Gov. Albert Bryan Jr. was at a Government Employees’ Retirement System meeting four years ago when he says the reality of the pension system’s imminent collapse hit him squarely between the eyes.
“For the first time I looked at people’s faces and it was like, ‘OK, this is going to happen,’” said Bryan.
That’s when Bryan says he set to work on an election year plan to alleviate the strain on the failing system that will go broke as soon as 2023 without some kind of intervention.
“I was able to put forth a retirement solvency solution in the election, and that’s why I was able to talk about the legalization of cannabis in a way that would bring a revenue stream that would be able to help the system because ordinarily, this group would be against cannabis, but if it’s helping the retirement system, then they’re not as adamant,” Bryan said during an interview last week from Florida, where one of his daughters was undergoing medical tests.
Fast forward to 2020 and the territory’s 2018 law allowing medicinal cannabis has not yet led to a legal cannabis market. Bryan’s December 2019 proposal to devote much of the tax revenue from the expected legal market to the pension system remains stalled in the Legislature. And his bid to prolong the life of the government pension system through a bond refinancing plan was torpedoed by an 11th-hour lawsuit filed in V.I. Superior Court by the Government Retirees United for Fairness, or GRUFF, some of the very people it was meant to help.
The legislation Bryan proposed, which was narrowly passed by the Senate after numerous amendments in August and September, sought to refinance $1 billion in bond debt at today’s lower interest rates, secured by the roughly $200 million the government receives each year in federal alcohol excise tax revenues.
According to Bryan, placing the bond debt and the rum money guaranteeing it into a a new legal entity or what is called a “special use vehicle,” would have removed $1 billion from the government’s balance sheet, pushed back $255 million in interest payments due over the next three years and generated $20 million in savings for the next seven years.
With $85 million in bond payments due on Oct. 1, timely implementation of the legislation was critical to its success, but then the lawsuit forced Bryan to withdraw the bond offering.
The move did not go unnoticed in the wider financial world.
“Market conditions for municipal borrowers could hardly be frothier, offering the territory a golden opportunity to refinance a big chunk of public debt at lower interest rates,” the Wall Street Journal reported in a Sept. 28 article headlined “U.S. Virgin Islands Cancels $1 Billion Debt Deal.”
“Pulling the deal – a relative rarity in the municipal market – marks another financial setback for the Virgin Islands, which faces challenges more severe in some respects than its larger Caribbean neighbor Puerto Rico,” the Wall Street Journal reported, adding that the territory’s pension system is “one of the worst-funded in the U.S.”
While Bryan has said his financial team is determined to salvage what it can of the refinancing plan, he decried the politics he said is ultimately to blame for the original proposal’s failure.
“It’s amazing to me the amount of disruption we have faced with this measure,” said Bryan. “Every single senator who is there, none of them have said this is a bad thing to do in terms of getting this lower interest rate. The only thing they can be opposed to is us creating a revenue stream for the retirement system. Why do they want us not to create a revenue stream for the retirement system?” said Bryan.
Critics included Sen. Janelle Sarauw, who in a Bloomberg news report compared the bond deal to predatory lending that will just push problems on future generations.
“Why do we want to tie up our greatest revenue stream for the next 10 to 15 years?” she told Bloomberg, adding that an amendment to the legislation on Sept. 17 capping the interest rate at 3.75 percent was done to make it “impossible” to price the bonds.
Others, like Sen. Kurt Vialet, also rejected the 20-year securitization plan because it would show diminishing returns and mounting payments in the final 10 years. “I don’t like to kick the can down the road,” he told the publication Bond Buyer, which also reported on the refinancing failure.
“We have to figure out creative ways to drive revenue to the Virgin Islands,” said Bryan of his critics. “The old mantra of being a legislator to monitor what the governor is doing is no longer as primarily important. We need ideas, we need people who are willing to put their political skin below the betterment of the people. That are willing to say, hey, people don’t understand this, they’re not ready to go this way, but I am going to lead and I’m going to do this because I have more information than them. We don’t have that,” said Bryan.
“The nine senators that voted with us, they took a tremendous leap of faith, but they understand that we don’t have a lot of options. We can go east, or we can go west, but the one thing we can’t do is stay right here because we’re going to die here. So, I applaud them,” said Bryan.
Had the deal gone through, it would have marked the U.S. Virgin Islands’ first reentry into the bond market since 2016, when the islands’ credit ratings were downgraded into junk territory. Investors were spooked by Puerto Rico’s pending bankruptcy but also by the V.I. government’s debt of more than $2 billion – or $19,000 for every man, woman and child – as well as its unfunded pension liabilities, according to a Reuters report at the time.
The U.S. Virgin Islands is not the only municipality trying to buy time by taking advantage of lower interest rates to address pressing funding needs now on the gamble that the financial picture will improve in the future. Chicago, for example, refinanced its massive bond and pension debts in 2017 with securitization bonds backed by its sales taxes.
“When you look at other fiscal situations in the states, we have been able to hit our revenue mark from our original budget even though we reduced the budget by 10 percent, we hit the mark we wanted,” said Bryan. “So, we’re coming in at the close of the year over what our reduced rate was, paid all our bills and still were able to pay out $65 million in income tax returns in a single year, which I think is a record, again, for the Virgin Islands. And even with that, we still have 61 days of cash,” he said.
“The only reason we really put this out there was because it was a good shot at creating another revenue source towards finally nipping this retirement problem in the bud,” said Bryan of the bond refinancing.
However, with change comes risk, he said.
“In my entire life, that has been something that I have accepted,” Bryan said. “New car smell comes with a new car payment. They go together. There is not going to be somebody to come and wave a magic wand and all the problems are going to go away, whether it’s WAPA, the sewage system, solid waste problems, the old payments that we have, the debt structuring. It all comes with pain.”
As he drove through Georgia and Florida last week, Bryan said he pondered, “When you look at how people are living, you say, ‘well, how are these people doing this?’ All the roads are nice, the grass is manicured, the hedge is good. They pay $10,000 a year in land taxes. They pay taxes to the county, the state, they pay city tax, they pay special ordinance taxes in order to create stadiums. That’s how they do it. We can’t afford to do that,” said Bryan, because the poverty rate in the Virgin Islands is too high.
“Looking at this economy globally, our tax base is severely undertaxed. It can’t support the lifestyle that we want as Virgin Islanders,” said Bryan. “In order to get these things, we are going to have to sacrifice in terms of attracting more people, attracting more businesses, expanding and investing in infrastructure, that’s going to allow for money to come from other places, otherwise, we are just going to be stuck in the same place because nobody wants to pay more taxes,” said Bryan.
With some 8,679 government retirees with an average age of 71 facing pension cuts of 42 percent come January as the GERS board tries to extend the life of the system – it pays out about $21.4 million a month, or about $257 million annually – Bryan said he will move forward with a new refinancing plan.
“I’m not deterred at all. As much as people complain about what we try to do, they don’t put up anything else as an alternative. I know that the majority of Virgin Islanders are hard-working people who are going about their business. They cast their vote [two years ago] and they expect me to fix the problem. When they look back to see what we’ve done, they are going to be proud. Those people don’t say anything every day, they’re too busy working. They pay attention two weeks before the election. They just want it to work right,” said Bryan.
“We are not afraid to charge into the unknown, to take risks and to push legislation that is going to ultimately benefit the territory, because staying in one place and doing the same thing over and over again certainly can’t be the solution.”