, and sequester tax money to make those contributions if the governments had difficulty making the contributions on their own.

The government has implemented fiscal policies that apparently were good enough to persuade the credit rating agencies Moody’s and Standard and Poor’s to upgrade their ratings on state general obligation bonds. (Fitch, which also rated the bonds, didn’t change its rating.)

But it looks like we aren’t gaining a whole lot of ground. The per capita unfunded liabilities went up more than 10 percent in the past couple of years. Why is that? If we’ve been stepping up the payments, are the costs running away from us?

Specifically, if we are contracting to provide lifetime health benefits to state retirees even after they are retired, increases in medical costs and in the life expectancy of people in general may cause EUTF costs to explode. We need to think deeply about whether the OPEB programs we now have are sustainable. The data we are looking at indicate that they are not.

Granted, some of the data now out in the public wasn’t there before. It was only last year that the Governmental Accounting Standards Board approved consistent and comprehensive standards addressing OPEBs other than pensions, and as a result of the enhanced disclosures people began to see just how enormous the problem is.

We need to be seriously thinking about a meaningful reform of what we promise our state workers after retirement. For those workers already in the system, we might not be able to do much because the promises were made long ago and were accepted and relied upon by our public employees.

But if we do nothing at all, we may soon find ourselves between a rock and a very hard place. Many states and municipalities on the mainland are there now.