USVI Public Records

Document text

FISCAL YEARS Presented to Committee on Finance 34th Legislature of the Virgin Islands of the United States Earl B. Ottley Legislative Hall Tuesday, August 16, 2022 St. Thomas, U.S. Virgin Islands Government Employees’ Retirement System of the Virgin Islands Annual Overview of Operations Government Employees’ Retirement System Overview of Operations August 16, 2022 1 GOVERNMENT EMPLOYEES’ RETIREMENT SYSTEM OVERVIEW OF OPERATIONS TABLE OF CONTENTS Introduction ........................................................................................................... 2 Major Accomplishments for Fiscal Year 2022 ....................................................... 3 Major Goals for Fiscal Year 2023 ....................................................................... 3-4 Membership and Annuity Payments ...................................................................... 4 Refund of Employee Contributions ....................................................................... 4 Employer Contributions Due from Autonomous Plan Sponsors ............................ 5 Actuarial Valuation / Unfunded Liability October 1, 2021-Exhibit A ................. 5-6 Portfolio Performance – As of June 30, 2022-Exhibit B......................................... 6 Withdrawals from Portfolio ................................................................................... 7 Member Loan Program .......................................................................................... 7 Annual Financial Audit ........................................................................................... 8 GERS Funding Note Cash Flow Activity and Challenges-Exhibit C ................... 8-9 Conclusion ......................................................................................................... 9-10 Exhibit A ............................................................................................................... 11 Exhibit B ............................................................................................................... 12 Exhibit C-1 ....................................................................................................... 13-14 Exhibit C-2 ............................................................................................................ 15 Exhibit C-3 ............................................................................................................16 Government Employees’ Retirement System Overview of Operations August 16, 2022 2 INTRODUCTION Good afternoon Honorable Senator Kurt A. Vialet, Chairman, Committee on Finance, distinguished Committee members, other distinguished senators present in the chambers, and good afternoon to the listening and viewing audience. I am, Austin L. Nibbs, Administrator/CEO of the Government Employees’ Retirement System of the Virgin Islands (GERS). I am pleased to appear before this Committee to present the System’s Annual Overview of Operations. At this time, I will pause for the executive staff present to introduce themselves. As you know, the System is not required to submit a budget to the Legislature for approval. The Board of Trustees is responsible for the approval of the annual budget of the GERS. Therefore, our presentation is an overview of the operations of GERS. We will, however, respond to any questions posed by the committee relating to budgetary information submitted to the Post Audit Division. A schedule of our budget was submitted to the Post Audit; we would like to place on record that the GERS fiscal year 2023 budget has not yet been approved by the Board of Trustees. Before we begin, I would like to thank the employees of the GERS for their dedicated service that they have provided to our members during the uncertain times of looming insolvency and the Covid-19 pandemic period. Although, our offices were closed, and we did not offer in-person services to our members and the public for about two years, I can report that productivity and the delivery of services remained high. We also thank the 34th Legislature and the Administration for their commitment to the finding a mechanism to fund the GERS and curtailed insolvency. Prior to the installment amounts expected from the Funding Note, the System was projected to run out of money in the fiscal year ending September 30, 2025, which would have Government Employees’ Retirement System Overview of Operations August 16, 2022 3 resulted in retiree benefits being reduced to the level of the contributions received. This does not mean that all of the problems that existed because of many years of neglect to fund the System on an actuarial reserve basis have gone away; to the contrary. Later in our presentation, we will highlight the problems that continue to exist and our recommendations. MAJOR ACCOMPLISHMENTS FOR FISCAL YEAR 2022 Our major accomplishments are presented below based on our strategic plan five areas of focus. Organizational Development, Stakeholder Engagement, Technological and Infrastructure Advancement, Financial/Fiscal Sustainability and Growth, and Operational Efficiency and Excellence.  Paid negotiated adjustments to staff.  Completed negotiations with bargaining units for subsequent years.  Active members allowed to participate in regular board meetings.  Circulated newsletters via constant contact.  Partnership with AARP on Financial Wellness seminars.  Continue to stream all board meetings live on our YouTube Channel.  Migrated 95% to cloud-based solutions.  Implemented Avaya Soft Phone and the Customer Service Cal Center for efficient internal/external communication.  Supported and provided resources and tools to the staff to operate remotely during COVID-19 and beyond.  Created and implemented the telework policy.  Applied and received funding from FEMA for storm damage at the GERS and Havensight Mall.  Reduced retirees receiving paper checks to 2%.  Reduced the time to process the initial retirement annuity payment to an average of 90 days.  Negotiated a long-term lease with Port of $ale.  Negotiated a term sheet for the hotel development at the Havensight Mall. MAJOR GOALS FOR FISCAL YEAR 2023  Further reduce the time to process the initial retirement annuity payment.  Issue the Tier II Annual Benefits Statement.  Begin the migration of the V3 from Version 8 to Version 10.  Complete the roofing and air conditioning capital projects at complex on St. Thomas.  Begin the demolition of the warehouses at the Havensight Mall for the green space and lease space for the development of a branded hotel.  Complete the procurement process for replacement of underground piping at the Havensight Mall. Government Employees’ Retirement System Overview of Operations August 16, 2022 4  Finalize the partnership arrangement with the Historic Trust to operate a museum on the Havensight Mall property (White House).  Finalize the procurement of power generation equipment at the Havensight Mall and the GERS Complex.  Compete the search and select a successor Administrator/CEO by the end of 2022.  Correct the imbalance in board members. MEMBERSHIP AND ANNUITY PAYMENTS As of the July 29, 2022, payroll, the GERS paid benefits to 8,734 retirees and beneficiaries. The number of retirees added to the payroll from October 1, 2021 – July 29, 2022, was 320. During that same period, 266 deceased retirees were removed from the payroll. The total amount paid in benefits from October 1, 2021 – July 29, 2022, was $217,753,268.19. The average monthly amount that is paid in benefits to the retirees and beneficiaries is approximately $22 million. The active membership as of July 30, 2022, was 8,928 (central government 6,341 and semi-autonomous agencies 2,587). There is a 1.02 ratio between the actives and the retirees. REFUND OF CONTRIBUTIONS The refunding of contributions continues to negatively affects our cash flow. Fiscal Year Amount ($M) 2018 $11.4 2019 12.4 2020 8.3 2021 (Unaudited) 8.8 2022 (July 31st - Unaudited) 6.4 We expect this trend to decrease due to the additional funding that will be infused in the system in future years. It is our hope that the funding should increase the confidence of the non-vested member to continue employment with the Government Employees’ Retirement System Overview of Operations August 16, 2022 5 government and not withdraw their contributions which will further reduce the cash flow and investment opportunities. EMPLOYER CONTRIBUTIONS DUE FROM AUTONOMOUS AGENCIES As of August 5, 2022, the outstanding employee deductions, and employer contributions due from the Water and Power Authority (WAPA), the Roy L. Schneider Hospital (RLSH), and the Juan F. Luis Hospital (JFLH). Employer Contributions Employee Contributions Other Deductions Interest & Penalties Total Due WAPA $5.9M $2.0M $ 268K $874K $8.9M RLSH $997.1K $482.2K $20.1K $ 1K $1.5M JFLH $1.6M $763K $ - $ - $2.3M* * FYs 2012, 2013, and 2014. ACTUARIAL VALUATION/UNFUNDED LIABILITY – OCTOBER1, 2021 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. An actuarial valuation is performed to calculate the ADC (or ADEC) and is based on the assumptions and methods adopted by the Board. For many years, the actual amounts contributed by the plan sponsors have not been based on the required ADC amounts. The amounts that were contributed by the Plan Sponsor have been significantly less than the required ADC. The October 1, 2021, actuarial valuation was presented in the board retreat held in July. The valuation will come before the board in the August 25th board meeting for approval. The full report will be provided to all senators and made public after approval by the board. Government Employees’ Retirement System Overview of Operations August 16, 2022 6 October 1, 2020 October 1, 2021 Actuarial Accrued Liability (AAL) $5.11B $5.12B Actuarial Value of Assets $0.58B $0.48B Unfunded Actuarial Accrued Liability $4.53B $4.65B Funded Percentage 11.4% 9.3% Total Actuarially Determined Employer Contribution (ADEC) $373.7M $381.3M ADEC as a Percentage of Pay 90.8% 89.3% The information that is presented above and in Exhibit A represents the results of the Actuarial Valuation as of October 1, 2021. For this period, GERS had a Total Actuarial Accrued Liability of $5.12 billion. Plan Assets totalled $480 million, and the Unfunded Liability was $4.65 billion. This resulted in a funded ratio of 9.3 percent on an ongoing actuarial basis. The ADEC as a percentage of payroll is 89.3 percent. We note that the current ADEC paid by the plan sponsors as a percentage of payroll is 23.5 percent. PORTFOLIO PERFORMANCE – EXHIBIT B As of June 30, 2022, the market value of the portfolio was $334.7 million which includes: Domestic Fixed Income Assets - $210.3 million Alternative Investment Assets (Private Equity-Limited Partnership) - $10.8 million Cash - $113.6 million Other alternative investments (real estate, local investments, and member loans) - $77.2 million. Note that the total retirement system aggregate performance for the 1-year period was -6.9 percent and Fiscal YTD was -7.5 percent. During the recent board retreat and investment committee meeting, our investment advisor (Meketa Investment Group) made recommendations to the board regarding changes to the asset allocation policy targets and investment strategies beginning September 1, 2022. These recommendations will come before the board in the August 25th board meeting for approval. Government Employees’ Retirement System Overview of Operations August 16, 2022 7 WITHDRAWALS FROM PORTFOLIO – FISCAL YEAR TO DATE For fiscal year to date, $120 million were withdrawn from the portfolio to cover benefit payments and expenses. We note that the initial installment contributions of $89.2 million received from the GERS Funding Note was deposited in the cash account which restored the cash account to the level at the beginning of the fiscal year, which resulted in a net withdrawal for the fiscal year of $30.8 million. MEMBER LOAN PROGRAM As of July 31, 2022, the member loans portfolio consists of 1,333 personal loans (active-747/retiree-586) - $11.6 million and 75 mortgages - $3.9 million. A loan portfolio at July 31, 2022, of $15.5 million. On December 31, 2022, 596 of the 1,333 personal loans will mature and by the end of December 2026, all personal loans would have matured. The majority of the mortgages will mature by December 31, 2030. During the board retreat, management recommended the reinstatement of the member loan program in accordance with Act No. 7880, for personal loans effective October 1, 2024 (Fiscal Year 2025), and for mortgages effective October 1, 2025 (Fiscal Year 2026). Historically, the member loan program provided diversification in the investment portfolio, provided financial assistance to the members, and earned a substantial investment income for the System. However, reinstatement of the program internally will be considered in conjunction with securing of GERS’ long-term financial stability. The System will be exploring the feasibility of partnership opportunities with third party financial institutions to provide credit as opposed to the use of the System’s limited cash flows. Government Employees’ Retirement System Overview of Operations August 16, 2022 8 ANNUAL FINANCIAL AUDIT The System’s fiscal year ending September 30, 2021, annual certified financial audit is delayed due to the mandatory rotation of auditors. The report is expected to be issued by the end of September 2022. All senators will receive a copy of the report. GERS FUNDING NOTE CASH FLOW ACTIVITY AND CHALLENGES – EXHIBITS C The $3.8 billion in cash contributions made available to the GERS by the Funding Note provide significant support for the long-term solvency of the System. On behalf of the 17,000 plus members of the System, we would like to thank the 34th Legislature again for its critical role in making it happen. However, we must bring to your attention that the unevenness of the annual cashflows, over the thirty-year term of the Note, presents a challenge that has to be carefully managed and overcome. As the chart above illustrates and Exhibit C-1 shows, the annual contributions from the Note are heavily backloaded; with half of the total contributions being funded in the last twelve years -- mostly at the expense of the middle years (fiscal years 2033 GERS Funding Note Contributions $180.0 $160.0 $140.0 $120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $- 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Government Employees’ Retirement System Overview of Operations August 16, 2022 9 -2038). The challenge is to bridge the gap in the middle years, in order to get to the $1.9 billion on the back end. At the direction of the Board, work has begun on such a plan, which will likely involve further assistance from the Legislature. As part of the plan, the Board is requesting two initiatives to be funded in the Government of the Virgin Islands’ (GVI) FY2023 budget. Firstly, is to amend Title 3, Chapter 27, Section 718 (b) to advance to the GERS in FY2023 the increase in the employer contributions, from the current 23.5 percent to 26.5 percent of covered payroll, which the board is authorized to increase on January 1, 2025. This increase will add approximately $13 million annually in employer contributions. Secondly, the Board requests that the Legislature rescinds Act No. 6233 which was passed by the 22nd Legislature in 1998 and include in the FY2023 General Fund Budget, funding the $15 million annual administrative expenses of the System. This was the policy and practice until it was discontinued in 1998. Together, these two actions will constitute a miniscule 0.03 percent of the GVI’s $850 million General Fund budget for FY2023; but it can be meaningful in our planning, including the change in our asset allocation policy targets from fixed income (bonds) to equity exposure and the timing and scale of reinstating the member loan program. CONCLUSION The Board looks forward to working with the 34th and 35th Legislatures to secure additional funding to offset the gaps in the annual cash flow deficits beginning with FY 2026 through FY 2039. Exhibits C-1. Based on the current portfolio (excluding the local assets) assuming a 6 percent or 7 percent market rate of return would result in approximately $18 million in annual gains, which would not be enough to offset the gap in the annual deficits. Therefore, the GERS cannot rely solely on its investments. Without additional funding, within ten years, this would result in the Fund being left with just its local investments in 2035 and Government Employees’ Retirement System Overview of Operations August 16, 2022 10 2036, respectively. Exhibits C-2 and C-3. Another means of additional funding would be to fill the vacant budgeted general fund positions. Mr. Chairman, this concludes our presentation. We are available to respond to questions that the committee may have. Preliminary Valuation Results as of October 1, 2021 EXHIBIT A ·---- ·------·. Actuarial Accrued Liability (AAL) October 1, 2020 ' October 1, 2021 $5.11 Billion $5.12 Billion - Actuarial Value of Assets $0.58 Billion $0.48 Billion $4.65 Billion Unfunded Actuarial Accrued Liability $4.53 Billion Funded Percentage .. 11.4°/o 9.3% Total Actuarially Determined Employer Contribution (ADEC) $373.7 Million ·- $381.3 Million ADEC as a % of Pay 90.8% 89.3% The actuarial value of assets is the same as the market value of assets. Segal 11 , ' MEKETA INVESTMENT GROUP · S.I . S.I. Date EXHIBIT B MEKETA Government Employees' Retirement System of the Virgin Islands Total Retirement System Aggregate I As of June 30, 2022 Throughout this report, SI stands for 'Since Inception•. Asset Class Performance Summary Market Value ($) % of Portfolio (%) QTD YTD (%) (%) 1 Yr 3 Yrs 5 Yrs 10 Yrs (%) (%) (%) (%) (%) YTD Fiscal Total Retirement System Aggregate 334,718,980 100.0 -3.3 -7.7 -7.5 -6.9 1.5 3.7 5.8 8.3 Jul-81 Domestic Fixed Income Assets 210,334,374 62.8 -4.7 -10.4 -10.5 -10.4 -0.7 1.1 1.5 6.6 Jul-81 Bloomberg US Aggregate TR -4.7 -10.3 -10.3 -10.3 -0.9 0.9 1.5 7.1 Jul-Bl Alternative Investment Assets 10,829,628 3.2 Cash 113,554,978 33.9 12 1 Provided by GERS Staffand the Actuary. MEKETA INVESTMENT GROUP. EXHIBIT C-1 ·MEKETA Government Employees' Retirement System of the Virgin Islands Funding Note and Asset Allocation Implic,ations On April 12, Meketa was notified of a plan to fund additional assets to GERS. The updated projected cash flows are below. Estimated Cash Flow Activity Fiscal Year End Employee Contributions Employer Contributions Dedicated Funding Note Estimated Cash In-Flow Benefit Payments Expenses Estimated Cash Out-Flow Estimated Total Cash Flow 2022 $48.7 $99.2 $89.2 $237.1 $288.8 $15.3 $304.1 -$67.0 2023 50.0 101.7 158.0 309.7 292.5 15.6 308.1 1.6 2024 51.3 104.2 158.0 313.5 296.6 15.9 312.5 1.0 2025 52.6 106.8 158.0 317.4 299.4 16.2 315.6 1.8 2026 54.0 109.5 81.5 245.0 302.8 16.6 319.4 -74.4 2027 55.4 112.2 73.6 241.2 310.9 16.9 327.8 -86.6 2028 56.9 115.0 82.4 254.3 313.9 17.2 331.1 -76.8 2029 58.3 117.9 82.4 258.6 316.5 17.6 334.1 -75.5 2030 59.8 120.8 82.4 263.0 318.3 17.9 336.2 -73.2 2031 61.4 123.9 82.4 267.7 319.6 18.3 337.9 -70.2 2032 62.9 127.0 82.4 272.3 320.3 18.7 339.0 -66.7 2033 64.6 130.1 82.4 277.1 320.6 19.0 339.6 -625 2034 66.2 133.4 82.4 282.0 320.2 19.4 339.6 -57.6 2035 66.8 134.5 82.4 283.7 319.0 19.8 338.8 -55.1 2036 66.8 134.5 82.4 283.7 316.8 20.2 337.0 -53.3 13 1 Provided by GERS Staff and the Actuary. MEKETA INVESTMENT GROUP EXHIBIT C-1 MEKETA Government Employees' Retirement System of the Virgin Islands Funding Note and Asset Allocation Implications Estimated Cash Flow Activity (continued} Fiscal Year End Employee Contributions Employer Contributions Dedicated Funding Note Estimated Cash In-Flow Benefit Payments Expenses Estimated Cash Out-Flow Estimated Total Cash Flow 2037 66.8 134.5 82.4 283.7 313.8 20.6 334.4 -50.7 2038 66.8 134.5 94.5 295.8 310.4 21.0 331.4 -35.6 2039 66.8 134.5 114.6 315.9 305.8 21.4 327.2 -11.3 2040 66.9 134.5 157.6 359.0 301.0 21.9 322.9 36.1 2041 66.9 134.5 158.0 359.4 295.9 22.3 318.2 41.2 2042 66.9 134.5 158.0 359.4 290.5 22.7 313.2 46.2 2043 66.9 134.5 158.0 359.4 285.0 23.2 308.2 51.2 2044 66.9 134.5 158.0 359.4 279.7 23.7 303.4 56.0 2045 66.9 134.5 158.0 359.4 273.9 24.1 298.0 61.4 2046 66.9 134.5 · 158.0 359.4 268.6 24.6 2932 66.2 2047 66.9 134.5 158.0 359.4 263.3 25.1 288.4 71.0 2048 66.9 134.5 158.0 359.4 258.4 25.6 284.0 75.4 2049 66.9 134.5 158.0 359.4 253.4 26.1 279.5 79.9 2050 66.9 134.5 158.0 359.4 248.4 26.6 275.0 84.4 2051 66.9 134.5 158.0 359.4 243.9 27.2 271.1 88.3 2052 66.9 134.5 158.0 359.4 239.6 27.7 267.3 92.1 Impact of GERS Funding Note Assuming 6% market rate of return EXHIBIT C-2 600 500 400 300 Projected Assets as of September 30 (in $millions) 200 100 0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 Excluding Funding Note Including Final Terms of GERS Funding Note Including Initial Estimates of GERS Funding Note . - Segal ·-· ·-·· 15 Impact of Updated Capital Market Assumptions Assuming market rate of return of 7% vs. 6% · EXHIBIT C-3 600 500 400 300 : Projected Assets as of September 30 (in $1nillions) 200 100 0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 6% Return 7% Return . - Segal I I I I ' - -