This marks my third “Annual Overview of Operations” as Administrator and Chief Executive Officer of the Government Employees’ Retirement System.
In my first Overview of Operations in 2023, I spoke, metaphorically, about the GERS glass being half full, and not half empty.
In my second Overview of Operations last year, I spoke about the GERS being a “glimmer of light” in an otherwise gloomy budget season. And, I trust that we have brought some more “glimmers of light” again this year in what has been another gloomy budget season.
In my third Overview of Operations this year, I will conclude by offering a detailed diagnosis of the Government Employees’ Retirement System of the Virgin Islands – a 65-year-old patient that has faced life-threatening conditions over the years.
The American Hospital Association advises physicians to use the following one-word conditions in describing a patient’s condition to those inquiring, including the media:
Good – Vital signs are stable and within normal limits. Patient is conscious and comfortable. Indicators are excellent.
Fair – Vital signs are stable and within normal limits. Patient is conscious but may be uncomfortable. Indicators are favorable.
Serious – Vital signs may be unstable and not within normal limits. Patient is acutely ill. Indicators are questionable.
Critical – Vital signs are unstable and not within normal limits. Patient may be unconscious. Indicators are unfavorable.
Dead – Vital signs have ceased. Patient has died.
I’m happy to paraphrase the American author and humorist, Mark Twain, by stating that “any reports of the GERS’ death were exaggerated.” So, fortunately, we can rule out “Dead” from the conditions that we will consider here today.
Similarly, however, we can state definitively that, despite the positive indicators shared with you thus far today, the GERS’ vital signs are not within normal limits. Based upon the Preliminary September 30, 2024, Valuation Results prepared by Segal, our actuarial firm, GERS has a Funded Percentage of 14.1%. as outlined earlier. That is to say, with an Actuarial Accrued Liability (“AAL”) of $3.91 billion, and a Market Value of Assets totaling $552 million, at September 30, 2024, GERS only has 14.1 cents in assets for every dollar of liabilities, on an actuarial reserve basis. To place this 14.1% Funded Percentage in proper context, a commonly used rule of thumb for what’s considered to be a “good” funding ratio is 80%. Even if one were to take the present value of the Funding Note, which is $1.65 billion, utilizing a 6% discount rate, the Funded Percentage would be 56.3%. Considerably better than 14.1%, but far less than fully funded.
GERS is a member of the National Conference of Public Employee Retirement Systems (“NCPERS”). According to its 2025 Public Retirement Systems Study, system-funded percentages in the United States had been averaging between 70 – 80% since the first half of 2020 and reached an average of 83.1% in 2024.
With a Funded Percentage of 14.1% (or even 56.3%), then, the GERS’ condition cannot be considered “Good” or “Fair,” as these both require the patient’s vital signs to be within normal limits. This leaves just “Serious” and “Critical” for our consideration. The distinction here is whether the patient’s vital signs are unfavorable, in which case their condition is “Critical,” or if the patient’s vital signs are questionable, in which case their condition is “Serious.”
Honorable Members of the Committee on Budget, Appropriations and Finance; other senators present, ladies and gentlemen, my considered assessment of the Government Employees’ Retirement System’s condition is that it has improved from “Critical” but remains “Serious.” The key determinants are:
- Some of its vital signs remain unstable, and
- Some of its indicators are questionable
I shall elaborate.
Let there be no mistake about it, one reason that the GERS’ condition has improved from “Critical” to “Serious” over the past couple of years is directly related to the historic Funding Note totaling some $3.8 billion over 30 years, or so, that was initiated in 2022.
However, when I state that some of the GERS’ vital signs remain unstable, I refer specifically to the unevenness of the annual cashflows over the thirty-year term of the Funding Note. As I have stated previously, this presents a challenge that must be carefully managed and overcome. To wit, annual contributions from the Funding Note are heavily backloaded, with half of the total contributions being funded in the last twelve years – mostly at the expense of the middle years (Fiscal Years 2033 through 2038).
The challenge, then, is to bridge the gap in the middle years in order to get to the $1.9 billion on the back end. If this is not achieved, the GERS is actually projected to become temporarily insolvent under two different scenarios.
First, an acknowledgment that, at long last, the rum cover-over rate has become permanent at $13.25 per proof gallon. It was an honor to travel to Washington, D.C. this past February at the invitation of Virgin Islands Congressional Delegate, Stacey Plaskett, along with Senate President Milton Potter, Senator Novelle Francis, Senator Kurt Vialet, Senator Marvin Blyden, GERS Board Chairman Dwane Callwood, and the Senate President’s Chief of Staff, Cosme Christian. While there, we met with several members of Congress, or their staff, to advocate in favor of making the $13.25 rum cover-over rate permanent.
Although the rum cover-over rate is increasing permanently, but not retroactively, from $10.50 to $13.25 after December 31, 2025, there is still a risk that the actual Funding Note payouts will be lower than originally anticipated due to lower overall demand in rum consumption. It was previously estimated that at the $10.50 rate, the Funding Note payouts were going to be about $20 million less than originally projected for 2023 and 2024. However, the actual shortfalls during those years were $34 million in 2023 and $56 million in 2024, for a total shortfall of $90 million.
Assuming that the $20 million shortfall due to the lower cover-over rate is accurate, then the estimated shortfalls in 2023 and 2024, due to lower rum consumption, were $14 million and $36 million, respectively. For projection purposes and to quantify the impact of the lower rum consumption risk, scenarios were run utilizing an average shortfall of $25 million per year in the original Funding Note payout schedule, at the $13.25 rate.
Scenario 1
Assumptions:
- Payroll Contribution Rate: 23.5%
- $25 Million Funding Note Shortfall per year due to lower rum consumption
- 6% Annual Investment Return
Under this scenario, the GERS is temporarily insolvent from 2033 to 2039 and would need at least $290 million from GVI General Fund revenues to pay full benefits.
Scenario 2
Assumptions:
- Payroll Contribution Rate: 26.5%
- $25 Million Funding Note Shortfall per year due to lower rum consumption
- 6% Annual Investment Return
Under this scenario, the GERS is temporarily insolvent from 2036 to 2038 and would need at least $82 million from GVI General Fund revenues to pay full benefits.
Several Additional Observations:
- Benefits Payments, Employee Contribution Refunds and Administrative Expenses are projected to be at least $300 Million per year over the next 15 years.
- With this in mind, we would ideally want our asset levels not to decline below $300 million to ensure that we have enough liquid assets to pay out retiree benefits in full every year.
- Even without lower rum consumption, if the employer contribution rate remains at 23.5% of payroll, GERS assets are projected to go below $300 million during the years 2032 through 2040, at a 6% investment return.
- If GERS earns a 4% investment return instead of a 6% return each year, assets are projected to dip below $100 million during the years 2036 through 2039.
For the reasons detailed above, in its meeting of September 26, 2024, and pursuant to Title 3 Virgin Islands Code Section 718(b), the GERS Board resolved that the Employer Contribution Rate be increased from 23.5% to 26.5%, effective January 1, 2025. In its meeting of November 18, 2024, the GERS Board of Trustees changed the implementation date to October 1, 2025. While this medicine may, admittedly, taste bitter, this increase in Employer Contributions is required if the Government Employees’ Retirement System of the Virgin Islands – a 65-year-old patient that has faced life-threatening conditions over the years – is to continue the further progression of its condition from “Serious” to “Fair” and from “Fair,” ultimately, to “Good.”
Mr. Chairman, that concludes my diagnosis and presentation.
Editor’s Note: Opinion articles do not represent the views of the Virgin Islands Source newsroom and are the sole expressed opinion of the writer. Submissions can be made to visource@gmail.com.
