Commentary: The ‘GERS Rescue Plan’ and Credit Where Credit is Due

St. Thomas GERS building (Source photo by Don Buchanan)
The Government Employees’ Retirement System headquarters on St. Thomas. (Source photo by Don Buchanan)

With the passage of Bill 34-0188 – the “GERS Rescue Plan” – the 34th Legislature of the Virgin Islands can rightfully say that they tackled a difficult and pressing problem and solved it for the benefit of all government retirees. This is unquestionably a very good thing.

Once all of the back-slapping and self-congratulatory speeches die down, and the “I Saved GERS” campaign buttons are sold out, we will need to confront the realities of what was passed in this legislation. The Good. The Bad. And the Ugly.

Twice before, Gov. Albert Bryan Jr. tried to apply a Band-Aid to the gaping GERS deficit wound, and twice before his bills were rightfully rejected by the 33rd Legislature. Those two bills proposed to do only one thing – to remortgage certain debt obligations of the USVI and push the payments on those bonds out a decade or more. This would have provided some, but not nearly enough relief to the looming collapse of GERS. The governor’s bills were defeated, first by the market, and second by the Legislature.

The new bill, sponsored by Senators Kurt Vialet and Janelle Sarauw and cosponsored by all of the remaining members of the Legislature, goes vastly farther than the governor’s prior attempts. Most importantly, the new bill obligates the Government of the V.I. to turn over to GERS an annual payment of $158 million to be funded from rum excise taxes paid by the U.S. Treasury to the USVI. It is this $158 million annual payment that saves GERS from collapse.

So this is the GOOD of the bill. The V.I. government will finally be owing up to its obligation to fund government retiree benefits, an unescapable ethical and legal responsibility. Kudos to Senators Vialet and Sarauw for bringing this to the table, shepherding it through committee and having it pass in a near unanimous vote of the Legislature.

But, as we all know, money doesn’t grow on trees and $158 million per year doesn’t appear out of nowhere. So where DOES this money come from?

The simple answer is that for every gallon of rum produced and sold in the U.S. by Cruzan and Diageo in St Croix, the U.S. Treasury collects an excise tax and pays back to the V.I. government $13.25 per gallon. In 2021 these two companies produced about 21 million gallons of rum which resulted in a U.S. Treasury payment of $273 million to the USVI.  

Out of the money paid by Treasury to the V.I. government, around 50 percent is given back to the rum companies in the form of marketing incentives, molasses subsidies, and payments on rum company debt service pursuant agreements signed by Gov. John de Jongh Jr. So this leaves around $140 million per year available to the USVI. That “residual” payment is used to pay the debt service (principal plus interest) on around $700 million in outstanding government bonds. Whatever is left over used to go to the General Fund to pay for various projects.

Over the past five years some of the projects that were funded by the rum residual included the Paul E. Joseph Stadium, the Crisis Intervention Fund, the UVI Scholarship Fund, UVI Medical School Debt, and the St. Thomas Capital Improvement Fund.  

So now we move from the Good to the Bad of this plan. All of the projects that in the past were funded by the rum residual will no longer have that source of funding. All of the future projects that could have been funded by the rum residual will need to either be cancelled or find other sources of funding. Money doesn’t appear out of nowhere.

We had a debt to the Government Employees’ Retirement System and we have committed to pay that debt, but it will have a noticeable effect on our ability to fund other projects.  Could this have been avoided? Possibly, but not easily.

While the people of the Virgin Islands will take on the burden of this funding obligation, it is important to recognize that none of the pain is shared by the retirement system itself.  GERS has an administrative overhead of $15 million per year, forecast to increase at 2 percent per year. This makes it one of the most expensive retirement systems in the entire country to administer. Comparable plans have overheads of $5 million per year. GERS should have, in my opinion, committed to become more efficient.

The plan adopted by the Legislature has no risk sharing in it. While GERS can be comfortable knowing it will be paid a fixed sum of $158 million per year, the money to fund that obligation comes from a variable source – the rum matching funds. What happens if rum production decreases? What happens if the U.S. government reduces the $13.25 per gallon? What happens if a hurricane or fire destroys the Diageo or Cruzan factories? There is no shared risk in this plan. The V.I. government is obligated regardless of the amount of rum matching funds actually available.

This could have been an opportunity to implement reforms in GERS – to curtail or eliminate double pensions, to move from a defined benefit to a defined contribution scheme, to impose efficiencies on management. But none of those ideas would have found political favor and hence none of those sensible things were done.

So we have a lot of Good, some Bad, and now the UGLY. The ugly truth of this bill is hidden in the arcane language of the debt refinancing provision, the portion of the bill originally sponsored by Gov. Bryan in 2020. In order to enhance cash flow during the early years of the plan, when the finances of GERS are at their most critical level, the plan proposes to “remortgage” about $700 million in bonds that would have been fully paid off over the next 10 years.

The approved plan will push that debt out 10 or 20 years, placing our debts on the shoulders of our children. The plan, without being explicit about it, increases the debt by borrowing more money to pay for the interest expense for the first three years. Paying interest on interest doesn’t sound too sensible, does it? Overall, this portion of the plan, which has yet to be sold to the market, will only produce about 2 percent of the total cash flow needed to finance GERS (around $70 million in savings out of $3 billion in funding).  However, for this fairly meagre sum, we are imposing long-term – 20 to 30 year – debt on the people of the Virgin Islands. In my opinion this was not only unnecessary, but it is a very, very poor fiscal decision. When you have to resort to refinancing to pay your current debts it is almost always a clear red flag.

So there you have it, the Good (and it is very good), the Bad, and the Ugly. I congratulate all of those in the 34th Legislature who voted their conscience and supported this bill. They deserve credit, and whether this turns out to be a day to celebrate for years to come, or something less celebratory, remains to be seen but for now they should proudly wear their campaign buttons proclaiming “I SAVED GERS”.

— David Silverman, St John