 Aloha and welcome back to Ehana Kako. We're here every week on the Think Tech O'a'i broadcast network. I'm Kili Iaki and I'm president of the Grassroot Institute. As you know from time to time we've been discussing a remarkable happening here in the state of Hawaii and that has been the privatization of our public hospital system. We've found that the government hasn't done that great a job of running our state hospitals and as a result services have been lacking for a good number of people who need those vital services. Well, our state legislature and governor this past year passed a law that allowed for the hospital's labor to be put out to the best bidder and several corporations competed for that. Kaiser won the contract, but you'd think that'd be the end of it. It's not at all. There has been high drama since that time and quite a bit of interference with the process moving forward. We're going to talk a little bit about that and some of the implications. Today I have Tom Yamachika, the president of the Tax Foundation of Hawaii. They do terrific work and Tom has been weighing in on this issue. He's been analyzing it since the start and we're going to gain his insights today especially in terms of what the cost to taxpayers really might be of the delays taking place with the privatization of Maui's hospitals. Now, let's greet Tom. Tom, welcome to the program. Thanks for having me back, Kili. It's always so great to work with you. I mean, we at the Grassroot Institute consider you just one of our team. We're privileged to publish your work and call upon you so frequently for tax information. Tell us a little bit about Tax Foundation itself. Well, we're a nonpartisan taxpayer watchdog organization. Our primary job is to watch the legislature of our state and what they do and especially in terms of public finance and taxation. So make sure our taxpayer dollars are spent wisely. That's right. You weigh in quite a bit delivering testimony and analyzing bills and so forth. I think they've gotten used to seeing us together because sometimes they call us up to the table to sit next to one another because we're going to kind of say the similar thing. We want government to be accountable and transparent with respect to tax issues. A lot of times that does happen, yes. You've been following quite a few issues this past year, and I know we're going to get to talking about the Mali Hospital soon. But what is some of the work that Tax Foundation has done recently? Well, in this past legislative session, I think what we have seen is that not much happened, which is a good thing because there was a whole lot of stuff that was proposed that would have been really burdensome for taxpayers. There was a 1% surcharge or 1% increase in the general excise tax for education proposed by the teachers association. There was a half percent surcharge in the general excise tax to fund some kind of long-term care benefit program that didn't pass either. There was an effort to raise the income tax rates from, as you know, we used to have the top rate at 11% at the end of 2015. It dropped back to eight and a quarter, which is still high in terms of the rest of the nation, but it's not stratospheric. And of course there were efforts to get that back to 11%. That's right. And you know, I'm so glad you said that it was good that not a lot took place because there were all of these measures for potential tax increases. And we fought long and hard. I appreciate the analysis that you brought to the table and listened to some of the testimonial you gave on behalf of Tax Foundation. Now go back to something you mentioned because it sounds fairly innocent and innocuous and that is the proposal that there would be a 1% increase to the GET, general excise tax, for the sake of needs within the schools or a half a percent, as you referred to, for elder programs and so forth. Now people can simply say, well that's only one and a half percent increase. But as you look at the numbers, what's the real impact of something like a one and a half percent increase to our GE tax here in Hawaii? Well, I think it's fair to say it would be a staggering amount. Even the half percent surcharge that we now have on Oahu only rakes in a quarter billion dollars every year. Now we're talking about a rate of about four and a half percent. Is that right overall for the GET? So the difference between the four percent which is imposed in the neighbor islands and the five percent here in Oahu, that's what I'm talking about. The differential is $250 million. And when people say, let's raise the GET by just one percent, when we really talk about that absolute measure of one percent, it's a quarter of the whole GET, isn't it? That's a massive amount right there. How much of our state budget is basically dependent upon this consumption tax, the GET? About half. That's really staggering, Tom. I know I look at these figures, the budget, and you do, and we go in and we analyze and we testify. But just to sit back and think about it, I don't think people know that half of the state's budget is funded by this consumption tax, the GET. Well, it's very true. And I think it's one reason why when people look at our tax system and they see how much it hurts people in the lower end of the income spectrum, that's one reason why. We call that a regressive impact, right? And the reason... And the reason how that works, how people who may not have all the tax strategies that a billionaire may have or people in the upper income levels, just ordinary upper middle class, explain how those people at the lower end of the income spectrum are hit hardest relatively in terms of the impact of the GE tax on them. Okay, well, it's simply explained like this. You know what income tax, we all pay income tax. But the rate is graduated based on how much we make. So if we make more, we pay more, relative to the number of dollars that we earn. And that's called a progressive tax. That's called a progressive tax. Okay. A regressive tax is one where you pay the same amount and it doesn't matter who you are. Like 4%. Right. So typically sales taxes, RGET, hotel room taxes and so forth, they're at flat percentages. They don't care how much you make. They're imposed the same rate nonetheless. So it could be a rich person buying luxuries. It could be a poor person buying subsistence materials, basic food, shelter. And it's the same rate. So what is the disproportionate impact upon those who have lesser income? They don't have as much money. So when the tax takes from their purchases, it is going to be larger relative to their total amount of money that they have available. In fact, in some cases, as you have pointed out in some of your research, that could be about 13% of someone's income at the lower end of the income ladder. Yeah, there was research done by, I forget which institution on the mainland, but we have that copied on our website. Well that's inordinate. Well, we're going to get to our topic today of the hospital system on Maui and its privatization and some of the problems of what's going on today. But there is a budget issue somewhat related to it and we'll get to that relationship later on and that is the state of our state's unfunded liabilities with respect to the employee retirement system and health insurance for our pensioneers. Tell us a little bit about that because I know Tax Foundation has weighed in on that. Sure. What's the situation here in Hawaii? Well, what you need to understand is that the systems that we're talking about, the employee's retirement system and the EUTF or the Employer Union Trust Fund, they are what we call defined benefit plans. What that means is that when you as a state employee reach a certain amount of service or a certain length of service with the state and you then separate from service for whatever reason, you're entitled to a certain dollar amount of benefits that is specified in the plan. And it's the same dollar amount of benefits whether the plan has money or not because the state then assumes the liability of having to pay them. So what happens is to assess the health of this kind of plan and this is as opposed to like a profit sharing plan or what we call a divine contribution plan which basically is your employer puts away a certain amount of money and the amount that you get at the end is based on how well that money does. Right. Okay. So the employer's responsibility is fulfilled by contributing a certain amount of money into the plan and we don't know how much is going to come out because there are so many risk factors like the markets and so forth. But you're saying it's not that way with our state retirement plans. Right. With our state retirement plans, it's basically the other way around, they specify what comes out and need the state to contribute what goes out. So we are making promises at the front end that we need to fulfill regardless of how well the fund performs in the financial market. That's correct. And so we can get ourselves into a pretty difficult situation. Which is why to assess the health of the plans, we bring in somebody called an actuary who works with statistical tables of the same way insurance products are priced. And they come up with the conclusion that okay, our ERS is underfunded. Okay, it's underfunded. By $8 billion. $8 billion. And the EUTF is underfunded by $12 billion. So that's about $20 billion of underfunding. In round numbers. And that affects the health of it tremendously and creates what we call a liability situation. Yeah, it's a problem that we don't have yet. But it's kind of... It's a problem we know is coming in the future. Right. Because of this. That's right. It's the train rolling down the tracks. We continue to operate, but we have to deal with it in draconian ways, really. But rather than talk further about this, which is fascinating, and maybe we'll have you back to talk about the unfunded liabilities, let's use this as a segue. Because one of the problems with what's going on with the Maui hospital transition and its delay and some of the legal issues involved here is that we may be putting ourselves into a greater unfunded liability position in the long run. And we'll come back to that, but let's go to the beginning of the story. Privateization. We had a situation here where our state hospital system on all the islands was not bringing in the income needed to sustain it. As a result, clinics were being shut down, people were being let go of, and services were not there. And so the legislature responded, at least for the three public hospitals on Maui, by saying, let's take the labor, which costs about 70% of the whole cost of the hospital, and let's put it out to bid to the best private firm, whether it be Kaiser, Hawaii Pacific Health, Adventist, or anybody else. And so they did that. Well, what are your thoughts about this move to privatize? Is that a good thing? It's actually quite a big thing here for Hawaii, because it would be the largest privatization from government-controlled situation to the private sector. What do you think about it? There are certainly policy reasons, both foreign against it, but it's certainly something that the government's got to try when the current system is not working. And it became clear that the current system wasn't working because of the massive amounts of money that the Hawaii Health Systems Corporation was losing every year. It was losing so much money that other government programs and services had to be curtailed to basically make up for it. Well, there were many people who applauded the decision of the legislature and governor to move forward with the privatization. And as you know, Kaiser was ultimately awarded the contract through competitive bidding and started to set up shop, really, to operate the hospital system. But there's been a bit of interference. There's a particular lawsuit. And tell us a bit about that that has come from the union leaders. Right, the government employees union, which is one of the unions that represents the hospital workers. The HGEA, along with the UPW. Yes, they sued to stop the privatization, basically saying that it was a breach of their contract because they had to deal with the state whereby they would provide the workers for these essential state facilities. And instead of having the contract run its course, as they had agreed many years ago when the contract started, the legislature passed a law that said, hey, we're going to stop. We're going to basically start firing people. And we are going to have their duties taken over by a different entity, not part of government. So that's kind of the crux of the union's complaint, and they went to federal district court. Right, and in federal district court it was dismissed, but they've appealed it to the Ninth Circuit, and that's currently pending. There's even more excitement and drama, but we're going to have to take a quick break and see while that case is pending now, what else is going on in the legislature. We're going to be right back after a short break. I'm with Tom Yamachika, president of the Tax Foundation, and when we return, we'll catch you up, bring you up to date with what's going on at the legislature, as well as the problems that had been created by the delay of the privatization. I'm Keith Leghiakina with Grass Root Institute. We'll be back on Nehanacaco in just a moment. You're watching The Big Boy. Hey everybody, my name is David Chang, and I'm the new host of the new show, The Art of Thinking Smart. I'm really excited to be able to share with you secrets on giving yourself a smart edge in life. We're going to have awesome guests and great mentors of mine from the political, military, business, nonprofit, you name it. So it's something for everybody. For a very healthy summer, watch Viva Hawaii. We are here live on Mondays at 3 p.m., and we bring guests like our best health coach, Elena Maganto, eat well and follow her tips. Viva la comida saludable. Aloha, my name is Josh Green. I serve as senator from the Big Island on the Kona side, and I'm also an emergency room physician. My program here on Think Tech is called Health Care in Hawaii. I'll have guests that should be interesting to you twice a month. We'll talk about issues that range from mental health care to drug addiction to our health care system and any challenges that we face here in Hawaii. We hope you'll join us. Thanks for supporting Think Tech. Welcome back to Ehana Kako, here every week on the Think Tech Hawaii broadcast network. Ehana Kako, that's based upon a venerable Hawaiian saying, Apule Kako, which means let's pray together. At the same time, we believe at the grassroots institute, that we need to Ehana Kako, which is let's work together. Imagine what would get done or what would not get done if we didn't work together. There's very little we could do, but together we can build a better government, economy, and society. And that's why we also like working with Think Tech Hawaii and take our hats off to all of the great staff and the overall producer, Jay Fidel, churning out about 35 hours of great content from Honolulu, sending it across the world every week. And you can get that on ThinkTechHawaii.com. Now back to Tom Yamachika, president of a very important organization for Hawaii, a very important voice, foundation of Hawaii, which serves as a watchdog on fiscal and tax issues at our state legislature. Tom, we were talking about the suit that the unions, the HGEA, leveled against the state's attempt to transition the Maui hospitals to private sector labor. Yes, and just before the break, I was mentioning that, or I was going to mention, that the district court in Honolulu here, they found that the union suit was without merit and they tossed it out. The union, as they had the right to do, appealed it to the Ninth Circuit Court of Appeals. And some judges from the Ninth Circuit came down to Hawaii, heard some arguments, and they basically imposed what we call a stay, which means everybody stop, you know, don't do anything, you know, don't continue with the privatization, but give this court a chance to weigh in. Right, and this stay has put a deadline date into the situation. What is that date, that September date? I believe September 30th. September 30th. By which, what needs to be held off? I mean, what needs to happen by September 30th? The parties are supposed to, you know, make efforts to resolve their case, but the privatization isn't supposed to be fully integrated and killed then. Okay, so now that's going on. And on the side, however, a new issue developed and that was the state legislature passed a law in which they awarded a severance package, or at least they proposed the awarding of a severance package for the employees who would no longer be under the contract that the unions had, and the interesting thing is that Kaiser had actually hired back about 95% of them and about 5% had taken the option of retiring, yet the legislature passed the severance package for benefits and for salary to cost maybe $40 million or $60 million. $40 million is the number I heard, but basically the idea was you have people who are no longer going to be state workers. So they have been progressing through what you and I know is a very, very generous retirement system and a very, very generous system of health benefits. That's going to stop. They're no longer going to be able to progress toward that. If they have invested in it, they're not going to... It's basically a train wreck for them, so can we take care of them is the question that the legislature was trying to answer. And so this... I understand they were trying to answer that question and give these people relief whether or not they found successor employment with Kaiser. Right. But the reality is the package Kaiser offered does provide the salary and the benefits and is a package that is at least comparable. So in essence, the need is no longer there, but still the challenge goes forth. The union still desire to get that $40 million plus severance package and our legislature passed it, our governor opposed it. Let me ask you this. Why did the governor oppose this package? Well, there are a couple of different reasons. The basic one was that it would cost too much. The second one was an issue that ERS's attorneys had identified in what they call the last minute, but basically was that the adoption of this particular severance package would disqualify ERS from federal tax exemption. And so let me take a step back. But before you do that, the two reasons were, first of all, the governor felt we just couldn't afford it. It was too costly. And secondly, it would jeopardize the status of the ERS in terms of its nonprofit status before the IRS. Right. Okay. Go ahead, continue to talk. Okay. So let me start off by saying that when you have pension plans, they're protected by a number of different federal rules and regulations, not only in the tax code, but also in something called ERISA, which is a labor law that's designed to protect pension plans so that they will continue to deliver benefits even after the employees that earn the benefits have left the company. I mean, how horrible it would be if somebody works for a company for 50 years, leaves the company, and the company goes bust and there's no more retirement plan. Right. So there are a number of qualification requirements that have built up both in the tax code and in labor law over all of these years. Now, you've heard of a 401K plan. Right. Okay. Now, what 401K means is there is a section of the tax code called section 401K. And what that does is it provides requirements to a situation where you have an employee benefit plan that provides you a choice of either you take cash now or you put it in the plan to take out later when you're retired. Right. And your tax bracket is lower, obviously. Your tax liability would be lower. Right. At least that's the theory. Yes. We can't predict the future, but that's the theory. Okay. Okay. 401K is basically for private sector. Okay. And there are provisions in it that say that it doesn't apply to government and it doesn't apply to government defined benefit plans. All right. Okay. And that's why we do here, because the benefits package that was in the bill that the governor vetoed and the legislature overrode, making it law, would give the separated employees a choice to either get some benefit in cash or if they declined that, they would have enhanced benefits in ERS. So this is a practice one would expect to have a benefit plan, but with regard to the government plan, that that's not part of the legal option. Is that what you're saying? Right. Okay. So we have already established that the solution that is sought by the legislature and the unions is something we can't afford, but secondly, it's got some legal issues that jeopardize the status of ERS. Now, we've only got a couple of minutes left. So let me put your crystal ball to work now and tell us what are some of the problems that we're going to potentially face with this decision. Okay. If the IRS holds that ERS is not a tax exempt organization or not a tax exempt employee plan, then a couple of things can happen. One is it's got to pay tax and its investment income. And in taxable year of 2014, or fiscal year of 2014, it made $2 billion. And that's just one year. That's one year. So we would go back and be held liable for the taxes due on the investment income of the fund. That could be exorbitant. I mean, that would be incredible. Yeah. I mean, the tax on $2.1 billion is an excess of $800 million. So that's what would come out of the fund, go back to Uncle Sam, and we wouldn't get that for our workers anymore. So in essence, if we don't have that money available, it deepens our unfunded liability. Yes, it does. Wow. And what's another consequence before we leave quickly? That the employees would be presently taxable on contributed amounts to ERS to the extent they're vested. So for example, if you're fully vested, an amount goes into ERS, you get taxed now. And employees are not anticipating this. So they'll have a surprise at the end of the year. In the end, I mean, ultimately, that's not good for these union workers to get into a situation like this where they have a surprise tax liability. Oh, yeah. They'll be, once they find out what the surprise is, there'll be consequences. And I'm not sure what they're going to be, but they're not going to be good. Well, Tom, thanks for pointing that out. And I'm going to thank you for being on the program today. I know you've written this up and it's available at Tax Foundation. What's that website? TfHawaii.org. TfHawaii.org. And also Tom's work is available at the Grassroot Institute. If you go to the Grassroot Institute website, grassrootinstitute.org, you can read about this situation where we've passed a law that is both unfunded and potentially illegal. Interesting goings on at the state legislature this year. We'll be back to talk about more of this and what else is happening in the state of Hawaii. I'm Kelea Akina with the Grassroot Institute on Ehana Kako, every week here on the ThinkTakawaii Broadcast Network. Much aloha to all of you. See you next week.