Howard Rog, an actuary for GERS, said the estimated time period of the system's collapse could increase or decrease based on the rate of return GERS receives on its investments. Rog said there have been years where GERS has gotten a rate of return under its standard return rate of 8 percent, thereby sliding the system closer to insolvency.
Andre Wright, GERS financial advisor, said unfunded legislative mandates, increasing early retirement, declining mortality rates, and poor investment opportunities have compounded the debt.
"However, probably the most significant factor is that the plan's sponsor, which in this case is the V.I. government, has not adequately contributed to the system, causing the liability to increase by 8 percent annually," he said.
Willis C. Todmann, GERS acting administrator, said because of these factors, GERS is paying out more in benefits than it is collecting in contributions, and has had to liquidate $2.8 million in assets every two weeks to just to pay off its personnel obligations.
Rog added if GERS continued on its current path, the "worst-case scenario" is that the system would be paying out close to $400 million annually in benefits at the end of 20 years without having any assets to liquidate.
Rog and Wright discussed two recommendations submitted by GERS to take care of the unfunded liability. Wright said GERS' primary strategy is to ask senators' approval for the issuance of $600 million in pension obligation bonds and a $49.9 million increase in the government's annual contributions to the system. This would provide an immediate cash infusion into the system and bring the unfunded liability down to $431.8 million, he said.
The second recommendation, Rog said, is a $550 million bond issue, an extra $43.9 million in annual government contributions and an allocation to GERS of $25 million to $50 million annually from HOVENSA's tax payments to the government over a 20-year time period. This solution would bring the unfunded liability down to $300 million.
Wright said the GERS team tried several different scenarios before ending up with the two recommendations. He explained GERS did not plan to take care of the entire debt all at once, but instead develop a method of payment which would be financially feasible. Both recommendations also do not include an increased contribution rate for employees currently paying into the system.
Upon questioning from senators, Wright added the GERS fiscal team did not think about the government's current financial state when arriving at the figures for the two recommendations. "This is a debt owed to the system by the government," he said. "I don't care where the funding comes from–it's not our responsibility to tell you how to come up with the money. It's our responsibility to tell you the best, and most practical ways, of taking care of this debt."
Sen. Ronald E. Russell further asked if GERS could seek federal funding or liquidate some of its assets to take care of the liability. Rog said "No" to both questions.
Wright further explained the pension obligation bonds would not cause the government to go further into debt. "It would be like refinancing your home. The bond would be used to refinance the existing debt or obligation, not add new debt to the system," he said. Wright added pension obligation bonds are being used in many states across the U.S. for similar purposes.
However, Wright did say that GERS faces the risk of not achieving a high rate of return when re-investing the bond proceedsa risk that could cause the system to lose more money.
Nathan Simmonds, chair of the V.I. government's fiscal team, said both recommendations are not viable for the government at this point in time. However, Simmonds added the government's recently "improved cash flow" does make it possible to develop another long-term solution to the problem.
Simmonds said since GERS does not have the authority to issue pension obligation bonds, the responsibility falls upon the V.I. government to issue and pay back the recommended bond amounts.
Simmonds also said utilizing corporate income taxes from HOVENSA to make payments toward the debt is not a reliable source of funding. Since HOVENSA made its first corporate income tax payment to the government this year, there is no reliable history to judge whether the company will be able to keep up with the payments, he said.
Wright said he did not agree with this assessment. "For us to say that the HOVENSA tax is not sustainable over the next 10 to 15 years, I have a problem with that. The world is short of oil and oil products. HESS has been here over 20 years, the government's given them incentives, they're now paying back on those incentives, and I believe they will stay here," he said.
Simmonds further said the government does not have the "bonding capacity" to issue $600 million worth of bonds. He explained that the Revised Organic Act limits the amount of funding collected for bond debt to no more than 10 percent of the assessed value of taxable real property.
Because of this limitation, he said, there is only about $250 million presently remaining in bond capacity for the government. Simmonds added that if spent, this money would eliminate the government's ability to obtain financing for future needs such as health facilities, public safety, schools or roads.
Additionally, such funding would be needed in the advent of a hurricane, since the Federal Emergency Management Agency will no longer provide funds for revenue losses beyond $5 million following a natural disaster, Simmonds said.
Senators questioned Simmonds about whether the government could use a portion of the over $60 million in unanticipated revenues generated by the government this year for the debt.
"While most of this money was appropriated in the Omnibus Authorization Act and the supplemental budget sent down by Gov. Charles W. Turnbull in September, we were told there was over $100 million in excess revenues realized," Sen. Norman Jn Baptiste said.
Simmonds said this was not true, and that there is a possibility that the government may have over-appropriated the funds. Simmonds did add, however, that GERS was allotted the $6.3 million appropriated in the Omnibus Bill for the unfunded liability.
Simmonds subsequently asked senators for another 90 days to find a way to fund the debt. He said more collaboration between the two parties was needed, and that the government team was not able to work with GERS on a solution until Tuesday night.
Carver Farrow, GERS chairman, said 90 days was too long a period of time, but settled on 60 days. Farrow also promised to work in conjunction with Simmonds and his team to come up with a solution to the unfunded liability.
"It's clear that the GERS financial advisors are not on the same page as the government's financial advisorsnot even close," Sen. Lorraine L. Berry said at the end of the meeting.
Berry added that when a final recommendation does come back, it would go to the Senate's Finance Committee in the form of a bill.
All senators were present at Wednesday's session.
Share your reaction to this news with other Source readers. Please include headline, your name and city and state/country or island where you reside.