Hawai'i's state and county governments have to come up with as much as $11.1 billion to pay for the retiree healthcare benefits they have promised civil servants over the next 30 years.

The unfunded liability was disclosed in a state consultant's report that tallied the costs of retiree medical and health benefits for Hawai'i's nearly 100,000 employed and retired public workers.

While news of the health benefit liability comes too late for consideration in this year's legislative session, legislators next year are expected to wrestle with how to handle the burden. The options range from taking no action to finding money to create an investment fund.

"There's a range of things, but before we make a determination on what we would do we need to get some more information," said Sen. Rosalyn Baker, D-5th (W. Maui, S. Maui), head of the Senate Ways and Means Committee. Baker was briefed on the report Wednesday. "It's not something you have to fix overnight, nor can we fix it overnight."

The health benefits are separate from the pension benefits, which are funded through the Employee Retirement System with its $10.7 billion in assets. Unlike that system, the state and county governments have no investment fund to pay for retirees' health benefits. Those are covered on a pay-as-you-go basis.

State and local governments have long offered generous retirement and other benefits to attract workers away from the private sector. Among other benefits, the state pays 100 percent of the medical, prescription drug, dental and vision insurance premiums for workers who retire after 25 years.

The issue of how much these benefits will cost on a long-term basis has moved to the forefront recently after the Government Accounting Standards Board, a group overseeing government accounting rules, decided to require the disclosure of unfunded retiree healthcare liabilities. Not including the information didn't provide a complete picture of states' financial obligations.

In the past year, most states and local governments have been retaining actuaries to look at the benefit payments and how much will be owed in the future.

The consultant Aon Corp. was hired to study Hawai'i's unfunded liability. Key legislators, government officials and union representatives were briefed on the report this week by state Comptroller Russ Saito. Saito said the information also was shared with trustees of the Employer-Union Trust Fund and the Hawaii State Teachers Association's Voluntary Employee Beneficiary Association, which have a role in administering retirement benefits.

SEVERAL OPTIONS

Some states have moved beyond getting the estimates to looking at ways they can lower their accrued liability, with some considering setting aside money that can be invested much like the state ERS does to help pay for retiree pension benefits.

The Aon report on Hawai'i said the state and counties' accrued liability would total $11.1 billion if nothing is done and the pay-as-you-go method is maintained.

Under an aggressive pre-funding scenario, used as an example in the Aon report, the accrued liability would be cut to $7 billion. This would involve the state boosting its contribution toward funding the benefits to $591 million annually and earning an 8 percent return on money that's invested.

That's about $340 million more than what state and county governments currently pay per year, or roughly equivalent to nine times the annual operating budget of the state public libraries.

Saito said it's likely that legislators will consider a range of options, including funding levels that are higher or lower than those discussed in the Aon report.

In other states there have been a range of options explored, including selling bonds to capitalize an investment fund, lowering of retirement benefits and raising taxes.

Baker said it's still too early to say what approach the state and counties will adopt and that they will be monitoring how other states deal with the issue.

State House Rep. Marcus Oshiro, D-39th (Wahiawa), the chairman of the House Finance Committee, said there is plenty of time for all interested parties to meet to see if they can reach a consensus on the issue.

"Nothing should be taken off the table prematurely," said Oshiro, explaining that the Legislature is looking at a similar issue with respect to the ERS. A conference committee is looking at bills that cure the ERS' $5.3 billion unfunded actuarial liability over a 25- or 29-year period. They include a provision that limits or restricts benefit enhancements.

"We should have a gathering of all the stakeholders," Oshiro said. "Let's have a frank and honest discussion of all the options available to us."

CREDIT RATING AT STAKE

The state may have little choice in choosing between a pay-as-you-go system or starting to pre-fund the liability. It's expected that bond rating agencies will start taking the accrued retiree medical benefits liability into account in future years, and not showing some progress toward working down the obligation may result in a lower credit rating for the state.

That would translate into higher costs when the state goes to borrow money for construction and other projects by selling bonds. Standard & Poor's, in its most recent note on Hawai'i's debt ratings, noted the retiree healthcare benefit liability had yet to be quantified. It also noted that it was keeping tabs on the unfunded liability of the ERS, which has declined recently.

It noted the state's ratings outlook could be changed if the retiree obligation didn't appear to be manageable and the state's improved financial picture wasn't maintained.

The actuarial accrued liability for state and county retiree healthcare benefits is estimated at $11.08 billion under the current funding system. That's more than twice as much as state tax revenue in the last fiscal year.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.