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HomeStory SeriesBudget CrisisThe V.I. Budget Crisis, Part 3: The GERS Time Bomb

The V.I. Budget Crisis, Part 3: The GERS Time Bomb

GERS Complex on St. Croix. (Photo provided by GERS)
GERS Complex on St. Croix. (Photo provided by GERS)

The V.I. government is at a crossroads. Along with this year’s $110 million deficit, the USVI is facing ongoing structural deficits of around $170 million per year out of a locally funded budget of around $850 million. It has outstanding debt of more than $2 billion, not counting the debts of the government-owned Water and Power Authority, which is also facing serious financial problems. For the first time, after two rounds of ratings downgrades in less than a year, lenders have refused to buy V.I. government bonds.

In parts one and two of this series we looked at how we got here and how the 2008 worldwide financial crisis and 2012 shut down of the Hovensa refinery took their pounds of flesh from the government’s coffers.

The USVI is also facing a $3 billion unfunded pension liability and a pension plan projected to cease being able to pay full pensions by 2023.

Figure 3: GERS Unfunded Liability Over Time (Click on image for larger view)
Figure 3: GERS Unfunded Liability Over Time (Click on image for larger view)

This chart shows the increase in the unfunded liability over time. The sudden big jump at the end is due to a change in how the federal government requires the liability be calculated. The change takes into account a nationwide decline on projected long-term returns on pension fund investments, related to the 2008 worldwide financial collapse and slow recovery.

The Government Employee Retirement System is heading toward insolvency. There are no good options left to prevent this from happening. For several years, GERS officials and outside analysts have projected it will sell all its assets and be unable to make full monthly pension payments by 2025 at the latest, possibly even a year or two sooner.

If the government does not solve its deficit problem, any solutions that are enacted will fail as the government uses those funds for immediate needs. This is happening right now, as the territory’s financial crisis is making this dire situation much worse. The government stopped paying both employer and employee pension contributions in December, GERS Administrator Austin Nibbs told the GERS trustees March 1.

Figure 4: Pension Contributions, Pension Payments and Payment Deficits (Click on image for larger view)
Figure 4: Pension Contributions, Pension Payments and Payment Deficits (Click on image for larger view)

The system took in about $85.38 million in contributions in 2015 and paid somewhat more than $200 million in pension checks, according to budget information provided to the Legislature in 2016. It made up the $118 million difference by selling off assets and through investment income on its assets. Not paying contributions increases the drain on the trust fund by another $70 million or so per year, or about a third. That could make the system unable to pay full checks perhaps two years sooner than otherwise, perhaps in 2022 or 2023. If or when that happens, it will be a sledgehammer blow to the V.I. economy, taking a huge amount of income out of circulation, according to everyone involved.

Once the trust fund is sold off, the pension payments are legally the responsibility of the V.I. government and will add $130 million or more to the annual budget deficit. Ratings agencies and independent financial analysts at Debtwire have pointed to the GERS unfunded liability, standing at more than $3.1 billion at present, as one of the reasons for questioning whether the territory would continue to be able to pay its debts.

In the past, GERS actuaries and federal auditors have said the system will still be able to pay about 45 percent of what pensioners are owed, using money from the government’s continuing employer and employee pension contributions. The reduced projected returns worsen that figure. But even so, whatever level is adequate only works if the government is actually paying pension contributions. As of March, 2016, the government was not paying at all.

There was ample warning of the disaster. As far back as 1998, the system was already giving out more in benefits than it was collecting in contributions, a clear sign of crisis. Successive legislatures and governors have made timid steps to address the crisis, increasing contributions some, but not enough. Cutting benefits is extremely unpopular among retirees, who are a reliable voting bloc. The Legislature to this day gives away $1 million to retirees every year as Christmas presents or “bonuses” to retirees, unwilling to eliminate even a plain give-away for fear of being unpopular.

Many, including the V.I. inspector general and Attorney General Claude Walker, have focused attention on the system’s investment strategies. But these simply are not the causes of the GERS crisis. The amounts of money involved, annually, are tiny in comparison to the problem.

A 2011 federal audit placed the blame on multiple legislative actions between 1984 and 2001 that increased benefits without increasing contributions, combined with a declining ratio of retirees to employees. The audit found contributions needed to be increased to 43 percent of payroll. That percentage has been increasing over the ensuing six years. There have been increases and contributions for most – but not all – employees are around 30 percent of payroll now.

Adding to GERS’ difficulties, the ratio of government employees paying into the system to retirees getting payments from the system has been worsening over time. There is a natural trend in this direction. On the first day the pension plan was put in place, there were zero retirees and a set number of employees. As time goes by, the number of retirees continues to grow, until natural mortality begins to set in and an equilibrium is reached. But early retirement incentives, aimed at helping the government’s budget woes in 2001 and 2011, accelerated the trend in the USVI. (See Figure 5: GERS Retirees versus Active Employees)

(The figures for government employees are from moments in time, reflected in budget testimony and other sources. The actual numbers slightly fluctuate constantly.)

At this point, it would take extremely draconian cuts combined with extremely large increases in pension contributions to save the system.

But as of March, the government was not paying any contributions into the pension system. Changing the legal contribution level will not help if the contributions are not being made anyway. The territory must address its budget deficit first, in order to help GERS. Just as they tell airline passengers to put on their own oxygen mask before helping anyone else, the government cannot help GERS if it cannot help itself.

Gov. Kenneth Mapp said the same thing recently.

“There is no solution to the GERS financial condition if there is no solution to the governments fiscal situation,” Mapp said at an April 19 press conference on going after tax delinquents. If the government cannot fix its “fiscal blight” it cannot fix GERS, he said

Mapp briefly discussed possible changes in how retiree medical insurance is handled. The government spends $37 million a year on health insurance for retirees and their families. Mapp floated the idea of increasing retiree shares of the premium costs and maybe restricting the generosity of government-funded medical insurance for retiree family members who have access to insurance through work. If you change the contribution structure and devote half the savings to GERS “you could buy several more years of solvency,” Mapp said at the April 19 press conference.

Meanwhile, the government is not even paying normal employer and employee contributions. So government pensioners would be wise to do what they can to plan for sharp cuts in their pensions. It is unfair. It is bad. But it will happen.

Next: Part 4: Debt or Spending? What To Worry About

Read the whole series:

How Did We Get Here, How Do We Get Out?
The V.I. Budget Crisis: Part 2, The Hovensa Effect
The V.I. Budget Crisis, Part 3: The GERS Time Bomb
The V.I. Budget Crisis Part 4: Debt or Spending? What To Worry About
V.I. Budget Crisis Part 5: Weren’t Rum Funds Supposed To Save Us?
The V.I. Budget Crisis: Part 6, Technology Park Tax Breaks
The V.I. Budget Crisis: Part 7, What About Horse Racing and Casino Gambling?
The V.I. Budget Crisis: Part 8, Gubernatorial BloaThe V.I. Budget Crisis: Part 9, Hyperactive Legislating
The V.I. Budget Crisis: Part 9, Hyperactive Legislating
The V.I. Budget Crisis, Part 10: Chronic Overtime
The V.I. Budget Crisis, Part 11: Education, Where The Big Spending Is
The V.I. Budget Crisis, Part 12: What Else Can the USVI Do To Help? Rationalizing Government Agencies
The V.I. Budget Crisis: Part 13: Finding New Revenues – AirBnB and Marijuana
The V.I. Budget Crisis, Part 14: Medicaid and Medicare
The V.I. Budget Crisis: Part 15, Rum and Congress
The V.I. Budget Crisis, Part 16: Irma and Maria Make A Bad Situation Worse
V.I. Budget Crisis Part 17: Federal Help Is Coming, But Not Enough
V.I. Budget Crisis, Part 18: Honesty Makes the Best Policy
V.I. Budget Crisis, Part 19: Congress Can Still Do a Lot – But If It Doesn’t, Brace For Impact

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  1. Unfortunately, the ONLY solution the government will put forth will be to increase taxes on the people who already pay taxes (obviously taxi drivers excluded) who have nothing to do with the GERS. They have already displayed their unwillingness and fear of cutting spending (laying off workers, continuing to give perks like paid time off during Christmas and Carnival, Christmas bonuses to retirees, and the list goes on). The cowardice, immaturity, and delusional behavior of the government and the GERS beneficiaries will be their doom. And they will take the tax burdened private sector with them.

  2. The GERS ship is sinking and no one wants to bail out the water, put a hand, make a sacrifice…but prefer to blame each other with hands thrown up wildly in the air, as though collectively they do not share a common doom, and by some wonderful miracle the Vessel will stay afloat.

    Strange mentality…but not surprising: “Every man for himself…and God for us all.”

  3. I think the GRS needs to buy out some of the retirees and government employees that do not want to be part of the GRS with a lump sum offer. If they accept the offer, they would need to sign an agreement stating they are no longer part of the retirement system. Those who opt to stay in the system would get a cut in their biweekly payment straight across the board not according to gross income. Some people invested in an education in order to be paid a higher salary. Why should the they be penalize for having a higher education and/or more work experience than the lower paying employee? Additionally, financial planning workshops should be provided to help guide members in making the right financial decisions about their money. Banking and investment firms would be more than happy to educate members about investing and saving for retirement.

  4. For last 20 years I have been hearing this wolf cry. Do you know why ex-politicians and government employees are recycled? Yes, you are right. They are filling up there pockets, making side deals, taking on side jobs, and starting businesses with friends and hiding and pocketing as much money as they can. GRS is the shark in the bay and Government leaders are feeding government employees to to the sharks while they sit in their yachts sipping Mai Tais with their eyes close. They have no shame! They don’t hear the cries for help or have a sense the urgency. It doesn’t effect them. Politicians have situated themselves in “financial security boat” while government employees are fed to the sharks and when cries get a little too loud for their comfort, they yell out , “We are coming to save you! Don’t worry, keep swimming!” What a comical horror story!!!! No one seems to care except the government employees swimming toward the shark.