Tackling Hawaii’s massive unfunded liability for future public pensions is going to be painful for the state, counties — and taxpayers, pension officials say.

The Hawaii Employees’ Retirement System was facing $8.15 billion in unfunded liabilities as of June 30, 2011, according to a new report. That represents the gap between what’s been promised in benefits to public workers and the money set aside to pay for them over the next 25 years. The figure swelled by 14 percent in one year.

The report said the system is only 59 percent funded, about 20 percentage points below the national average, and its health will likely worsen before it gets better.

Pension officials in a recent interview told Civil Beat there are only four solutions to tackle the debt, all of which the ERS board has tinkered with in recent years:

• Increase employer contributions
• Increase employee contributions
• Improve investment returns
• Reduce retirement benefits

“There’s no magic bullet,” said Colbert Matsumoto, chairman of the ERS board of trustees. “It takes a combination of all four.”

Lawmakers last year, at the urging of the ERS, approved legislation that will raise employer and employee contribution rates, as well as scale down benefits for future hires starting this July. The measure also reduced the fund’s assumed investment return rate from 8 percent to 7.75 percent.

But even with those changes factored in, the retirement system still faces the $8.15 billion shortfall between what it has promised and what it has to pay the benefits. And that was after the portfolio saw a 21 percent return on investments in 2011.

“It’s a mind boggling problem when you understand the gravity of it,” Matsumoto of the unfunded liability in an interview Friday.

He said fiscal restraints by the state and counties — pay cuts, vacancies and hiring freezes — have actually exacerbated the unfunded liability. That’s because pension contributions are calculated as a percentage of payroll, and the fund’s actuary assumes the government’s payroll and employment base will increase over time.

Further adding to the dilemma is that accrued pension benefits are characterized as a contractual obligation in the state Constitution. That means the state and counties would likely face court challenges if they tried to trim benefits for existing employees.

Beyond the four solutions that directly affect the pension system’s viability, Matsumoto said the “best solution is to maintain a level of economic growth” in the state.

That would mean increasing revenues either by raising taxes or growing the economy, he said. It’s obvious politicians and the public have no appetite for tax increases. And there’s no shortage of resistance to developments or projects that could spur economic growth, like rail, Big Wind and the Hawaii Superferry, for example.

But not addressing the problem now could create a “tax hell hole” for future generations, Matsumoto said.

Kalbert Young, the state’s budget director who also serves on the ERS board, said the state needs to be proactive about the unfunded liability.

“Market fluctuations on a large liability can easily grow the liability because the underlying unfunded liability base is so large,” he told Civil Beat in an email. “It is for this very reason that the state does need to be proactive and realistic in tackling these type of long-term liabilities — not only in the pension system, but also in the (Employer-Union Health Benefits Trust Fund).”

The health fund is in even worse shape. The EUTF, which covers health premiums for active and retired public employees and their dependents, was facing $14 billion in unfunded liabilities as of June 30, 2010, the most recent valuation available.