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GERS Debt Approaching $1 Billion Mark

July 6, 2005 — Tuesday's Senate hearing on the proposal to enact the Retirement System Reform Act of 2005 was all about public opinion and support, as residents packed Legislative chambers, creating a town meeting-like atmosphere. With most in the crowd wearing Save GERS T-shirts, community concern about retirement benefits was evident to senators and all V.I. officials in attendance.
"The Government Employee Retirement System is in serious financial trouble and will collapse in less than nine years if nothing is done," said Hugo Dennis, state president of the V.I. chapter of AARP, to much applause from those in the audience.
Dennis said the prime reason for this is a large debt owed to the system by the government. Called unfunded liability, the sum of the debt is quickly approaching the $1 billion mark, leaving the GERS unable to provide needed benefits to retirees.
"Because of this unfunded liability, the employee receiving the benefits will have to pay for himself and the government," Judge Ive A. Swan said. Swan explained that when the employer—in this case, the V.I. government—does not contribute, then the employee becomes responsible for taking on their share.
"It comes down to who has the power to do what," Swan said. Because the GERS board cannot control contribution rates without Legislative input, Swan proposed that the Legislature be eliminated from the decision-making process.
"This way, the board can set the amount of contributions, and the employee isn't left compensating for what the government didn't do."
Swan also discussed the level of qualifications needed when hiring GERS employees or board members. "I don't want somebody with a sixth- or seventh-grade education making these decisions … the qualifications and training have to be improved," Swan said. "I don't want them to get educated about this when they get there."
Testimony given by Willis Todmann, acting GERS administrator, expressed much of the same concerns. "Today the annual benefits paid out exceeds $130 million … in effect, the system's economic value to this community extends well beyond the annual annuity benefits support of the 6,500 retirees and their dependents," Todmann said.
Todmann added that if GERS doesn't improve these conditions, "the repercussions in the community would be devastating, and much of the good life, as we now know it, would vanish immediately."
Consequently, Todmann's solutions to avoid the system's collapse hinged upon a separation of GERS and its board from the Legislature, allowing for flexibility in contribution rates and the ability to pursue alternative investments opportunities to bring in more money.
Currently, the board is only authorized to pursue investments with class-A securities, which has resulted in losses to the system of approximately $60,000. "The board must be authorized to invest in BBB or better-grade investment securities, as well as alternative investments, which would increase investment returns," Todmann said.
A separation would also allow GERS to set and adjust contribution values for the employer and employees, which would help pay off the unfunded liability and enable retirement benefits to be funded in advance of an employee's retirement date.
While this should already be happening under the Legislature's supervision, Todmann said that it is not due to the lack of proper funding. "The GERS has suffered greatly because now, as it stands, the Legislature and the administration determine when and how much funding we should receive. Had the system been properly funded on this reserve basis, the massive unfunded liability would not exist," Todmann said.
Additionally, GERS has been negatively impacted due to the result of generous Legislative mandates which also have not been funded, GERS Trustee Yvonne Bowsky said. These mandates have resulted in shortfalls in money coming in for the system, adding to the unfunded liability number.
For people who think that GERS would have too much authority with this separation, Todmann also recommended that the Legislature could consider limiting future contributions to a maximum increase of 1.5 percent in a fiscal year. "This would greatly enhance the possibility of the much-needed inflows to the system," Todmann said.
GERS officials also recommended the implementation of a Tier-II system of contributions, by which government employees hired during Fiscal Year 2006 would have a different level of benefits than employees still within the system. While this measure would mean that new employees would have to wait longer before they receive retirement benefits, it does enable more money to be generated.
Since it is the general trend of the government to reduce the size of the workforce, the system can no longer provide benefits without going into bankruptcy, Todmann explained in support of Tier-II legislation.
Indeed, after this statement, bankruptcy seemed to become the major theme of the evening, with former Sen. Donald "Ducks" Cole saying that GERS is the V.I.'s next category-10 hurricane.
"We can't have a system that is owed $900 million by the government and has only $1.2 billion in assets," Cole exclaimed. "That system will collapse—there's $84 million going in, and $120 million in benefits being supplied. Something has to be done." Cole suggested that GERS join forces with the Public Finance Authority in order to fund the debt. "They could take money from bonds, pay a portion to GERS for the unfunded liability and also give them some money to invest," Cole said.
Cole was also outraged that GERS assets—now being liquidated in order to fund the difference between what's coming in and what's going out—are not insured.
GERS attorney Alfonso E. Nibbs explained that membership in a pension plan insurance company requires that certain qualifications be met—ones that GERS cannot accomplish because of the unfunded liability. "If we did qualify for this program, there would not be debt," Nibbs said. "We have to pay our bills on time."
Sen. Ronald Russell suggested that GERS take the government to court and sue for the money owed. In reply to Russell's suggestion, GERS board members testified that they had attempted to, but the 3rd U.S. Circuit Court of Appeals had dismissed the case because "GERS and its members did not have the standing to sue."
"So basically, until we go broke, [the courts are saying] don't come to me," Nibbs said.
Russell responded by saying that "unfunded liability is the noose around the neck for GERS … the Legislature now has to take the lead in getting this corrected. The buck stops with us." All other senators agreed.
League of Women Voters Vice President Barbara Petersen added testimony calling for further revision of the bill, as it does not provide for a mechanism to ensure the payment of money owed by the government.
Petersen also suggested that GERS reconsider investments like hedge funds because they are "too risky for the system."
The bill, sponsored primarily by Sen. Louis Hill, also calls for the establishment of a medical review board to quickly and efficiently handle issues for those persons with disabilities, and measures that extend the terms and qualifications of GERS board members.
The Committee on Government Operations and Consumer Protection will continue hearings on the bill in St. Croix on Wednesday, July 6 at 6 p.m. at the Legislative Conference Room.
Senators present at Tuesday's hearing were Adlah "Foncie" Donastorg, Louis Hill, Juan Figueroa-Serville, Liston Davis, Terrence "Positive" Nelson, Shawn-Michael Malone, Ronald Russell, Roosevelt David, and Celestino White Sr.
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