State of Hawaii

State pensions down
and need boost

Officials predict a rise in employer
payments if the stock market
does not turn around

By Dave Segal

An actuary for Hawaii's largest pension fund said yesterday that the state faces huge and growing increases in payments into the Employees' Retirement System unless the stock market begins to turn around.

Michael Carter, of Gabriel, Roeder, Smith and Co., told the ERS board at its monthly meeting that state and county employers will have to increase their contributions by 39.5 percent in fiscal year 2005 from fiscal 2004 to help bail out a shrinking pension fund that continues to absorb the brunt of a nearly 3-year-old bear stock market.

The pension fund, which lost an audited 5.9 percent in fiscal 2002 after a 6.9 percent loss in fiscal 2001, was valued at more than $9.9 billion at its year-end peak in fiscal 2000. The fund's value fell to just under $8.8 billion in fiscal 2001 and then $7.9 billion in the fiscal year ended June 30, 2002. That amount had shrunk further, to $7.1 billion, as of Sept. 30 when the fiscal 2003 first quarter ended.

Carter said state employers will have to raise their contributions to $328.7 million in fiscal 2005 from $235.7 million in fiscal 2004. The amount in 2004 is a 25 percent increase over the $188.5 million the state is paying this fiscal year.

"The picture is not pretty," said Carter, who said actuarial valuations of a given fiscal year determine employer contributions three years later.

ERS Administrator David Shimabukuro said pension recipients should not fret about the fund's recent performance.

"The retirees and the members shouldn't be worried, because their pensions are guaranteed by the (state) Constitution," Shimabukuro said. "We have a long-term investment strategy, and the retirement system has made money 32 of the last 35 years. The stock market will always go up and down.

"Even though the fund has been down the last couple years, it still has more than $7 billion in it, and we will get through this. In fact, the market already has started to turn."

But Carter revealed projected numbers showing employer contributions will grow to $656 million in fiscal 2010 if the pension fund ends up with a 5 percent loss this year. The fund lost 9.8 percent on its investments in this fiscal year's first quarter.

"If it's any consolation, Hawaii is not alone," Carter added. "The main thing (the figures show) is that it would be very beneficial for the fund and the state if the market starts recovering. This is the most severe that public or private-sector funds have been impacted by the market unless you go back to the Great Depression."

The ERS fund -- which provides retirement, disability and survivor benefits for more than 96,000 city, county and state employees, retirees and their beneficiaries -- has become increasingly underfunded.

Its funded ratio dropped for the second year in a row in fiscal 2002 as it fell to 84 percent, or 16 percent underfunded, from 90.6 percent in the previous year. To make matters worse, the fund has more than $1.5 billion in investment losses to declare if not offset by strong returns in future years.

Those losses, in this case, are smoothed out over a four-year period by an actuary so that the state's appropriation requirements do not zigzag from year to year.

The ERS portfolio at the end of fiscal 2002 had 41 percent of its holdings in U.S. stocks, 23 percent in U.S. bonds, 15 percent in foreign stocks, 9 percent in foreign bonds, 9 percent in real estate and 3 percent in alternative investments.

The ERS beneficiaries include 62,208 active members, a 3.7 percent increase over 59,992 in 2001, and 30,330 retired members, a 2.3 percent gain over 29,660 in the previous year. The remaining ERS beneficiaries are inactive vested members.

Among other items to come out of yesterday's board meeting was that the average salary for active members increased 5.4 percent to $41,292 in 2002 from $39,175 in 2001, and the average benefit for retirees gained 3.9 percent to $17,518 in 2002 from $16,853 in 2001. Employer payrolls jumped 9.3 percent to $2.569 billion in 2002 from $2.350 billion in 2001.

Besides the lagging stock market, another main reason for the fund's shortfall was the state withholding $346.9 million in earmarked employer contributions over a three-year period.

The legislative action is now the topic of a $350 million lawsuit by the State of Hawaii Organization of Police Officers and the ERS against the state, the City and County of Honolulu and Kauai, Maui and Hawaii counties. Hearings for the case are scheduled for next year.

In another development yesterday, the ERS board decided to terminate the services of PM Realty Advisors due to organizational changes within the company.

The Newport Beach, Calif.-based manager, one of four real estate managers handling ERS's real estate investments, had a 6.3 percent gain in the year from Sept. 30, 2001, to Sept. 30, 2002. However, several key staff members left when the company was put up for sale.

Even though the sale fell through, the ERS board was uncomfortable in staying with a largely new management team. The $92 million that was under assets by PM Realty will now go to Dallas-based Invesco, which lost 0.77 percent during that same period. The ERS real estate portfolio is worth $620 million and represented 9 percent of ERS's total portfolio.

Also, the eight-member ERS board welcomed a new member yesterday in Georgina Kawamura, the newly appointed state budget director for Gov. Linda Lingle's administration. She replaced the former budget director, Stanley Shiraki, on the board.

Other board members are Jackie Ferguson-Miyamoto, Odetta Fujimori, Darwin Hamamoto, Pilialoha Lee Loy, Richard Humphreys, Neal Kanda and Colbert Matsumoto.

State of Hawaii

E-mail to City Desk


Text Site Directory:
[News] [Business] [Features] [Sports] [Editorial] [Do It Electric!]
[Classified Ads] [Search] [Subscribe] [Info] [Letter to Editor]
© 2002 Honolulu Star-Bulletin --