GERS Collapse Will Come, Retirees Better Start Planning

V.I. retirees – and future retirees – need to start preparing themselves now for much smaller pension payments than they anticipated, because the trust fund will evaporate. There are no good options left to prevent this from happening and it may well reach a crisis point a year or two before the oft-cited 2025 date for the complete exhaustion of the trust fund.

When the system reaches that point, retirees’ income will drop sharply. Those soon to retire must wonder about the likelihood of any monthly income. The good news, such as it is, is that money will keep coming into the system, and GERS projections suggest retirees will still get about 45 percent of their former pensions.

So a person now getting $1,500 per month will get about $675 – better than nothing by a long shot.

There will be angry interviews on TV. There will be angry "this is unfair" testimony in Senate hearings. There will be articles in newspapers asking how we came to this point. Radio chatter will reach a heightened decibel level, surpassed only by the angry fingers typing Facebook and other social media comments.

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Politicians will point fingers at one another and bemoan past decisions of those that no longer sit with them. Maybe there will be protests. But it will still happen. It is almost certainly too late to prevent. Don’t hope for the best. Start planning right now for sharp cuts down the road.

It will be great, great news if this is not so, but there is nothing to suggest so, and every reason to believe it will happen.

GERS has been liquidating its pension fund to make current payments for more than a decade. That is like eating the seed corn instead of planting it. The moment that began, the fund was in a serious crisis.

It’s true that Gov. Kenneth Mapp promised in his State of the Territory Address, "This year, one of my administration’s top priority will be the challenges plaguing the Government Employees Retirement System."

But when the Senate passed modest reforms last year, it removed the most significant part – removing the cap on contributions at the $65,000 income level – at Mapp’s own request, on the grounds that the government could not afford the increased contributions. (See: Senate Passes Modest Pension Reform in Related Links below)

And in any event, there is no obvious solution and certainly no easy one. Some suggest borrowing our way out of it. But as Mapp acknowledged in the State of the Territory address, "Floating $600 million in pension obligation bonds and turning these funds over to GERS to purchase an additional 22 years of life of the system is not a fix."

And even if the territory wanted to, that amount is 50 percent higher than the territory’s total borrowing capacity, beyond which creditors would cease to lend and begin to panic about the territory’s ability to pay.

Finance Commissioner Valdamier Collens told the Senate in September of 2015 that the remaining debt capacity stood at about $400 million at that time.

And on Monday, Budget Director Nellon Bowry told the Finance Committee the government is facing $100 million per-year deficits every year, as far as the eye can see, while testifying in favor of Mapp’s request for a $14.4 million appropriation – for government pay raises, not to help GERS. (See Mapp Official: Raises ‘Sustainable’ Because Deficit Already $100 Million in Related Links below)

Some suggest expanding the system to include the private sector, as a way to bring in new revenues. But as GERS officials testified back in 2014, that cannot work. Public pensions are exempt from the federal Employee Retirement Income Security Act of 1974, but only if they have little to no private funds.

"We cannot afford to lose our ERISA exempt status," GERS general counsel Cathy Smith testified in 2014, adding that if that status were lost, GERS would have to pay premiums into the Pension Benefit Guarantee Fund, "and the PBGF would shut us down" because GERS does not meet its funding ratio requirements. (See Senators Told No Magic Bullet for V.I. Government Pension in Related links below)

Some senators cannot give up on the idea of an easy fix though and cannot stomach sharp contribution increases. They asked GERS officials yet again about including private businesses during a Finance Committee hearing Monday, and Smith gave the same answer. Even then, some senators just wanted to cling to the false hope.

After hearing yet again why it cannot work, Sen. Positive Nelson said Monday he still endorsed the idea of adding private sector employees.

"Don’t say you are afraid of taxation," Nelson said accusingly. He said the system could just pay taxes on the private part. He did not address the GERS being taken over and liquidated or paying dues for PBGF. Nor did he address how a completely separate system – as would be required – would help the public system in any way.

Some senators, like Sen. Clifford Graham and Senate President Neville James, have made statements suggesting they are fully conscious there are no easy solutions. But they are not endorsing difficult, unpopular solutions.

Some continue to just ignore the problem.  Sens. Kenneth Gittens and Kurt Vialet just introduced legislation to force the GERS to resume medium-term loans to retirees and government employees.

When GERS stopped the loans, Nibbs told senators the reason: the system was going broke too fast and would have to sell off new loans at a sharp discount when it ran out of assets in a few years. They responded, not by addressing the shortfall, but by trying to force GERS to resume lending anyway.

The bill was held as senators urged GERS to find a "compromise" to continue some loans.

Some want to blame GERS financial mismanagement.  Attorney General Claude Walker recently testified to a Senate committee that he opposes giving the system any more money until greater controls are put in place.  Walker pointed to a recent Inspector General report finding insufficient oversight over some loans and investments.

But the only one that is an actual loss, a 20-year old investment in speculative life insurance policies, is projected to lose $42 million. That’s huge. But far less than the system has liquidated every year for the past decade just to pay current benefits. (See: Senate Putting Lonesome Dove Oil Revenues Toward GERS in Related Links below)

It is simple make believe to pretend the alternative investments and loans to Seaborne and Carambola Resort are the reason the system is failing. And even if it were not, casting blame that way does nothing to solve it.

The USVI and GERS are not in a unique position. Most public pension systems are facing annual deficits and huge unfunded liabilities and many local governments have ignored the painful fixes needed.

A pension problem brought Detroit to bankruptcy. Puerto Rico has huge problems, pensions among them. Illinois took a ratings hit in 2015, partly because it has a $111 billion unfunded pension liability – the highest in the nation. But having company is small comfort. The USVI also has fewer resources to devote to fixing the problem.

As far back as 1998, the system was giving out more in benefits than it was collecting in contributions. (See GOV’T OWES $84M TO RETIREMENT SYSTEM in Related Links below)

That year GERS gave out $11.7 million more than it took in and projected an unfunded liability – pension payments it would not be able to pay – of about $518 million. The pension system was already in crisis.

For a few years, solid returns on a billion-plus investment portfolio allowed the trust fund to continue to grow in total dollars, but with a growing projected unfunded liability.

By 2003, GERS officials were looking into the future at a projected $732 million in unfunded pensions unless sharp increases in contributions were enacted right away.

By 2006, the unfunded future pension payments came to over $1 billion, and the GERS trust fund had a market value of $1.2 billion. At this point, it was starting to spend more of its trust fund than it was earning on investments and the trust fund began to shrink.

By 2011, the unfunded liability stood at more than $1.4 billion. GERS was selling more and more of its portfolio to meet current benefit payments.

The trust fund has been shrinking by about $70 million to $100 million per year. It shrank by $72 million from 2013 to 2014, despite good investment performance. It shrank an additional $128 million from 2014 to 2015, with investment losses of $28 million, according to GERS budget testimony.

As of January 2016, the trust fund had shrunk to $751 million, not counting many tens of millions of dollars in real estate and millions of dollars in outstanding loans.

Efforts to stem the flood of red have been tepid, at best, to the point where it is difficult to see what could rescue the plan at this point.

The Senate passed modest increases for new employees in 2005, creating two tiers of pension members. But those reforms, which were never enough to fully address the problem, were not implemented until 2011, blunting their impact.

Gov. John deJongh Jr.’s 2008 budget increased employer contributions for newer employees from 14.5 percent to 17.5 percent. With 8 percent employee contributions, that raised most contributions to almost 26 percent of payroll – a significant step, but not enough to reverse the tide.

In 2011, a Department of the Interior report found contributions needed to be raised to 43 percent of payroll to make the system whole. But since then, Senators and two governors have balked at such large increases as too painful, not to mention too politically unpopular.

Also in 2011, as part of a broad emergency economic stabilization bill, the Legislature mandated that $7 million of federal alcohol taxes remitted to the territory every year, often called the rum cover-over, be spent on GERS. But despite the legal mandate, that has never happened and what money was left after debt payments has been spent on other things. (See: A Broken Promise To GERS in Related Links below)

In 2013, the Legislature amended that law, to make pension benefits more generous, worsening the problem. (See Senate Passes Government Benefit Giveaway In Last-Minute Amendment in Related links below)

Gov. John deJongh Jr. created a pension reform task force to recommend solutions in 2011, which led to draft legislation in March of 2014. The Senate, then deeply hostile to the outgoing governor, declined to act on it.

In January of 2015, the GERS Board of Trustees increased executive branch employee contributions – for Tier II new hires only – to 20.5 percent, and employee contributions from 8.5 to 9.5 percent, with small additional increases scheduled for 2016 and 2017. While an improvement, that was still far below the 43 percent of payroll that would have been necessary in 2011- and even further below what is necessary now. (See: GERS Enacts Pension Reform in Related Links below)

In September of 2015, the Senate passed legislation largely based on deJongh’s previously rejected 2014 proposal. But only after removing much of its contribution increases. And even before it was weakened, GERS actuaries projected it would have almost no effect on when the system stopped being able to make full pension payments.

They told senators that to become solvent the system would need much higher contribution levels, benefit cuts and $600 million to $1 billion in cash right away. (See: GERS Needs Both Higher Contributions and $600 Million Cash to Solve Insolvency in Related Links below)

On Monday, GERS Administrator Austin Nibbs told the Senate it would need a "$1.3 billion cash infusion."

Anything short of that would only delay insolvency by a few months to years, as the provided chart shows.

Yet the territory does not even have enough borrowing capacity to carry out that plan, even if its government had the will to forego any other borrowing for any other purpose while also massively increasing contributions and cutting benefits. And the loan would have to be repaid – with interest.

To work, the huge loan would have to be invested and earn much more than the interest on the loan. Any glitch or hiccup in the rate of return on investments would spell disaster.

But the Senate, successive governors and the GERS board itself are all unwilling to take the sort of drastic steps needed.

To be fair, senators have passed some reform, increasing contributions for more recent hires. And they have gotten better about not increasing benefits in recent years. Earlier this year, for instance, senators resisted pressure to let members of the judiciary out of paying higher member contributions.

But senators are still reluctant to take even low-risk, easy measures. In 2008, when GERS was already well into crisis, senators enacted legislation appropriating between $1 million and $2 million per year from V.I. Lottery revenues – not to shore up the system, but as a completely frivolous "Christmas bonus," in effect a Christmas gift from the government – with every retiree getting checks that average between $100 and $200.

The Source mocked the frivolous gifts to a reliable voting bloc in an editorial in 2014, (See: How About A Christmas Present For JFL? in Related Links below) but the million-dollar giveaway happened anyway. It happened again in 2015. And it will probably happen again this year, even as senators and government officials make serious sounds of concern about GERS.

If senators cannot summon up the fortitude to eliminate a literal giveaway of funds that could be used to shore up the system, it is hard to imagine they will face the retiree and government employee anger that would accompany actual, hard decisions to cut benefits or sharply increase employee contributions.

What about something really out of the box, like maybe legalizing marijuana and putting a large tax on it, devoting all of it to GERS? That might help lessen the impact. But even optimistic figures suggest it would provide at most maybe 10 percent of what is needed.

According to data from the Pew Research Center, 49 percent of Americans have tried marijuana and 12 percent have used it within the last year. With roughly 2.8 million cruise passengers and other visitors per year, that suggests around 252,000 marijuana-smoking tourists visit each year. If all the occasional marijuana users who are already visiting the territory purchase $20 worth, with $10 of that as taxes and the rest to the farmer, that would generate a whopping $2.5 million annually toward GERS.

Add in local consumption, by the same Pew Center statistics, perhaps 12,000 Virgin Islanders use marijuana. Most use occasionally, while a smaller number are heavy users. If the occasional users buy $20 a month, with $10 going to taxes, that’s $120,000 in revenue per month, or $1.5 million in revenue per year, for $4 million in all, between local and visiting consumers.

While these are very tentative numbers, even if the real revenues were double this, that would only be around $8 million a year, while GERS needs more like 10 times that amount.

All in all, it is difficult to imagine a scenario where benefits do not drop sharply by 2025.

Maybe taxes could be increased on everyone to help pay for government employee benefits? Perhaps the territory could leave the mirror tax system it uses now, that taxes at the same rate as the U.S. Internal Revenue Service. Tax increases might generate more revenue, though one might imagine employees around the territory who do not work for the government may balk at paying more taxes to subsidize government pensions when they have no pensions themselves at all.

Can big companies bear the brunt of the burden? The territory’s two biggest money makers – Cruzan Rum and the Diageo distillery – have special agreements with the V.I. government so that not only do they not pay any local corporate taxes to speak of (no corporate income tax, no gross receipts tax, no property tax) but the territory also transfers a large portion of those distilleries’ federal taxes right back to them.

Many of the territory’s major hotels and tourism-based businesses – including the Buccaneer, Divi Carina Bay Resort, Emerald Beach Resort, Bolongo Bay Beach Resort, the St. John Westin Hotel and Yacht Haven – are not on the tax rolls, thanks to Economic Development Commission tax breaks.

And the territory’s biggest telecoms companies – Choice Communications, the Innovative entities and Broadband VI – all are off the tax rolls since 2009 when they negotiated generous private tax break agreements with the University of the Virgin Islands RTPark.

Congress would likely have to step in and change the laws that allow those tax breaks. And those companies would all argue they need the tax breaks to stay afloat. So it is not clear what big companies would be paying more, even if tax rates go up.

Employees of those companies pay payroll taxes though, so the employees could be made to pay more.

Small companies that do not receive EDC tax breaks have seen increased gross receipts taxes in recent years.

Does this mean all hope is lost? No. As it stands, by 2024 or 2025, GERS will be forced to cut pension checks to about 45 percent of what was promised. Even though the trust fund will be exhausted, contributions will keep coming in.

If the Senate and the governor take an "all of the above" approach: increasing contributions across the board; actually devoting $7 million of rum revenues per year as the law already dictates; increasing payroll or other taxes; cutting out Christmas present giveaways and devoting the money to shoring up the system; and enacting unusual measures like legalizing and taxing marijuana, there will be more revenue and pensioners’ annuities could be cut less.

But unless gold falls out of the sky or the U.S. Congress miraculously takes pity and cuts a billion dollar check as a string-free gift to GERS, even as unfunded public pension liabilities top $2 trillion nationwide, the GERS trust fund will be exhausted and pensioners will see a big forced cut in benefits.

As GERS Investment Manager Bruce Thomas confirmed March 18, "GERS will run out of assets."

Retirees take note and start planning.

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