Feb. 24, 2009 — The Government Employees' Retirement System is hemorrhaging its principal to meet current retiree payments, GERS officials told the Senate Financial Affairs Committee Tuesday.
For GERS to generate enough money to keep paying retirement annuities, employees and employers would need to pay almost twice as much into the system as they do now. The current economic downturn has substantially weakened the system's investment portfolio, officials said.
"For years we've been paying out more than we collect, and for years the return on our investments has covered the difference, is that correct?" asked Committee Chairman Neville James.
"In a basic sense, yes," said GERS Chief Financial Officer Joseph Boschulte. "Nine or 10 years ago, the portfolio regularly generated a net annual profit of around $10 million dollars, and that would offset the payment deficit locally."
James pointed out the number of government employees contributing to the system had increased since 2006. According to GERS figures, there were 9,841 employees contributing into the system in 2006 and 6,731 retirees receiving annuities. In fiscal year 2008, the roles of active employees contributing to the system had grown to 11,108, but the number of retirees grew much less, to 6,919.
"Do we have to keep hiring more employees to generate the contributions we need?" James asked.
"That is one option," Boschulte said. "Another option is to increase the contribution from the employee or the employer. … Talking to our actuaries, in order for the system to balance, to meet its needs, the current combined contribution of 25.5 percent of payroll should be 43.5 percent, so there is a significant gap."
The Legislature had tried to help GERS in the past, James said, mentioning two appropriations the Legislature made for lump-sum payments to GERS to shore up its fund. One was a $40 million appropriation in October 2006 in the waning days of the Gov. Charles W. Turnbull administration, then re-appropriated for other needs in 2007, James said.
Sen. Nereida "Nellie" O'Reilly asked how long the fund would last if no changes are made.
"These are rough estimates," said GERS investment advisor Gino Reina of Segal Advisors. "If we return to eight-percent returns per year going forward, the system would run out of assets in the neighborhood of 15 to 20 years from today."
Right now, however, the system is not making eight-percent returns. With the economic downturn, it is losing money rapidly.
"The portfolio as a whole lost about 21 percent for the last calendar year," Reina said.
But Reina and GERS officials believe the market woes are a temporary threat, while the built-in unfunded liability is more urgent.
"Like most investors, we have sustained a decline in the overall value of the portfolio," said GERS Board of Trustees Chairman Vincent Liger. "However we are confident that due to the diversification of our portfolio, we are well-positioned to minimize losses over the long run."
Reina agreed the market downturn has been serious, and said no one knows when it will turn around.
"But in five to seven years, there is confidence the stock market will go back to returns of eight to10 ten percent a year," Reina said. "It is not positive now, but the market is forward-looking. If investors see the light at the end of the tunnel, the stock market could start recovering by the end of the year."
The thin silver lining, meanwhile, is that many stateside pension plans are doing much worse.
"Pension plans on the mainland have lost an average of 26 percent of their value, while ours is down about 21 percent," Reina said.
No votes were taken at the oversight hearing. Present were James, O'Reilly and Sens. Terrence "Positive" Nelson, Michael Thurland and Usie Richards. Non-committee member Sen. Craig Barshinger attended, too. Absent were Sens. Adlah "Foncie" Donastorg, Wayne James and Celestino White.
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