The Two Gorillas Still Menace the Budget

by Tom Yamachika, President, Tax Foundation Hawaii

In the upcoming legislative session, which is right around the corner from now, there is going to be tremendous budgetary pressure.

For one thing, lots of resources were used for wildfire relief efforts. This money had to come from somewhere. The Governor said that a bunch of it was just moved from other projects and programs. Which means the the constituents behind those projects and programs are going to want their funding restored, perhaps with some compensation for the temporary “theft.”

But that is actually a minor amount of money, comparatively. There are, and have been for some time, two huge gorillas in the room that need resources too. And there is no getting away from them because they exist because of promises made long ago to people who relied on those promises for years, in some cases decades. The names of the two gorillas are ERS, the Employees’ Retirement System, and EUTF, the Employer-Union Trust Fund. Together they represent assurances made to state workers that after they retire, they would receive a pension, which is what ERS gives them, and health care for life, which is EUTF’s function.

Let’s take a look at the pension side first. According to a new study from the Pew Charitable Trusts, ERS’ funded ratio is 64%, meaning that the ERS fund has less than two-thirds of the money it needs to pay out its promised returns, according to actuarial estimates. That’s concerning enough, but the number dropped from 69% funded ratio in 2008, a trajectory opposite from what we need. The ERS’ current financial statements show that it had, as of June 30, 2022, about $21.8 billion. This means ERS is currently underfunded by more than $12 billion. Given that the amount of money our entire state government spends in a year is about $16 billion, $12 billion is a huge amount of money.

When we go to the EUTF, the outlook is a little better but still concerning. The EUTF’s own report shows an unfunded actuarial accrued liability, or UAAL, of about $9 billion. Meaning that, according to actuarial estimates, the EUTF needs about $9 billion more than it now has if it is to fund the benefits that the State already has promised to its retirees. The good news is that the UAAL number has been trending downward, from a peak of $12.4 billion in 2019.

The amount of assets in EUTF has been slowly trending upward, from $0.8 billion in 2015 to $3.9 billion in 2020; it got a pandemic bump to $5.3 billion in 2021, followed by a more anemic rise to $5.9 billion in 2022. More significantly, the liabilities borne by the fund appeared to flatline in 2019-21 just shy of $16 billion, and then dropped quite a bit to $14.9 billion in 2022.

Even with the EUTF numbers appearing to be more under control, we cannot understate the significance of the two gorillas in the room. They need to be dealt with, and that need results in further pressure on an already beleaguered state budget.

For those of you who think it’s going to be possible to pass meaningful tax reform this session (including those last session who tried to get meaningful cuts in for the ALICE, namely Asset-Limited Income-Constrained and Employed folks), good luck to you. But you need to start your journey knowing that the two big gorillas lurk somewhere along the path.