The Government Employee Retirement System will go broke and cease being able to pay out benefits in about a decade if contributions to the plan do not sharply increase, Administrator Austin Nibbs told the Senate Friday. It is a message he has delivered for the past five years.
Total contributions received in fiscal year 2011 were about $88 million less than what was paid out – a flow of red ink that is growing worse, so that for the nine months ending June 30, GERS took in $99.2 million less than it paid out to retirees, Nibbs told the Finance Committee during budget hearings.
More recently, market conditions have also been less than helpful to the GERS portfolio, he said. Between March 30 and June 30, the market value of the GERS portfolio decreased from $1.1 billion to $982 million, due to a market loss of $30 million, drawing down $40 million to pay retirees and other factors, Nibbs said.
The 2005 GERS Reform Act began to move the system in the right direction, and its slight increases in contributions for a second tier of more recently hired employees are helping, but are not enough, Nibbs said.
Structural imbalances from past increases in benefits that were not funded with increased contributions play a role, Nibbs said. But a declining ratio of active employees to retirees receiving benefits is exacerbating the problem, he said.
In 1982, there were 6.6 active employees for every retiree, according to data in the GERS presentation to the Senate. By 1995, that had gone down to 2.58 to one, and at this time last year it was 1.39 to one.
Last year’s Economic Stability Act’s strong retirement incentives have reduced that ratio further by shrinking the ranks of workers paying into the system and moving those same workers over to expand the ranks of retirees receiving benefits, Nibbs said.
There are about 9,935 active members and 8,141 retirees, for a 1.22 to 1 ratio the lowest ratio ever. The smaller that ratio, the more each active employee would have to contribute to pay all the retirees.
Since 2006, contribution rates rose from 22.8 percent to 26 percent of payroll, with employees paying 8.5 percent and the government 17.5 percent, Nibbs said. But over that same time, the contribution level needed to fund the program increased from 43.3 percent to 52.7 percent. And the 8 percent paycut in the 2011 Economic Stability Act "increased the required contribution to 58.4 percent due to the lowered salary base," he said.
If nothing changes, "the system is expected to run out of money in 2023," he said.
GERS has taken some steps in recent months, he said. Effective October 1, 2013, the GERS board voted to increase the contribution rate for Tier 1 and Tier II employees by 1 percent each year for three years, starting October 2013. And the contribution rate for legislators was increased to 15 percent and that for judges to 17 percent. Also, the board has changed the retirement age for Tier II regular employees to age 60 to 65 with 10 or more years of service – a change from past practice of allowing employees to retire after 30 years, regardless of age.
But these are not enought to stanch the flow of red ink, he said, showing senators a report outlining the effects of different policy changes on the solvency of the system.
Leon Joyner Jr., vice president of The Segal Company, presented a financial analysis of GERS, showing the projected impact of an array of possible actions, under different economic assumptions.
On the down side, even very rosy economic and investment projections only extend solvency one or two years if contributions are not increased dramatically. But on the positive side, bold action can salvage the system if it is done soon, Joyner and Nibbs both emphasized.
Joyner said the system will remain solvent indefinitely and the trust fund will start to grow again if the employee contribution is kept at 8.5 percent and the employer contribution is increased by three percent a year from its current 17.5 percemnt of payroll until it reaches 44.5 percent of payroll, when combined with changes to retirement ages and the indefinite suspension of cost of living increases. Increases spread between the employer and employee would acheive the same result, Joyner said.
"We must face this reality and we are not going to get too far blaming, backbiting and denying," said Sen. Carlton "Ital" Dowe, the committee chairman. "To do nothing to me is not an option," he said.
Any changes should happen soon, and would go into effect in October 2013, Nibbs told Dowe.
GERS now owns Renaissance St. Croix Carambola Beach Resort after its owners defaulted on a $15 million loan from GERS, Nibbs confirmed to the Senate during his testimony.
In late 2009, GERS loaned Carambola $15 million on a 10-year note. It was disbursed and GERS has received $2.1 millin in principal and interest, he said. But on May 11, NIibbs had GERS foreclose on the loan, "as a result of Carambola defaulting on its principal and interest payments," Nibbs said. "The Marriott Flagship and franchise agreement will continue," he said.
GERS Board Member Raymond James defended the loan and reassured senators that GERS was not at risk for the debt.
"I know there are issues with Carambola, but we will get our $15 million back," James said. "Unlike an investment in the stock market, we have the property as an asset," he said.
Another GERS loan made in 2009 of $3.3 million to Seaborne Airlines is doing well, he said. To date, GERS has received $340,000 in principal and $913,000 in interest. Seaborne has requested a modification to the loan which is before the board Nibbs said. Seaborne is hoping to take advantage of the departure of American Eagle from the territory to expand and take some of those passengers, according to Nibbs.
Government employees who are members of the system pay eight percent and employers 17.5 percent of salary for 25.5 percent, but to actually sustain promised benefits into the future would take "at least 43 percent of payroll," Nibbs said.
"For the past three years, I have reported that without a significant cash infusion and or increases in the
contribution rates … the system will run out of assets if nothing is done," he said.
More recently, market conditions have also been less than helpful to the GERS portfolio, he said. Between March 30 and June 30, the market value of the GERS portfolio decreased from $1.1 billion to $982 million, due to a market loss of $30 million, drawing down $40 million to pay retirees and other factors, Nibbs said.
GERS was before the senate to discuss its 2013 operating budget. Since a 1998 act of the Legislature, the GERS has financed its own operations instead of having the government pay administrative costs, Nibbs said. The total budget for GERS is projected at around $15 million, he told the senators.
No votes were taken at the information-gathering budget oversight hearing.
