How is a volcano like a dip in the stock market?
That’s not a riddle, though I’m sure our witty members could come up with some clever responses.
Rather, it is a different perspective on how the Kilauea eruption might have a long-term effect on the state’s unfunded public pension liabilities.
Earlier this week, the Grassroot Institute of Hawaii was honored to host Thom Williams, executive director of the Hawaii Employees’ Retirement System, for an event titled “Navigating risk at Hawaii’s public pension system.” (See full presentation here.)
Williams was invited to discuss the challenges involved in maintaining the financial integrity of the state retirement system, especially in light of its $12.9 billion in unfunded liabilities.
People in Williams’ position often look at best practices from other states to help determine how to navigate risk. But there’s one element of life in Hawaii that most states don’t have to worry about, and which highlights how rare events can have long-term economic effects: the volcanic eruptions on Hawaii Island.
As Williams explained, Hawaii’s hardworking emergency response crews have been working round the clock to help people during the Kilauea eruption. That means lots of overtime.
Neither Williams nor I would claim that this overtime is unwarranted. We are both very grateful for the sacrifice and dedication of Hawaii’s emergency workers.
However, the overtime needed to handle this emergency could have an unexpected effect on the state’s pension liabilities.
As Williams explained, “City and county emergency workers are spending an awful lot of time responding to this emergency. And because overtime is included in their compensation, it’s going to affect — potentially — the benefit they get from the ERS. So I’m monitoring the level of overtime and the longevity of this eruption because it can show up in our liabilities in time.”
The reason overtime payments will affect benefits is due to how base pay for pensions is calculated.
“We pay benefits on the highest five years earnings, and it matters not when that occurs,” said Williams. “So for some of these people who are responding to the emergency, because of the inclusion of overtime to their base pay, it may very well mean that they will get an elevated benefit for the remainder of their retirement lifetimes.”
Williams posed the Kilauea situation as an example of how a natural disaster can have as much of an impact on the state’s pension system as a dip in the stock market would. So if an event like the Kilauea eruption can create liabilities far into the future, the obvious question is whether the proper safeguards exist to guarantee the pension system will not collapse under its own obligations.
We already know that the state’s unfunded liabilities threaten the economic and fiscal health of the state. But Williams’ observation about employee overtime payments raises interesting questions about how to minimize risk.
How, for example, can we address the immediate survivability of those whose lives and homes are in danger, while still ensuring that our government can meet its future obligations?
Obviously, our concern isn’t really about the employee overtime needed to handle this emergency — or any other emergencies in the state, such as the recent devastating flooding on Kauai. Helping our neighbors in danger is a given.
Rather, it is about making sure that when calamitous events do occur, we can still be confident of the long-term ability of the state pension system to provide for the retirements of the tens of thousands of state and county retirees — including our emergency workers — who have honorably devoted their long careers to service in government.