The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the Senate Committee on Ways and Means on Feb. 28, 2023.
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Feb. 28, 2023
10 a.m.
Conference Room 211 & Videoconference
To: Senate Committee on Ways and Means
Sen. Donovan Dela Cruz, Chair
Sen. Gilbert Keith-Agaran, Vice Chair
From: Grassroot Institute of Hawaii
Joe Kent, Executive vice president
RE: SB1158 SD1 — RELATING TO THE EMPLOYEES’ RETIREMENT SYSTEM
Comments Only
Dear Chair and Committee Members:
The Grassroot Institute of Hawaii would like to offer its comments on SB1158 SD1, which would provide police officers who become members of the Hawaii Employees’ Retirement System after June 30, 2023, with retirement benefits similar to ERS members who became members before July 1, 2012.
No doubt, this bill is intended to assist Hawaii’s police departments in filing staff vacancies by providing officers more generous retirement benefits; however, we are concerned that this measure might endanger the financial stability of the ERS.
In particular, we are concerned that overturning the prohibition on “pension spiking” will increase the pension system’s unfunded liabilities, which in 2021 stood at $14.2 billion.[1]
Yes, this measure would once again allow “pension spiking” — an action that the Legislature stopped for new ERS members back in 2012.
“Pension spiking” occurred when public employees worked overtime or received substantial bonuses. These payments — in addition to their base salaries — were used to calculate an employee’s retirement benefits.
By racking up substantial hours of overtime for just a few years during their careers, public employees could receive inflated pensions.
The Legislature recognized that this practice was sapping money from the ERS and contributing to its large unfunded liabilities, which at the time totalled roughly $8 billion.
In the 2012 regular session, the Legislature passed and Gov. Neil Ambercrombie signed SB1269, which prohibited pension spiking for public employees hired after June 30, 2012.[2]
At the time, then-ERS Administrator Wes Machida said that getting the bill enacted “was really a good accomplishment for us from a liability standpoint. It helps us curtail the liability going forward.”[3]
The prohibition did, in fact, save the state and county governments several million dollars. In 2010, for example, pension spiking had added $12.3 million in unfunded liabilities.[4] The prohibition was not a silver bullet to bring down the system’s unfunded liabilities, but it helped.
Today, the ERS still is in no position to allow more pension spiking. In 2021, Hawaii’s public retirement system was only 58.3% funded. Only five other states had a lower percentage of their pension systems funded.[5]
Under its current assumptions, ERS management predicts it will take about 24 years to zero out its unfunded liabilities[6] — assuming economic downturns, global instability or other such factors do not significantly interfere.
Allowing pension spiking would make it that much harder to pay off the unfunded liabilities.
The Pew Charitable Trusts reports that high unfunded liabilities sap government revenues and can affect credit ratings. In July 2022, two Pew researchers wrote:
“Although states have decades to pay off these sums, such spending commitments can have budget consequences both now and later.
“If the amount states must spend each year to pay down these obligations gets too high, less money may be available to fund other priorities, such as healthcare or education, or to cover unexpected needs.
“As part of a state’s full financial picture, these liabilities also can affect credit ratings and borrowing costs.”[7]
The Grassroot Institute of Hawai recognizes that this bill is well-intentioned, but changing ERS calculations for police officers is not the way to improve police recruitment efforts.
The state and counties should consider avenues that would not burden the ERS, such as providing additional relocation assistance or other perks unrelated to pensions.
Thank you for the opportunity to submit our comments.
Sincerely,
Joe Kent
Executive vice president
Grassroot Institute of Hawaii
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[1] “Annual Comprehensive Financial Report for Fiscal Year Ended June 30, 2021,” Hawaii Employees’ Retirement System, Nov. 23, 2022, p. 132.
[2] Nanea Kalani, “Pension Spiking Measures Await Gov’s OK,” Honolulu Civil Beat, May 15, 2012; “SB1269 SD2 HD2 CD1,” Hawaii State Legislature, 2012 Archives.
[3] Ibid.
[4] Ibid.
[5] “Annual Comprehensive Financial Report for Fiscal Year Ended June 30, 2021,” p. 33, 171. Note that this figure is on an actuarial basis. On a market basis, the funded ratio is 64.3%.
[6] Ibid, p. 37.
[7] Joanna Biernacka-Lievestro and Joe Fleming, “States’ Unfunded Pension Liabilities Persist as Major Long-Term Challenge,” Pew Charitable Trusts, July 7, 2022.
