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GERS Officials: Unfunded Liability Nearing $1 Billion

July 15, 2004 – The Government Employees Retirement System is guaranteed to collapse within perhaps 10 years if economic reform measures are not instituted, the Senate Finance Committee was told Thursday by the system's officers in their overview presentation as part of the fiscal year 2005 budget hearings.
The GERS board submitted its proposed GERS Reform Act to Gov. Charles W. Turnbull in May. It is now in the hands of Sen. Louis Hill, the bill's main sponsor, who said on Thursday that it's being reviewed by the legislative legal counsel and should reach the Senate floor soon.
The act is the first piece of comprehensive legislation to be directed to the retirement system in its 45 years of existence.
The reform bill first came to public light last October at a meeting on St. Thomas of the Advocates for the Preservation of the Retirement System. Although the meeting had been publicized, only a handful of government employees came to hear about their financial future. Hill spoke at the meeting, along with the GERS board chair, Raymond T. James, who presented the legislation. (See "First GERS Reform Bill in 44 Years Surfaces".)
On Thursday, reading from a 38-page report documenting the beleaguered system's financial woes, Willis C. Todman, GERS chief executive officer, said the system's unfunded liability "is expected to be approaching the $1 billion mark as we speak here today." Unfunded liability refers to the negative difference between what the GERS pays out in retirement benefits and what it receives in employer and employee contributions.
In September 2001, the unfunded liability amounted to$731.7 million, the report states, up 44.7 percent from the 1999 level. By the time the 2003 actuarial valuation is completed later this year, Todman said, the figure is expect to increase by another $200 million.
The report covers the first three quarters of fiscal year 2003 – Oct.1, 2003, through June 30, 2004 — Todman said.
'Unfunded Legislative Mandates'
He appeared before the Finance Committee with James; Laurence E. Bryan, GERS administrator; Alfonso E. Nibbs, staff attorney; and Joanne Barry, Benefits Division director.
Burdened by increasing benefits paid out in the face of dwindling contributions, GERS has been further plagued by "a decade of unfunded legislative mandates," Bryan said.
For one thing, he said, an early retirement incentive enacted in 1994 and subsequently extended created annual shortfalls of $4.8 million for the original act and $1.1 million for the extension. As of June 30, 2003, GERS was owed a total of $11 million for costs resulting from this act alone, he said.
For another, in September 2001, $1.9 million from the General Fund was earmarked to cover early retirement for hazardous duty employees of the Water and Power Authority. But, Todman said, GERS has never received that funding.
"The cumulative under-funding resulting from 10 years of neglectful legislative mandates amounts to $125.6 million," he said.
The board has been raising concerns for several years about having to use investment earnings to fund retiree payouts. The government contributes about $50 million a year to the system and employee contributions amount to $23 million, for a total of some $73 million. However, GERS "pays $100 million a year in annuities to retirees," Todman stated, tapping into investment earnings to cover the shortfall.
According to a consultant report prepared in 2001, the statutory employer and member contribution rates are "not sufficient to meet the cost of funding the system on an actuarial reserve basis, as required by law." Contribution rates, set by statute, are currently 22.7 percent of the total government payroll.
Bill Calls for Increased Contribution Levels
The report said the current rates are insufficient to cover 40.1 percent of the payroll cost of the system, the level needed to maintain GERS operations. The consultant said the system needs to take in an additional 17.3 percent of the payroll immediately from combined member and employer contributions.
The reform proposal calls for both government and employee contribution levels to increase, with one schedule of increases for current workers and another for future hires beginning in fiscal year 2005. Todman said the proposed changes would "allow GERS to reduce, or at least slow down, the future deficit growth of the burgeoning unfunded liability."
Responding to questions from Sen. Celestino A. White Sr. about the reform legislation, Hill said the bill is in the hands of the legal counsel primarily to ensure the correct "legislative" language. There are no substantive changes to the board's proposal, he said.
Queried repeatedly by White, Hill would say only that the bill will reach the Senate floor "soon." "I have asked the counsel when is 'soon,' and she said 'soon,'" he said.
Hill said his office has been working closely with GERS administrators and board members for six months on the bill. "I take no credit for the legislation," he said to the GERS representatives. "You're the pros."
Todman also cited statistics from the most recent GERS audit, for fiscal year 2002. (He said the FY 2003 audit report is expected later this month.)
According to the FY 2002 audit, conducted by KPMG, the system had plan net assets of $1.1 million, a drop of $77.2 million, or 6.36 percent, from the FY 2001 total of $1.2 million.
For FY 2002, GERS received $62.8 million in employer and employee contributions and paid out $97 million in benefits — a $34.1 million shortfall. It was worse in FY 2001: GERS took in $80.1 million and paid out $123 million.
And as for this fiscal year, Todman said, so far, "we have had to liquidate $29 million in assets to fund the annuity payroll."
Despite the "demonstrated need for reform," Hill said, "some legislators are reluctant to impose measures which would not be popular, such as increased employee contributions. The fact remains that if we don't do something, the system will fail."
Hill also said government employees as a whole appear to have "a passive attitude. They don't seem to realize the system could crash."
He told the retirement system representatives that "I think GERS does a truly good job," but he suggested the need for an educational outreach program for workers.
WICO Pushing St. Croix Ship Visits
The Finance Committee also heard an overview report from The West Indian Co. on Thursday morning. Edward Thomas, WICO president and chief executive officer, had upbeat news, some of it for St. Croix.
Thomas said he has been in "intense discussions" with member lines of the Florida-Caribbean Cruise Association in an attempt to entice ships back to St. Croix. In his statement, Thomas said Mediterranean Shipping Co. has committed to several calls at St. Croix between January and April 2005.
Responding to senators' questions later, Thomas said what he actually has suggested to the F-CCA is a plan for member visits: "I asked if each of them — there are 14 lines — could make a visit once every two months… They are looking at that."
He said will next be meeting with F-CCA officials on Aug. 27 in Miami.
Turning to the St. Thomas-St. John district, Thomas said Princess Cruises has increased it Eastern Caribbean trips by 40 percent, with its flagship Caribbean Princess scheduled to make weekly calls at St. Thomas starting in October.
And, he said, with the inaugural call of the Voyager of the Seas in November, St. Thomas will be the only Caribbean port that is a stop on the itineraries of all five voyager class vessels.
The Queen Mary II will make 13 calls at St. Thomas between Nov. 13 and Feb. 22, Thomas said, and Carnival Cruise Lines' new megaship Carniva
l Valor will start biweekly calls on Dec. 22.
Passenger numbers don't tell the whole story, Thomas said. It is passenger and crew spending that determines the strength of the industry in the community. According to the Bureau of Economic Research, he said, 1.8 million passengers visited in 2003, after arrivals had dropped to 1.65 million for 2002 in the wake of the terrorist attacks of Sept. 11, 2001. But more important, Thomas said, spending increased to $273 per passenger and $110 per crew member.
Beautification Considerations
Hill asked Thomas about the status of an Anti-Litter and Beautification Commission project to renovate the pump house on the eastern shore of the Charlotte Amalie harbor. Plans to turn the structure into a tourist kiosk have gone by the wayside in light of the commission's recent financial problems. Also, Hill said, there was a title problem with the property.
Thomas told Hill he would check into the project's current status.
Thomas brought up his own concerns about the Charlotte Amalie Vendors Plaza. "It's a disgrace," he said. "Cruise lines always want to know what that ugly thing in the middle of town is." He suggested looking at Antigua's plaza for inspiration. "It's attractive and doesn't appear to be expensive to construct," he said.
Hill, noting continual downtown parking problems on St. Thomas, said he is working on legislation to create a two-story parking lot where the municipal lot now is. Thomas mentioned the highway reconstruction plans for the Havensight and Long Bay areas. He said plans call for the work to be completed in "just one season, not two."
The committee was scheduled to hear from the Housing Finance Authority, the Law Revision Commission and the Commission on Uniform State Laws in the afternoon session.
Committee members present for the morning hearings were the chair, Sen. Adlah "Foncie" Donastorg; and Sens. Roosevelt David, Shawn-Michael Malone and Hill. The other members, Sens. Norman Jn Baptiste, Luther Renee and Ronald Russell, were absent. Sen. White, also present, is not a member of the committee.
The Finance Committee's fiscal year 2005 budget hearings, chaired by Donastorg, are in their third week, with sessions scheduled almost every weekday until July 30.

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