LOS ANGELES — Hawaii's next finance director says his appointment is a sign that the new governor is serious about lowering the state's unfunded pension liabilities.
David Ige, who was sworn in as governor Dec. 1, named Wesley Machida, head of Hawaii's employee pension system, to head the Department of Budget and Finance.
Machida said he came to know Ige while working with Ige on pension reform in the governor's former role as Senate Ways and Means Committee chair.
"Ige was instrumental in getting a lot of pension reforms," Machida said. "We worked together on proposals over the past four years to lower the unfunded pension liabilities."
Machida, who has worked with all three branches of Hawaii government in various government and private industry roles, will replace Kalbert Young as head of the department, which oversees Hawaii's $14 billion Employee Retirement System, as well as the state budget and debt management.
When Machida, 56, officially assumes the role of finance director on Dec. 29, Kanoe Margol, his deputy at ERS, will become interim director of ERS.
Soon after Machida was promoted to head ERS in July 2010, after a decade as assistant administrator, he said he began working on long-term projections for the retirement system.
"I found by looking at those projections that it would only take one significant change to occur, before the system would be in danger of not being sustainable," Machida said. "We started to develop a plan as to how to get back on track."
His proposals — although not adopted in their entirety — were taken up by both outgoing Governor Neil Abercrombie and Ige, Machida said.
"He was a key component in Hawaii's ability to pay down unfunded liabilities, which helped move the funded ratio in a positive direction after several years of trending downward," Ige said in an emailed response.
Young listed reducing pension liabilities as well as other-than-pension retirement liabilities among his most significant accomplishments during his four years as finance director, along with substantial annual contributions to reserves and improving the state's overall debt profile.
Machida worked as a department head under Young.
Young, who will become vice president of budget and finance and chief financial officer for the University of Hawaii System on Jan. 1, said he likes Machida very much and thinks he will be good for the state.
"He has a very similar philosophy in terms of government finance," Young said. "He is a very sound conservative fiscal practitioner. I am glad he will lead the state to the next phase of its evolution as the next finance director."
Young modified the state's debt profile, which he said had a very volatile forward-looking profile with payments ramping up significantly when he started.
"Using refundings for savings and repositioning existing debt, coupled with new money transactions, we have been able transform the debt profile into a more optimal shape," Young said.
Hawaii's retirement system is now 61.4% funded, up from 60% in 2013, according to an actuarial report presented to state legislators during a Dec. 10 hearing. The state currently estimates it is on track to be fully funded by 2040, but it may take longer because the ERS board voted in September to lower the assumed rate of return from 7.75% to a more conservative 7.5% by 2017.
Hawaii began prefunding OPEB liabilities in 2013 with the aim of reaching 100% of its actuarially required prefunding level by 2019.
Hawaii retirees live on average into their early 80s, roughly five years longer than the national average, Machida said. In recognition, the ERS board made changes to the mortality tables that are higher and more specific to Hawaii, he said.
The state revises its actuarial assumptions every five years and the next evaluation is planned for 2016. The last report showed that the median lifespan of a female Hawaii teacher is 90, that the state had 47 retirees age 100 or older, and 1700 retirees 90 years and older, he said.
Major legislation was passed in May 2011 that reduced employee benefits by limiting spiking, partly through the exclusion of overtime in estimating employee annual pension payouts based on current salary. In one instance, Machida said, an employee with a $60,000 base salary worked enough overtime to bump that person's base salary to $200,000 a year. That results in a jump in pension benefits from $30,000 to $120,000 annually. Since employers are contributing at the base salary rate, it resulted in a payment shortfall that also contributes to unfunded liability, he said.
If they hadn't taken steps to turn things around, Machida said the funded ratio would have dropped to 50% and would have continued to decline.
Changes were made to the system used to pay benefits, and reforms were initiated on both the benefit side and the employee and employer contribution side, he said.
The work is not done, however. In order to make sure the system stays on track, it has to be vigilantly monitored, he said.
Machida veered back and forth from private to public service starting as an intern working as an auditor at what is now KPMG in 1982. He also worked in the early 1980s for a company that would become part of Ernst & Young and for Grant Thornton in the late 1990s as an auditor. His public service included stints at the Department of General Accounting Services and the Department of Attorney General.
"I have either worked directly for most of the departments in Hawaii's three branches of government or I have audited them," Machida said.
On the debt issuance side, Young also put a lot of effort into increasing the underwriter pool to help Hawaii achieve lower fees and interest rates.
Young said the size of syndicates on Hawaii general obligation bonds increased dramatically during his term, from between one or two per deal to between eight and a dozen.
Machida said that he plans to evaluate issuance fees and see if there are additional ways to lower costs.
His first step will be to establish a four-year strategic plan. On the list will be looking at methods of maximizing revenues from the state treasury by evaluating what interest rates investments are earning. He also plans to evaluate budgeting systems to make sure department heads are receiving all the information they need.
"As Director of Finance, Wes brings with him a breadth of financial knowledge in both the private and public sectors," Ige said. "Wes's experience as assistant auditor and as a certified public accountant ensures that Hawaii's finances will be invested in a thoughtful, accountable manner."