The territory does not have enough borrowing capacity to issue the $600 million to $1 billion in pension obligation bonds experts say would be needed to save the Government Employee Retirement System, Gov. Kenneth Mapp’s financial team told the Finance Committee on Tuesday.
If it could issue the bonds, paying them off would cut funding for everything else and, if the economy turned downward again, the government would be in a severe bind, officials also said.
The GERS pension fund is expected to be spent and unable to pay full pensions in less than a decade. When pension reform legislation increasing some employee’s contributions to the plan was heard in the Committee of the Whole earlier in September, GERS officials and financial advisors testified the reforms would help over time, but without at least a $600 million to $1 billion infusion of cash to invest, the plan would go broke first. (See Related Links below)
They urged the V.I. Government to consider issuing pension obligation bonds, under the authority of legislation passed in late 2006.
On Tuesday, Finance Commissioner Valdamier Collens testified to the downsides of pension obligation bonds and to the limits of their likely availability. He said if we issue them, "it will likely have an impact on the ratings of other bonds" and will "reduce the availability of funds to devote to other priorities."
Collens also said the administration and ratings agencies are concerned that issuing bonds would reduce pressure to make the painful structural changes needed, "leading to greater demand for pension increases while deflecting or deferring the need for contribution increases and pension reform."
He said while some pension bond issuance might be possible, the financial team would want to go over these concerns with bond counsel and other advisors before committing to issue any.
Finance Committee Chairman Clifford Graham asked, "If we were to consider pension obligation bonds today, do we have the borrowing capacity?" Borrowing capacity is tied to the assessed value of all property in the territory, with all outstanding borrowing deducted from the available capacity.
"The capacity right now is about $400 million," Collens said. "But in my opinion, with the Fiscal Year 2016 budget and what we expect will happen in 2017, I would be hard pressed to say we would have enough to cover $600 million," he said.
Sen. Marvin Blyden asked Collens if there was any other source of "quick cash" to help the system.
Collens suggested setting aside a portion of the net rum revenues the territory receives.
This year those funds are contributing $15.8 million to all V.I. government funds and $86 million to debt service, raising doubt as to whether that source has enough revenue, by itself, to save the system if all of the funding is devoted solely to GERS.
At another point, Budget Director Nellon Bowry said major, painful structural reforms were needed. He said the territory may need to move from a "defined benefit" system, where the pensions are set to a "defined contribution" system, where the pension amounts vary, depending on the health of the system, while the contributions are set by formula.
Collens was testifying on a bill [Bill 31-0146] sponsored by Sen. Neville James to improve GERS finances with some contribution increases. The legislation, which is based on, but slightly different from, legislation proposed by former Gov. John deJongh Jr. in 2014 [DeJongh Pension Reform Proposal], raises some retirement ages, adds to the types of employees eligible to join GERS and lets eligible employees join right away instead of waiting. Also, instead of setting pensions based on the top five years of earnings, it would set them based on career earnings, so that a few years at higher pay right before retiring would not result in potentially decades of much higher pension payments.
That legislation also eliminates the cap on employee contributions, which Collens said would put the government in an immediate bind if it were enacted right now and not phased in. Right now, pensions for most employees are capped at $65,000, and employees with higher salaries than that only pay contributions on the first $65,000. The bill would change the law so that well-paid government employees would pay full pension contributions on every dollar of their salary. But their pensions would increase by only 1 percent of each dollar earned above that level.
For a person making $100,000 per year, that would mean a $350 increase to their annual pension payments for each year they work, GERS officials said. At the same time, it would generate a larger amount for the system, helping to shore up GERS.
While Collens said it would help GERS and "needs to be done," it means the government would have to come up with the cash for employer contributions – and it does not have the cash.
Collens said the change would mean another $2 million in employer contributions the government would have to find for the upcoming year. And it would mean another $800,000 in employee contributions, he said. Employee contributions would not affect the budget but the employer contributions would.
He urged the Legislature to “phase in” the change so the government could plan ahead for the funding. He also suggested that high paid government employees might retire rather than pay more into the system, worsening the GERS’ funding problems, if it is done suddenly.
"We know it is one of the things that has got to be done, that is necessary, but it has to be done gradually," he said.
Graham said it was important to get those concerns on the record.
"At the last hearing, we saw the benefits of lifting the $65,000 cap and now we have heard you tell us some of the costs of that decision and I am glad you put that on the record," Graham said.
The bill was approved and sent on to the Rules and Judiciary Committee with all members present voting yes. Sen. Tregenza Roach was absent at the time of the vote. It is slated for a final up or down vote in the Legislature during session scheduled for Sep. 22-23.