Oct. 23, 2008 — With more money going out than coming in, the Government Employee Retirement System is beginning to liquidate some of its investment assets in order to make current payments to retirees.
The GERS system has a long-term built-in deficit of more than $1 billion due to a series of benefit increases that were not matched by increased employee or employer contributions to the retirement plan. (See: "GERS Chief Raises Alarm On Unfunded Liability") The current global economic crisis is a factor as well,
The system’s portfolio, which had a market value of $1.3 billion a year ago was worth $970 million Oct. 10. (See: "Nervous GERS Trustees Meet Amid Global Financial Crisis").
In September, GERS took in $15 million and disbursed $17.8 million, GERS Chief Financial Officer Joseph Boschulte said at the GERS board's regular meeting Thursday on St. Croix. For Fiscal Year 2008, ending Sept. 30, GERS took in $149.9 million and disbursed $216 million, leaving the system a one-year deficit of $66.1 million.
"We are seeing the system has a liability each month," he said. "In the past the interest and gain on investment was enough to cover the responsibilities of the system … Right now the only way (to meet the obligations) is to draw down the system's assets because we are not getting the return on the investments."
GERS is liquidating $10 million in assets to cover the immediate shortfall.
Stuck with $1.3 million in Lehman Brothers bonds that have become nominally worthless in the wake of that company's demise, the board of trustees voted to hold onto the bonds and hope the ongoing federal financial bailout increases their value. GERS rules say it must liquidate any assets which slip below a triple-B rating. The bonds now have no rating and no nominal value, and Pimco, the large bond management firm retained by GERS, recommended retaining the bonds.
"Pimco argued, and I agree, that there is value in the securities and to wait until we see how the bailout affects their value. The alternative is for the system to lose $1.3 million if we sell them now."
The bonds mature in 2013 and beyond, so for the next several years, there is no loss incurred by holding onto the bonds, trustee Raymond T. James said. The board members present voted unanimously to make an exception to the policy requiring liquidating low-rated investments and retain the Lehman Bros. bonds.
GERS offers home loans to its members and GERS Administrator Austin L. Nibbs proposed reducing the required downpayment on GERS home loans to five percent, down from 10 percent.
"A lot of the younger members who have contacted me seem to be having a problem meeting the down payment," Nibbs said. "Young government employees who want a piece of the rock are having a problem making the 10 percent."
Trustee Yvonne E. Bowsky vigorously objected, arguing that lowering the requirements would put the GERS at risk of the same sub-prime mortgage problems that have shaken the U.S. and world financial markets.
"People with a downpayment show a certain sense of financial responsibility," Bowsky said. "People who walk off the street saying just give it to me, with no down payment or just very little downpayment, this is what happened in the states."
Vincent Liger, the board chairman, agreed that stringent requirements were needed, but argued Nibb's proposal is not equivalent to sub-prime mortgages.
"In the states people without employment were getting mortgages with no downpayment," Liger said.
The board voted to table the question until all board members were in attendance and could weigh in on the issue.
Present were: Bowsky, Liger, James and Marvin Pickering. Carver Farrow and Leona E. Smith were absent.
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