Public pensions and other post-employment benefits in Hawai‘i will take up an increasing portion of the state budget as baby boomer public employees prepare to enter retirement. How we choose to handle this significant budget constraint will affect every person in the State of Hawai‘i.

HONOLULU, Hawai‘i — The Hawai‘i Budget & Policy Center (HBPC) has released a new report, entitled “A Public Investment,” outlining recommendations on meeting the public retirement commitments our government has made to public sector employees, past, present and future. This is a budgetary issue of interest to all Hawai‘i residents, and one that is crucial for policy-makers to understand and address effectively. The report identifies strategies to meet public obligations responsibly and equitably.

Public workers and retirees make up 11 percent of the adult population of Hawai‘i. Nearly one out of every five adults aged 65 and older is a public worker retiree. Hawai‘i’s state and county governments employ more than 66,000 people who, if they meet eligibility requirements, will eventually receive pension and “other post-employment benefits” (OPEB) such as health insurance coverage in retirement. Over the years, Hawai‘i’s public retirement liabilities have grown as current and promised benefits have outpaced contributions and asset growth to cover them. These retirement costs are sometimes referred to as “unfunded liabilities,” which means that our obligations exceed the funds currently available to pay them.

“Spending such a large portion of state and county funds on retiree costs makes it challenging to invest in other public needs such as affordable housing, education, infrastructure like roads and sewers, and the environment,” said Beth Giesting, HBPC Director. “Our currently healthy economy will slow down again someday and, when it does, tax revenues will be affected. Income tax collections will suffer if joblessness increases or wages stagnate. A recession would affect tourism which generates an estimated 20–38 percent of general excise tax revenue and nearly all transient accommodation tax revenue. And during a recession, more residents will need the support of public benefits, putting further pressure on reduced revenues.”

The number of public retirees that the State of Hawai‘i is responsible for is increasing, while the number of active employees contributing to the retirement fund has plateaued. Hawai‘i, like many other states, did not completely prefund retirement costs as it hired workers, and did not ensure that funds and earned income were left in place to offset future costs. Hawai‘i also did not adjust contributions soon enough to account for increased longevity, or for the escalation in health benefit premium costs. It’s not just the longevity of retirees to consider, though. Between 2015 and 2045, the state population is projected to increase by 18 percent. However, the working-age group between the ages of 18 and 65 is set to increase by only five 5 percent, while the over-65 population will expand by 61 percent.

“In combination with Hawai‘i’s continuing high cost of living, this could lead to further out-migration for well-qualified workers and limit economic growth,” said Giesting. Dedicating a large part of state and county general funds to cover unfunded liabilities also leaves less money for active public employee salary increases and benefits. The promise of post-employment benefits may have served as a recruitment and retention tool in the past, but in a competitive employment environment like Hawai‘i’s, benefits 30 years in the future may not make up for low salaries in the present.”

Hawai‘i’s state workers are paid less than their national peers: the average U.S. state worker pay is $48,436, while Hawai‘i’s is $37,999 after adjusting for the cost of living.

To address mounting retirement obligations, Hawai‘i’s public employers have agreed to make actuarially determined payments over 30 years to pay down unfunded liabilities and grow the pension and health fund trusts that help fund future public contributions. These payments, which are largely supported by state and county taxes and fees, will be a sizeable burden in a small state like Hawai‘i.

“But paying off these accumulated benefit obligations is important,” said Giesting. “Making responsible payments now reduces public spending in the long-run, since contributions increase assets that earn income to offset rising costs. They also reduce public spending by improving state and county financial ratings and borrowing rates. And since the money provided is most likely to be spent for short-term needs like rent, food, health care, and other consumable goods and services, it circulates through the economy and supports many other jobs.”

A recent study shows that 2014 Hawai‘i expenditures stemming from state pensions supported 9,000 jobs that paid $432.7 million in wages, $1.4 billion in total economic output, and $327.3 million in tax revenue.

“We must never lose sight of the importance of covering pension and OPEB costs for the individuals involved, for the benefits to the state’s economy and for the sake of fairness,” said Giesting.

HBPC’s mission is to ensure that our state and local economic policies increase opportunity for all residents. We do this by analyzing and understanding the implications of tax and budget decisions and making sure that the public and policy-makers are informed through strategic communications, coalitions, and key partners. Our work is guided by the belief that government at all levels should play an active role in helping people reach their full potential.