GERS Reform Bill Submitted to Legislature

Gov. John deJongh Jr. has submitted draft legislation to Senate President Shawn-Michael Malone with major reforms to the government’s pension system. Committee hearings are likely to begin in May, Malone said Wednesday evening. [GERS Bill]

The Government Employee Retirement System has been sounding the alarm for years, saying the pension plan is heading toward insolvency. (See related links below)

In 1994 the Legislature made retirement benefits more generous and gave incentives for early retirement. Partly as a result, in 1996, the system started giving out more than it took in. By 2012 the annual deficit had reached $138.3 million, with contributions at $105.4 million and benefits and expenses at $243.7 million.

A blunt 2011 U.S. Department of the Interior’s Office of the Inspector General report found the GERS had an unfunded liability of more than $1.4 billion and could default in less than two decades – absent major increases in contributions, reductions to early retirements and other changes.

Since then, a variety of factors have worsened the situation, so now the unfunded liability stands at more than $1.8 billion and GERS projects the system will be out of money by 2023 if nothing significant is done.

In 2005 the Legislature passed a reform act, increasing contributions and creating two tiers of employees with younger employees getting fewer benefits for the same contributions. But the reform is not sufficient and has also not been fully implemented, so the problems remain severe.

In order for the retirement system to actually pay for itself and be solvent, the V.I. government’s actuaries have found employees and employers would have to contribute 43.2 percent of payroll, according to the report. They are now only paying in 25.5 percent – not nearly enough to support the current benefits and growing population of retirees.

The legislation submitted Wednesday is the result of a collaborative effort between the governor’s office, the GERS Board of Trustees and the Pension Reform Task Force, deJongh said.

"We have collectively drafted this legislation to remove the threat of insolvency, restore a positive trajectory to system funding, and attain a funded percentage of 42 percent by 2031 and forestall the 2023 risk," deJongh said. According to the governor, projections suggest the recommended measures will halt the declining percentage of funded GERS liability by 2018 and reverse the trend by 2024.

In his letter to Malone, deJongh said the suggested measures for correcting the pension system insolvency "will not be pleasant for any of the parties involved."

DeJongh outlined four steps addressed in the legislation to reduce the existing pension debt, estimated to be $1.8 billion in unfunded liability and a continuing annual disbursement that exceeds revenues by about $80 million. Those steps are:
– asking employers and employees to contribute a larger amount toward pension benefits;
– reducing benefits already being received and increasing the age and years of service needed before retiring;
– limiting the annual cost of living increase;
– and changing the formula used to calculate benefits.

The reform of GERS "is one of the most significant fiscal challenges facing our territory today. As difficult as this challenge is, the consequence of inaction is greater. Simply stated, if we fail to act, within a few short years the system will no longer have the capacity to meet its obligations to retirees on an annual basis," deJongh said.

Malone said Wednesday evening that the Finance Committee, headed by Sen. Clifford Graham, would take up deJongh’s bill, along with similar legislation submitted by GERS. The Senate would thoroughly examine all the issues and hopefully a consensus approach can be reached, he said.

"It is going to be tough. There won’t be any easy decisions. But if we don’t do something, it will jeopardize the whole system," Malone said.

Graham and Legislature Post Auditor Jose George, who were part of deJongh’s GERS task force, will analyze the bill from deJongh and the one from GERS, and then Graham will hold hearings, Malone said.

The Legislature has rescheduled to March 17 a meeting with the governor on the deficit and then will have to act on that and on its current backlog of legislative matters. "Then we are not going to meet during Carnival, so we are looking at early May," Malone said.

While painful decisions need to be made with GERS, the timing could hardly be worse, Malone said, adding that he may look at passing pension reforms but perhaps delaying the painful implementation.

Malone said considering this proposal and reforming the pension system are difficult "because it is coming at a time when the Virgin Islands economy is struggling. … Increasing the government and the employee contributions is most unfortunate right now. We are told the government has a deficit and the revenues are not coming in like we need," he said.

Everyone is being squeezed right now, with high electric rates hurting everyone and government insurance costs going up, making it that much more difficult to impose yet another burden on government employees and retirees, Malone said.

"We do know we have to do something to improve the system but this is really happening at a challenging time for us, so we will work to have the least impact made" to government employees, he said.

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