State of the Territory | Securing the Future of GERS: Challenges and Hope

In her bi-weekly column, “State of the Territory,” former Sen. Janelle K. Sarauw delves deeper into issues of concern for V.I. residents.

June 24, 1959, is a day etched in the history of the Virgin Islands. On that day, the 3rd Legislature enacted Act 479, creating the Government Employees Retirement System (GERS). This momentous event laid the foundation for one of the oldest pension systems under the American flag. GERS has been a crucial source of financial security, providing retirement annuities and disability benefits to Virgin Islands Government officials, employees, and their dependents ever since.

Over the years, GERS has evolved. It started under the Division of Personnel but gained autonomy in June 1987 when it transformed into a quasi-agency governed by a dedicated Board of Trustees. This shift allowed for more efficient management, setting the stage for continued growth and adaptability.

Current Status

As of Sept. 30, 2022, GERS faced significant financial challenges. Its total actuarial accrued liability stood at $3.96 billion, with plan assets at $400 million, leaving an unfunded liability of $3.56 billion. However, there’s hope; a funding note suggests GERS could remain viable until at least 2052.

In July 2023, GERS paid benefits to 8,776 retirees and added 319 new retirees but also faced the loss of 276 deceased retirees. The benefits paid from Oct. 1, 2022, to July 31, 2023, reached $221,113,751.82, averaging around $22 million per month. The active employee-to-retiree ratio is now 1 to 1, which requires higher contributions compared to the more favorable 2.2 to 1 ratio in the 1990s.

Challenges with Member Withdrawals

One pressing issue is the increasing trend of members withdrawing their funds before reaching vested status. In recent years, this trend has escalated significantly, with refunds reaching $8 million in 2023. These withdrawals affect the system’s liquidity and reduce the pool of active members contributing to the trust fund. This puts added strain on the system’s ability to meet the financial needs of retirees and beneficiaries. Addressing this issue and retaining members within the system are critical for GERS’s future.

Financial Standing

As of July 31, 2023, GERS’ portfolio was valued at $393.4 million, consisting of various asset classes. Domestic fixed-income assets accounted for $192.8 million, international equity assets were at $76.5 million, and domestic fixed-income assets stood at $115.4 million. Additionally, there were alternative investment assets (private equity-limited partnership) worth $8 million and $691 thousand in cash. Other alternative investments, including real estate, local investments, and member loans, contributed an additional $67.7 million to the portfolio. During the fiscal year, $110 million had been withdrawn from the portfolio to cover expenses and benefits.

The Loan Program

GERS also administers a loan program with assets totaling $8.5 million as of July 31, 2023. This program includes 726 personal loans and 52 mortgages, with most loans set to mature by 2025 and most mortgages by Dec. 31, 2030.

Legislative Reforms (see full timeline here)

In 2005, the GERS Reform Act (Act 6794) made important changes:

  • It created a Tier 2 for government employees, where they paid more into the system but received reduced benefits.
  • It started the GERS Alternative Investment Program, allowing more types of investments.
  • It let the GERS board gradually raise how much money people put into the system by up to 3 percent over five years.
  • It said the government had to give money for special early retirement programs.
  • It stopped increasing benefits unless they found a way to pay for them.

Over the years, more changes were made:

  • In 2008, the Senate passed a law that made employers pay more, going from 14.5 percent to 17.5 percent of an employee’s pay.
  • In 2010, they set aside $4 million every year for ten years to help pay retirees.
  • They also let GERS invest more in riskier, potentially more profitable things, up to 10 percent.
  • In 2013, the GERS board raised how much employers and employees had to pay again, with a 3 percent increase for employers and 1 percent for employees each year for three years.
  • In 2014, they raised the rates more.
  • Employers paid 3 percent more, reaching 20.5 percent, and it stayed that way for five years.
  • Tier 1 employees paid 1 percent more every year for three years.
  • Tier 2 employees also paid 1 percent more each year for three years, starting in 2015.
  • In 2015, they stopped giving loans to members to save money. 

Finally, Act No. 8540 in 2023 was a big deal:

  • It let the V.I. Public Finance Authority make a separate group called the “Internal Revenue Matching Fund (IRMF) Special Purpose Securitization Corporation.”
  • This group managed money from taxes collected on the sale of V.I.-made rum in the mainland United States, usually around $250 million each year.
  • This money was mostly used to pay the territory’s debts.
  • Act No. 8540 made it more organized and improved GERS’s financial future.

Proposed Initiatives for GERS’s Stability

Two vital funding initiatives have been proposed for GERS’s Fiscal Year 2024 budget:

Initiative 1: Amending employer contributions to raise the rate from 23.5 percent to 26.5 percent, injecting approximately $13 million annually into employer contributions.

Initiative 2: Rescinding Act No. 6233, requesting funding to cover the $15 million annual administrative expenses of the System.

These initiatives, though representing a modest 3 percent of the GVI’s $850 million General Fund budget for FY 2023, hold the potential to reshape GERS’s future financial landscape, ensuring its solvency and achieving 100 percent funding by 2048.

The Pivotal Role of Excise Tax and the Battle for a Permanent Solution 

In the realm of GERS’ financial stability, the Government Employees’ Retirement System of the Virgin Islands, one factor looms large: excise tax. This tax is derived from Virgin Islands-produced rum sold on the mainland United States, commonly known as the “covered-over” excise tax. It serves as a vital lifeline, funding the retirement system and anchoring its financial well-being.

To ensure GERS’s financial health, the government implemented a strategy through a Special Purpose Vehicle. This approach was seen as the best defense against insolvency. It hinged on the assumption of a cover-over rate of $13.25 per gallon of rum, aligning with historical norms.

However, a significant complication arose with the expiration of the “tax extender” provision. This provision had temporarily boosted the rate from $10.50 to $13.25 per barrel, but it ceased in 2021. Since then, the U.S. Virgin Islands has been receiving lower funds due to the reduced rate. This poses a multifaceted challenge: it reduces the territory’s overall income and disrupts debt calculations that rely on the higher rate. If the lower rate continues, it will extend the timeline by seven additional years to pay off the debt that saved the Government Employees’ Retirement System from impending financial collapse.

Delegate Plaskett has been at the forefront, attempting to gain bipartisan support to secure a permanent increase in the excise taxes from rum sales. The objective is to direct these funds to both the Virgin Islands and Puerto Rico. However, this endeavor hinges on the right legislative vehicle, which remains elusive. Initially, following the expiration of the tax extender, Ms. Plaskett was hopeful that permanence could be achieved by the end of 2022. Yet, as of August 2023, the path ahead has grown markedly uncertain.

Former Finance Committee Chairman Senator Kurt Vialet, when expressing concerns about the absence of an extension for the rum tax increase, faced accusations of fearmongering. Presently, this predicament has become an undeniable reality: a challenging battle to secure the rum extender. It is important that every annuitant and active employee understand the historical necessity of this measure. Congresswoman Plaskett plays a critical role in fostering bipartisan cooperation, navigating legislative complexities, and advocating for the rum extender as an imperative step toward securing the financial future of the territory and the Government Employees’ Retirement System.

Shortfall and Resilience

The lower excise tax rate has resulted in a shortfall in funds, impacting GERS. So far, the V.I. Public Finance Authority has had to cover the $30 million shortfall.

An upcoming interview with GERS Board of Trustees chair Dwayne Callwood and Administrator/Chief Executive Officer Angel E. Dawson Jr. promises deeper insights into GERS’s challenges, solutions, and strategic vision for the future.

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