State of Hawaii

State may defer
pension payment

A $201 million contribution
to the retirement system may
balance the budget

By Richard Borreca

Fearing new shortfalls in the state budget, the Cayetano administration has warned the Legislature that it may have to defer a $201 million payment to the State Employees' Retirement System.

"The updated financial plan indicates that shortfalls may occur beginning in FY05 (fiscal year 2005). ... Deferring the FY05 ERS payment is an option should the shortfalls become more imminent," Neal Miyahira, state budget director, said in a letter to Senate leaders.

Miyahira warned that other cuts may be needed.

"If the economy does not improve in the coming months, other options will also be considered, accelerating proposed cuts and adjusting the 2004-05 biennium budget," Miyahira wrote.

Miyahira stressed the retirement system is not in danger and that the state has the ability to continue paying pensions.

"It is still going to be above acceptable levels. This as an option, because we are having difficult times right now," he said.

In his letter, Miyahira said the state may also have to reduce its ERS reimbursement by $40 million.

Besides making regular payments to fund the retirement of state workers, the state is also attempting to erase the unfunded liability of the retirement system.

The unfunded liability is how much it would cost to pay the retirement benefits of all state retirees and all existing state workers.

So far, the state has covered 91 percent of the unfunded liability. The $40 million would have gone toward that unfunded liability.

Miyahira's warning came before the state Council on Revenues met yesterday and decided to hold to its previous, gloomy tax revenue prediction for the fiscal year ending June 30.

The council had said in January that the state tax revenues would drop 0.7 percent compared with last year because of the economic downturn spawned by the September terrorist attacks. Before Sept. 11 the council was projecting 4.1 percent growth in tax revenue for the fiscal year.

The council sets the state tax collection predictions upon which the state budget is based. If the council says that less money will be collected in taxes, the state budget has to be reduced to match the prediction.

House Speaker Rep. Calvin Say said it was a big relief that the council did not drop its predictions even further. But he added that the new House budget plans call for doubling the state budget cuts to 4 percent from 2 percent.

In addition, Say said, the House plans on taking $100 million from the state's Hurricane Relief Fund to help balance this year's budget, which is short by $300 million.

And finally, the House is looking at grabbing another $103 million by taking extra money out of state special funds, dedicated to specific purposes.

"We will have a balanced budget," Say vowed.

If there is improvement in the state economy, Say said he hopes the state budget cuts for next year can be pared to 3 percent from 4 percent.

"I am very optimistic we are on the rebound," Say said.

In the Senate, Sen. Brian Taniguchi, Ways and Means Committee chairman, said the Senate is looking at taking more money from state special funds, increasing the alcohol and tobacco tax, but staying away from taking money from the ERS.

"We are trying to balance the budget without it," said Taniguchi (D, Manoa), "but mathematically it is very difficult."

But Sen. Colleen Hanabusa, Ways and Means vice chairwoman, said the ERS already is adequately funded, and it is not necessary to add money immediately to the fund.

To help balance the budget in past year, the Legislature took pension fund profits above 10 percent.

The Legislature, however, is concerned about the performance of the ERS portfolio. Say introduced a resolution yesterday calling for a special audit of the ERS.

Say (D, Palolo) said the system has kept on investment managers who have not performed well and whom consultants recommended be dropped.

Members of the Council on Revenues, meanwhile, were optimistic that an economic recovery was coming.

"All the indicators we're watching are actually ahead of schedule based on our forecast last fall," council Chairman Michael Sklarz said yesterday.

"Visitor arrivals continue, actually, to come in better; real estate activity continues quite strong; construction activity is holding up; personal income seems to be doing well; and the job situation, after a sharp fall in the fall, seems to have stabilized," he said.

"The real test will be in the next few months to see if we get the rebound that we think we will," Sklarz said.

The Associated Press contributed to this report.

State of Hawaii

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