Union salary hikes include hidden costs

by Joe Kent, Grassroot Institute, May 3, 2017

Hawaii’s public union members are on track to receive pay raises of between 2-3.5 percent annually for the next few years. However, the hidden costs to the public pension system could be even greater.

That’s because when government salaries increase, so do pension promises, and the added weight could strain the underfunded Hawaii Employees’ Retirement System (ERS).

Hawaii’s public school teachers, for example, will receive a pay raise that will cost taxpayers $116 million, but this will cost the public pension system an estimated $200 million, according to Thom Williams, executive director of the state Employees’ Retirement System.

In an e-mail to the Grassroot Institute, Williams noted that, “ERS’s pension liability will increase over the plan’s 30-year amortization period by approximately $200 million.”

That liability increase, he said, “results from the additional costs of the benefits we anticipate we will pay due to the teacher salary increases.”

Total salary increases for all union negotiations this year will likely exceed $460 million, and this could add even more costs to the pension system.

However, Williams wrote that the extra pension costs have already been anticipated.

“We don’t expect any increase in the plan’s unfunded liability resulting from the increase in pay, as the plan incorporates a 3.5 percent general wage growth assumption,” he said. “The teacher increases fall within that range.”

This means that the ERS had predicted the union salary hikes, but it still represents a real cost to a pension fund that is almost half empty. If all public union members receive pay increases at 3.5 percent per year, the pension debt will grow to $12 billion, according to the latest actuarial valuation report.

It’s unclear how the increasing salary and pension costs will be paid for, as Hawaii’s budget is already being overspent by $364 million, not including the public employee pay raises. The extra spending will draw down all emergency funds, and put Hawaii in a precarious financial situation.

This is not to say that some Hawaii government employees might be due for a pay raise, but the rising payroll costs have put the state’s finances in jeopardy, whereas Hawaii lawmakers need to balance the budget, as we’ve detailed before.

There are many ways Hawaii lawmakers could step back from this cliff of financial unsustainability, but ignoring the problem and just continuing to grow spending by record amounts will only make the problem worse.

Hawaii needs leaders who will clamp down on spending sprees, save emergency funds for real emergencies, and live within our means.