Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2004

State of Hawaii

Sir:

Your Committee on Labor and Public Employment, to which was referred S.B. No. 779, S.D. 2, entitled:

begs leave to report as follows:

The purpose of this bill is to create a "hybrid" contributory plan in the Employee's Retirement System (ERS), a new class H membership that provides a defined benefit retirement allowance while providing a minimum hypothetical account balance that is based on employee contributions.

For purposes of receiving testimony and facilitating discussion on the hybrid contributory plan, this measure was heard in conjunction with H.B. No. 2401, which proposes a plan based on S.B. No. 779, S.D. 2, and developed by ERS over the past two years.

Testimony in support of this bill was provided by the Hawaii State Teacher's Association. The Department of Budget and Finance and ERS testified in opposition.

During the 2001 Regular Session, the Legislature adopted S.C.R. No. 159, which directed ERS to conduct a study of current public sector pension benefits and make recommendations for enhancement or change, and to study the feasibility of adding an alternative defined contribution plan.

ERS conducted a comprehensive study and presented its findings and recommendations to the 2002 Legislature. In its recommendations, ERS proposed a hybrid contributory plan that would apply to new employees, class C noncontributory members, and class A contributory members.

It was believed that the hybrid contributory plan could enhance public sector pension benefits and, in turn, improve the recruitment and retention of public sector employees. Based on these findings, this bill was introduced during the Regular Session of 2003 to promote further discussion on the mechanics of the "hybrid" contributory plan.

Despite proceeding through the Senate, this bill was deferred last year at the request of ERS so that an actuarial study could be performed, and the design of the plan could be further refined. The actuarial study was performed pursuant to H.C.R. No. 97, 2003, the design was refined, and proposed legislation as embodied in H.B. No. 2401 was submitted to your Committee for review and deliberation.

Your Committee agrees with ERS's findings that the "hybrid" plan will greatly benefit the employees of the State. Many employees have neither the expertise nor the discipline to save and invest their money wisely, which is a necessity under a non-contributory retirement plan. Many employees and retirees who opted out of the contributory plan in the past have regretted that decision because they either spent the money that should have gone toward their retirement or made investments that performed poorly. The same can also be said of many employees who were hired after the contributory plan was discontinued.

Your Committee also acknowledges that the "hybrid" plan is designed to be cost neutral – an important factor given the escalating costs of employer contributions for pension accumulation.

After careful consideration, your Committee has amended this bill by deleting its substance and inserting the provisions of H.B. No. 2401. As amended, this bill would:

Additional technical, nonsubstantive revisions were made for clarity, style, and conformity.

Your Committee notes that this proposal will not require a general fund appropriation.

Finally, your Committee commends the exemplary efforts of the ERS, and in particular, Administrator David Shimabukuro, who devised the original concept of the hybrid plan and worked tirelessly over the past two years to bring this idea to fruition.

As affirmed by the record of votes of the members of your Committee on Labor and Public Employment that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 779, S.D. 2, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 779, S.D. 2, H.D. 1, and be referred to the Committee on Finance.