Efforts to save money now will cost taxpayers more later while putting government employees and retirees at risk, says Grassroot Institute of Hawaii

Delaying health benefits fund payments will add $8 billion to Hawaii taxpayer debt

News Release from Grassroot Institute, January 12, 2021

HONOLULU, Jan. 12, 2021 >> Hawaii taxpayers will be on the hook for nearly $8 billion more, if the state goes ahead with a five-year plan to skip prefunding of its Employer Union Trust Fund, according to the Grassroot Institute of Hawaii.

The fund, which pays out health benefits to current and retired state and county employees and their dependents, currently has unfunded liabilities of $11.5 billion.[1] Skipping the payments for five years could increase that total by at least $2 billion,[2] to over $13.5 billion,[3] according to the institute, which based its estimates on a report released this week by Gabriel, Roeder, Smith & Company.[4]

The state and counties were mandated in 2013 to make annual payments to pay down the unfunded liability by 2044,[5] but Gov. David Ige waived that requirement for fiscal 2021 and is planning to introduce legislation to waive it until 2025.[6] This would free up a total of $1.78 billion for the state and $537 million for the counties[7] between fiscal 2021 to fiscal 2025, excluding Maui County, which has committed[8] to fully funding its portion of approximately $13 million per year.[9] 

But deferring payments will have the unfortunate side effect of adding interest and payroll growth costs of $4.2 billion for the state,[10] according to the GRS report, and $1.3 billion for the counties, according to an estimate by the Grassroot Institute of Hawaii.[11]

The original deferred payments must also be paid back, which with interest and payroll costs could total up to $7.8 billion over the next 30 years, assuming the state and all the counties except Maui County suspend the payments between fiscal years 2021 to 2025. 

This would increase the amount of unfunded liabilities to be paid down by Hawaii taxpayers, and destabilize the health benefits plan of 68,000 active government employees and their 60,000 dependents as well 47,000 retirees and their 20,000 dependents.[12]

Keli‘i Akina, president and CEO of the Grassroot Institute of Hawaii, said, “Saving money in the short term would cost taxpayers too much in the long run, as well as threaten the health benefits of tens of thousands of government employees, retirees and their families.

“Rather than kick the can down the road by suspending the EUTF prefunding payments,” he said, “state lawmakers need to find ways to reduce spending and use those savings to pay off the state’s debts.”

Facing the problem now, Akina said, will avoid bigger problems in the future. 

“Hawaii needs leaders with an eye toward building a better economy for the long term,” he said.

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The Grassroot Institute of Hawaii is an independent 501(c)(3) nonprofit research and educational institution devoted to promoting individual liberty, economic freedom and accountable government. Its goal is to improve the quality of life in Hawaii through a lower cost of living, expanded opportunities and greater prosperity for all.

Footnotes:

[1]  “Draft Hawaii Employer-Union Health Benefits Trust Fund Retiree Health Care Plan, Actuarial Valuation Report as of July 1, 2020,” Gabriel, Roeder, Smith & Company, Jan. 11, 2021, Section A, p. 2.

[2] The State of Hawaii’s unfunded liability for the EUTF is $8.9 billion, and the unfunded liability for the counties is a total of $2.6 billion, as shown on Joseph Newton and Mehdi Riazi, “Hawaii EUTF” Gabriel, Roeder, Smith & Company, Jan. 11, 2021, p. 2, row “UAAL,” which stands for “Unfunded Actuarial Accrued Liability.” The state’s unfunded liability could increase by approximately $2 billion as shown on the red line on the chart on page 9. Note that $2 billion is not stated in the report, but is visually apparent in the chart on page 9. Note also that the report calculates only the estimated unfunded liability for the state but not the counties. It is possible that the unfunded liabilities of the counties could increase as well, but data is unavailable. The current unfunded liability across the state and counties is $11.5 billion, as shown on page 3, column (3).

[3] The $13.5 billion estimate is derived by adding $2 billion to the current unfunded liability of $11.5 billion. However, it should be noted that the actual unfunded liability could be higher, since the GRS report does not estimate the additional unfunded liability for the counties.

[4] "Notice of meeting of the board of trustees" Hawaii Employer-Union Health Benefits Trust Fund, Jan. 5, 2021.

[5]  Act 268 of 2013 requires that the state and counties pay an annual required contribution to pay down the unfunded liability over 30 years, stating, “For the purposes of this section, "annual required contribution" means a public employer's required contribution to the trust fund established in this section that is sufficient to cover: (1) The normal cost, which is the cost of other post-employment benefits attributable to the current year of service; and (2) An amortization payment, which is a catch-up payment for past service costs to fund the unfunded actuarial accrued liability over the next thirty years."

[6] “State of Hawaii,” State Department of Budget and Finance, Oct. 21, 2020, p. A-28, which states, “Employer annual contributions in excess of the ‘pay-as-you-go’ premiums for fiscal year 2021 were suspended due to COVID-19 by emergency declaration of the Governor on July 17, 2020, and the Administration expects to propose legislation to continue the temporary suspension through fiscal year 2025.”

[7] “Grassroot Institute of Hawaii analysis of county ARC increase from deferral of 5 years of prefunding,” Grassroot Institute of Hawaii, Jan. 11, 2021. The state deferred payments are found by totaling column c, and the county deferred payments can be found by totaling column f.

[8]  “Draft Hawaii Employer-Union Health Benefits Trust Fund Retiree Health Care Plan, Actuarial Valuation Report as of July 1, 2020,” Gabriel, Roeder, Smith & Company, Jan. 11, 2021, Section A, p. 5, which states, “The County of Maui has indicated it plans to fully fund the ARC.”

[9] Joe Kent, “Ige’s EUTF Funding Dodge Will Come Back To Haunt Us,” Honolulu Civil Beat, Sept. 21, 2020.

[10] “Draft Hawaii Employer-Union Health Benefits Trust Fund Retiree Health Care Plan, Actuarial Valuation Report as of July 1, 2020,” Gabriel, Roeder, Smith & Company, Jan. 11, 2021, p. 8, column e.

[11] “Grassroot Institute of Hawaii analysis of county ARC increase from deferral of 5 years of prefunding,” Grassroot Institute of Hawaii, Jan. 11, 2021.

[12] “Who we are,” Hawaii Employer-Union Health Benefits Trust Fund, 2021.