Gov. Albert Bryan Jr. and his senior staff met Monday with the Government Employees Retirement System’s Board of Trustees, GERS Administrator Austin Nibbs and Virgin Islands legislators to discuss solutions to the unfunded liability of the pension system, according to a statement from Government House.
The statement says Bryan is “committed to protecting retirees, protecting vested workers and implementing sustainable funding sources for GERS.”
The statement did not list any specific actions the government could take to lessen the impact of the pension’s looming insolvency.
The pension system has been liquidating its investment fund to make current payments for more than a decade and will likely cease being able to pay full pension checks sometime in 2024. If extreme and politically unpopular measures are taken, that could be delayed by one or two years. Or if GERS cannot sell some of its assets or the markets take a downturn, the cliff may arrive sooner. Once the trust fund is drained, the only resources available will be current contributions, which will amount to less than 50 percent of what is needed.
In principle, the V.I. government will be liable for the remainder, but it is not apparent how the government could absorb the necessary additional $130 million in annual costs. The government has been in financial difficulty and faced chronic structural deficits since the 2012 closure of the Hovensa refinery.
As far back as 1998, the system was giving out more in benefits than it was collecting in contributions.
That year GERS gave out $11.7 million more than it took in and projected an unfunded liability – pension payments it would not be able to pay – of about $518 million. The pension system was already in crisis.
For a few years, solid returns on a billion-plus investment portfolio allowed the trust fund to continue to grow in dollars, but with a growing projected unfunded liability.
By 2003, GERS officials were looking into the future at a projected $732 million in unfunded pensions unless sharp increases in contributions were enacted right away.
By 2006, the unfunded future pension payments came to over $1 billion, and the GERS trust fund had a market value of $1.2 billion. At this point, it was starting to spend more of its trust fund than it was earning on investments and the trust fund began to shrink.
By 2011, the unfunded liability stood at more than $1.4 billion. GERS was selling more and more of its portfolio to meet current benefit payments.
The trust fund has been shrinking by about $70 million to $100 million per year. It shrank by $72 million from 2013 to 2014, despite good investment performance. It shrank an additional $128 million from 2014 to 2015, with investment losses of $28 million, according to GERS budget testimony.
As of January 2016, the trust fund had shrunk to $751 million, not counting many tens of millions of dollars in real estate and millions of dollars in outstanding loans. It has lost more than $100 million per year in the intervening four years. The Senate passed modest increases for new employees in 2005, creating two tiers of pension members. But those reforms, which were never enough to fully address the problem, were not implemented until 2011, blunting their impact.
Gov. John deJongh Jr.’s 2008 budget increased employer contributions for newer employees from 14.5 percent to 17.5 percent. With 8 percent employee contributions, that raised most contributions to almost 26 percent of payroll – a significant step, but not enough to reverse the tide.
The severity of the steps necessary to address the problem has increased steadily with each year since the crisis began, until now it is far beyond any normal budgetary action or possible increase in contributions.
In 2011, a Department of the Interior report found contributions needed to be raised to 43 percent of payroll to make the system whole. It pointed to a series of acts of the V.I. Legislature that increased benefits without increasing contributions, as the main cause of insolvency, along with a shrinking ratio of current employees to retirees.
Since then, Govs. deJongh and Kenneth Mapp both made solving the GERS insolvency a priority. Both of Bryan’s immediate predecessors took some actions on pension reform and in both cases the Legislature enacted some, but not all, of the proposals. None of the actions taken have been of a magnitude that would be able to address the problem.
In 2011, as part of a broad emergency economic stabilization bill, the Legislature mandated that $7 million of federal alcohol taxes remitted to the territory every year, often called the rum cover-over, be spent on GERS.
In 2013, the Legislature amended that law, to make pension benefits more generous, worsening the problem.
Gov. deJongh created a pension reform task force to recommend solutions in 2011, which led to draft legislation in March 2014. The Senate, then deeply hostile to the outgoing governor, declined to act on it.
In January 2015, the GERS Board of Trustees increased executive branch employee contributions – for Tier II new hires only – to 20.5 percent, and employee contributions from 8.5 to 9.5 percent, with small additional increases scheduled for 2016 and 2017. That was still far below the 43 percent of payroll that would have been necessary in 2011– and even further below what is necessary now.
In September 2015, the Senate passed legislation largely based on deJongh’s previously rejected 2014 proposal, but only after removing much of its contribution increases. Before senators weakened the reforms, GERS actuaries projected it would have almost no effect on when the system stopped being able to make full pension payments.
Many, including former V.I. Attorney General Claude Walker, have pointed the finger at local business loans given out by GERS as the culprit, in effect blaming the GERS management for poor decision making. That is inaccurate because the amounts involved in those loans are minuscule in comparison to the rate at which the pension’s trust fund is being sold.
The pension plan and the government have taken other steps to try to shore the system up and GERS increased employee contributions this year.
But the collapse still looms.