HB1356.DOC

SECTION 1. The legislature finds that the health benefits funding mechanism established in this Act is the next best alternative to establishing a self-insured health benefits program for public employers and their employees. In 2011, Hawaii's unfunded health care liabilities peaked between $15,000,000,000 and $17,000,000,000. Meanwhile, healthcare premium costs have risen from $505,000,000 in fiscal year 2004 to about $873,000,000 in fiscal year 2013. This is an average increase of $40,800,000 per year.

According to Act 268, Session Laws of Hawaii 2013, the State and counties have to put down an annual contribution that could be as much as $500,000,000 per year for the next thirty years starting in 2019 to pay down the unfunded liabilities for other post-employment benefits. Prior to 2019, Act 268 mandates the State and counties to contribute an annual contribution according to an increasing funding schedule based on a percentage of the liability. Combined, these costs together will exceed $1,000,000,000 in fiscal year 2016 and are expected to increase. The State and counties cannot afford to pay for both the increasing cost of healthcare premiums as well as the prefunding of the liability.

For other post-employment benefits, most state governments, including Hawaii, currently follow a pay-as-you-go approach, paying an amount each year about equal to the benefits distributed or claimed in that year. Other post-employment benefits standards set forth by the Governmental Accounting Standards Board do not mandate the prefunding of other post-employment benefits.

Paying for both the increasing costs of healthcare premiums as well as prefunding other post-employment benefits is not sustainable into the foreseeable future with the State's current and projected revenues. Some of the easiest ways to address the unfunded liabilities for public employee health benefits are to:

(1) Raise revenues by increasing taxes;

(2) Reduce benefits to state and county employees, retirees, and their dependents;

(3) Reduce the workforce of State and county employees; or

(4) A combination of any of the above.

Raising taxes for the healthcare needs of State and county employees places an unfair burden on the State's general population. Raising the general excise tax would be a regressive policy that would disproportionately impact those who can least afford it. Raising property taxes at the county level would unfairly target property owners and landlords, the costs of which would likely pass down to property renters.

Also, any reduction in benefits would be unfair to state and county employees, retirees, and their dependents who were promised healthcare benefits under the terms of their employment. Further, a reduction in state and county employees would be detrimental if it reduces necessary government services.

The State needs a more affordable and less painful solution. Therefore, the legislature finds that it is in the best interest of the State to:

(1) Establish a system to manage the healthcare needs of active and retired state and county employees, retirees, and their dependents, consisting of the following funds:

(A) Current Hawaii employer-union health benefits trust fund, which collects premium contributions from employers and employees;

(B) Current other post-employment benefits trust, which is used to prefund other post-employment health and other benefit plan costs for retirees and their beneficiaries; and

(C) A newly established rate stabilization reserve fund to be used for funding when there is insufficient money in the Hawaii employer-union health benefits trust fund to cover benefit costs. The reserve fund will be used to prevent frequent increases in premium contributions required from active employees and employers of the State; provided that these funds shall not be raided and moneys shall be used only for the purposes authorized by this Act;

(2) Stop employer contributions to the other post-employment benefits trust once the separate accounts for each public employer within the separate trust fund has a combined subaccount balance of at least $2,000,000,000;

(3) Transfer any investment income and interest from the other post-employment benefits trust to the rate stabilization reserve fund at the end of each fiscal year once the trust has a combined subaccount balance of at least $2,000,000,000; and

(4) Transfer any remaining balance at the end of each fiscal year in the Hawaii employers-union health benefits trust fund to the rate stabilization reserve fund.

Also, the Hawaii employer-union health benefits trust fund projects a seven per cent investment return from the money in the other post-employment benefits trust. Once the trust fund has a balance of $2,000,000,000, the investment income interest at seven per cent is $140,000,000. This investment income and interest would be transferred to the rate stabilization reserve fund to prevent frequent increases in premium contributions from the employees and employers of the State and counties.

The governor is required to prepare a six-year program and financial plan for the State encompassing all state programs every odd-numbered year pursuant to section 37-69, Hawaii Revised Statutes. The money saved from not having to prefund the unfunded health liabilities of the State and counties for the next thirty years beginning in 2019 will increase funding flexibility for the State and lead to a more balanced six-year program and financial plan. These savings could be used to fund the employee retirement system, public and charter schools, the Hawaii health systems corporation, or other funding needs of the State and counties, including rail transit.

Survival and taking control of our destiny is the goal of this Act. The financial viability and future of Hawaii is at stake. The understanding, encouragement, and support of everyone in the public and private sector, including employee unions and employers, is needed to solve the State's unfunded liabilities, which have the potential to bankrupt the State.

Accordingly, the purpose of this Act is to, among other things:

(1) Establish a rate stabilization reserve fund to provide reserve funding to stabilize the Hawaii employer-union health benefits trust fund at times when that trust fund has insufficient moneys to cover the costs of providing health and other benefits plans for employee-beneficiaries and dependent beneficiaries when there is insufficient moneys in the trust fund; and

(2) Cap the required annual contributions to the other post-employment benefits trust once the separate accounts for each public employer within the separate trust fund has a combined balance of at least $2,000,000,000.

SECTION 2. Chapter 87A, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§87A- Rate stabilization reserve fund; establishment; purpose. (a) There is established a rate stabilization reserve fund to be placed within the department of budget and finance for administrative purposes.

(b) The rate stabilization reserve fund shall provide reserve funding to stabilize the fund when there is insufficient money in the fund to cover the costs of providing health and other benefit plans for employee-beneficiaries and dependent-beneficiaries as required by this chapter. Unless otherwise specified by law, the rate stabilization reserve fund shall not be subject to appropriation for any purpose and shall not be subject to claims by creditors of employers or the board.

(1) Moneys transferred from the fund;

(2) Interest from the separate trust fund established to prefund other post-employment health and other benefits plan costs for retirees and their beneficiaries pursuant to section 87A-42; and

(3) Appropriations from the legislature.

(d) The rate stabilization reserve fund shall meet the requirements of the Governmental Accounting Standards Board regarding employment benefits trusts."

SECTION 3. Section 87A-31, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

"(b) [The fund, including any earnings on investments, and rate credits or reimbursements from any carrier or self-insured plan and any earning or interest derived therefrom, may be used to stabilize health and other benefit plan rates; provided that the approval of the governor and the legislature shall be necessary to fund administrative and other expenses necessary to effectuate these purposes.] Any remaining balance in the fund in excess of $100 at the end of each fiscal year, shall be transferred to the rate stabilization reserve fund established in section 87A- ."

SECTION 4. Section 87A-42, Hawaii Revised Statutes, is amended as follows:

1. By amending subsections (a) and (b) to read:

"(a) Notwithstanding sections 87A-31 and 87A-31.5, the board, upon terms and conditions set by the board, shall establish and administer a separate trust fund for the purpose of receiving employer contributions that will prefund other post-employment health and other benefit plan costs for retirees and their beneficiaries. The separate trust fund shall meet the requirements of the [~~Government~~] Governmental Accounting Standards Board regarding other post-employment benefits trusts. The board shall establish and maintain a separate account for each public employer within the separate trust fund to accept and account for each public employer's contributions. Employer contributions to the separate trust fund shall be irrevocable, all assets of the fund shall be dedicated exclusively to providing health and other benefits to retirees and their beneficiaries, and assets of the fund shall not be subject to appropriation for any other purpose and shall not be subject to claims by creditors of the employers or the board or plan administrator. The board's powers under section 87A-24 shall also apply to the fund established pursuant to this section. Notwithstanding any law to the contrary, any earnings on investments from the assets of the trust fund shall be transferred to the rate stabilization reserve fund established in section 87A- at the end of each fiscal year once the separate accounts for each public employer within the separate trust fund have a combined balance of at least $2,000,000,000.

(b) Public employer contributions shall be paid into the fund in each fiscal year, and commencing with the 2018-2019 fiscal year, the amount of the annual public employer contribution shall be equal to the amount of the annual required contribution, as determined by an actuary retained by the board[.]; provided that no public employer contribution shall be required if the separate accounts for each public employer within the separate trust fund have a combined balance of at least $2,000,000,000."

2. By amending subsection (f) to read:

"(f) For the purposes of this section, "annual required contribution" means a public employer's required contribution to the trust fund established in this section [~~that is sufficient to cover:~~

~~(1)~~ ~~The normal cost, which is the cost of other post-employment benefits attributable to the current year of service; and~~

~~(2)~~ ~~An amortization payment, which is a catch-up payment for past service costs to fund the unfunded actuarial accrued liability over the next thirty years~~]."

SECTION 5. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 6. This Act shall take effect upon its approval.

INTRODUCED BY:	_____________________________

HOUSE OF REPRESENTATIVES	H.B. NO.	1356
TWENTY-EIGHTH LEGISLATURE, 2015
STATE OF HAWAII