REPORT TITLE:
ERS; Hawaii Constitution


DESCRIPTION:
Amends State Constitution to protect employees' retirement system
accumulation fund from diversions such as reducing annual
employer contributions.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2029 
HOUSE OF REPRESENTATIVES                H.B. NO.           
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            
                                                             
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                   A  BILL  FOR  AN  ACT

RELATING TO THE EMPLOYEES' RETIREMENT SYSTEM.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The purpose of this Act is to propose an
 
 2 amendment to Article XVI, section 2, of the Constitution of the
 
 3 State of Hawaii to protect the employees' pension accumulation
 
 4 fund of the employees' retirement system from diversions that
 
 5 could either reduce the amount of investment earnings deposited
 
 6 into it or the amount of contributions from employers.
 
 7      The State's employees' retirement system provides a pension
 
 8 fund to assure retirement benefits promised to state and county
 
 9 employees.  Each year an actuarial consultant calculates the
 
10 State's and counties' cost of those benefits given certain
 
11 assumptions, such as future salary increases, mortality rates,
 
12 employee and employer contributions, the impact of legislative
 
13 changes, and investment returns.  This process establishes what
 
14 the State's and the counties' annual employer contribution
 
15 requirements should be.
 
16      The legislature finds that for the years before 1997, public
 
17 employers, the State of Hawaii and the four counties, benefited
 
18 from laws that reduced the employers' contributions to the
 
19 employees' retirement system by $1,200,000,000.  This practice,
 

 
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 1 which allowed for the skimming of investment earnings that
 
 2 exceeded a specific benchmark, reduced the employers'
 
 3 contributions to the retirement system, thereby giving the state
 
 4 and county governments more money to spend in other areas.  This
 
 5 was not a wise practice because investment earnings can fluctuate
 
 6 from year to year.  A combination of skimming during years when
 
 7 investment returns are good and failure to appropriate sufficient
 
 8 funds during bad years (years when investment returns are not
 
 9 very good) can negatively affect the pension fund to the
 
10 detriment of the pensioners.
 
11      Furthermore, pensioners or retirees are living longer so
 
12 that more benefits are being drawn over a longer time period.
 
13 The legislature's continued extension of the skimming practice
 
14 and the addition of more retirement benefits generally, has
 
15 increased the unfunded liability of the employees' retirement
 
16 system so that the unfunded liability grew from $749,000,000 in
 
17 1987 to $1,200,000,000 in 1996.  An unfunded liability is the
 
18 amount of money that is expected to be owed to current and future
 
19 retirees.  In 1997, the legislature realized that the employees'
 
20 retirement system must be allowed to retain all of its earnings
 
21 in order to liquidate its unfunded liability.  The process was
 
22 begun with an amendment to the law made by Act 327, Session Laws
 
23 of Hawaii 1997, so that the unfunded accrued liability would be
 

 
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 1 liquidated in twenty-one years, beginning July 1, 1995.  Among
 
 2 other things, Act 327 did away with the practice of skimming.
 
 3      Instead of allowing this corrective process to continue,
 
 4 however, the legislature in 1999 through Act 100 required that
 
 5 actuarial investment earnings in excess of a ten per cent
 
 6 investment yield rate be applied to annual contributions by the
 
 7 State and counties for fiscal years 1997 and 1998.  This restored
 
 8 the unwise practice of skimming and reduced the employers'
 
 9 contribution to the employees' retirement system.  As a sop, Act
 
10 100 also prohibited any similar law requiring the employees'
 
11 retirement system to apply actuarial investment earnings to
 
12 offset state and county contributions.  However, there is no
 
13 guarantee that this prohibition will not be violated in the same
 
14 manner in the future.
 
15      It is therefore the purpose of this Act to propose a
 
16 constitutional amendment to prevent any future diversions of
 
17 employer contributions to or investment earnings of the
 
18 employees' retirement system to any other purpose.
 
19      SECTION  2.  Article XVI, section 2, of the Constitution of
 
20 the State of Hawaii is amended to read as follows:
 
21                   "EMPLOYEES' RETIREMENT SYSTEM
 
22      Section 2.  Membership in any employees' retirement system
 
23 of the State or any political subdivision thereof shall be a
 

 
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 1 contractual relationship, the accrued benefits of which shall not
 
 2 be diminished or impaired.  All actuarial investment earnings of
 
 3 the employees' retirement system shall be applied to the
 
 4 employees' pension accumulation fund and no actuarial investment
 
 5 earnings of the employees' retirement system shall be diverted to
 
 6 any other purpose, such as reducing annual employer contributions
 
 7 by applying a percentage of the actuarial investment earnings as
 
 8 an offset."
 
 9      SECTION 3.  The question to be printed on the ballot shall
 
10 be as follows:
 
11      "Shall the employees' pension accumulation fund for public
 
12      employees be protected from diversions for annual employer
 
13      contributions?"
 
14      SECTION 4.  New constitutional material is underscored.
 
15      SECTION 5.  This amendment shall take effect upon compliance
 
16 with Article XVII, section 3, of the Constitution of the State of
 
17 Hawaii.
 
18 
 
19                              INTRODUCED BY:______________________