Hawaii Gov. Neil Abercrombie’s administration is touting fiscal prudence, announcing the state deposited $100 million to the Hawaii Employer-Union Health Benefits Trust Fund in late June.
That was to “prefund” the cost of the state’s unfunded liabilities, including health insurance premiums and life insurance for state retirees.
However, Sheila Weinberg, founder and CEO of the Chicago-based fiscal watchdog Truth in Accounting, said Hawaii can’t claim it’s being fiscally prudent because that trust fund is “drowning in debt.”
“Flaunting this relatively little deposit is like expecting people to think you’re a hero because you threw a one-foot rope into the water to save someone drowning in water 110 feet deep,” Weinberg said.
Huge Retiree Health Costs
She points out retirees’ health care costs of $11 billion is more than $24,000 per Hawaii household and almost three times state employees’ annual pay.
In the past, Abercrombie said, the state opted to pay only the required minimum annual premiums, but is now working to pay down the $11 billion debt ahead of schedule.
“After decades of this issue being ignored, today we are taking action by beginning to pre-fund—and pay down—our [retiree] liability,” Abercrombie said. “This is the first step in many that are required to address this longstanding liability. We are demonstrating our resolve to meet and address our financial health and take our obligations seriously.”
Kalbert Young, director of the state Department of Budget & Finance, dismissed Weinberg’s criticism outright.
“While it is true that the total liability is still in excess of $10 billion to $11 billion, what Truth in Accounting has never appreciated or been truthful about is that there is no realistic or rational way to eliminate, pay, or reduce that liability over a year or any short period of time,” Young said.
Like a mortgage, no household can pay off their mortgage in any one year, nor would it be rationally expected to do so, Young said, comparing this situation to the state’s long-term liabilities.
“The significance is that the state is beginning that long road this year,” Young said. “One hundred million may be small in comparison to $11-plus billion, but it’s $100 million more than was there 12 months ago, three years ago, 10 years ago.”
‘$4 Billion Trick’
Weinberg also expressed skepticism toward the state’s reason for “pre-funding” the $100 million, saying it resulted in the administration “performing a $4 billion magic trick.”
“The administration took advantage of an obscure accounting loophole. This dodge of reality allows states to significantly reduce the amount of their unfunded liability by ‘pre-funding’ relatively minuscule amounts of their retiree health care benefits,” Weinberg said.
She said that in 2011, the trust fund’s unfunded liabilities were $16.3 billion, but after Abercrombie’s administration discounted future benefits from 7 percent to 4 percent, the value dropped to $11.2 billion in 2013.
Young said this analysis by Truth in Accounting is “not really realistic or truthful.”
The reason the Unfunded Actuarial Accrued Liability went down from $16 billion to $11.8 billion isn’t an “accounting loophole,” Young said, but rather because that liability is calculated as an actuarial formula the Government Accounting Standards Board sets.
When the state wasn’t prefunding the discount rate, the liability was 4 percent, but when prefunded, the UAAL would be calculated at a 7 percent discount rate since it would have a basis from which to earn investment returns for a longer period of time, Young said.
Required Funding Increases
Hawaii enacted Act 268 in 2013, mandating state and county governments pay at least 20 percent of the annual amount needed to fund promised benefits to current and retired workers by fiscal 2015. That percentage bumps up 20 percent annually until 2019, when the funding mandate reaches 100 percent, and continues for at least 30 more years.
The state will begin prefunding one year earlier than the 2013 Act 268 requirement.
Despite those steps, Weinberg criticized Hawaii for “ignoring related employee compensation cost.” In 2013, she said, the administration claimed it met the state’s constitutional balanced budget requirement, while putting off more than $600 million of compensation costs related to retiree benefits.
Actuaries who reviewed Hawaii’s finances said the state should pay $868 million in 2013, but the state paid only 27 percent of that, Weinberg said.
Young said a portion of the $868 million cited by Weinberg—roughly $400-plus million—is already being paid by the state.
“For all the criticism from Truth In Accounting, I challenge them to find another state or municipality in the country that has made such a significant turnaround in approach, or headway in dealing with (other post-employment benefits), or with a better proposed funding trajectory for OPEB in the country,” Young said. “I would argue that Hawaii stands alone in its approach to positively address its OPEB liability.”
Used with permission of HawaiiReporter.com.