Gov. John deJongh Jr. may have done a fair job with his 2014 state of the territory address, said some senators, but they are rising up against his stand on hot-button issues, including the GERS pension reform and deJongh’s suggestion to revisit the 8 percent cut as a means of stemming the $70.5 million budget deficit expected by the end of the fiscal year.
Sen. Clifford Graham, who also chairs the Senate Finance Committee, said he is uncomfortable with certain recommendations of the Pension Reform Task Force.
The task force was established by deJongh in May 2012 to look for solutions on how to avert the GERS’s potential bankruptcy. The task force released an April 2013 report with policy recommendations, including one that states regular Tier II government employees would not be able to collect retirement benefits until they have served at least 10 years and are at least 62 years old.
“It’s going to be disheartening for a lot of retirees,” said Graham, “especially if you start at a young age, at 20 or 22, do 30 years of service and have to wait until you’re 62 to collect.”
Graham said the key is to look at recommendations in the taskforce report that people can live with and to replace contentious items with alternatives that would serve the same purpose. He recommends looking at models adopted by other states that are undergoing the same employee pension crisis.
“With pension reform in other states and other areas, what happens is you can get your retirement but, while you’re eligible for Social Security, your benefits can be reduced,” said Graham. “We can look at options like that as opposed to penalizing someone until you reach the age of 62.”
Sen. Tregenza Roach said the governor’s recommendation to implement every single proposal by the task force defeats the purpose of the Legislature. If the retirement age is to be changed, he said, the executive and legislative branches should look at whether it should affect just new employees or include those who started investing in the system when a different set of rules were in place.
“We don’t want to act in one way to try to fix the system and expose ourselves to litigation which could be costly,” he said.
Sen. Craig Barshinger said the governor was being “ambiguous” and “contradictory” by wanting to fix the GERS problem but refusing to pony up the government contributions to GERS that would help bridge the revenue gap.
“His reaction seems to be he wants the Legislature to do something miraculous to fix the GERS but he’s not willing to commit right now to pay the full Tier II employer contributions, and he must do that,” said Barshinger.
Graham said the GERS pension reform bill should be on the Senate floor by May at the latest, before the Senate gets into the budget cycle in June, if it is going to be funded in the Fiscal Year 2014-15 budget.
Dealing with the $70.5 million Deficit
Most senators have serious concerns about deJongh’s suggestion to revisit the 8 percent cut on government employee salaries as a means of filling the $70.5 million hole anticipated at the end of the current fiscal year, and senators insist that it has nothing to do with the election year.
According to Senate President Shawn-Michael Malone, since the first 8 percent cut was implemented in 2011, the economy has suffered major hits, including the abrupt closure of the Hovensa refinery in 2012.
“If you lay it out in that perspective, if you cut government employees pay again, unlike the last time, this time you will have a major problem,” said Malone.
Cutting employee salaries again would deal another blow, not just to the already economically stifled government employees directly affected by the cut, but also the overall economic landscape, he said.
“All it’s going to do is reduce your government expenditures,” said Malone. “Let’s say you have a nice, balanced budget, but it’s going to cause another recession in the Virgin Islands. Because those same employees and retirees have to shop in Kmart, have to pay for their phones, it’s not the wisest solution.”
Graham agreed, saying the administration may have saved $29 million because of the 8 percent cut, but at the expense of its revenues.
“When you have an 8 percent pay cut, the economy will shrink because you have 8 percent of the government payroll out of circulation,” he said. “As a result, you get less gross receipts, you get less corporate income taxes and less excise taxes that are paid.”
In addition, Graham said that employees who were not eligible for earned income credit become eligible with the 8 percent pay cut, which means more money in benefits paid out to the newly eligible employees out of government coffers.
Malone added that the 8 percent cut would also stymie revenue generation for GERS, which is the second largest employer in the territory, after the V.I. government.
“Not only will money being spent in this economy contract, the GERS would also lose revenue. Eight percent less of a salary would be less to the GERS every month,” said Malone.
According to Malone, the territory had faced a budget deficit of this magnitude in the past and had painstakingly addressed it with a revised budget. The administration has to first prioritize essential services and payments to employees, he said, and then with “whatever is left, we need to revise and cut it up.”
Other Options to Reduce the Deficit
Instead of the 8 percent cut, Malone advocates Sen. Janette Millin Young’s bill, which was vetoed by deJongh, that would hire additional employees to help the Bureau of Internal Revenue structure and crack down on taxes on villa rentals.
According to Malone, villa rentals are constant in the territory and the size of the villa-renting businesses, under which condominiums and private houses are classified by their owners, are nearly comparable to the territory’s hotel inventories, which amounts to about 5,000 hotel rooms. Villa rentals on St. Thomas, he said, could go for $5,000 a week, and as high as $12,000 on St. John.
“If you do the math, on the conservative level, that would yield $20 million,” said Malone. “We have an analysis that accompanied that legislation. This is not a pie in the sky or was done in a vacuum, so to veto it was not a very justified response.”
Malone also advocates looking at Internet gaming in the territory, which he said, “has been law for a long time.”
“St. Croix has been trying to get it going, and we have been getting some push back from some of our colleagues in the commission,” said Malone. “But the governor needs to tell them to get going. There were two license holders here that were ready to move, and investors ready to move forward.”
Malone also said the rum cover-over extender should not be counted out, in spite of the deJongh’s urge not to look to it as the territory’s main economic remedy. According to Malone, the Department of Interior already indicated its willingness to pay the territory the cover-over amounts in advance; it’s just a question when Congress passes the extender bill.
“It would be foolish to think it’s not going to happen and I appreciate the governor being realistic like that,” he said. “But that’s $30 million to $70.5 million, and when that happens, then you’re down to maybe a $35 million to $30 million deficit.”
Graham disagrees that while small income generators that yield “insignificant saving,” according to deJongh, pale next to the larger and more immediate yield of an 8 percent cut, they ultimately add up.
“A lot of people here believe that every time the government falls into a financial lull, everything is balanced on the backs of the government employees,” he said.
Unclear or Unaddressed Issues
While deJongh’s address was “fair” and “conciliatory,” according to Malone, it did fail to address big issues in detail and missed others altogether.
According to Malone, specifics on WAPA and energy remain an elephant in the room. In spite of promised savings, said Malone, local businesses continue to close and cannot reinvest due to soaring utility bills. Residents should be informed of roughly when they should see real savings, he said.
While Malone lauded the accomplishments of the Department of Education, he said the governor also failed to address the relevance of the territory’s education system to the labor needs of the economy. While passing accreditation and high test scores are great, said Malone, the ultimate yield might not benefit the territory’s economy.
“At the end of the day, all those people who are employable, can they participate in this economy? All this money is spent in educating them, but is it relevant?” he asked.
Graham said he wanted to hear more on the territory’s homelessness problem and what it means to the homeless population and to the territory’s tourism-based economy. The Market Square renovation, for example, is useless if it were fenced off to prevent the homeless from using it as temporary housing.
“In the meantime, all the vendors are up here by Emancipation Garden and Market Square is just sitting there,” he said. “Instead of fencing it, let’s get a grip on the homeless population and resolve this issue.”