Rosy numbers may be hiding Hawaii’s unfunded pension liabilities

Government watchdogs have been warning for years that underfunded public employee pension programs will create economic havoc in the states and municipalities that have promised benefits they can’t afford.

Current estimates place the nationwide total unfunded pension liabilities about about $5.6 trillion, with the national funding level at about 35 percent. Some municipalities have already been forced into bankruptcy, like Detroit, Mich.; Stockton, San Bernardino and Vallejo, Calif.; Harrisburg, Penn.; Jefferson County, Ala.; and Central Falls, R.I., among others.”

{mosads}But while many people are aware of the problem of unfunded public pension plans, there’s another fiscal crisis on the horizon: the other post-employment benefit (OPEB) liabilities.

After all, pensions aren’t the only benefits that have been promised to public employees. There’s health insurance, life insurance, dental, Medicare advantage and other benefit programs. And just as states underestimated the level of their pension liabilities, so, too, have they misjudged the depth of their OPEB liabilities.

The problem started small — or smaller than the pension problem at least.

In 2008, the Government Accounting Standards Board (GASB) reported that state and local OPEB liabilities were about $1.5 trillion nationwide. Unfortunately, government liabilities don’t go away by themselves, and it’s not as though health costs have been shrinking over the past decades. A new report from the American Legislative Exchange Council (ALEC) estimates that the unfunded liabilities for OPEB grew by 6.4 percent between 2016 and 2017, and at this rate will double every 11 years.

And yet, states continue to downplay the problem of OPEB liabilities.

Which brings us to Hawaii.

According to ALEC, Hawaii in 2015 had the largest per capita OPEB liability in the nation, at $43 billion. That’s $30,000 for every man, woman, and child in the state.

But that’s not what the state’s numbers say. The state’s calculations for 2015 put its OPEB liability at a far more voter-friendly $11.7 billion overall, or $8,243 per capita.

Who is right? Could Hawaii really be underestimating its OPEB liability by nearly 72 percent? This is an issue that has frustrated watchdog groups for years. Optimistic projections can undersell the depth of the problem and distort the fiscal future for voters. Conversely, pessimistic numbers can be seen as political scaremongering and be easily dismissed.

The reason for the disparity in this case is the assumed rate of return. The state of Hawaii, through its Employer-Union Health Benefits Trust Fund (EUTF), uses a rate of 7 percent, while the ALEC calculations are based on a “risk free” rate of 2.1 percent. ALEC’s low rate of return comes from a recommendation by the Society of Actuaries’ Blue Ribbon Panel on Public Pension Plan Funding and a calculation of a hypothetical 15-year U.S. Treasury bond yield. Hawaii officials says that their 7 percent assumption is based on the EUTF’s investment policy.

The problem is that even if you go with the state’s sunny rate of return, its OPEB liability is still among the highest in the country — though with every state operating under different assumed rates of return, direct comparisons are difficult.

But even if ALEC’s estimations are too conservative, there’s ample evidence that Hawaii is too optimistic. During the 2018 legislative session, Gov. David Ige submitted an updated budget request for an additional $50 million. About $49 million of that request was to pay OPEB obligations based on an updated actuarial valuation report.

It’s not the kind of thing that inspires confidence in the state’s numbers.

And those numbers need to be reliable if policymakers are going to tackle this issue.

When it comes to solutions, states like Hawaii could look to Nebraska, South Dakota, and Kansas, all of which have zero or near-zero unfunded liabilities for public employee health benefits. Those states accomplished that by transitioning to systems where public employees pay for access to the state plan or pay for private insurance.

Those options might not be practical for Hawaii or other states where political or constitutional considerations make it difficult to make changes to promised benefits.

Currently, Hawaii law mandates annual tax contributions meant to pay down the unfunded liabilities within 30 years. It’s a law with good intentions, but if Hawaii and other states are using inaccurate projections, then it won’t do much to stave off a coming crisis.

The time will come when we can examine long-term changes to post-employment benefits that will be sustainable over the long run. But we need to understand the true state of the problem.

Public policymakers in Hawaii and around the country need to bite the bullet and ask for better accounting and more transparency in their OPEB liabilities. Then we can look at ways to reduce and eliminate debt while still providing stable retirements for our public employees.

Malia Hill is the policy director of the Grassroot Institute of Hawaii (@GrassrootHawaii), a public policy think tank dedicated to the principles of individual liberty, free markets and limited, accountable government