Strict budgeting needed to sustain retirement system
Amere five months ago, it was reported that the state was enjoying a $1 billion treasury surplus after closing the fiscal year that ended June 30. For state departments, visions of robust budgets for pet projects materialized. For public labor unions and members, thoughts of hefty pay raises formed. For nonprofits, the possibility of more grant money emerged.
What a difference a half-year makes.
Virtually each day of this new year has brought gloomier fiscal news. The direst came Monday, via a report that showed the shortfall in Hawaii’s public employees pension fund skyrocketing to $12.44 billion in fiscal 2016, up shockingly from last year’s $8.77 billion. That widening gap in the unfunded liabilities for the state Employees’ Retirement System, for which taxpayers are on the hook, is dismal news indeed — especially since a prudent payment plan devised years ago to pay down the ERS shortfall had seemed to be making headway. Gov. David Ige, co-architect of that plan when he was Senate money chairman, now must work with former legislative colleagues to address that growing gap. One option broached would allot $385 million a year more, for an annual sum of $1.14 billion of taxpayer money for the pension program — including retirement, disability, survivor benefits — that covers 120,000 active and retired state and county workers.
It will be neither simple nor animosity-free.
Ige is being criticized by the Legislature’s two powerful money committee leaders, Sen. Jill Tokuda and Rep. Sylvia Luke, for submitting a state budget proposal Luke deemed “borderline schizophrenic.” They excoriated him last week for “padding” departmental budgets by tens of millions of dollars, knowing full well that state tax-collection projections have been lowered, meaning $155 million less than expected to spend this year. They also blasted him for failing to account for expected pay raises for major public-union contracts, which come due this year. For all the political theater, both legislative and administrative branches must muster the political will to deflate budgetary ballooning and carry out efficiencies in government. And since increased wages mean increased pension amounts, pay hikes will need to be judicious, and balanced against work-rules reforms that promote those efficiencies.
One salient example from a recent legislative hearing: The state Department of Agriculture, which has seen an average of 1 of 3 jobs vacant over the past five years, should justify such jobs as crucial, or be prepared to pare. And that should apply to all departments — truth in budgeting and better use of funds.
As for the ERS, two major factors are fueling the growing shortfall: weak investment earnings, and the fact that pensioners are living longer.
The first factor will require internal financial — and perhaps personnel — recalibrations within the ERS; the latter, though, must be accepted as simple fact that Hawaii’s older population is living longer so rising costs can be expected. What shouldn’t be accepted as unchangeable, though, are the ERS’ generous benefits and how they’re calculated, for future government hires. Lawmakers should ban “pension spiking” — inflating base-pay calculations with overtime, unused vacation and other add-ons. Reform also needs to include conversations on converting the pension fund to a 401(k)-style program for future employees, making them more responsible for their own retirements.
Hawaii’s legislators should take note of a recent appellate court ruling backing California’s move to control escalating pension costs. Wrote Associate Justice James Richman in August: “While a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension.” Sustainable. For all of today’s talk about energy sustainability and food security, state policymakers and government employees must launch a new normal with taxpayers’ money. It involves needed reform of civil service benefits and formulas. It involves culling long-unfilled vacancies and morphing outdated jobs to be more efficient. It’s called budget sustainability, and it needs to start now.