The Government Employee Retirement System has too much money in non-traditional ventures, entered into without proper diligence or management, V.I. Inspector General Steven van Beverhoudt and his staff conclude in a new report.
The report [IG Report on GERS Alternative Investments] faults GERS for several decades of investments, from the 1993 purchase of Havensight Mall to a 2014 loan for a St. Thomas grocery store.
It concludes the investments are not within normal investment standards and some, including tens of millions of dollars in loans, are not authorized in V.I. law. It also urges major changes to V.I. law governing investments, including reversing looser investment standards passed by the Senate in 2015. It recommends GERS exercise tighter monitoring of its existing projects and loans; stop giving new loans to non-GERS members.
According to the report, GERS disputes the Inspector General’s Office’s assertions that it did not perform due diligence and that its loans are not authorized under current law.
The report does not conclude that these problems are a major factor behind the system’s $1.8 billion unfunded liability nor its projected insolvency by 2025, which were primarily caused by insufficient pension contributions, unfunded benefit increases and a worsening ratio of current employees to retired employees.
But it does urge much tighter investment standards.
Some of the "alternative investments" under scrutiny are large V.I. businesses that were facing financial difficulties when they came to GERS for help, such as the purchase of Havensight Mall; a $15 million loan to Carambola Resort on St. Croix and a loan to Seaborne Airlines. Others are speculative ventures, such as the 2014 loan of $8.2 million to V.I. Finest Foods for a yet-to-be completed grocery on St. Thomas. And $13 million was a low-interest "property tax anticipation loan" to the V.I. government in 2011.
The report finds all of these to be inappropriate, partly because it concludes they are not authorized in the law.
"There is no language in the code that defines any of the alternative investment options as loans. They consider alternative investment opportunities as ‘investments,’" the report’s authors write.
They said GERS Administrator Austin Nibbs and other system officials "all asserted that lending was permitted" under the law’s provision for "special situations." But that section still refers to "investments" that are "expected to most favorably affect the earnings outlook or the public’s psychology with respect to the prospects for a particular company," they argue.
The report also faults the loans for having below-market interest rates in some cases, especially a 4.9 percent loan to the V.I. government, and because some of the applicants faced too little scrutiny. For example, GERS loaned $8.2 million to V.I. Finest Foods in 2014 for a grocery on St. Thomas.
"The application and qualification process took almost two years because the proposers had difficulty turning over documentation to prove favorable character, capacity, collateral, capital, and conditions. In fact, … the outside financial consultant wrote an investment memorandum recommending that GERS “do not invest” due to competition, repayment ability, and the proposers’ limited experience in retail grocery operation," the authors write.
But the loan went forward. GERS endorsed the project, citing that it will be the only locally owned grocery.
The report finds V.I. Finest Foods had a bank balance of $47 in June 2013 and was overdrawn at another point that year, calling into question whether the company really qualified for a multi-million dollar loan and if it had the ability to repay it.
The Inspector General’s Office especially criticized a 2006 "viatical investment" that it said "jeopardized about $42 million of its investment portfolio." A viatical investment involves buying life insurance policies at less than their term payout, guaranteeing premium payments and, in essence, betting that the individuals will die off soon enough to make a profit. While legal under V.I. law, the report argues they are too complex and risky for GERS.
GERS also issued a $10 million line of credit to the company it invested with, out of concern that the entire investment could be lost if the company could not pay the insurance policy premiums.
According to the report, in 2014, the GERS board "concluded that the entire investment will most likely be lost" and is writing down its value by 20 percent a year "until it is completely written off."
In total, the report questions $192 million in alternative or non-standard investments. For scale, the total value of its entire portfolio, as of January, 2016, is $751 million – about $100 million less than a year prior. The system is taking in less than it is paying out in benefits and has been liquidating its trust fund to pay current benefits for more than a decade.
While some of these ventures may be at risk of loss, such as the viatical investment, others have been paid off, for example, a $3.3 million loan to Seaborne Airline, or are being paid, like the loan to the V.I. government and for an ethanol dehydration facility on St. Croix.
The purchase of Havensight Mall in 1993, and the 2009 loan of $15 million to Carambola Resort and its subsequent acquisition by receivership may or may not generate a profit for the GERS. The system bought Havensight for $32 million and has since invested another $17.7 million, for a total of $49.7 million, according to the report. Meanwhile, the mall has struggled to make a profit and its potential sale price is unknown.
Carambola defaulted on a $15 million loan, and GERS has since spent an additional $12 million for renovations, for $27 million. Gov. Kenneth Mapp has suggested the property is worth much less than the amount invested. In 2012, not long after GERS acquired Carambola, then GERS Board Chair Raymond James told a senate committee that once repairs are complete "it may sell at $27-28 million …"
"It is a negative, but at the end of the day, two or three years out, we will get the money back," James told the Senate in 2012. (See: GERS Expects to Sell Carambola at a Profit in Related Links below)
Reached by phone Monday, GERS Board Chair Wilbur Callendar said he had not read the report yet, but said he believed GERS did perform due diligence and proper oversight of the alternative investments and that GERS was correct to dispute those parts of the report. He referred questions about the legality of loans and the prospect of some of the investments to Nibbs and GERS Investment Officer Bruce Thomas. Nibbs and Thomas had not responded to requests for comment as of 10 p.m. Monday, but Public Information Officer Lorraine Gumbs-Morton said officials would respond shortly.