GERS study shows system's impending collapse


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ST. THOMAS - The government's pension system continues to teeter on the brink of disaster, becoming insolvent by 2025 unless major reforms are passed by the Legislature.

According to the latest report from the Government Employees' Retirement System's actuary, the unfunded liability of the system now stands at $1.84 billion.

The unfunded liability is the difference between the amount the pension system takes in versus what it must eventually pay out.

During the last two decades, the unfunded liability has grown because of insufficient contributions, a ratio of fewer active employees to retired employees and unfunded legislative mandates, such as early retirement packages.

In the 2013 actuarial report, all aspects of the system were analyzed to come up with a big picture. While the report had been done every two years, the GERS board voted in July to have the report done annually in order to provide the board, the Senate and the public with the most accurate and up-to-date information possible.

The Segal Company was hired to complete the most recent report.

"Because the liquidity of the system is changing so fast, we need to have more statistical information in real time," GERS Administrator Austin Nibbs said.

Active to retiree ratio

Segal Company Vice President and actuary Leon Joyner said in a healthy pension system that is fully funded, you would expect to see a gradual shift in the number of active employees to retirees. However, in a healthy system that shift would eventually balance out without any major disruption or threat to the system, he said.

The government's pension system is not healthy, and therefore the shifting ratio is worrisome.

"The active membership is going down," Nibbs said.

The report states that the current ratio is one active employee - the ones paying into the system - to every 1.2 retirees - the ones taking money out of the system.

Nibbs said in his mind that is essentially a one to one ratio.

The Economic Stability Act of 2011, which offered incentives to eligible government employees to retire in order to reduce the government's payroll, sped that progression up a bit, according to Joyner.

According to the report, as of Sept. 30, 2013, the system had 7,845 retired members and 179 beneficiaries receiving total semi-monthly benefits of $9,287,519.

The last time the actuarial report was done for GERS, in 2011, there were 7,462 retired members and 130 beneficiaries receiving semi-monthly benefits of $8,381,441.

GERS portfolio

GERS holds its money in its portfolio of stocks and other investments. In order to keep the pension system operating, it needs to maintain a 7.5 percent return on investments.

According to the actuary, the GERS portfolio did quite well in the last two years. In 2012, the system saw a 14.48 percent return, and in 2013 it had a 9.12 percent return.

However, an actuary looks at the long term, taking into account the past, present and future in making its analysis.

Joyner said the actuarial rate of return includes the 2008 economic downturn, which depresses the rate of return to below the 7.5 percent benchmark. Next year, the five year cycle will not include the 2008 downturn and will likely meet or exceed the 7.5 percent return amount, he said.

Contributions

The actuarial report found that in order to keep the plan afloat, the level of contribution must be increased.

The contribution recommended includes payment for the active employees in the system as well as a payment toward the unfunded liability.

That total amount is divided by the projected payroll for active members to determine the funding rate.

In 2011, the funding rate was 52.63 percent of payroll.

The 2013 rate is 59.68 percent.

"This is what the ARC - annual recommended contribution - should be in order to break even," Nibbs said. "Right now our benefit payments are more than our contribution."

Nibbs said the system contribution for 2013 was 25.92 percent - or about $95 million - resulting in a shortfall that only adds to the unfunded liability of the system.

"We recommended in the Pension Reform Act increasing the rates," Nibbs said.

He said the changes in the rates and structure of the system would carry the GERS through 2032.

The proposed legislation is still pending before the Senate.

Unfunded liability

The unfunded liability of the retirement system has continued to grow over the years and is now at $1.84 billion, according to the report.

Joyner said the increase of the unfunded liability can be attributed to three things:

- The Economic Stability Act of 2011 which added several hundred retirees to the plan and forced the system to be paying out more in benefits than it might have been otherwise.

- The 2008 recession hit the system hard, and that impact was factored in over a five-year period which ends in 2013. Joyner said with this latest report, the effect of the economic downturn has been fully realized.

- The actual amount being contributed to the system is far less than the annual recommended contribution, which adds to the unfunded liability.

Solutions

"We need to increase the rates, contribution rates, both employee and employer," Nibbs said. "The benefit structure has to be changed also."

Nibbs said GERS does not support reducing existing benefits for retirees or people vested in the system, but the structure can be changed for those who are new to the system.

He said tier II employees, those hired after Oct. 1, 2005, will be vested in 2015. Any changes to that group would have to be done before next year.

The system also needs an infusion of cash to address the unfunded liability, Nibbs said.

The recent move by the Senate to give GERS the Lonesome Dove asset could be a step toward that, but it is unclear where that stands at the moment. The governor vetoed the measure recently.

Under Gov. Charles Turnbull, the government was given authorization to issue up to $600 million in pension obligation bonds to provide a large cash infusion to GERS, but the bonds have never been floated.

"There's no good news," Nibbs said about the latest report. "Every actuarial evaluation has gotten worse and worse."

Joyner said there is hope for the plan, but it will take a serious overhaul, and it must be done immediately.

"The plan is still projected to be insolvent and action needs to be taken by the Legislature. The benefits paid out from the system and the contribution to the system need to be brought together for the long haul," Joyner said.

- Contact reporter Aldeth Lewin at 714-9111 or email alewin@dailynews.vi.Year Active Retired Ratio

Members Members of active

and to

Beneficiaries Retirees

1993 11,642 3,473 3.4

1994 12,116 3,751 3.2

1995 11,493 4,438 2.6

1997 11,572 4,682 2.5

1999 10,763 6,212 1.7

2001 9,303 5,581 1.7

2003 10,037 6,093 1.6

2006 10,739 7,282 1.5

2011 10,376 7,592 1.4

2013 9,393 8,024 1.2

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