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Interior Department Calls for GERS Fix

In a blunt report released this week by its Office of the Inspector General, the U.S. Department of the Interior joined the chorus warning that the V.I. Government Employee Retirement System will stop paying checks unless the V.I. Legislature increases employee and employer contributions.

With an unfunded liability of more than $1.4 billion, GERS "could default in 14 to 19 years or less," Mary Kendall, DOI’s acting inspector general, wrote in a memo prefacing the report. Kendall sounded the same concerns GERS administrators have raised every time they have testified before the Legislature for at least five years.

"Factors that have contributed to this situation include insufficient contribution levels, an unhealthy ratio of active to retired members and unfunded legislative mandates," Kendall wrote.

In order for the retirement system to actually pay for itself and be solvent, the V.I. government’s own actuaries have found employees and employers would have to contribute 43.2 percent of payroll, according to the report. Today, they are only paying in 25.5 percent – not nearly enough to support the current benefits and growing population of retirees.

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While many systems have unfunded liabilities or are hurting due to the financial downturn, the V.I. is at exceptional risk. The average state retirement plan is funded at 96 percent of what is needed to be solvent, but GERS has only 60.7 percent of the funding it needs to be solvent, making it "one of the most underfunded plans in the nation," according to the report.

Exacerbating the problem is an increasing proportion of retirees to active employees. In past years, the system typically had more than 12,000 active members and about 5,400 retirees, for a ratio of 2.2 to one. But by 2010, government had shrunk so the system had about 10,800 active members and 7,500 retirees, "for a perilously low ratio" of 1.4 to one, according to the report.

Early retirement giveaways passed by the Legislature in 1994 helped feed this trend. Those early retirements cost the system $121 million in contributions, which the Legislature offset with a $31 million appropriation – leaving a $90 million hole, according to the report.

In 2005, the Legislature passed a reform act, increasing contributions and creating two tiers of employees with younger employees getting fewer benefits for the same contributions. But the reform is not sufficient and has also not been fully implemented, so the problems remain severe.

As a result of all these factors, in 2010, GERS took in about $117 million in payroll contributions and spent about $208 million on benefits. Like a vise, contributions and benefits together are squeezing $5 to $6 million out of GERS’ trust fund every single month to pay current benefits, according to the report.

GERS Administrator Austin Nibbs could not be reached for comment Friday afternoon. However, all of the report’s conclusions echoe similar statements made by Nibbs and other GERS staff during GERS Board of Trustee meetings and frequent testimony before the Legislature.

The OIG report recommends Gov. John deJongh Jr. quickly take several actions to begin turning the situation around. Most significantly, it recommends deJongh should work with the Legislature "to develop and implement measures to improve the Retirement System’s sustainability," and "ensure that any future early retirement legislative provisions are adequately funded."

In his official response, deJongh agreed with the overall thrust but said the situation is even worse than the report projects. Based on the most recent data, deficits "will result in the system running out of funds in 10-12 years," deJongh said.

The governor said he has been raising warnings about the problem since his first state of the territory address in 2007 and increased the employer contribution from 14.5 percent to 17.5 percent proactively. His administration had hoped to use growing rum excise tax revenues to help plug the hole, but due to declines in other tax revenues, those revenues were needed for the government’s regular expenses, he said.

Retirement incentives, pay cuts and hiring freezes instituted this year, while necessary due to an immediate budget crisis, also have an impact on the retirement system, deJongh said.

DeJongh submitted an action plan with his response. His administration will have a task force working with the Legislature to "develop and implement realistic measures to enhance the sustainability of the retirement system," by the end of the first quarter of fiscal year 2012, deJongh said in his plan.

In her letter prefacing the report, Kendall wrote that deJongh had been responsive. But due to the seriousness of the situation, Kendall asked the DOI’s Office of Insular Affairs to "(e)nsure that the Virgin Islands Government provides documentation that demonstrates implementation … of actions … to avoid default."

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In a blunt report released this week by its Office of the Inspector General, the U.S. Department of the Interior joined the chorus warning that the V.I. Government Employee Retirement System will stop paying checks unless the V.I. Legislature increases employee and employer contributions.

With an unfunded liability of more than $1.4 billion, GERS "could default in 14 to 19 years or less," Mary Kendall, DOI's acting inspector general, wrote in a memo prefacing the report. Kendall sounded the same concerns GERS administrators have raised every time they have testified before the Legislature for at least five years.

"Factors that have contributed to this situation include insufficient contribution levels, an unhealthy ratio of active to retired members and unfunded legislative mandates," Kendall wrote.

In order for the retirement system to actually pay for itself and be solvent, the V.I. government's own actuaries have found employees and employers would have to contribute 43.2 percent of payroll, according to the report. Today, they are only paying in 25.5 percent – not nearly enough to support the current benefits and growing population of retirees.

While many systems have unfunded liabilities or are hurting due to the financial downturn, the V.I. is at exceptional risk. The average state retirement plan is funded at 96 percent of what is needed to be solvent, but GERS has only 60.7 percent of the funding it needs to be solvent, making it "one of the most underfunded plans in the nation," according to the report.

Exacerbating the problem is an increasing proportion of retirees to active employees. In past years, the system typically had more than 12,000 active members and about 5,400 retirees, for a ratio of 2.2 to one. But by 2010, government had shrunk so the system had about 10,800 active members and 7,500 retirees, "for a perilously low ratio" of 1.4 to one, according to the report.

Early retirement giveaways passed by the Legislature in 1994 helped feed this trend. Those early retirements cost the system $121 million in contributions, which the Legislature offset with a $31 million appropriation – leaving a $90 million hole, according to the report.

In 2005, the Legislature passed a reform act, increasing contributions and creating two tiers of employees with younger employees getting fewer benefits for the same contributions. But the reform is not sufficient and has also not been fully implemented, so the problems remain severe.

As a result of all these factors, in 2010, GERS took in about $117 million in payroll contributions and spent about $208 million on benefits. Like a vise, contributions and benefits together are squeezing $5 to $6 million out of GERS’ trust fund every single month to pay current benefits, according to the report.

GERS Administrator Austin Nibbs could not be reached for comment Friday afternoon. However, all of the report's conclusions echoe similar statements made by Nibbs and other GERS staff during GERS Board of Trustee meetings and frequent testimony before the Legislature.

The OIG report recommends Gov. John deJongh Jr. quickly take several actions to begin turning the situation around. Most significantly, it recommends deJongh should work with the Legislature "to develop and implement measures to improve the Retirement System’s sustainability," and "ensure that any future early retirement legislative provisions are adequately funded."

In his official response, deJongh agreed with the overall thrust but said the situation is even worse than the report projects. Based on the most recent data, deficits "will result in the system running out of funds in 10-12 years," deJongh said.

The governor said he has been raising warnings about the problem since his first state of the territory address in 2007 and increased the employer contribution from 14.5 percent to 17.5 percent proactively. His administration had hoped to use growing rum excise tax revenues to help plug the hole, but due to declines in other tax revenues, those revenues were needed for the government's regular expenses, he said.

Retirement incentives, pay cuts and hiring freezes instituted this year, while necessary due to an immediate budget crisis, also have an impact on the retirement system, deJongh said.

DeJongh submitted an action plan with his response. His administration will have a task force working with the Legislature to "develop and implement realistic measures to enhance the sustainability of the retirement system," by the end of the first quarter of fiscal year 2012, deJongh said in his plan.

In her letter prefacing the report, Kendall wrote that deJongh had been responsive. But due to the seriousness of the situation, Kendall asked the DOI's Office of Insular Affairs to "(e)nsure that the Virgin Islands Government provides documentation that demonstrates implementation ... of actions ... to avoid default."