Insolvency near, GERS officials say

ST. THOMAS - The V.I. Government Employees Retirement System is heading toward insolvency unless measures are taken to shore it up, officials told senators Friday.

As an autonomous agency, GERS does not receive funding from the General Fund, but GERS officials come before the Senate each year during budget hearings to give an annual update.

GERS Administrator Austin Nibbs told senators Friday that the system is out of balance. He said in Fiscal Year 2011 the system had a negative cash balance of $88 million - meaning the contributions to the system in that year were $88 million less than the amount paid out in benefits.

As of June 30, the system has a negative cash balance of $99.2 million in this fiscal year.

The pension system's unfunded liability stands at about $1.4 billion. The unfunded liability is the difference between the pensions GERS is obligated to pay out and the money that will be available to pay those pensions, which is the money being paid into the system.

Unfunded legislative mandates, inadequate contribution levels and a declining ratio of active to retired employees have created the $1.4 billion unfunded liability.

The retirement system holds an investment portfolio to sustain and grow the system. It is made up of stocks, bonds, alternative investments and real estate holdings.

Nibbs said in March the market value of the GERS portfolio was $1 billion. By the end of June, that had dropped to $981 million - a loss of almost $80 million. He said the decrease was because of a $30 million loss in its investments' performance, liquidating $40.8 million in cash, and a $7.7 million loss of value in the system's senior life settlement investment, one of the GERS alternative investments.

During the last three years, the system has seen a 10.8 percent return on investment for the portfolio as a whole, Nibbs said.

Part of the GERS alternative investment portfolio includes two major loans made to local businesses.

In December 2009, a $3.3 million loan was issued to Seaborne Airlines for a five-year term. To date, the company has paid a total of $1.2 million back, $340,000 in principal and $913,372 in interest. Nibbs said Seaborne has requested a modification to the loan agreement that is pending board approval.

The $15 million loan given to Carambola Beach Resort had defaulted, and in May, GERS took ownership of the property. The GERS board had agreed to lend the hotel $15 million for a five-year term in 2009, but only $2.1 million was paid back to GERS.

Senators were critical of the risk GERS took lending money to the hotel, but board chairman Raymond James defended the action.

Unlike stock, in which a lost investment is never returned, the lost investment of a loan is recovered.

"The value is in the property, which we now own," James said. "I know there are issues there, but I can assure you, we will get our money back."

To help keep the system functioning, the GERS board has taken several actions including:

- Increasing the Tier 1 regular employee and Tier 1 Class 3 hazardous duty employee contribution rate by 1 percent each year for three years beginning Oct. 1, 2013. The Tiers are based on an employee's hire date relative to when the GERS Reform Act of 2005 went into effect; those before Oct. 1, 2005, are Tier 1, and those hired after that date are Tier 2 employees.

- Suspending the Cost of Living Allowance indefinitely for all retirees beginning in 2013.

The board also has submitted a number of measures to the Legislature to shore up the system including:

- Increasing the Tier 2 regular employee and Tier 2 Class 3 employee contribution rate by 1 percent each year for three years.

- Increasing the senators' contribution rate to 15 percent.

- Increasing the contribution rate for sitting judges to 15 percent at the start of the next term, 16 percent the second year and 17 percent the third year.

- Increasing the employer contribution rate 3 percent each year for the next six year to an ultimate contribution rate of 38.5 percent of pay.

- Changing the retirement age of Tier 2 regular employees from 60 to 65 and removing the provision allowing retirement after 30 years of service regardless of age.

- Changing the retirement age of Tier 2 Class 3 employees to age 50 with 25 years of service or age 55 with 10 years of service and eliminating retirement at any age with 20 years of service.

Sen. Craig Barshinger asked Nibbs when the proposed measures would need to be passed. Nibbs said they would before the end of the 29th Legislature.

"We must act on these initiatives now," Sen. Carlton Dowe said.

- Contact reporter Aldeth Lewin at 714-9111 or email alewin@dailynews.vi.

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