This is an open letter to members of the 34th Legislature.
Sixty-two years ago this month, your predecessors in the 3rd Legislature enacted one of the most visionary and impactful pieces of public policy legislation in the history of the U.S. Virgin Islands.
In June 1959, Act No. 479 created a retirement pension plan for government employees and established the Government Employees’ Retirement System (GERS) to administer it. Its primary purpose was to encourage Virgin Islanders to enter and remain in the service of the government by providing an attractive retirement benefit package.
After fulfilling its purpose admirably for six decades, GERS is, literally, a couple of years away from insolvency, about to die an ignominious death with calamitous consequences. It will be a sad ending to a success story — unless members of the 34th Legislature live up to your campaign promise “to fix the GERS problem.”
When insolvency comes, a lot of bad things will happen to a lot of good people. In the best-case scenario, 8,800 retirees will see their annuity payment cut in half, reducing the average benefit payment to well below the Virgin Islands minimum wage.
This would be particularly catastrophic for three quarters of them, whose current benefit is already below minimum wage. Two-thirds are 70 or more years old — the most vulnerable among us.
It’s not just retirees. Another 8,700 active employees will have their retirement plans shredded. More than half have more than 15 years of credited service — years of enforced salary deductions all for naught. Assuming one adult dependent for each of the 17,500 distressed members, it would mean 35,000 disaffected constituents — two-thirds the number of registered voters.
The reduction of benefits would hamper their ability to make rent, mortgage and utility payments and to pay for healthcare, which aging citizens increasingly require. The overall increase in the poverty level is likely to overwhelm the territory’s fragile social services infrastructure.
The loss of hundreds of millions of dollars in annual disposable income will multiply and spread through the wider economy. This would cause a reduction in the GVI tax capture and a contraction in the territory’s economy that is likely to be greater than the Hovensa refinery closing — with a much higher misery index. The bad news is that the best-case scenario is not the most likely; it really could get worse.
So, what went wrong?
Simply stated, the cost of pension benefits outgrew the funding source. The plan is set up to pay current year benefits from current-year payroll contributions — aka pay-as-you-go. That sufficed in earlier years, when there were many more employees than retirees. In 1983 there were 9,914 employees and 1,460 retirees; a 7 to 1 ratio. Benefits payout totaled a mere $8.5 million that year.
As the plan matured, employees became retirees. Hastened by early retirement options and fiscal constraints forced employee cutbacks, the demographics shifted such that retirees now outnumber employees — and they are living longer in retirement. That shift, plus a slew of unfunded benefit enhancements — nine by last count, costing millions — combined to cause benefit costs to outgrow payroll contributions.
This year, employee and employer contributions can pay only half of the $265 million retiree benefit payout. The last 20-plus years of shortfalls have been made up by cashing in over $2 billion worth of investments. At the current rate of liquidation, there will be no assets remaining to fill the gap after in a couple of years — ergo insolvency.
We have known for a long time that calamity was coming. Actuaries, auditors and taskforces have chronicled the fiscal decline and told us what must be done to reverse it. The 2013 Pension Reform Taskforce Report, after predicting insolvency in 2023, advised that “anything other than significantly increasing cash contributions into the plan ... or cutting the plan’s existing obligations for retiree payments is unlikely to have a significant effect on avoiding insolvency.”
The 2016 Mercer Report repeated that “the potential remedies are limited and conceptually simple: make significant additional contributions, either as one-time cash infusion or substantially increased annual contribution; or cut benefits of current recipients ....” A combination of increased contributions and reduced benefits is obviously an included option.
So, if the problem is simply stated, and the remedies are conceptually simple, what is the difficulty? The simple answer is that the fix is very costly — think of the System’s $4.4 billion unfunded liability. That is the additional amount needed to fully fund the benefits promised to 17,500 members of the System; an amount that exceeds the value of the Virgin Islands economy, and which gets bigger each year it is unattended. Your challenge is to assemble a funding package combining significant one-time cash infusion, substantially increased annual contribution, and yes, some benefit reduction. Therein lies the test of your much-touted ability to make tough decisions.
Two things are clear: one, all the roads to a remedy run through the Legislature; and two, it must be the 34th. Otherwise, the slide into insolvency will be unstoppable.
— Nellon L. Bowry, St. Croix, is GERS chairman, and twice served as director of Office of Management and Budget.