Large numbers of senior government employees retiring this year due to incentives included in the recent emergency budget-balancing Economic Stability Act will add tens of millions of dollars to a nearly $100 million annual shortfall, Government Employee Retirement System Administrator Austin Nibbs said during Senate budget hearings Tuesday.
This new burden is just the latest straw on the back of the system, which already has an unfunded liability of more than $1.5 billion. Unless retirement contributions increase, the system cannot continue much longer, he said.
The problem lies in the ratio of people contributing to the retirement system to people receiving benefits, Nibbs said. In 1982, there were 6.6 active employees for every retiree. By 1995, that had gone down to 2.58 to one. Right now, there are 1.4 active government employees paying into the system for every retiree receiving pensions. The smaller that ratio, the more each active employee would have to contribute to pay all the retirees. There are currently 10,741 active members paying into the system and 7,695 retirees and beneficiaries, Nibbs said.
The Economic Stability Act’s strong retirement incentives ($10,000 cash for leaving and paying three percent more into GERS if they stay) for all employees with 30 or more years of service is going to reduce that ratio further by shrinking the ranks of workers paying into the system and moving those same workers over to expand the ranks of retirees receiving benefits, Nibbs said. As a result, GERS’ actuary projects the retirement system will receive $11 million less per year and the unfunded liability will increase by $26.4 million, Nibbs said.
Eight-percent salary reductions in the same emergency budget balancing act will drain about $5.4 million more, he said.
"Although we are sensitive to the budget deficit … (the pay cuts and workforce reductions) will hurt the system’s liquidity and cash needs and further increase the unfunded liability if other revenue sources are not identified to replace the lost contributions," Nibbs said.
But these sums are details at the fringe, while the system hemorrhages ever larger amounts with each passing year, Nibbs said, as he has every time he has appeared before the Legislature for the past four years.
In 1996, GERS received contributions of $71.7 million and paid benefits and expenses of $73.3 million, for a $1.6 million deficit and the problem has continued ever since, he said.
"For the past four years, total contributions on an average have been $77 million less than benefits and expense payments," he said. For the first nine months of 2011, the deficit is $83.8 million – more than the deficit for all of 2010.
Government employees who are members of the system pay eight percent and employers 17.5 percent of salary for 25.5 percent, but to actually sustain promised benefits into the future would take "at least 43 percent of payroll," Nibbs said.
"One of the major reasons for the significant unfunded liability is the unfunded legislative mandates going back to the 15th Legislature," Nibbs said, listing nine unfunded mandates enacted by the V.I. Legislature from 1983 through 2001. Legislation in ’84, ’94, ’95, ’00 and ’01 all expanded early retirement while four separate acts passed in ’01 increased retirement benefits for various classes of employees, according to data supplied by Nibbs in his testimony. But these legislative grants of cash to retired voters do not include provisions to pay for them.
For one example, a recent U.S. Inspector General review found the Early Retirement Incentive, Training and Promotion Act of 1994 cost the system $121 million in contributions. The Legislature appropriated $31 million to make up for the loss, resulting in a net loss of $90 million to the system, he said. "That is just one of nine unfunded mandates," he said.
"For the past three years, I have reported that without a significant cash infusion and or increases in the
contribution rates … the system will run out of assets if nothing is done," he said.
Sens. Louis Hill and Carlton "Ital" Dowe both said legislation would be introduced early next year to address the growing problem.
"This is the tough vote, the vote we have all been running from for a decade now, but it is a vote every single one of us understands is necessary," Hill said.
More recently, market conditions have also been less than helpful to the GERS portfolio, he said. As of June 30, the market value of GERS’ portfolio was $1.1 billion and as of August 19, had decreased to $1 billion, a decline Nibbs said was tied to market declines after rating agency Standard & Poor downgraded the U.S. credit rating from AAA to AA+.
The 2005 GERS Reform Act began to move the system in the right direction, and its slight increases in contributions for a second tier of more recently hired employees took effect this year, Nibbs said, asking the Legislature not to do anything to change or weaken the law.
"The system will not survive another 10 years if we tinker with the reform act of 2005," he said.
GERS was before the senate to discuss its 2012 operating budget. Since a 1998 act of the Legislature, the GERS has financed its own operations instead of having the government pay administrative costs, Nibbs said.
The GERS operating budget for 2012 is projected to be $15.4 million, with $6.7 million for salaries and wages and $2.1 million for benefits and employee Medicare and Social Security contributions, according to figures from the Legislature’s post auditor. Utilities are projected to consume $650,000 and "other services and supplies" some $3.1 million.
No votes were taken at the information-gathering budget oversight hearing.
