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GOVERNMENT EMPLOYEES RETIREMENT SYSTEM OVERVIEW OF OPERATIONS Presented to the Committee on Finance of the Twenty-ninth Legislature of the Virgin Islands Presented By Austin L. Nibbs, CPA Administrator Earle B. Ottley Legislative Hall August 23, 2011 9:00 A.M. Government Employees Retirement System August 23, 2011 Overview of Operations 2 Charlotte Amalie, St. Thomas USVI GOVERNMENT EMPLOYEES RETIREMENT SYSTEM Overview of Operations – Fiscal Year 2011 TABLE OF CONTENTS Introduction ……………………………………………………………………………............................................ 3 Human Resources …………………………………………………………………………………………………………….. 4 Accomplishments ……………………………………………………………………………………………………………… 4 Membership …………………………………………………………………………………………………………………….. 5 Contributions Received and Benefit Payments …………………………………………………………………. 7 Contributions Outstanding ……………………………………………………………………………………………….. 7 Cost of Living Adjustment ……………………………………………………….………………………………………… 8 Annual Bonus …………………………………………………………………………............................................. 8 Actuarial Valuation Information ……………………………………………………………………………………….. 9 Unfunded Legislative Mandates ……………………………………………………………………………………….. 11 Investments ……………………………………………………………………………............................................ 13 Real Estate …………………………………………………………………………….............................................. 16 Loans ………………………………………………………………………………………………………………………………… 19 Technology Upgrade…..…………………………………………………………………………………………………….. 20 Website ……………………………………………………………………………………………………………………………. 21 In-House Processing of Payrolls ………………………………………………………………………………………… 22 Annual Financial Audit ………………………………………………………………………………………………………. 23 Projected Goals and Outcomes …………………………………………………………………………………………. 23 Recommended Amendments to Legislation ……………………………………………………………………… 24 Summary …………………………………………………………………………………………………………………………… 26 Appendices Contributions Received and Benefit Payments …………………………………………. Exhibit A Investment Fund ……………………………………………………………….……………………… Exhibit B Treasurer’s Report (Statement of Cash Flows – June 30, 2011 …………………. Exhibit C Schedule of Budget vs. Actual – Fiscal Year 2011 …………………………………….. Exhibit D Schedule of Administrative Expenses – Fiscal Year 2011…………..………………. Exhibit E Government Employees Retirement System August 23, 2011 Overview of Operations 3 GOVERNMENT EMPLOYEES RETIREMENT SYSTEM OVERVIEW OF OPERATIONS Good morning, Honorable Senator Carlton “Ital” Dowe, members of the Committee on Finance, other distinguished senators who are present in the chambers and good morning to all. I am Austin L. Nibbs, Administrator of the Government Employees Retirement System of the Government of the Virgin Islands (GERS). I would like to take this time to acknowledge senior management that is in the chambers. This report is a compilation of nine months of activity covering the period of fiscal year October 1, 2010 through June 30, 2011. INTRODUCTION The GERS was enacted by the Third Legislature of the Virgin Islands on June 24, 1959 by Act 479, which created the Employees Retirement System as a defined benefit pension plan. On October 1, 1959, the System started operations and contributions by employees and the plan sponsor began. The statute that governs the operations of the GERS is Title 3, Chapter 27 and 28th of the Virgin Islands Code. The statutory mandate of the GERS is to enrolled employees into the System within thirty (30) days of service, as a condition of their employment. The GERS pension plan is a defined benefits plan. The objective of the GERS is to encourage employees who enter the System to remain in the service of the Government by establishing an orderly means whereby those members who became superannuated or incapacitated as a result of disability Government Employees Retirement System August 23, 2011 Overview of Operations 4 may retire without suffering economic hardship. The System has never missed an annuity payment to its retirees. However, for the System to continue to meet its statutory obligations to its members, the System must be actuarially funded. HUMAN RESOURCES For the past 40 months, all employees of the System has been involved whether directly or indirectly in the implementation of new technologies and systems in the areas of benefits, loans, records management and accounting and payroll. I commend and thank the employees who have been working days, nights and weekends assisting with the system upgrades. As of June 30, 2011, there were 86 full time employees:  14 employees assigned to the St. Croix office; and  72 employees assigned to the St. Thomas office For the same period, there were 13 temporary employees assisting with the migration of the new technologies in the areas of records management, benefits and loans. ACCOMPLISHMENTS Our major accomplishments to date during fiscal year 2011 are:  Implemented Tier II section of the 2005 Reform Act.  Conducted the election, orientation process and the seating of the new retiree trustees.  Completed the user acceptance testing and training phases of the new pension and benefit (loans) administration software.  Conducted the RFP process and selection of a vendor for the procurement of a new financial accounting system. Government Employees Retirement System August 23, 2011 Overview of Operations 5  Began the process to bring the annuity and administrative payrolls in-house in January 2012.  Began the process to provide members with educational services in Financial Planning.  Began the RFP process for implementation of the Supplemental Contribution Program.  Developed a preventative maintenance program for the new St. Croix building.  Installed an updated firewall which improved the network security from cyber-attacks.  Implemented video conferencing to save on travel costs. MEMBERSHIP The overall membership in the System from fiscal year 1982 through June 30, 2011 is shown in the chart below: Year Active Members Retirees & Beneficiaries Ratio of Actives to Retirees Total Members 1982 8,914 1,360 6.55 to 1 10,174 1987 10,466 2,338 4.47 to 1 12,804 1991 11,766 2,901 4.05 to 1 14,677 1993 11,642 3,473 3.35 to 1 15,115 1994 12,116 3,751 3.23 to 1 15,867 1995 11,493 4,438 2.58 to 1 15,931 1997 11,572 4,682 2.47 to 1 16,254 1999 10,763 6,212 1.73 to 1 16,975 2001 9,303 5,581 1.66 to 1 14,884 2002 11,352 5,938 1.91 to 1 17,290 2003 10,555 6,052 1.74 to 1 16,607 2004 9,362 6,258 1.49 to 1 15,620 2005 9,967 6,484 1.54 to 1 16,451 2006 9,841 6,731 1.46 to 1 16,572 2007 11,207 6,811 1.65 to 1 18,018 2008 11,122 7,050 1.58 to 1 18,172 2009 11,085 7,134 1.55 to 1 18,219 2010 11,117 7,497 1.48 to 1 18,614 2011 9 months 10,741 7,695 1.40 to 1 18,436 Government Employees Retirement System August 23, 2011 Overview of Operations 6 The membership numbers show that the gap between the active members and the retirees and beneficiaries is tightly closing. There is a 1.40 to 1 ratio between the active members and the retirees and beneficiaries for the nine month period ending June 30, 2011. Fifteen (15) years ago, there was a 3 to 1 ratio between the active members and the retirees and beneficiaries. With the implementation of Bill No. 29-0123 (Act No. 7261 - The Virgin Islands Economic Stability Act of 2011), the gap will tighten further. We are in the process of determining the precise impact on the System. However, based on preliminary indications from our Actuary, there will be a significant negative impact on the System due to the enactment of Bill No. 29- 0123. The Actuary has estimated that with a workforce reduction due to enforced mandated retirement of all employees with 30 or more years of service, without replacements, the System is expected to receive $11 million less annually in contributions and the unfunded actuarial accrued liability will increase approximately $26.4 million. The Actuary also estimated with the 8 percent reduction in salary for employees paid from the general fund earning $26,000 or more, the loss in contributions annually will be approximately $5.4 million. We will not determine the true impact of Act No. 7261 to the System until after September 30, 2011. The decrease in active membership also decreases the employee and employer contributions to the System. The System cannot afford to lose any contributions unless new revenues are identified to replace the shortfall. Government Employees Retirement System August 23, 2011 Overview of Operations 7 CONTRIBUTIONS RECEIVED AND BENEFIT PAYMENTS As presented in the chart on page 5, the number of retirees and beneficiaries continues to increase thereby increasing the benefit payments. For comparisons purposes, we attached Exhibit A which shows the total contributions, total benefits payments and expenses and total deficits in millions from 1994 thru June 30, 2011. The comparison reveals that in 1996 the System received contributions of $71.7 million and paid benefits and expenses of $73.3 million for a deficit of $1.6 million. This trend has continued since 1996 where total contributions received are significantly lower than the benefits and expense payments. For the past four years total contributions on an average have been $77 million less than benefits and expense payments. The comparison also shows that in 2009, the deficit was $77.2 million, in 2010 (unaudited), the deficit was $81.6 million, and for the 9 months of 2011 (unaudited), the deficit is $83.8 million. The GERS is receiving from its regular members 8 percent and employers 17.5 percent for a combined contribution rate of 25.5 percent. Our Actuary has repeatedly stated that the required contribution should be at least 43 percent of payroll. This is the amount necessary to maintain the operations of the retirement benefit structure on an actuarial reserve basis, as mandated by the provisions of the Virgin Islands Code. To meet the full actuarial costs, the contribution rate would have to be increased by 17.5%. CONTRIBUTIONS OUTSTANDING The outstanding employer’s contributions (excluding delinquency fee, interest and loss investment income) due to the GERS from the central government and other government Government Employees Retirement System August 23, 2011 Overview of Operations 8 agencies for fiscal year 2011 covering the period October 1, 2010 through June 30, 2011 are as follows: Agency Regular 3% Total Central Government $ 0 $ 0 $ 0 Water and Power Authority $2,340,000 $916,190 $3,256,190 Total Contributions Due $2,340,000 $916,190 $3,256,190 Part of the outstanding balance is employee contributions that are due to the GERS. The contributions are for the pay periods ending February 5, 2011 through June 25, 2011. We have advised WAPA that based on the Virgin Islands Code, employee contribution deductions must be forwarded to the GERS within 10 days after the deductions are made. Not forwarding the employee’s contribution deductions to the GERS is in violation of the law, and also reduces the employee’s ability to apply for the maximum amount on loans, which is based on amount of contributions received. We are working with the Virgin Islands Water & Power Authority (WAPA) to resolve this outstanding balance with offsets from prior year’s overpayments. COST OF LIVING ADJUSTMENT/ANNUAL BONUS On July 15, 2011, 245 annuitants on disability were paid their 1.5% annual cost of living adjustment (COLA). The gross annual amount that will be paid to these annuitants is $154,350. On July 31, 2011, 6,042 retirees who are age 60 and older and have been receiving a service annuity for at least 1 year were paid their COLA. The gross annual amount that will be paid to this class of retirees is $6,577,553. Government Employees Retirement System August 23, 2011 Overview of Operations 9 Bill No. 28-0020 (Act No. 7080) provides for the Virgin Islands Lottery (VIL) to make an annual payment to the GERS by July 15th of not less than $2,270,000.00 to be paid by September 15th. The bonus is given to annuitants and pensioners who are 60 years of age, and have been receiving a service annuity for at least 1 year, and is eligible to receive a cost of living increase by July 15 of the year in which the bonus payment is made. We have received from the VIL through August 2, 2011 a total of $860,846.64. We have advised the VIL management that in order for GERS to pay the annual bonus by the date and amount prescribed in the law, the VIL will have to remit $1,409,153.54 to GERS by August 31, 2011. ACTUARIAL VALUATION INFORMATION Title 3, Chapter 27, Section 718 (a) of the Virgin Islands Code mandates that the Employees Retirement System of the Government of the Virgin Islands be financed on an “actuarial reserve basis.” An “actuarial reserve basis” generally means that the retirement benefits are funded during employees active years of employment so that by the time they retire, the benefits would have been fully funded in advance of their retirement date. The actuarial valuation, which is conducted by the System’s Actuary, determines the contribution rate necessary to meet the cost of benefits being accrued and a corresponding amount to pay down a portion of the unfunded liabilities. We are presently accumulating the data to complete the actuarial valuation for the year ended September 30, 2010. Our Actuary has estimated that the System’s unfunded actuarial accrued liability at September 30, 2009 to be $1.4 billion. A schedule of the unfunded actuarial accrued Government Employees Retirement System August 23, 2011 Overview of Operations 10 liability and the funded ratios from fiscal years 1998 through 2009 is presented below. Year (a) Actuarial value of assets (b) Unfunded actuarial accrued liability (UAAL) Actuarial accrued liability (a) + (b) Funded Ratio (a)/(c) 1998 1,078,291,775 307,300,371 1,385,592,146 77.82% 1999 1,255,210,822 518,608,964 1,773,291,625 70.78% 2000 1,330,089,822 525,608,964 1,855,698,786 71.68% 2001 1,342,894,336 731,727,064 2,074,621,400 64.73% 2002 1,337,676,064 815,884,419 2,153,560,483 62.11% 2003 1,346,906,862 921,669,858 2,268,576,720 59.37% 2004 1,360,288,336, 977,502,024 2,337,790,360 58.19% 2005 1,366,982,183 1,088,574,553 2,455,556,736 55.67% 2006 1,421,093,035 1,236,571,529 2,657,664,564 53.47% 2007 1,509,244,380 1,241,138,878 2,750,383,258 54.87% 2008 1,530,604,789 1,310,218,726 2,840,843,515 53.88% 2009 1,534,899,736 1,397,261,661 2,932,161,397 52.35% We note that in 1998 (13 years ago), the unfunded accrued liability was $307.3 million, the actuarial accrued obligations were $1.4 billion and the funded ratio was 77.82 percent. 11 years later in 2009, the unfunded accrued liability increased from $307.3 million to $1.4 billion (more than 4 times), the actuarial accrued obligations increased from $1.4 billion to $2.9 billion (100 percent increase) and there was a significantly decrease in the funded ratio from 77.82 percent to 52.4 percent. Government Employees Retirement System August 23, 2011 Overview of Operations 11 The unfunded accrued liability at September 30, 2010 and June 30, 2011 is estimated to be $1.5 billion. UNFUNDED LEGISLATIVE MANDATES One of the major reasons for the significant unfunded liability is the unfunded legislative mandates going back to the 15th Legislature. Presented below are the nine (9) unfunded legislative mandates enacted by the 15th, 20th, 21st, 23rd and 24th Legislatures for which the System has distributed benefits which have negatively impacted the Fund. A recent review conducted by the U.S. Inspector General revealed that because of the enactment of the Early Retirement Incentive, Training and Promotion Act of 1994 (Act No. 6007) which was passed by the 20th Legislature, the GERS lost $121 million in contributions. The Legislature appropriated and GERS was paid a total of $31 million resulting in a loss of $90 million in contributions. This $90 million in loss contributions is the impact to the System that was calculated for only one of nine unfunded mandates. UNFUNDED MANDATES ACT NO. YEAR Legislative Mandates Omnibus Authorization Act of 1984 15th 4877 10/25/1983 To Provide for Early Retirement of Dept. of Education Personnel 15th 4896 2/21/1984 Early Retirement Incentive Training & Promotion Act of 1994 20th 6007 8/16/1994 To Extend Act 6007 21st 6088 12/5/1995 To Fund Salary Increases for Retirees & Eligible Employees 24th 6415 6/18/2001 To Place Employees on Step 24th 6427 6/19/2001 Expansion of Eligible Members of Early Retirement Program 24th 6429 9/24/2001 To Provide Early Retirement Benefits Options & To Reduce Expenditures 23rd 6361 10/19/2000 To Increase Retirement Benefits for Superior Court Judges 23rd 6391 2/1/2001 Government Employees Retirement System August 23, 2011 Overview of Operations 12 In accordance with Title 3, Chapter 27, Section (j), the employer shall, in addition to any other contributions and payments to the System required by law, contribute to the System such sums as may be required to compensate the System for the costs of any special early retirement program. In accordance with Title 3, Chapter 27, Section (k), the employer shall pay to the System the total costs of any special, early retirement program in advance of the commencement of the early retirement program. If the employer is in default of payment for any prior special, early retirement program, the System may not distribute any special early retirement benefits from any additional special, early retirement program until full payment of the previous special early retirement program is made. In accordance with Title 3, Chapter 27, Section (l), the System shall not pay benefits to an employee unless his and the employer’s contributions adequately finance benefits and related costs provided under this chapter. We note that the System was ordered by the Court before to make payments, although, the employer’s contributions did not adequately finance benefits and related costs. The sections of the law were read into the record to point out that there are laws to protect the System; however, the laws were overlooked and circumvented to the detriment of the System. Other unfunded measures were the crediting of excess annual and sick leave benefits credit to retiree’s years of service up until December 31, 2009 and the past due administrative expenses totaling approximately $37 million for Fiscal Years 1987 through 1998. Government Employees Retirement System August 23, 2011 Overview of Operations 13 Since the enactment of Act No. 6223 in 1998, the GERS has financed its own operations. This legislation removed the provision that required the Government of the Virgin Islands to pay the administrative costs associated with the operations of the GERS. This is the fourth year that I have appeared before this body to present the annual overview of operations for the System. For the past 3 years, I have reported that without a significant cash infusion and or increases in the contribution rates, our Actuary has predicted that the System will run out of assets if nothing is done. Although, we are sensitive to the budget deficit of the Government of the Virgin Islands, what is occurring today with the reduction in the workforce and the 8 percent reduction in wages for the next 2 years, will hurt the System’s liquidity and cash needs and further increase the unfunded liability if other revenues sources are not identified to replace the loss contributions. INVESTMENTS The investment fund portfolio is managed with the specific goal to grow the assets to meet the System’s pension liability and ensure a reliable cash flow that provides for the funding requirements of near-term pension obligations. To achieve these goals, the Board allocates the Fund’s assets to a variety of asset types and strategies in consultation with the Investment Consultant. Generally, equity investments are included for their long-term return and growth characteristics, and fixed income assets are added for their ability to control investments risk and provide for a reliable cash flow that meets the System’s funding requirements. The Fund’s successful long-term performance confirms the importance of asset diversification and controlling investment risk within each asset class. Government Employees Retirement System August 23, 2011 Overview of Operations 14 As of June 30, 2011 and March 30, 2011, the market value of the portfolio was $1,100,752,836 and $1,113,879,986 respectively. (See Exhibit B). The market value of the portfolio at July 31, 2011 was $1,072,068,727. A decrease in value of $28,684,109 from June 30, 2011 market value. Since the U.S. debt ceiling has been raised and Standards and Poor’s (S&P) has downgraded the U.S. credit rating from AAA to AA+, the portfolio market value has decreased to $1,015,731,550 at August 19, 2011. A decrease in market value of $56,337,177. As you know, the global stock markets reacted the first trading day after S&P downgraded the long-term U.S. debt. The market value of the System’s equity portfolio declined because of the uncertainty in the market. Our investment consultant and investment managers have assured us that there will not be any significant negative impact to our investments. We are monitoring our portfolio performance on a daily basis. The System will continue its commitment to a disciplined investment strategy that focuses on long-term results. The System’s investment fund is presently managed by 17 investment managers. Title 3, Section 12, Chapter 27 of the Virgin Islands Code gives the Board of Trustees the authorization to invest in an Alternative Investment Program. Alternative investments are private market (non-publicly traded) investments in domestic and international venture capital and special equity. The Alternative Investment Program is designed to enhance the total Fund performance by generating a long-term rate of return greater than the assumed actuarial rate of 8%. GERS seeks to support investing within the Virgin Islands community that will influence job creation and or retention, wage prosperity and economic expansion. To date, GERS has Government Employees Retirement System August 23, 2011 Overview of Operations 15 invested in three types of alternative investments, private equity, real estate and special situations. In December 2009 the System invested in two local companies (Seaborne Airlines and Carambola Beach Resorts), which are categorize as Alternative Investments – Other Situations. Seaborne Virgin Islands, Inc. On December 4, 2009, a loan in the amount of $3,300,000 was closed with Seaborne Virgin Islands, Inc. The term of the loan is 5 years. The transaction consisted of two tranches, 1). a first lien term loan for $1,300,000 of which the proceeds were used to replace Seaborne’s existing credit facility. The interest rate shall not be less than 8.25 percent per annum or exceed 12.25 percent per annum. The initial coupon for this loan was 8.25 percent. and 2). a senior secured convertible mezzanine loan for $2,000,000 which was used by Seaborne to conduct the needed overhaul and maintenance of the airplanes. The interest rate is 14.5 percent. The collateral for the loans includes all of the real and personal property of Seaborne Virgin Islands, Inc. and the unconditional guarantee of Coastal Airways, Inc. the parent company of Seaborne, secured by all of the issued and outstanding common capital stock of Seaborne Virgin Islands, Inc. All of the proceeds of the loans were disbursed. To date, the GERS has received $600,360 in interest on the loan. Renaissance Carambola Beach Resorts and Spa On December 8, 2009, a loan in the amount of $15,000,000 was closed with Carambola. The term of the loan is 5 years. The interest rate is 10.5 percent. The initial funding was $8,242,592 which was used to purchase existing bank loan documents and judgments, payment of bonafide priority liens against the property and closing costs. To date, a total of $14,925,281 Government Employees Retirement System August 23, 2011 Overview of Operations 16 was disbursed. Last year, Carambola obtained the Marriott Renaissance flagship. The collateral for the loan includes the primary collateral consisting of all land and buildings of Carambola Beach Resort. To date, the GERS has received $2,147,091 in principal and interest. REAL ESTATE (A) GERS Complexes The System owns the GERS Complex on St. Thomas, which is the official headquarters of the GERS. The tenants are the Division of Personnel, the Department of Justice and Rescare (Job Corp). GERS also owns an additional 2.9 acres located at Estate Orange Grove Parcel No. 5 which is the former offices of the St Croix operations and Parcel No. 6 which is rented to the Casino Control Commission. Government Employees Retirement System August 23, 2011 Overview of Operations 17 Rents received for the 9 months of fiscal year 2011 are as follows: Rents Received Tenant Fiscal Year 2010 9 Months of Fiscal Year 20ll Department of Personnel $294,340 $81,438 First Bank $117,671 $2,321 Department of Justice $630,071 $333,567 Rescare $19,233 $11,219 Casino Commission $84,006 $77,006 Total Received $1,145,321 $505,551 The outstanding rents and utilities from tenants at June 30, 2011are as follows: Receivable From Tenants As of June 30, 2011 Agency Outstanding Rents Outstanding Utilities Department of Justice $94,261 $270,641 Department of Personnel $91,009 $44,022 Total $185,270 $314,663 We have received many inquiries; however, we have been unable to rent the first floor of the new Executive Office Complex on St. Croix which comprises of 5,381 square feet. When fully rented, the annual rent expected is approximately $134,525.00. Government Employees Retirement System August 23, 2011 Overview of Operations 18 (B) Land Estates Hoffman and Nullyberg In late 2006, the System purchased 120 acres of land at Estates Hoffman and Nullyberg on the east end of St. Thomas. The Development Committee proposed a mixed use development consisting of a conference and entertainment center, hotel, assisted living (108 units) and 105 single family lots. A public hearing was held by the DPNR on July 12, 2011 on the proposed zoning map amendments from A-1 (Agricultural District) to R-3 (Residential Medium Density) with a use variance for general and professional offices and from A-1 to R-2 (Residential Low density-One and Two Family). There will be another public hearing before the legislative hearing is held. The property is appraised at $4.3 million. Estate Coakley Bay In October 2010, the System purchased 170 acres of land at Estate Coakley Bay on the east end of St. Croix. The Development Committee has not determined the best use of the property. The purchase price of the land was $5 million. (C) Havensight Shopping Mall The Havensight Shopping Mall, a premier tourist destination commercial shopping center in St. Thomas is the gem of the Caribbean and has been one of the best investments for the System. This property was purchased on June 30, 1993, for $32 million. In December 2009, the property was appraised at $66.6 million. The Board is still negotiating a management agreement with the West Indian Company. Government Employees Retirement System August 23, 2011 Overview of Operations 19 The net dividend payments received from WICO for mall operations for fiscal year 2010, the 9 months of fiscal year 2011 and the dividends outstanding are as follows: Havensight Mall WICO Dividends Received – 2010 $2,709,662 WICO Dividends Received as of June 30, 2011 $1,564,256 WICO Dividends Outstanding at June 30, 2011 (1) $ 797,584 (1) We note on August 15, 2011, we received $350,000 of the dividends outstanding. LOANS In addition to providing regular retirement benefits, the System also provides personal, auto, land and mortgage loans to qualified members and retirees. During fiscal 2010, the loan portfolio generated revenues (interest income) of $10,920,823. We are proud to provide this service to our members some who would not be able to obtain credit to better their standard of living if this service was not available to them. There are 8,736 loans in the portfolio as shown below: Loan Category Interest Rate Units Dollar Value Personal Loans 8% 6,281 $105,567,039 Auto Loans 8.75% 21 142,997 Land 8% 32 800,677 1st Priority Mortgage 8% 265 7,800,536 2nd Priority Mortgage 9% 3 18,210 Retiree Loans 8% 2,134 26,762,106 Government Employees Retirement System August 23, 2011 Overview of Operations 20 The total loan portfolio as of June 30, 2011 is $ 141,091,565. TECHNOLOGY UPGRADE Comprehensive Retirement Software Solution – V3 The System currently operates three independent systems (benefits, loans and accounting). We are in the 40th month of the implementation of a comprehensive pension and benefits system software solution known as V3. The objective of this software implementation is to merge the legacy benefits and loan administration systems into a state-of-the-art, web- based, business solution, and upgrade and integrate the legacy financial accounting system with the V3. The V3 technology provides the foundation to enable and sustain the business agility of the GERS, in addition, to being fully integrated with the central government and the other government instrumentalities that interface with the GERS. The project consists of three rollouts (phases): Rollout 1: Digital Conversion of GERS’ member files. Completed. Over 2 million pieces of paper (contents of member files) were scanned and converted to electronic files. Rollout 2: V3 Imaging and Line of Business Implementation. In training and clean up phase. Go Live Date – September 29, 2011. Employees no will longer have to leave their desks and walk to the records room to request a member’s file. With a few clicks of a mouse, an employee can pull up a member’s file at the work station. The member’s information will be on one system and visible to the employee. Rollout 3: V3 Self-Service Implementation. Go Live Date – January 1, 2012. This is the interactive portion of the software. Members will have access to their information and request services with a personalized user name and password. Government Employees Retirement System August 23, 2011 Overview of Operations 21 When the software is fully implemented, customer service to our members will be greatly enhanced through the ability of V3 to facilitate electronic web-based transactions and communications. Other expected results of the upgrading of the systems are:  Online loan applications and payments  Ability for members to estimate benefit calculations  Ability of GERS to produce member statements as required by law  Improved data quality and security  Digitized member data for improved access, retrieval and protection  Greatly reduced processing time for requested services  Improved identification of receivables from government agencies  Improved work flow tracking and processes Website Our website has received excellent reviews by our members and other users. A few weeks ago, I was in a meeting in Boston with our custodian bank representatives. They complimented the System on the impressive website and mentioned that they were able to obtain all of the information needed from the website to prepare for the meeting. The purpose of our website is to keep our members and other users informed of the major financial as well as non-financial information and other developments that affects the System. I would like to publicly thank Lorraine Gumbs-Morton, Public Information Officer for the upkeep and maintenance of the website. Our website address is www.usvigers.com. Government Employees Retirement System August 23, 2011 Overview of Operations 22 IN-HOUSE PROCESSING OF PAYROLLS Effective January 1, 2012, the System will process the retiree and administrative payrolls in-house instead of outsourcing to a contractor. Since 2000, ADP has been contracted to process the retiree and administrative payrolls. The initial cost to the System to outsource the payroll in 2000 was $250,000. The cost ballooned to $370,732 in fiscal year 2010. We determined the System will save approximately $270,000 annually if the payrolls are processed in-house. The System has the capability, expertise and equipment to handle the processing of the payrolls. The system will be backed up each pay period at a hot site in New Jersey and with ADP as part of our disaster recovery plan. Commencing October 1, 2011, all members retiring and residing in the 50 states, territories and possessions will be required to receive their annuity payment by direct deposit. In January 2012, the System will discontinue mailing check stubs. These two measures will save the System approximately $96,000 annually in supplies and mailing costs. 81 percent of our retirees use direct deposit to receive their annuity payments. In a few weeks, we will contact each retiree who receives a check to inform them of the benefits and convenience of converting to direct deposit. We note that as of May 1, 2011, the Social Security Administration required that all new benefit applicants receive their monthly payments electronically, and all current beneficiaries who receive a paper check must switch to electronic payments by March 1, 2013. Therefore, we encourage the remaining 19 percent of our retirees who receive a paper check from GERS and a social security check, to convert to direct deposit this year. Government Employees Retirement System August 23, 2011 Overview of Operations 23 ANNUAL FINANCIAL AUDIT The System’s most recent certified audited financial statements by Bert Smith & Company are as of September 30, 2009. The audited financial report was issued August 13, 2010. The Fiscal Year 2010 financial audit is in progress and is expected to be completed by September 2011. PROJECTED GOALS AND OUTCOMES FOR FISCAL YEAR 2012  Have all systems interacting with each other by upgrading the financial accounting system from MAS 90 to MAS 500 and fully integrating it with the new pension and benefits (loans) system (V3) and the administrative payroll system. This integration will eliminate all external manual processes and reconciliations. It will also result in timely and accurate reporting and the elimination of internal control weaknesses cited in the annual audit report.  Successful implementation of the in-house processing of the annuity and administrative payrolls.  Complete and implement the Strategic Plan.  Conduct educational seminars in Financial Planning for members.  Implement the Supplemental Contribution Program in accordance with Title 3 Chapter 28B of the Virgin Islands Code. This will provide the Tier II members with an alternate vehicle to save for retirement.  Complete the job classification and wage study. With the introduction of new systems, there will be a need to cross train employees, revise job descriptions and review compensation levels. Government Employees Retirement System August 23, 2011 Overview of Operations 24  Complete and issue the Fiscal Years 2010 and 2011 certified financial audits. This will provide timely access to audited financial information and compliance with the governing statute and the requirements of the Government of the Virgin Islands.  Complete and issue the certified actuarial valuation and report for the 2 year cycle ending September 30, 2010. RECOMMENDED AMENDMENTS TO LEGISLATION On August 12, 2011, I appeared before the Committee on Government Operations, Energy and Veteran’s Affairs to give testimony on the proposed Bill No. 29-0099, an Act amending Title 3, Virgin Islands Code, Chapters 27 and 28A as they pertain to the retirement of personnel. As indicated in my testimony, in 2009, the GERS selected an in-house Committee comprising of Board members and staff and embarked on a project to revise the language and ambiguities in the law and to make recommendations for amendments to the Reform Act. As required by law, on January 29, 2010, we submitted the implementation plan for the Reform Act of 2005 (Act No. 6794, Bill No. 26-0071) to the President of the 28th Legislature. On May 18, 2010, we were invited and appeared before the Committee of the Whole to give testimony on the implementation plan. There were subsequent informal meetings with the Senators and the in-house Committee, to explain the recommended amendment and changes line by line. In December 2010, we submitted the final version of the plan to the Legislature. The major amendments recommended to the Legislature in 2010 and endorsed by the Actuary as follows:  Per diem basis and contractual employees who work exclusively for the Government at least 40 hours per week may be included as a member and receive service credits by paying the required contributions. Government Employees Retirement System August 23, 2011 Overview of Operations 25  Exclusion of the cost of living annuity, bonuses or adjustments for the specific purpose of the compensation ceiling of $65,000.  Increase the contribution rate from 11 percent to 15 percent for members of the Judiciary and the Legislature.  Increase mortgage loans to $350K.  Increase new automobile loans to $40K.  Ability for retirees to refinance existing personal loans.  Allow members to purchase additional service credits (air time). Last week, we requested our Actuary to consider and complete an analysis of the following to determine the impact to the System and the unfunded liability:  Changing retirement eligibility. Regular employee: Age 62 with 10 years of service, eliminating the any age with 30 years of service. Class 3 employee: Age 50 with 25 years of service or age 55 with 10 years of service, eliminating the any age with 20 years of service.  Changing the benefit multiplier for service earned in the future.  Increasing the contribution rates: 1) Tier I Regular from 8 percent to 11 percent Tier I Hazardous (Class 3) from 10 percent to 15 percent 2) Tier II Regular from 8.5 percent to 11.5 percent Tier II Hazardous (Class 3) from 10.625 percent to 15.625 percent 3) Judges and Legislators from 11 percent to 20 percent 4) Employer – from 17.5 percent to 20.5 percent Government Employees Retirement System August 23, 2011 Overview of Operations 26  Add TIER III: Use career average earnings instead of final 5–year average salary for non-vested members to determine the base salary to calculate the annuity. Reduce annuity payment based on social security benefits.  Reducing the percentage or delaying the COLA. SUMMARY Mr. Chairman, I do not know how more convincing or persuasive I can be to caution this body not to tinker with the provisions already included in the present Reform Act of 2005. The purpose of the Reform Act of 2005 was to slow down the bleeding of the System. The numbers that were presented today were not fabricated. The System is hemorrhaging and because of the passage of Act No. 7261, and without a significant infusion of cash, increase in the contribution rates and radical changes in the benefits structure, the bleeding will continue. The System was established 52 years ago and must continue for another 52 years. There cannot be any more unfunded legislative mandates or self-interest or special interest group legislation. We are all in this boat together. This System will not survive another 10 years if we tinker with the Reform Act of 2005. We must look at ways to amend existing legislation and add legislation to slow down the years of deficits that the Fund has experienced. A great part of the future of the GERS will depend on the Government of the Virgin Islands (Plan Sponsor) commitment to fund their contributions to the System based on an actuarial reserve basis. By not funding the Plan on an actuarial reserve basis creates the annual deficit and increases the unfunded actuarial liability. Government Employees Retirement System August 23, 2011 Overview of Operations 27 On August 31st, and September 1st and 2nd, the Board of Trustees will meet at the GERS Complex on St. Thomas to hear presentations from all of our investment managers on their performance. We invite the members of this Committee and the general public to attend. Mr. Chairman, this concludes our presentation. We are prepared to respond to any questions the Committee may have on the operations of the GERS. EXHIBIT A GOVERNMENT EMPLOYEES RETIREMENT SYSTEM CONTIBUTIONS AND BENEFIT PAYMENTS AND EXPENSES Benefit Payments Fiscal Total and Surplus/ Year Contributions Expenses Deficit ( ) 1994 61.7 46.7 15.0 1995 74.9 64.6 10.3 1996 71.7 73.3 (1.6) 1997 74.3 80.0 (5.7) 1998 71.9 91.6 (19.7) 1999 71.7 95.4 (23.7) 2000 70.2 103.7 (33.5) 2001 69.1 121.2 (52.1) 2002 80.1 133.0 (52.9) 2003 82.1 138.0 (55.9) 2004 84.9 142.6 (57.7) 2005 81.9 153.0 (71.1) 2006 99.3 161.0 (61.7) 2007 96.6 170.5 (73.9) 2008 112.8 184.7 (71.9) 2009 116.8 194.0 (77.2) 2010 (Unaudited) 117.1 198.7 (81.6) 2011 (9 mos. Unaudited) 88.9 172.6 (83.8) EXHIBIT B Investment Fund Portfolio Quarter Ending June 30, 2011 Invesment June 30, 2011 March 31, 2011 Change in Investment Manager Asset Class Portfolio Value Portfolio Value Portfolio Value Employees Retirement System Fund - All Segments AllianceBernstein Fixed Income Core 97,052,213 $ 95,049,143 $ 2,003,070 $ Attilanus Fund Alternative Investment 58,364,860 58,364,860 - Brandywine Global Investment Management, LLC Fixed Income International 84,319,467 82,730,675 1,588,792 Global Currents Investment Management, LLC International Value Equity 53,356,728 52,938,136 418,592 Fisher Investments Institutional Group Small Cap Value Equity 60,309,194 62,440,116 (2,130,922) LSV Asset Management Large Cap Value Equity 96,276,199 105,272,013 (8,995,814) Mesirow Financial Partnership LP FD IV Private Equity 7,475,493 6,143,715 1,331,778 Mesirow Financial Partnership LP FD V Private Equity 1,335,747 1,229,930 105,817 NWQ Investment Management Company, LLC Large Cap Growth Equity 83,652,222 93,859,817 (10,207,595) Oberweis Asset Management, Inc. Micro Cap Equity 75,288,829 76,331,027 (1,042,198) Oechsle International Advisors International Growth Equity 47,149,046 46,716,852 432,194 Pacific Investment Management Co., LLC Fixed Income Intermediate 89,855,883 88,192,423 1,663,460 Pugh Capital Management, Inc. Fixed Income Core 51,081,774 50,000,000 1,081,774 Sate Street Global Advisors Large Cap Core Equity 16,152,360 16,303,929 (151,569) Silvant Capital Management Large Cap Growth Equity 93,824,514 94,767,146 (942,632) Smith, Graham and Co. Investment Advisors, L.P. Fixed Income Core 50,979,204 50,000,000 979,204 Turner Investment Partners, Inc. Large Cap Growth Equity 74,946,366 75,997,395 (1,051,029) Union Heritage Capital Management Large Cap Core Equity 59,332,739 57,542,809 1,789,930 Total Fund 1,100,752,836 $ 1,113,879,986 $ (13,127,150) $ AllianceBernstein 8.82% Attilanus Fund 5.30% Brandywine Global Investment Management, LLC 7.66% Global Currents Investment Management, LLC 4.85% Fisher Investments Institutional Group 5.48% LSV Asset Management 8.75% Mesirow Financial Partnership LP FD IV 0.68% Mesirow Financial Partnership LP FD V 0.12% NWQ Investment Management Company, LLC 7.60% Oberweis Asset Management, Inc. 6.84% Oechsle International Advisors 4.28% Pacific Investment Management Co., LLC 8.16% Pugh Capital Management, Inc. 4.64% Sate Street Global Advisors 1.47% Silvant Capital Management 8.52% Smith, Graham and Co. Investment Advisors, L.P. 4.63% Turner Investment Partners, Inc. 6.81% Union Heritage Capital Management 5.39% Investment Manager Asset Allocation as of June 30, 2011 EXHIBIT C EXHIBIT D Approved Proposed Actual YTD Budget Budget 10/01/10- Budget FY 2010 FY 2011 06/30/11 Variance Description Personnel Services 6,712,476 7,172,084 3,995,909 3,176,175 Fringe Benefits 2,012,290 2,151,739 1,243,777 907,962 Payroll Cost (Subtotal) 8,724,766 9,323,823 5,239,686 4,084,137 Material, Supplies & Parts 224,194 253,275 54,432 169,762 Equipment 461,238 115,210 5,628 109,582 Repair & Maintenance 228,759 377,853 225,169 152,684 Utilities 720,000 817,300 292,781 524,519 Communication 235,220 192,850 181,183 11,667 Travel 459,651 546,227 345,390 200,837 Training 263,142 289,282 57,608 231,674 Professional Services 1,622,508 1,917,482 1,585,874 331,608 Insurance 845,607 845,607 125,401 720,206 Other Services & Charges 598,539 343,625 353,670 (10,045) Total Operating Expenses 14,383,624 15,022,534 8,466,822 6,555,712 Capital Expenditures Capital Outlay 4,763,738 5,707,765 5,319,007 388,758 Team GERS Technology Plan 2,282,520 1,263,723 457,998 805,725 Total Capital Expenditures 7,046,258 6,971,488 5,777,005 1,194,483 Total Expenses 21,429,882 21,994,022 14,243,827 7,750,195 GOVERNMENT EMPLOYEES RETIREMENT SYSTEM Schedule of Budget vs Actual (By Account) Fiscal Year 2011 EXHIBIT E Description 10/01/10 - 6/30/11 Salaries & Wages $ 3,995,909 Fringe Benefits 1,243,777 Professional Services 1,998,022 Actuarial Services - Segal 50,000 Investment Advisory Services - Segal 120,000 Legal Fees 172,745 Bert Smith and Company 88,600 ADP - Payroll Processing 244,245 Miscellaneous Personnel & Consulting Services 603,915 Accounting Services 5,400 Medical Service/Consulting 8,136 Stenographic Services 14,223 Security Services 232,760 Team GERS 457,998 $ 1,998,022 Maintenance and Repairs 225,169 Supplies 54,432 Insurance 125,401 Property and Casualty/General Liability 15,990 Directors and Officers/General Liability 99,562 Vehicles 9,849 $ 125,401.00 Utilities 292,781 Other Operating Expenses 989,329 Advertising 47,996 Board Stipend 12,789 Catering 20,406 Communication 181,183 Miscellaneous Services 323,957 Training 57,608 Travel 345,390 $ 989,329 Capital Expenditures 5,319,007 Total $ 14,243,827 GOVERNMENT EMPLOYEES RETIREMENT SYSTEM ADMINISTRATIVE EXPENSES October 1, 2010 - June 30, 2011