There was more medicine than sugar on Thursday as the Finance Committee heard government pension and budget officials testify that unpopular, unpleasant and difficult revenue-increasing measures need to be legislated or the government will run out of cash and the pension plan will collapse.
Despite recent increases in pension contributions of some of the more recently hired, the pension system will still collapse by 2022 without "a huge influx" of cash, officials said. And despite good revenue figures, the V.I. government faces a $140 million shortfall this year that cannot be filled by borrowing, budget officials testified.
Since at least the late 1990s, every Government Employees’ Retirement System administrator has urgently warned the V.I. Legislature that unfunded legislative mandates and early retirement incentives, combined with inadequate contribution rates for the pension levels, were bankrupting the system. Eleven years ago, in 2003, then-GERS Administrator Laurence Bryan warned the Legislature the pension plan would be broke by 2023. Some reforms were enacted in 2005 but not fully implemented at the time.
In 2014, GERS Administrator Austin Nibbs testified to the Legislature that if nothing is done, the system will have sold off all its assets and be unable to meet retiree pension payments by 2022, which is seven years away.
In January, GERS increased some less-senior employer and employee pension contributions to 20.5 percent and 9.5 percent of salary, and set up two additional 1 percent increases in the next two years.
While these are a step in the right direction, increased retirements and fewer government employees have added pressure on the system, which is still projected to cease being able to fully pay retirement checks in 2022, Nibbs said Tuesday.
"The rate increase is expected to increase contributions by $14 million annually," Nibbs said, adding that the unfunded liability stands at around $1.8 billion. The system has been paying more on pension checks than it takes in in contributions since 1996. In 2012, it spent $135.9 million more than it took in; in 2013, it spent $121.4 million more than it took in, and in 2014 the deficit was $129.2 million, he said.
To make the plan solvent and continue paying pensions into the future, it will take a large infusion of cash and benefit cuts, Nibbs said. "Contribution increases are not going to be enough," he said, urging the Legislature to enact pension reform measures from GERS and from Gov. John deJongh Jr.’s pension reform task force.
Sen. Novelle Francis said Hovensa’s pension had been taken over by the Pension Benefit Guarantee Corporation and asked if that could happen to GERS.
"There is no one to take us over," Nibbs said. Because it is a public pension, it is not part of the PBGC, and if it were to try to join, by expanding to have a private pension system as well, the funds cannot be commingled, so it would not help. But because of its huge unfunded liability, if it could join PBGC, GERS would be immediately placed in receivership, he said. As a result, the territory must act on its own.
"Something must be done. If we let this happen then I think shame on us," Nibbs said.
Later in the day, Acting Finance Commissioner Valdamier Collens reiterated his recent warning that the government only has about 16 days of cash on hand and a large budget gap that will need new revenues to fill.
"We have a projected cash-flow shortfall of approximately $140 million in Fiscal Year 2015," Collens said. The previous administration had projected a $97 million shortfall, but that included $57 million of new revenue generation from legislation "that is not presently enacted," Collens said.
It also does not include $40 million from a settlement for environmental damage on St. Croix’s south shore, he said.
Because the government is near its debt ceiling, if the government tries to go to the bond market again, it will not be well received, he said.
The government has seen some improvement in its position as a result of executive branch action to curtail hiring and cut travel, rental and cell phone expenses, as well as reduced fuel and utility costs from decreasing oil prices, Collens said. "However, the aforementioned initiatives alone cannot address the projected cash flow shortfall of $140 million. … The government of the Virgin Islands will need to enact revenue generating measures," he said.
Collens listed several potential measures, including a graduated income tax surcharge of 10 percent, a vehicle mileage tax, realization of customs duties, enactment of a sales tax on Internet transactions and changing the health insurance premium cost sharing ratio.
While this is not the comprehensive set of possible measures, any subset of these would require legislative action, he said.
Separately the Casino Control Commission Chairwoman Violet Anne Golden testified that Internet gaming in the territory is currently stalled.
“Until the Legislature amends the statue to modernize the Internet gaming to completely eliminate master service providers, as has been recommended by our advisors, and gives the commission the authority to select Internet gaming centers, we will not make progress,” Golden said.
She said the commission needs to have total control over the software providers, activities of operators, financial service providers and software equipment in order to move forward.
All committee members were present: Francis, Sens. Clifford Graham, Janette Millin Young, Sammuel Sanes, Kurt Vialet, Myron Jackson, Almando “Rocky” Liburd, Jean Forde, Marvin Blyden, Nereida “Nellie” Rivera-O’Reilly, Justin Harrigan, Terrence “Positive” Nelson, Neville James and Tregenza Roach.