Lowell L. Kalapa is president of the Tax Foundation of Hawaii.
BY LOWELL L. KALAPA | SPECIAL TO WEST HAWAII TODAY
Although most taxpayers are immersed in the daily struggle of trying to make ends meet in a sluggish economy, one of the biggest fears of government observers in Hawaii is the unfunded liabilities of the state and county retirement system and related health benefits for current and future public employee retirees.
The combined unfunded liabilities of both systems could reach as high as $20 billion. That is more than the state’s biennial budget and the number will grow larger as more and more benefits are accrued by the state and counties’ active employees. But why is the state retirement and health system underfunded?
There are a variety of reasons for the chasm that exists between a sound and healthy retirement and health system for public employees and what is lurking in the shadows. When the state Constitution was amended, collective bargaining was granted to public employees, permitting them to bargain for compensation on par with their private sector counterparts. However, retirement benefits, including health care, were not adjusted to be on par with those in the private sector. Instead, public employees retirement benefits were continued even after collective bargaining was granted.
The problem was the retirement benefit plan was predicated on much lower salaries afforded to public employees prior to collective bargaining. Thus, when new base salaries were negotiated under the collective bargaining law, they rivaled, if not bettered, those salaries paid to their private sector counterparts. Those more generous salaries then were used to calculate public employee benefits, which utilized the number of years worked and the highest three years of pay in the formula to calculate the retirement benefit. It soon became evident that if the formula was not changed, the rising salary base would outstrip the projected earnings of the state retirement system.
As a result, lawmakers were asked in the early 1980s to change the state retirement system from a contributory to noncontributory system, allowing the change in the multiplier of the formula that was used to determine retirement benefits.
Although any person joining the public sector workforce after July 1, 1984, is a noncontributory member of the state’s retirement system, the bulk of baby boomers in the public workforce are now beginning to retire, putting a strain on benefits and causing alarm that the unfunded liabilities will soon come due. Everyone who watches state government acknowledges that sooner or later, the state must begin paying down unfunded liabilities.
Realizing lawmakers haven’t had the political will to either reduce benefits for current or future public retirees or set aside annual contributions, one lawmaker has proposed a constitutional amendment that would require that in any one year when there is surplus of general funds at the end of the fiscal year, the surplus amount be paid to offset unfunded liabilities of the state retirement system and health benefits.
At first blush, this seems like a prudent approach to the problem, taking any surplus funds left over in the till and using those funds to pay down this looming debt. But wait, what that constitutional amendment is saying is that these unfunded liabilities are of such a low priority they should be paid only if there is leftover money, money that is available after all other programs and services are paid for in the state budget. It is somewhat akin to having one’s credit card company tell you that, oh by the way, if you have any money left over after you pay all your household bills, you should pay off your credit card balance.
Of course, in the case of the credit card company, they just charge you interest if you don’t pay off the balance. In the case of the state’s retirement system and retiree health benefits, those will have to be paid regardless of whether there is a surplus at the end of the fiscal year.
Before we reach the bottom of the barrel, taxpayers should expect lawmakers to fully fund those liabilities as a regular part of the state’s budget and not just when there are some funds left over. To do otherwise is irresponsible and totally unacceptable.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.