Dec. 1, 2006 — While a bill submitted by Gov. Charles W. Turnbull to further reform the Government Employees Retirement System has generated much community concern over the past week, public officials said Friday that the proposals were intended to make the system more solvent.
The bill, which Turnbull submitted in July, seeks to change several provisions included in the GERS Reform bill signed into law last November. According to news releases recently sent by two community organizations, the new reforms seem to offer increased benefits to a "handful" of government employees, which could put an additional financial strain upon the system.
Local retirees and government employees have spoken out against two specific provisions included in the bill: one which raises the cap on retiree's annuity payments from $65,000 to $85,000, and another that sets up a new retirement program for senators.
During Friday's Committee of the Whole meeting, representatives from AARP V.I. and Advocates for the Preservation of GERS (APG), questioned why the reforms were "being rushed through" the Senate without being thoroughly analyzed.
"We feel that GERS, our sole pension program four our public employees, is far too critical an element in the financial stability of this economy and in the lives of each annuitant to have this bill summarily rushed into law at the 11th-hour by an outgoing administration," said Hugo Dennis, president of AARP V.I.
Lifting the Cap
According Dennis, in order for GERS to sustain the increase in annuity payments, government employees would have to be paying into the system at a higher contribution rate for a set period of time.
Dennis and other testifiers said that immediately paying out increased benefits would add to the system's unfunded liability. He explained that a majority of government employees, currently paying into the system at a lower contribution rate, would have to subsidize the increased benefits paid to individuals making $85,000 or more.
GERS representatives and members of the governor's financial team disagreed with Dennis' statements, saying that employees who wish to take advantage of the increased benefits would first have to pay for them. "They could either write me a check for the difference or they could continue paying into the system, at a higher contribution rate, for an additional five years," GERS administrator Willis C. Todmann said after the meeting.
Todmann added that raising the cap will, in the long run, create more equity for the system, since government employees would continuously be paying into the system at a higher contribution rate.
Taking into account the fact that benefits paid out by GERS have, historically, exceeded contributions paid into the system, Todmann and other representatives said the proposed cap increase would add $80 million to unfunded liability, which now exceeds $1 billion.
However, GERS actuary Howard Rog, who testified during Friday's meeting via telephone, explained that the $80 million would not be accrued immediately but rather over the "life of the plan." GERS legal counsel Alfonso Nibbs added that this figure breaks down to approximately $36,000 a month, which could be paid off by annual appropriations made by the government.
"Just in terms of design, the cap should be, at some point, higher because a pension is supposed to replace people's income when they retire," Rog said. "However, you have to make sure that whatever you're promising must be financed properly."
Retirement plan for senators
If the new reform bill is signed into law, senators who have served for at least six years will be seeing an increase in their annuity checks when they retire.
According to the bill, senators who have served:
–1-6 years: receive 3.5 percent of their annual salary (senators serving under six years may request that their contributions be refunded);
–7-12 years: receive 4 percent of their annual salary;
–13-20 years: receive 4.5 percent of their annual salary; and
–20 or more years: 5 percent of their annual salary.
This system has generated much concern for community members, who have said that the percentage increase enables senators who have served for 20 or more years to collect 120 percent of their average salary upon retirement.
"Currently, what we do is when you're retiring, is we take a look at the last three years you've worked and average your salary," explained Mary Davis, chairwoman of Advocates for the Preservation of GERS. "That comes out to a certain percentage, and that's how much you can receive from the system."
During Friday's meeting, Davis said that senators, as "public servants," should not be rewarded with increased benefits for 20 years of service, while rank-and-file government employees can only receive 100 percent of their average salary after working for 40 years.
Davis' statement was refuted by attorney Elmo Adams, Turnbull's assistant legal counsel, who said that senator's benefits would be capped at 100 percent of their average salary. He added that any senator wishing to take advantage of the increased benefit would have
to pay for it.
"Their contribution rate would be increased from the current 9 percent to 11 percent," Adams said.
While most senators spent several hours Friday speaking in favor of the proposal, Sen. Celestino White Sr. pointed out that the original GERS Reform bill stipulates that the system may not provide for increases in benefits unless the increases are accompanied by a funding plan "based on sound actuarial information."
Both Todmann and Office of Management and Budget Director Ira Mills said that no appropriation has currently been made to fund the increased benefits.
Three sitting senators will not be returning to serve in the 27th Legislature: Sens. Lorraine L. Berry, Roosevelt C. David and Adlah "Foncie" Donastorg.
Issuing a Pension Obligation Bond
A bill authorizing the issuance of up to $600 million worth of pension obligation bonds to pay down the more than $1 billion unfunded liability currently plaguing GERS, was also at the forefront of discussion during Friday's meeting.
The bill, recently submitted by Gov. Turbull, is currently pending in the Committee of the Whole, as senators voted on Tuesday to hold it in committee until "further notice." However, Berry has said that the proposal could still be brought forth for consideration at the request of a majority of senators.
According to Nathan Simmonds, head of the government's financial team, only $400 million worth of pension obligation bonds will be issued once the bill is approved. Simmonds explained that while the bonds will not fully consume the government's general obligation bonding capacity, they will reduce the government's revenues, as money from the General Fund will have to be appropriated to pay down the debt service requirement.
Larry Soule, representing Banc of America Securities (financial advisors to the PFA), outlined the specifics of the proposal. He said the proposed face value of the bonds, which will equal $446 million, will include the cost of issuance (approximately $3.2 million) and the bond insurance premium ($13.4 million).
The government will have to appropriate $30.1 million annually from the General Fund to pay off the debt service requirements, while an additional $9.9 million will be given by the government as a contribution to GERS.
The first $40 million payment has already been factored into the fiscal year 2007 budget. According to Office of Management and Budget Director Ira Mills, the government recommends issuing the bonds "as soon as possible," so as to take advantage of the current low interest-rate environment and to stop the "hemorrhaging" of the system.
Present during Friday's meeting were Sens. Craig W. Barshinger, Berry, David, Juan Figueroa-Ser
ville, Shawn-Michael Malone, Terrence "Positive" Nelson, Ronald E. Russell and White.
Sens. Liston Davis, Donastorg, Pedro "Pete" Encarnacion, Louis P. Hill, Neville James, Norman Jn Baptiste, and Usie R. Richards were absent.
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