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Account Ability: The Elephant in the Room Called GERS

This article is one in a series about how to strengthen the V.I. government’s finances without raising tax rates. Each deals with a specific proposal.

Charged by the Source to figure ways to help the territory’s financial situation without raising tax rates, we have frequently experienced buckets of cold water in the face.

The latest: the territory’s Government Employees Retirement System’s debt – or to use the current phase, its unfunded liabilities – is twice the size per household as it is in the much richer state of Illinois, where that state’s shortfall has been the poster child of the mainland’s struggle with state and local retirement systems.

The extent of the unfunded liabilities for the two systems is about $5 billion for GERS and roughly $298 billion for Illinois. The unfunded liability is the difference between the current and apparent future resources of a system when compared to its liabilities for both pension payments and fringe benefits. The Illinois system covers both state and municipal employees; GERS covers the comparable islands’ workforce.

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Spelling out the per household comparison we have this:

    per household income, 2012           per household unfunded pension
                                                                        liabilities, 2015

    Source: Census calculations from government reports

          Illinois $54,644                         $61,600 (rounded)

          Virgin Islands $24,703           $116,000 (rounded)

So, Illinois, with more than twice the household income, has per household only about 50 percent as much unfunded liability. You could say that the situation in the islands is four times as bad as it is in Illinois, whose record is one of the worst of the 50 states.

There are three variables of differing significance at work here: 1) the generosity of the benefit formula; 2) the amount of funding provided to the system each year; and 3) to a lesser extent, the degree of success in the systems’ investment programs.

We are going to focus on the first of these factors because comparable information is available on the subject and because we know that the territory has recently taken at least some steps to increase the pension contributions of current workers. It should be noted that GERS had about $1 billion in investments in 2015, a number that drops each year and a figure that was taken into account when the unfunded liability was estimated.

Benefit formulae for pension systems are complex because each pension is based on the number of years served by the worker, the level of the salary, and a host of other variables which differ from place to place. But there is one simple comparison which can be used – and it relates to the circumstances under which an employee could receive a pension as large as his or her final salary on retirement. This measure is a good test of the generosity of a pension system.

Speaking of pensions and islands, once upon a time the not very responsible politicians in the Commonwealth of the Northern Mariana Islands, a U.S. territory just north of Guam, gave its former workers 100 percent of their last salary if they worked for only 20 years. That system soon collapsed.

How long does it take to get 100 percent of the salary in retirement benefits? Let’s look at the differential treatments of retired civil servants in the islands, and in New Jersey, which recently over-hauled its pension program because of its concerns with the size of its liabilities.

The first thing you notice in the statistics below is that both the USVI and New Jersey have two levels of retirement benefits – higher ones for those who have been in the system the longest, and lower ones who have just joined the state service. This is a technique used to lower the liability without changing the benefits promised to the older workers many years ago.

The table below shows for USVI and New Jersey, the number of years one has to work for the government to secure a 100 percent pension.

          Jurisdiction                     Number of years of work required
                                                        to get 100 percent pension

          NJ hired before May 21, 2010             55 years

          NJ hired after that date                      60 years

          USVI, hired before 2005                    40 years

          USVI, hired after 2005                       57 years

The big difference in the formula is the 40 years as compared to the 55 years, and it symbolizes similar differences in other benefit calculations. The comparison of the tax burden per household in Illinois and in the islands is perhaps an even better indicator, if an indirect one, of the different overall benefit levels.

The benefits for USVI workers shown above are those for large majority of the retirees, as opposed to special schemes for former senators, judges and workers in hazardous occupations (such as the police); these systems are more favorable to these workers than to the mass of the civil servants. (New Jersey’s system similarly takes special care of state police officers and judges.)

Our suggestion, admittedly self-evident, is that the flow of money going into the system has to not only equal the projected outflows, but substantially exceed them so as to incrementally reduce the current debt. More specifically, the entire GERS system should be adjusted, robustly, to further raise contributions to GERS by both workers and taxpayers and to lower benefits for newly employed workers, and perhaps also for those who have long been in the system.

To one degree or another everyone has been involved in creating the crisis and everyone will need to contribute to its resolution. A $5 billion shortfall in a system serving roughly 9,000 retirees is not going to be fixed by taking tiny steps.

While the USVI might feel that it could not reduce the pensions of those currently retired, it might – justifiably – set a different and higher income tax rate on GERS incomes. (One of the advantages of such a program is that the V.I. government knows exactly how much is paid in pensions, so, unlike cash income, there is no room for fudging).

Obviously retirees and future retirees will oppose these changes. However, all concerned, including the USVI public, have been living in an unrealistic world where nice pensions can be promised – apparently – without worrying about how to fund them. That dream, unfortunately, must end. Admittedly this is a painful process but the sooner it is initiated the better the pain can be managed.

While some of the proposals we are floating in other articles can be handled by the Executive Branch working alone – such as collecting more property taxes and getting rid of the Department of Education’s Third Party Fiduciary – changing the retirement system benefits would require action by the Legislature, a signature by the governor, and probably some amount of public support.

Proposal: That the USVI change its GERS and benefits formula drastically, and promptly, as outlined above, including the creation of still another class of newly hired employees who will have lower benefit formulae than current workers.

Predicted Results: Depending upon the size of the modifications, such a proposal should prevent the size of the unfunded liabilities from growing further, with possible future changes added to reduce the size of the debt to future retires.

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