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HB1644 would revive fiscally unsound ‘pension spiking’

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the House Committee on Labor and Government Relations on Feb. 1, 2024.
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Feb. 1, 2024, 9 a.m.
Hawaii State Capitol
Conference Room 309 and Videoconference

To: House Committee on Labor and Government Relations
      Rep. Scot Z. Matayoshi, Chair
      Rep. Andrew Takuya Garrett, Vice-Chair

From: Grassroot Institute of Hawaii
           Ted Kefalas, Director of Strategic Campaigns

RE: COMMENTS IN OPPOSITION TO HB1644 — RELATING TO THE EMPLOYEES’ RETIREMENT SYSTEM

Aloha Chair Matayoshi, Vice-Chair Garrett and Committee Members,

The Grassroot Institute of Hawaii would like to offer its comments opposing HB1644, which would reinstate the practice of including overtime in the definition of “compensation” for employees covered by the Hawaii Employees’ Retirement System.

We are deeply concerned that adding overtime pay to pension calculations will increase the pension system’s unfunded liabilities, which in fiscal 2022 stood at $13.5 billion.[1]

In particular, this bill would allow the return of “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 totaled 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.

The ERS cannot afford to allow the return of pension spiking. In 2022, Hawaii’s public retirement system was only 61.2% funded. Only five 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]

It is unclear whether this bill is intended to aid in attracting or retaining government workers. But whatever its goal might be, its approach is fiscally unsound.

Hawaii cannot afford to reinstate pension spiking and take a backwards step in its efforts to reduce the state’s unfunded liabilities.

Thank you for the opportunity to submit our comments.

Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[1] “Annual Comprehensive Financial Report for Fiscal Year Ended June 30, 2022,” Hawaii Employees’ Retirement System, Oct. 19, 2023, p. 8.

[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, 2022,” Hawaii Employees’ Retirement System, pp. 35 and 180. Note that this figure is on an actuarial basis. On a market basis, the funded ratio is 62.8%.

[6] Ibid, p. 39.

[7] Joanna Biernacka-Lievestro and Joe Fleming, “States’ Unfunded Pension Liabilities Persist as Major Long-Term Challenge,” Pew Charitable Trusts, July 7, 2022.

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