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Government Employees’ Retirement System of the Virgin Islands Overview of Operations Presented to Committee on Finance 29th Legislature of the United States Virgin Islands Presented by: Austin L. Nibbs, CPA—Administrator Earle B. Ottley Legislative Hall Friday, August 31, 2012 3:00 p.m. St. Thomas, U.S. Virgin Islands FISCAL YEAR Government Employees’ Retirement System August 31, 2012 Overview of Operations 1 GOVERNMENT EMPLOYEES’ RETIREMENT SYSTEM Overview of Operations – Fiscal Year 2012 TABLE OF CONTENTS Introduction.......................................................................................................................2 Accomplishments..............................................................................................................3 Membership......................................................................................................................5 Contributions Received/Benefit Payments/Outstanding...................................................6 Cost of Living Adjustment and Annual Bonus...................................................................7 Assets...............................................................................................................................8 Technology Update.........................................................................................................16 Annual Financial Audit....................................................................................................17 Goals for Fiscal Year 2013.............................................................................................17 Board Actions and Proposed Legislation (New and Amendments)................................19 Actuary Presentation – Preliminary September 30, 2011...............................................21 Summary........................................................................................................................22 Appendices Contributions vs. Benefit Payments and Expenses……………………….. Exhibit A Actuarial Unfunded Accrued Liability and Funded Ratio………………..... Exhibit B Investment Fund ………………………………………………………………. Exhibit C Actuarial Valuation – Preliminary September 30, 2011……………………. Exhibit D Government Employees’ Retirement System August 31, 2012 Overview of Operations 2 GOVERNMENT EMPLOYEES’ RETIREMENT SYSTEM OVERVIEW OF OPERATIONS Good afternoon, Honorable Senator Carlton “Ital” Dowe, members of the Committee on Finance, other distinguished senators who are present in the chambers and good afternoon 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. We are pleased to have Leon F. “Rocky” Joyner, Jr., Vice President and Actuary from The Segal Company appearing with us. Segal will make a presentation as part of our Annual Overview. For the past 54 months, employees of the GERS have been dedicated and committed to the implementation of new technologies and systems in the areas of benefits, loans, records management and accounting and payroll. I would like to take this opportunity to thank the employees of the GERS publicly for their hard work during the implementation phases of the new systems. We would also like to apologize to our members for any inconvenience caused by the office closings and untimely responses to their inquiries which occurred because of the challenges experienced with the installation and implementation of our new systems, and the unexpected retirements as a result of the Virgin Islands Economic and Stability Act and the layoffs. 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. Government Employees’ Retirement System August 31, 2012 Overview of Operations 3 The statute that governs the operations of the GERS is Title 3, Chapter 27 and 28 of the Virgin Islands Code. The statutory mandate of the GERS is to enroll employees into the System within thirty (30) days of service, as a condition of their employment. The objective 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 may retire without suffering economic hardship. The member services payroll processing staff and the staff of our newly created Payroll Servicing Unit are committed to making sure that our retired members have access to their annuity payments on the 15th and 30th of each month. It is a pleasure to report that the System has never missed an annuity payment to its retirees and beneficiaries. However, for the System to continue to meet its statutory obligations to its members, the System must be actuarially funded. ACCOMPLISHMENTS Our major accomplishments to date during Fiscal Year 2012 are:  We have completed the implementation of the new Member Services and Loans Integrated Software (V3) which will improve the delivery of services to the members.  We have installed new communication equipment which has improved the technological infrastructure of our network.  We have completed the implementation of the new financial reporting system software (MAS 500). Government Employees’ Retirement System August 31, 2012 Overview of Operations 4  We have installed and implemented the administrative payroll and human resources software (ABRA), and brought the processing of the administrative payroll in house which will save the System approximately $50,000 annually.  We have completed the implementation for in-house processing of the annuity payroll which is in the parallel testing phase. The first in-house processing of the Annuity Payroll will be October 15th. This will save the System approximately $250,000 in fees and approximately $80,000 in postage annually.  We have completed the installation of the first phase of the Member Self Service (MSS) and Employer Self-Service (ESS) which will go live in September 2012.  We have established an in-house Investment Office which gives the System daily oversight of the investment portfolio activity and the investment manager’s performance.  We have completed the interview process for the three (3) firms who responded to the RFP for the establishment of the Supplemental Contribution Program in accordance with Act No. 6905.  We have begun the planning for the Financial Planning Workshops.  The fieldwork for the Fiscal Year 2011 Annual Certified Financial Audit has been completed. The financial statements will be issued by the end of September 2012.  We have selected a new Investment Consultant – Meketa Investment Group.  We have increased the retirees and beneficiaries direct deposit participation from 87 percent (6,750 participants/7,720 retirees) at September 30, 2011 to 91 percent (7,373 participants/8,141 retirees) at June 30, 2012. Government Employees’ Retirement System August 31, 2012 Overview of Operations 5  Of the 365 employees who retired under the Virgin Islands Economic and Stability Act of 2011, 362 have received their first annuity payment.  We held Town Hall meetings with the members in both districts.  We held a Board Retreat on St. John from June 28th – 30th which was successful. The purpose of the retreat was to discuss strategies to address the unfunded liability and other problems facing the sustainability of the GERS.  The Board of Trustees endorsed and approved our recommended changes and amendments to pending legislation (Bill No. 29-0099). MEMBERSHIP The overall membership in the System at June 30, 2012 is shown in the table 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 unaudited 10,713 7,720 1.39 to 1 18,433 2012 9 months 9,935 8,141 1.22 to 1 18,076 Government Employees’ Retirement System August 31, 2012 Overview of Operations 6 The membership numbers show that the gap between the active members and the retirees and beneficiaries has decreased from a 1.39 to1 ratio in Fiscal Year 2011 to a 1.22 to1 ratio for the 9 month period ending June 30, 2012. Because of the implementation of Bill No. 29-0123 (Act No. 7261 - The Virgin Islands Economic Stability Act of 2011 - VIESA), and the layoffs through June 30, 2012, the active members have decreased from 10,713 at September 30, 2011 to 9,935 at June 30, 2012. Additionally, the retirees and beneficiaries have increased from 7,720 at September 30, 2011 to 8,141 at June 30, 2012. RETIREMENT FUNDING At the most basic level in the long run, a retirement plan must balance the monies coming in (inflows) through investment earnings and contributions against the monies going out (outflows) through benefit and expense payments. The basic equation: I + C = B + E Where: I is investment income (inflows) C is contributions (inflows) B is benefit payments (outflows) E is expenses (outflows) During any year in the life of the plan, one side of the equation will be greater than the other with the goal that both sides will balance in the long run. As we will see later in our presentation, this fund has not been in balance for many years. CONTRIBUTIONS We have attached Exhibit A which shows the total contributions received, the total deductions (benefits payments, refunds of contributions and administrative and Government Employees’ Retirement System August 31, 2012 Overview of Operations 7 operational expenses) and the total deficits in millions for the past 18 years through June 30, 2012. The comparison reveals that in Fiscal Year 2011 the total contributions received are approximately $88 million less (negative cash flow) than the total payouts. For the 9 months period ending June 30, 2012, the total contributions received are approximately $99.2 million less (negative cash flow) than the total payouts. The outstanding employer’s contributions (including delinquency fee, interest and loss investment income) due to the GERS for Fiscal Year 2012 covering the period October 1, 2011 through August 10, 2012 are as follows: Agency Regular 3% Total Water and Power Authority $4,646,173 $2,001,980 $6,648,153 Juan Luis Hospital 1,441,322 0 1,441,322 Total Contributions Due $6,087,495 $2,001,980 $8,089,475 COSTOF LIVING ADJUSTMENTS ANDANNUAL BONUS On July 15, 2012, 246 annuitants on disability were paid their 1.5 percent annual cost of living adjustment (COLA). The gross annual amount that will be paid to these annuitants is $41,077.92. On August 15th, there were 6,180 regular annuitants meeting the age 60 and older requirement and receiving a service annuity for at least 1 year that were paid a COLA. The gross annual amount that will be paid to this class of retirees is $1,471,353.60. 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 to be paid by September15th.The bonus is given to annuitants and pensioners meeting the 60 years of age requirement, and have been receiving a service annuity for at least 1 year, and are eligible to receive Government Employees’ Retirement System August 31, 2012 Overview of Operations 8 a cost of living increase in the year in which the bonus payment is made. To date, we have received $824,090.03 from the VIL. The bonus will be paid when the last payment is received from the VIL and will be based on the total amount received. ASSETS The assets of the GERS include the investment portfolio, cash and cash equivalents, real estate and the loans portfolio. Investment Portfolio 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. As of June 30, 2012 and March 30, 2012, the market value of the portfolio was $981,552,995 and $1,057,467,624 respectively. A decrease of $75,914,629. (See Exhibit C).The decline in the second quarter was the result of $30.1 million negative investment performance, $40.8 million of cash outflow (draw downs), and $7.7 million of a reduced valuation of our senior life settlement investment. The System returned gross of fees -2.9 percent in the second quarter, 5.3 percent calendar-year-to-date and 12.0 percent fiscal-year-to-date. The System’s asset classes produced mixed returns in the Government Employees’ Retirement System August 31, 2012 Overview of Operations 9 second quarter. The domestic equity portfolio posted the biggest decline, returning -6.5 percent. The international equity portfolio posted a -6.2 percent. The domestic and international investment grade bond portfolio advanced in the second quarter, returning 2.3 percent and 1.5 percent respectively. The portfolio on a whole earned a return of 10.8 percent over the 3-year period. The System will continue its commitment to a disciplined investment strategy that focuses on long-term results. Our mission is to promote long-term financial security for our membership while maintaining the stability of the fund. The System’s investment fund is presently managed by 17 investment managers. Despite the Middle East turmoil, the European debt issues, natural disasters and the volatile energy prices; the global financial markets were resilient over the last three years. Going forward, expanding into the emerging and frontier markets may increase the chances of the Fund earning the actuarial rate of 8 percent. The expansion of free markets, labor force growth, and improvements in education and healthcare are all positive growth aspects for the emerging markets. During the 3 years ended March 2012, Emerging stocks returned 21.3 percent while Frontier stocks represented by the MSCI Frontier markets returned 13.2 percent. Additional opportunities for investment may come from Private Equity and Real Estate. These two segments have historically earned higher returns while adding diversification and may be the only avenues for the Fund to access the local market. Title 3, Section 12, Chapter 27of 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 Government Employees’ Retirement System August 31, 2012 Overview of Operations 10 designed to enhance the total Fund performance by generating a long-term rate of return greater than the assumed actuarial rate of 8 percent. 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 invested in three types of alternative investments, private equity, real estate and special situations. Seaborne Airlines 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. All of the proceeds of the loans were disbursed. To date, the GERS has received $340,000.01 in principal and $913,372.64 in interest on the loan, for a total of $1,253,372.65. Seaborne Airlines has requested a modification to the loan agreement which is pending approval by the Board. Renaissance Carambola Beach Resorts and Spa On December 8, 2009, a loan in the amount of $15,000,000 was closed with Carambola Northwest, LLC. The term of the loan is 5 years. To date, a total of $14,925,281 was disbursed on the loan and we have received $2,147,091 in principal and interest. On May 11, 2012, as the Administrator of the GERS, I exercised GERS’s rights under the Loan Agreement and executed an initial Disposition Agreement with Carambola Northwest, LLC. By executing the Disposition Agreement, the Carambola property was immediately turned over to the GERS. This action was taken as a result of Carambola defaulting on its principal and interest payments. The required financial and legal due diligence and completion of the renovation of the remaining rooms and repairs are ongoing. We will advise our members and the general public on the details and the Government Employees’ Retirement System August 31, 2012 Overview of Operations 11 future of this investment when the due diligence, renovation, and repairs are completed. The Marriott Flagship and Franchise Agreement will continue. V.I. Property Tax Revenue Anticipation Note On November 14, 2011, the GERS entered into a loan agreement with the Government of the Virgin Islands (GVI) in the amount of $13 million at an interest rate of 4.91 percent and a maturity date of December 15, 2016. The security for the note is the pledged real property tax receipts from the delinquent real property tax receivables, including penalties and interest for tax years prior to and including 2005 totaling approximately $36 million. The GVI is current on the note. As of July 23, 2012, the GERS has received $2,795,272 of which $2,385,954 is principal and $409,318 is interest. Real Estate (A) GERS Complexes The System owns:  The three story 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).This property was appraised at $8.4 million on January 10, 2012.  The new complex on St. Croix which houses the St. Croix operations. This property was appraised at $5.7 million on February 24, 2010.  The former GERS St. Croix office building and the building which is occupied by the Casino Control Commission. Both properties were appraised on February 24, 2010 at $400,000.00 and $450,000.00 respectively. Government Employees’ Retirement System August 31, 2012 Overview of Operations 12 Rents received for Fiscal Year 2011 and for the 10 months of Fiscal Year 2012 are as follow: Rents Received Tenant Fiscal Year 2011 10 Months of Fiscal Year 20l2 Department of Personnel $139,608 $116,340 Department of Justice $518,882 $333,567 Rescare (Job Corp) $ 20,835 $ 16,027 Casino Control Commission $63,004 $63,004 First Bank $ 3,094 $2,836 Total Received $745,423 $531,774 The outstanding rents and utilities from tenants at July 31, 2012 are shown in the table below: Receivable From Tenants As of July 31, 2012 Agency Outstanding Rents Outstanding Utilities Department of Justice $37,063 $ 423,110 Department of Personnel $87,962* $ 10,847 Total $ 125,025 $ 433,957 *Includes $35,077 for rental of the Law Library during the Retroactive Wage Commission Project. (B) Land Estates Hoffman and Nullyberg In 2006, the System purchased 120 acres of land at Estates Hoffman and Nullyberg on the east end of St. Thomas. The Development Committee has proposed a mixed use development consisting of a conference and Government Employees’ Retirement System August 31, 2012 Overview of Operations 13 entertainment center, hotel, 108 units for assisted living 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). A hearing was held on October 26, 2011 before the Committee of the Whole on the rezoning. At that hearing, there was a challenge to the rightful owner to a portion of the property by a member of the New Herrnhut Moravian Church. On January 23, 2012, a meeting was held with the officials of the New Herrnhut Moravian Church and their attorney. No evidence of ownership of the property was provided to the GERS. The attorney representing the Church requested 30-45 days from January 23, 2012 to respond. To date, we have not received a response. On April 10, 2012, a letter was sent to the President of the Legislature and Chairman of the Committee of the Whole with copies to all senators requesting a reconsideration of the rezoning. It is our position that the GERS had conducted the proper due diligence at the time of purchase and secured the appropriate title insurance. Moreover, the purchase has been in the media and disclosed to the general public for the past 6 years and DPNR has performed their due diligence and made their recommendations. The fact that the New Herrnhut Moravian Church has not provided the GERS with a basis for their claim, we respectfully request that the Committee of the Whole move forward with GERS’s request for rezoning of the subject property during the 29th Legislative session. The property was appraised at $4.6 million on August 1, 2009. A current appraisal of the property is pending. Government Employees’ Retirement System August 31, 2012 Overview of Operations 14 Estate Coakley Bay In October 2010, the System purchased 170 acres of land at Estate Coakley Bay on the east end of St. Croix for $5 million. The Development Committee has determined the best use of the property is a mixture of 103 single family residential lots, and multi-family residential and commercial areas. We have applied to DPNR for a Planned Area Development (PAD) Zoning designation and scheduling of a public hearing. The property was appraised at $5.9 million on June 22, 2010. A current appraisal of the property is pending. (C) Havensight Shopping Mall The Havensight Shopping Mall is the best investment the System has made. This property was purchased on June 30, 1993, for $32 million. Since 1993, this property has grossed in excess of $100 million in revenues and the System has earned a return on its investment in excess of $67 million. The Property was appraised at $66.6 million on January 27, 2010. A current appraisal of the property is pending. The Board has agreed to have the West Indian Company (WICO) continue the management of the Mall and is in the process of negotiating a management agreement. Loans The System provides personal, auto, land and mortgage loans to qualified members and retirees. During Fiscal Year 2011, the loan portfolio generated revenues (interest income) to the System in the amount of $11,149,868.00. We are proud to provide this service to our members. Government Employees’ Retirement System August 31, 2012 Overview of Operations 15 At June 30, 2012, there were 8,105 units in the loans portfolio with a total value of $133,189,760.14. Loan Category Interest Rate Units Dollar Value Personal Loans 8% 5,420 $92,245,408.74 Auto Loans 8.75% 21 168,520.01 Land 8% 30 757,313.32 1st Priority Mortgage 8% 206 6,436,359.92 2nd Priority Mortgage 9% 1 11,420.61 Retiree Personal Loans 8% 2,427 33,570,737.54 On April 19, 2012, the Board of Trustees passed Resolution Nos.7-2012 and 8- 2012 which changed the mortgage rates. Effective October 1, 2012, the rates will be adjusted as follow:  30 year mortgage rate from 8.00 percent to 5.75 percent,  15 year mortgage rate from 8.00 percent to 5.00 percent, and  Land purchase mortgage rate from 8.00 percent to 5.00 percent. On October 27, 2008, the Board of Trustees passed Resolution No.15-2008 which changed the down payment for mortgage and land loans from 10 percent to 5 percent. TECHNOLOGY UPDATE On March 12, 2012, we rolled out the first phase of the new benefits and loans integrated software system. The first phase of the project includes improved efficiency and effectiveness of all benefits requests made by members. This is a newer, more robust application that stores all member information. The information which will be available for viewing is the result of an ongoing data cleansing and information gathering project which allows the System to provide members with accurate up-to-date Government Employees’ Retirement System August 31, 2012 Overview of Operations 16 information that is maintained as part of each member’s profile. The new software also reduces the processing time a member must wait while applying for a loan, because the database allows the sharing of such information by both the benefits and loans integrated systems. As stated in the beginning of my presentation, we have experienced many challenges especially with the posting of the deduction files from the central government which has slowed down the processing of loans to members that are employed with the central government. This has caused extraordinary hardships to many. These challenges are not insurmountable. We reached out to the Department of Finance (DOF) and they are working with us to resolve the e-file problems. I would like to thank the GERS team and the DOF team to include Val Collens, Executive Assistant Commissioner, Alvin Williams, Director of MIS, and Grace Fahie, Director of Payroll for working with us, as a team, to resolve this issue. On May 2, 2012, we launched our new Financial Reporting System (MAS 500).This system expands the ability for us to record transactions on a real-time basis along with the ability to electronically accept and approve transactions created within the new benefits and loans integrated software system for processing. In addition, the new system improves the processing time of the business and accounting operations of the agency. In September 2012, we will begin the beta testing of the first phase of the Member Self Service (MSS) and Employer Self Service (ESS) modules of the new benefits and loans integrated software. This phase will give members (active and retiree/beneficiary) the ability to access the self-service portion of the software, and will be accessible to our members around the latter part of September 2012. In this release, the member will be able to view and make changes to their information to include Government Employees’ Retirement System August 31, 2012 Overview of Operations 17 demographics, update addresses and contact, view their participant’s (contributions) account and request for a loan online. The second phase of the self service will roll out in October 2012 and will include the email functionality and members will be able to apply for ACH transactions online. The third phase will incorporate e-form capability and is expected to become operational at the end of December 2012 or the 2nd quarter of Fiscal Year 2013. ANNUAL FINANCIAL AUDIT The System’s most recent certified financial statements audited by Bert Smith & Company are as of September 30, 2010. The fieldwork for the Fiscal Year 2011 financial audit is completed. The audit report is expected to be issued by the end of September 2012. GOALS FOR FISCAL YEAR 2013  We will develop a comprehensive long range Strategic Plan for the System with the assistance of the University of the Virgin Islands.  We will issue the Fiscal Year 2012 Annual Certified Financial Statements and Annual Reports by March 15, 2013.  We will complete all backlogged prior service requests.  We will promote direct deposit participation for international retirees and continue to encourage retirees who receive a check to convert to direct deposit by March 13, 2013.  We will continue to provide system-wide customer service training in order to decrease the number of complaints reported by the members. Government Employees’ Retirement System August 31, 2012 Overview of Operations 18  We will complete the full implementation of the member and employer self- service modules.  We will continue to provide the necessary education to assist our members with planning for retirement and managing their retirement funds.  We will select a service provider to administer the Supplemental Contribution Program.  We will continue to improve the technology infrastructure to support the internal and external operations.  We will continue to address energy saving measures in our older buildings.  We will increase in-house oversight of the investment portfolio and the investment manager’s performance.  We will implement the in-house processing of annuity payroll on October 15, 2012.  We will begin the Financial Planning Workshops. BOARD ACTIONS AND PROPOSED LEGISLATION (NEW/AMENDMENTS) From June 28th through June 30th, the Board held a retreat at the Westin Resort on St. John. The purpose of the retreat was to discuss strategies to address the unfunded liability and other problems facing the System. Before I ask our Actuary to present the preliminary actuarial results at September 30, 2011, I will outline the actions taken by the Board and legislation proposed. Government Employees’ Retirement System August 31, 2012 Overview of Operations 19 The Board has taken action on the following: Contribution Rates Effective October 1, 2013  TIER 1-REGULAR EMPLOYEE Increase the contribution rate 1% each year for 3 years (cumulative)  TIER I - CLASS 3 EMPLOYEE Increase the contribution rate 1% each year for 3 years (cumulative) Cost of Living Allowance (COLA) Effective Beginning with year 2013 Suspend the COLA indefinitely for all retirees The Board has proposed and we have submitted legislation to the 29th Legislature for consideration of the following: Contribution Rates Effective October 1, 2013  TIER II – REGULAR EMPLOYEE Increase the contribution rate 1% each year for 3 years (cumulative)  TIER II – CLASS 3 EMPLOYEE Increase the contribution rate 1% each year for 3 years (cumulative) Effective October 1, 2013  LEGISLATORS Increase the contribution rate to 15%  JUDGES Increase the contribution rate for new judges to 17% Increase the contribution rate for sitting judges to 15% at beginning of next term Increase the contribution rate for sitting judges to 16% at beginning of second year of new term Government Employees’ Retirement System August 31, 2012 Overview of Operations 20 Increase the contribution rate for sitting judges to 17% at beginning of third year of new term and thereafter Effective October 1, 2013  EMPLOYER Increase contribution rate 3% each year for next 6 years (cumulative) to an ultimate rate of 38.5% of pay Changing Retirement Age Effective October 1, 2013  TIER II – REGULAR EMPLOYEE Age 60 to 65 with 10 years of service, eliminating the any age with30 years of service  TIER II – 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 Increasing Salary Cap Effective October 1, 2013  TIER I &TIERII Eliminate the salary cap. Increase to social security cap Average Career Earnings Incremental Percentage Effective October 1, 2013  TIERII 10 years - 1% 20 years – 2% 30 years Plus – 3% Includes increasing the retirement age to 65 years Personal Loans Effective October 1, 2013 Active Members Increase from $50,000 to $75,000 Refund of Contributions Effective October 1, 2013  TIER I &TIER II Allow refunds to non-vested members only Government Employees’ Retirement System August 31, 2012 Overview of Operations 21 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. A schedule of the unfunded actuarial accrued liability and the funded ratios from fiscal years 1998 through 2011 is presented as Exhibit B. At this time, the Segal Company will make a presentation of the preliminary actuarial results at September 30, 2011, and explain the impact the Board’s actions and legislation proposed will have on the sustainability of the System. THE SEGAL COMPANY PRESENTATION (SEE EXHIBIT D) SUMMARY Mr. Chairman, the purpose of the Reform Act of 2005 was to slow down the bleeding of the System. We now must go further and make changes to the plan benefits structure and contribution rates that came out of the Board retreat as outlined in this testimony. These bold recommendations and legislative changes represent shared sacrifices from all stakeholders. The GERS affirms its place in the territory’s economy by providing a stable source of stimulus through the annuity payments to the retirees and beneficiaries and Government Employees’ Retirement System August 31, 2012 Overview of Operations 22 loans to its members. The GERS remains committed to ensure that our members have a secure retirement. Mr. Chairman, this concludes our presentation. We are prepared to respond to any questions the Committee may have on the operations of the GERS and the preliminary actuarial results presented by Segal. CONTRIBUTIONS VS. BENEFIT PAYMENTS & EXPENSES Fiscal Year Total Contributions Benefits Payments & Expenses Surplus/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 120.3 193.9 (73.6) 2010 117.1 208.3 (91.2) 2011 (Unaudited) 119.6 204.8 (87.7 ) 2012 (9 months) 70.0 169.2 (99.2) UNFUNDED LIABILITY 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 1,255,210,585 518,608,040 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 2,840,823,515 53.88% 2009 1,534,899,736 1,397,261,661 2,932,161,397 52.35% 2010 1,505,970,212 1,513,059,673 3,019,029,885 49.88% 2011 (Unaudited) 1,400,000,000 1,700,000,000 3,100,000,000 45.2% Investment Manager Asset Allocation (unaudited) As of June 30, 2012 Invesment June 30, 2012 March 31, 2012 Change in Percent Investment Manager Asset Class Portfolio Value Portfolio Value Portfolio Value Change K;overnment Employees Retirement System Fund- All Segments AllianceBernstein Fixed Income Core $ 79,323,701 $ 88,742,915 $ (9,419,214' -10.61% The Attilanus Fund I -LP Senior Life Settlement 53,693,950 53,693,950 - 0.00% Brandywine Global Investment Management, LLC Fixed Income International 89,461,626 91,648,799 (2, 187,173\ -239% Global Currents Investment Management, LLC International Value Equity 45,146,959 47,926,823 (2,779,864\ -5.80% Fisher Investments Institutional Group Small Cap Value Equity 57,959,812 62,665,830 (4,706,018\ -7.51% LSV Asset Management Large Cap Value Equity 62,685,569 87,929,277 (25,243, 708\ -28.71% Mesirow Financial Private Equity 12,466,239 11,202,298 1,263,941 11.28% NWQ Investment Management Company, LLC Large Cap Value Equity 63,577,133 79,970,616 (16,393, 483\ -20.50% Oberweis Asset Management, Inc. Micro Cap Equity 69,528,083 73,986,591 ( 4,45 8,509\ -6.03% SSgAEAFE Core International 41,516,636 44,607,852 (3,091,2W -6.93% Pacific Investment Management Co., LLC (PIMCO) Fixed Income Intermediate 86,210,494 83,979,588 2,230,906 2.66% Pugh Capital Management, Inc. Fixed Income Core 54,988,222 53,913,426 1,074,796 1.99% State Street Global Advisors (SSgA) Large Cap Core Equity 10,389,008 10,683,236 (294,228\ -2.75% Silvant Capital Management Large Cap Growth Equity 70,710,839 74,747,230 ( 4,036,39]\ -540% Smith, Graham and Company Fixed Income Core 54,609,181 53,439,200 1,169,980 2.19% Turner Investment Partners, Inc. Large Cap Growth Equity 68,232,083 74,450,894 (6,218,81 ]\ -835% Union Heritage Capital Management, Inc. Large Cap Core Equity 61,053,462 63,879,097 (2,825,635\ -442% Total Fund $ 981,552,995 $ 1,057,467,624 $ (75,914,629) -7.18% The Attilanus Fund 1- LP Turner Investment Partners, Inc. 6.95% Smith, Graham and Company 5.56% Silvant Capital Manage me L _____ _ 7.20% State Street Global Advisors (SSgA) 1.06% Pugh Capital Management, Inc. 5.60% Pacific Investment Ma nageme Co., LLC (PIMCO) 8.78% Union Heritage Capital AllianceBernstein Brandywine Global Investment Management, LLC 9.11% Oberweis Asset 4.23% Management, Inc. 7.08% 4.60% Fisher Investments Institutional Group Asset Management 5.90% 6.39% Mesirow Financial 1.27% NWQ Investment Management Company, LLC 6.48% Exhibit c Government of the Virgin Islands Retirement System Slide Narrative Preliminary October 1, 2011 Valuation Results 3 Presents changes in the plan census since 2006. This represents a 13% decrease in active employees while the annuitants increased 9%. This change puts additional pressure on the contribution rate. 4 Since 2006, contribution rates rose from 22.8% to 26%. However, the required contribution increased from 43.3% to 52.7%. The Economic Stability Act of 2011 further increased the required contribution to 58.4%, due to the lowered salary base. 5 Since 1999, the funding ratio has declined from 70.8% to about 40% due to contributions less than required, investment return less than assumed and Plan improvements/incentives that were not paid for with additional contributions (i.e. unfunded mandates). Projections of Valuation Results 6 To provide the Board and Legislature with a measure of the magnitude of the funding issue facing the System, Segal updated previous projections for presentation to the Board. The assumptions for these projections are shown on Slide 6. 7 If the current assumptions are met with no further reductions to covered payroll, the System is expected to run out of money in 2023. 8 Slide 8 provides the detailed numbers supporting the Slide 7 graph. Please note in year one (2012), the total expected income is less than expected benefits and expenses by about $55 million. Each year, this is expected to increase resulting in drawing the assets down to $-0- about 2023. At that time, continued payment of benefits will require significant allocation of funds from General Government reserves, or significant reductions in benefits paid to annuitants. As projected, in 2024, contributions are expected to total only 41% of the System’s outgo, necessitating an additional $183.1 million of government fund allocation to pay benefits. 9 Slide 9 reflects the impact of investment returns on these results. If the System were to return 10% per year hereafter (rather than the 7.5% assumed) insolvency would be delayed by about two years. Likewise, a one-year return of 20% in 2012 would also defer insolvency two years. Returning 5% per year would hasten insolvency by two years. The main point is that investment return is not expected to move the insolvency date by more than a few years. 10, 11, 12 Provide numeric detail for the graph on Slide 9. 13, 14 The graph on Slide 13 and the table on Slide 14 present the estimated number of years Pre -Exhibit D with a 3% increase in the employer contribution rate each year until stability to the System is achieved. This results in nine years of 3% increase to an ultimate rate of 44.5% (from the current 17.5%). 15, 16 Slides 15 and 16 include an increase in the employee rate of 1% per year for three years to a total of 11.5%. This reduces the ultimate projected employer rate to 38.5% with seven years of 3% a year increases. 17, 18 Slides 17 and 18 include the impact of suspending the COLA, resulting in five years of 3% increase to the employer rate for an ultimate rate of 32.5%. 19, 20, 21 Slides 19, 20 and 21 change the annual employer increase to 2.5% per year and 2% per year. This results in seven years at 2.5% for a 35% ultimate rate or nine years at 2.0% for a 35.5% ultimate rate. Benefit Analysis for Salary Over $65,000 23, 24 These slides include a description of removing the $65,000 salary cap. The description includes a special career average benefit formula for the additional salary. 25, 26 These slides show the impact to average salary and the recommended contribution rates. 27, 28, 29 These slides show the impact of this change to the System’s insolvency projection. Essentially, this change is expected to forestall insolvency in about two years. Summary The System is projected to deplete its assets in 2023, without changes in contributions or benefits. The information shown above indicates that additional employee contributions of 3%, suspension of the post-retirement COLA, expanding the benefit structure (and contributions) to include limited benefit accruals for salary over $65,000 will lessen the government contributions needed to place the System on the road to more stable financial footing. Additional changes in benefits for new hires will also help the long-term funding outlook but will not materially affect the projected ins. But, significant increases in contributions and/or reductions in benefits are needed to forestall insolvency. 7671304v1/96050.017 Pre-Exhibit D Copyright ©2012 by The Segal Group, Inc., parent of The Segal Company. All rights reserved. GOVERNMENT OF THE VIRGIN ISLANDS RETIREMENT SYSTEM August 31, 2012 Leon F. (Rocky) Joyner, Jr. FCA, ASA, MAAA, EA Vice President & Actuary This document has been prepared and is not complete without the presentation provided at the August 31, 2012 Legislative hearing and any accompanying document. This document should not be shared, copied or quoted, in whole or in part, without the consent of Segal, except to the extent otherwise required by law. Exhibit D 1 Table of Contents Preliminary October 1, 2011 Valuation Results: Summary of valuation data and results Projections of valuation results including Investment return sensitivity Contribution rate changes Benefit changes Benefit Analysis for Salary over $65,000: Description of possible benefit change Projection of study results Exhibit D 2 Preliminary October 1, 2011 Valuation Results Exhibit D 3 Membership Summary Year Ended September 30 Category 2006 2011 2011 after layoff Active participants in valuation: Number 10,739 10,376 9,376 Average age 45.1 45.7 45.3 Average years of service 14.0 13.9 13.3 Average salary $36,744 $38,885 $38,693 Retired members and beneficiaries: Number in pay status 7,282 7,592 7,918 Average age 68.8 69.4 68.9 Average semi-monthly benefit $928 $1,104 $1,124 PRELIMINARY DATA AS OF SEPTEMBER 30, 2011 Exhibit D 4 13.7% 13.7% 14.2% 29.6% 39.0% 44.2% 14.5% 17.5% 17.5% 8.3% 8.5% 8.5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% Normal Cost 20-year Amortization Employer Employee 43.3% 22.8% 52.7% 26.0% 58.4% 26.0% PRELIMINARY RESULTS FOR YEAR BEGINNING OCTOBER 1, 2011 Actuarial, Employer and Employee Contribution Rates 2006 2011 (before layoff) 2011 (after layoff) Exhibit D 5 70.8% 64.7% 59.4% 53.5% 45.6% 70.8% 58.5% 56.2% 55.6% 39.3% 30% 40% 50% 60% 70% 80% 1999 2001 2003 2006 2011 AV assets to AAL MV assets to AAL Funded Ratios The funded percentage continues to decline. PRELIMINARY RESULTS AS OF SEPTEMBER 30, 2011 Exhibit D 6 Projection Parameters Projection Assumptions: After the decline in the active population due to the Economic Stability Act of 2011, the active population is assumed to remain level at 9,376 employees. Total payroll of $362.8 million is assumed to increase 2.5% per year. Administrative expenses are assumed to increase 3% per year. Benefit payments for the first 15 years are projected based on the preliminary 2011 valuation results. Benefit payments after 15 years are assumed to increase 2% per year to account for retirements from new entrants after 2011. Assets are assumed to earn a 7.5% return each year, unless otherwise noted. Caveats: The closer the plan gets to insolvency, asset illiquidity may become an issue and earning the assumed return may become more difficult. Projections, by their nature, are not a guarantee of future results. The projections are intended to serve as estimates of future outcomes, based on the information available to us and the assumptions described herein. Emerging results may differ significantly if the actual experience proves to be different from these assumptions. Exhibit D 7 Projection of Market Value of Assets - Baseline Annual Net Investment Return: 7.5% Employer Contribution Rate: 17.5% of payroll Employee Contribution Rate: 8.5% of payroll $0.0 $0.2 $0.4 $0.6 $0.8 $1.0 $1.2 $1.4 $1.6 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Billions Market Value as of September 30: Exhibit D 8 Projection of Market Value of Assets (In Millions) Year ending Sept. 30: Contributions Disbursements Return on Assets Market Value of Assets Funded Percentage (AVA/AAL) Employee Employer Additional Government Benefit Payments Expenses 2011 $1,246.0 46% 2012 $30.8 $63.5 - $222.4 $14.9 $88.1 1,191.2 40% 2013 31.6 65.1 - 228.1 15.3 83.8 1,128.3 36% 2014 32.4 66.7 - 234.0 15.8 79.0 1,056.6 33% 2015 33.2 68.4 - 240.0 16.3 73.4 975.3 29% 2016 34.0 70.1 - 246.2 16.7 67.2 883.7 26% 2017 34.9 71.8 - 252.6 17.2 60.2 780.8 22% 2018 35.8 73.6 - 256.4 17.8 52.4 668.4 19% 2019 36.7 75.5 - 261.4 18.3 43.8 544.7 15% 2020 37.6 77.4 - 268.4 18.8 34.4 406.8 11% 2021 38.5 79.3 - 273.3 19.4 23.9 255.8 7% 2022 39.5 81.3 - 279.2 20.0 12.5 89.9 2% 2023 40.5 83.3 $91.4 284.5 20.6 - - 0% 2024 41.5 85.4 183.1 288.7 21.2 - - 0% 2025 42.5 87.5 186.2 294.3 21.8 - - 0% 2026 43.6 89.7 187.7 298.5 22.5 - - 0% 2027 44.7 91.9 191.1 304.5 23.2 - - 0% 2028 45.8 94.2 194.4 310.6 23.9 - - 0% 2029 46.9 96.6 197.9 316.8 24.6 - - 0% 2030 48.1 99.0 201.3 323.1 25.3 - - 0% 2031 49.3 101.5 204.9 329.6 26.1 - - 0% Annual Net Investment Return: 7.5% Employer Contribution Rate: 17.5% of payroll Employee Contribution Rate: 8.5% of payroll Exhibit D 9 Projection of Market Value of Assets $0.0 $0.2 $0.4 $0.6 $0.8 $1.0 $1.2 $1.4 $1.6 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Billions Market Value as of September 30: Baseline 10% ROR 20% ROR in FYE 9/30/2012, 7.5% thereafter 5% ROR Exhibit D 10 Projection of Market Value of Assets (In Millions) Year ending Sept. 30: Contributions Disbursements Return on Assets Market Value of Assets Funded Percentage (AVA/AAL) Employee Employer Additional Government Benefit Payments Expenses 2011 $1,246.0 46% 2012 $30.8 $63.5 - $222.4 $14.9 $117.5 1,220.6 40% 2013 31.6 65.1 - 228.1 15.3 114.7 1,188.5 37% 2014 32.4 66.7 - 234.0 15.8 111.3 1,149.2 34% 2015 33.2 68.4 - 240.0 16.3 107.2 1,101.7 31% 2016 34.0 70.1 - 246.2 16.7 102.2 1,045.1 29% 2017 34.9 71.8 - 252.6 17.2 96.4 978.3 26% 2018 35.8 73.6 - 256.4 17.8 89.6 903.2 24% 2019 36.7 75.5 - 261.4 18.3 81.9 817.5 21% 2020 37.6 77.4 - 268.4 18.8 73.1 718.4 18% 2021 38.5 79.3 - 273.3 19.4 63.1 606.6 15% 2022 39.5 81.3 - 279.2 20.0 51.7 479.9 12% 2023 40.5 83.3 - 284.5 20.6 38.9 337.5 8% 2024 41.5 85.4 - 288.7 21.2 24.6 179.0 4% 2025 42.5 87.5 - 294.3 21.8 8.6 1.5 0% 2026 43.6 89.7 $186.3 298.5 22.5 - - 0% 2027 44.7 91.9 191.1 304.5 23.2 - - 0% 2028 45.8 94.2 194.4 310.6 23.9 - - 0% 2029 46.9 96.6 197.9 316.8 24.6 - - 0% 2030 48.1 99.0 201.3 323.1 25.3 - - 0% 2031 49.3 101.5 204.9 329.6 26.1 - - 0% Annual Net Investment Return: 10% Employer Contribution Rate: 17.5% of payroll Employee Contribution Rate: 8.5% of payroll Exhibit D 11 Projection of Market Value of Assets (In Millions) Year ending Sept. 30: Contributions Disbursements Return on Assets Market Value of Assets Funded Percentage (AVA/AAL) Employee Employer Additional Government Benefit Payments Expenses 2011 $1,246.0 46% 2012 $30.8 $63.5 - $222.4 $14.9 $234.9 1,338.0 41% 2013 31.6 65.1 - 228.1 15.3 94.8 1,286.1 38% 2014 32.4 66.7 - 234.0 15.8 90.8 1,226.3 36% 2015 33.2 68.4 - 240.0 16.3 86.2 1,157.7 33% 2016 34.0 70.1 - 246.2 16.7 80.9 1,079.8 31% 2017 34.9 71.8 - 252.6 17.2 74.9 991.5 28% 2018 35.8 73.6 - 256.4 17.8 68.2 895.0 25% 2019 36.7 75.5 - 261.4 18.3 60.8 788.3 22% 2020 37.6 77.4 - 268.4 18.8 52.7 668.6 18% 2021 38.5 79.3 - 273.3 19.4 43.6 537.3 15% 2022 39.5 81.3 - 279.2 20.0 33.6 392.5 11% 2023 40.5 83.3 - 284.5 20.6 22.6 233.8 6% 2024 41.5 85.4 - 288.7 21.2 10.7 61.4 2% 2025 42.5 87.5 $124.7 294.3 21.8 - - 0% 2026 43.6 89.7 187.7 298.5 22.5 - - 0% 2027 44.7 91.9 191.1 304.5 23.2 - - 0% 2028 45.8 94.2 194.4 310.6 23.9 - - 0% 2029 46.9 96.6 197.9 316.8 24.6 - - 0% 2030 48.1 99.0 201.3 323.1 25.3 - - 0% 2031 49.3 101.5 204.9 329.6 26.1 - - 0% Annual Net Investment Return: 20% in year ending September 30, 2012, 7.5% thereafter Employer Contribution Rate: 17.5% of payroll Employee Contribution Rate: 8.5% of payroll Exhibit D 12 Projection of Market Value of Assets (In Millions) Year ending Sept. 30: Contributions Disbursements Return on Assets Market Value of Assets Funded Percentage (AVA/AAL) Employee Employer Additional Government Benefit Payments Expenses 2011 $1,246.0 46% 2012 $30.8 $63.5 - $222.4 $14.9 $58.7 1,161.8 40% 2013 31.6 65.1 - 228.1 15.3 54.4 1,069.5 36% 2014 32.4 66.7 - 234.0 15.8 49.7 968.6 32% 2015 33.2 68.4 - 240.0 16.3 44.6 858.4 27% 2016 34.0 70.1 - 246.2 16.7 38.9 738.5 23% 2017 34.9 71.8 - 252.6 17.2 32.8 608.3 19% 2018 35.8 73.6 - 256.4 17.8 26.3 469.8 14% 2019 36.7 75.5 - 261.4 18.3 19.3 321.6 10% 2020 37.6 77.4 - 268.4 18.8 11.8 161.1 5% 2021 38.5 79.3 $10.2 273.3 19.4 3.7 - 0% 2022 39.5 81.3 178.4 279.2 20.0 - - 0% 2023 40.5 83.3 181.3 284.5 20.6 - - 0% 2024 41.5 85.4 183.1 288.7 21.2 - - 0% 2025 42.5 87.5 186.2 294.3 21.8 - - 0% 2026 43.6 89.7 187.7 298.5 22.5 - - 0% 2027 44.7 91.9 191.1 304.5 23.2 - - 0% 2028 45.8 94.2 194.4 310.6 23.9 - - 0% 2029 46.9 96.6 197.9 316.8 24.6 - - 0% 2030 48.1 99.0 201.3 323.1 25.3 - - 0% 2031 49.3 101.5 204.9 329.6 26.1 - - 0% Annual Net Investment Return: 5% Employer Contribution Rate: 17.5% of payroll Employee Contribution Rate: 8.5% of payroll Exhibit D 13 Projection of Market Value of Assets $0.0 $0.2 $0.4 $0.6 $0.8 $1.0 $1.2 $1.4 $1.6 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Billions Market Value as of September 30: Baseline +3%/Year in ER Contrib to 44.5% (9 years) Exhibit D 14 Projection of Market Value of Assets (In Millions) Year ending Sept. 30: Contributions Disbursements Return on Assets Market Value of Assets Funded Percentage (AVA/AAL) Employee Employer Additional Government Benefit Payments Expenses 2011 $1,246.0 46% 2012 $30.8 $63.5 - $222.4 $14.9 $ 88.1 1,191.2 40% 2013 31.6 76.2 - 228.1 15.3 84.3 1,139.9 37% 2014 32.4 89.6 - 234.0 15.8 80.7 1,092.8 34% 2015 33.2 103.5 - 240.0 16.3 77.5 1,050.7 31% 2016 34.0 118.1 - 246.2 16.7 74.6 1,014.6 30% 2017 34.9 133.4 - 252.6 17.2 72.3 985.3 28% 2018 35.8 149.4 - 256.4 17.8 70.6 966.9 27% 2019 36.7 166.0 - 261.4 18.3 69.6 959.5 27% 2020 37.6 183.4 - 268.4 18.8 69.5 962.8 27% 2021 38.5 201.6 - 273.3 19.4 70.2 980.4 27% 2022 39.5 206.7 - 279.2 20.0 71.5 998.9 27% 2023 40.5 211.8 - 284.5 20.6 72.9 1,019.1 27% 2024 41.5 217.1 - 288.7 21.2 74.5 1,042.3 28% 2025 42.5 222.5 - 294.3 21.8 76.3 1,067.4 28% 2026 43.6 228.1 - 298.5 22.5 78.2 1,096.2 28% 2027 44.7 233.8 - 304.5 23.2 80.4 1,127.4 29% 2028 45.8 239.7 - 310.6 23.9 82.7 1,161.1 30% 2029 46.9 245.6 - 316.8 24.6 85.3 1,197.5 30% 2030 48.1 251.8 - 323.1 25.3 88.0 1,237.0 31% 2031 49.3 258.1 - 329.6 26.1 91.0 1,279.6 32% Annual Net Investment Return: 7.5% Employer Contribution Rate: 17.5% of payroll, increasing 3% per year to 44.5% after 9 years Employee Contribution Rate: 8.5% of payroll Exhibit D 15 Projection of Market Value of Assets $0.0 $0.2 $0.4 $0.6 $0.8 $1.0 $1.2 $1.4 $1.6 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Billions Market Value as of September 30: Baseline +3%/Year in ER Contrib to 44.5% (9 years) +3%/Year in ER Contrib to 38.5% (7 years), +1%/Year in EE Contrib to 11.5% Exhibit D 16 Projection of Market Value of Assets (In Millions) Year ending Sept. 30: Contributions Disbursements Return on Assets Market Value of Assets Funded Percentage (AVA/AAL) Employee Employer Additional Government Benefit Payments Expenses 2011 $1,246.0 46% 2012 $30.8 $63.5 - $222.4 $14.9 $88.1 1,191.2 40% 2013 35.3 76.2 - 228.1 15.3 84.4 1,143.7 37% 2014 40.0 89.6 - 234.0 15.8 81.3 1,104.8 34% 2015 44.9 103.5 - 240.0 16.3 78.8 1,075.8 32% 2016 46.1 118.1 - 246.2 16.7 77.0 1,054.0 31% 2017 47.2 133.4 - 252.6 17.2 75.7 1,040.5 30% 2018 48.4 149.4 - 256.4 17.8 75.2 1,039.3 29% 2019 49.6 166.0 - 261.4 18.3 75.5 1,050.8 29% 2020 50.8 170.2 - 268.4 18.8 76.3 1,060.9 29% 2021 52.1 174.4 - 273.3 19.4 77.1 1,071.8 29% 2022 53.4 178.8 - 279.2 20.0 77.9 1,082.7 29% 2023 54.7 183.3 - 284.5 20.6 78.7 1,094.3 29% 2024 56.1 187.8 - 288.7 21.2 79.6 1,108.0 29% 2025 57.5 192.5 - 294.3 21.8 80.6 1,122.5 29% 2026 58.9 197.4 - 298.5 22.5 81.8 1,139.5 30% 2027 60.4 202.3 - 304.5 23.2 83.0 1,157.6 30% 2028 61.9 207.3 - 310.6 23.9 84.4 1,176.8 30% 2029 63.5 212.5 - 316.8 24.6 85.8 1,197.2 30% 2030 65.1 217.8 - 323.1 25.3 87.3 1,219.0 31% 2031 66.7 223.3 - 329.6 26.1 89.0 1,242.2 31% Annual Net Investment Return: 7.5% Employer Contribution Rate: 17.5% of payroll, increasing 3% per year to 38.5% after 7 years Employee Contribution Rate: 8.5% of payroll, increasing 1% per year to 11.5% after 3 years Exhibit D 17 Projection of Market Value of Assets $0.0 $0.2 $0.4 $0.6 $0.8 $1.0 $1.2 $1.4 $1.6 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Billions Market Value as of September 30: Baseline +3%/Year in ER Contrib to 44.5% (9 years) +3%/Year in ER Contrib to 38.5% (7 years), +1%/Year in EE Contrib to 11.5% +3%/Year in ER Contrib to 32.5% (5 years), +1%/Year in EE Contrib to 11.5%, Suspend COLA Exhibit D 18 Projection of Market Value of Assets (In Millions) Year ending Sept. 30: Contributions Disbursements Return on Assets Market Value of Assets Funded Percentage (AVA/AAL) Employee Employer Additional Government Benefit Payments Expenses 2011 $1,246.0 46% 2012 $30.8 $63.5 - $222.4 $14.9 $88.1 1,191.2 44% 2013 35.3 76.2 - 227.6 15.3 84.4 1,144.2 41% 2014 40.0 89.6 - 228.2 15.8 81.5 1,111.4 39% 2015 44.9 103.5 - 231.4 16.3 79.6 1,091.8 37% 2016 46.1 118.1 - 234.2 16.7 78.6 1,083.7 36% 2017 47.2 133.4 - 235.7 17.2 78.6 1,090.0 36% 2018 48.4 136.7 - 237.9 17.8 79.1 1,098.6 35% 2019 49.6 140.2 - 241.3 18.3 79.8 1,108.5 35% 2020 50.8 143.7 - 246.5 18.8 80.5 1,118.1 35% 2021 52.1 147.2 - 249.4 19.4 81.3 1,130.0 35% 2022 53.4 150.9 - 253.0 20.0 82.2 1,143.5 35% 2023 54.7 154.7 - 256.0 20.6 83.2 1,159.6 35% 2024 56.1 158.6 - 257.8 21.2 84.6 1,179.8 36% 2025 57.5 162.5 - 261.0 21.8 86.1 1,203.2 36% 2026 58.9 166.6 - 262.7 22.5 88.0 1,231.5 36% 2027 60.4 170.8 - 265.3 23.2 90.2 1,264.5 37% 2028 61.9 175.0 - 268.0 23.9 92.8 1,302.4 38% 2029 63.5 179.4 - 270.6 24.6 95.7 1,345.8 38% 2030 65.1 183.9 - 273.3 25.3 99.1 1,395.2 39% 2031 66.7 188.5 - 276.1 26.1 102.9 1,451.1 40% Annual Net Investment Return: 7.5% Employer Contribution Rate: 17.5% of payroll, increasing 3% per year to 32.5% after 5 years Employee Contribution Rate: 8.5% of payroll, increasing 1% per year to 11.5% after 3 years Suspend COLA Exhibit D 19 Projection of Market Value of Assets $0.0 $0.2 $0.4 $0.6 $0.8 $1.0 $1.2 $1.4 $1.6 $1.8 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Billions Market Value as of September 30: Baseline +3%/Year in ER Contrib to 32.5% (5 years), +1%/Year in EE Contrib to 11.5%, Suspend COLA +2.5%/Year in ER Contrib to 35% (7 years), +1%/Year in EE Contrib to 11.5%, Suspend COLA +2%/Year in ER Contrib to 35.5% (9 years), +1%/Year in EE Contrib to 11.5%, Suspend COLA Note: Upon final review, the results have been updated to that shown above Exhibit D 20 Projection of Market Value of Assets (In Millions) Year ending Sept. 30: Contributions Disbursements Return on Assets Market Value of Assets Funded Percentage (AVA/AAL) Employee Employer Additional Government Benefit Payments Expenses 2011 $1,246.0 46% 2012 $30.8 $63.5 - $222.4 $14.9 $88.1 1,191.2 44% 2013 35.3 74.4 - 227.6 15.3 84.3 1,142.3 41% 2014 40.0 85.8 - 228.2 15.8 81.2 1,105.3 38% 2015 44.9 97.7 - 231.4 16.3 79.0 1,079.3 36% 2016 46.1 110.1 - 234.2 16.7 77.4 1,061.9 35% 2017 47.2 123.1 - 235.7 17.2 76.5 1,055.9 34% 2018 48.4 136.7 - 237.9 17.8 76.5 1,061.9 34% 2019 49.6 150.9 - 241.3 18.3 77.4 1,080.3 34% 2020 50.8 154.7 - 246.5 18.8 78.8 1,099.3 35% 2021 52.1 158.6 - 249.4 19.4 80.3 1,121.4 35% 2022 53.4 162.5 - 253.0 20.0 82.0 1,146.4 35% 2023 54.7 166.6 - 256.0 20.6 83.9 1,175.0 36% 2024 56.1 170.8 - 257.8 21.2 86.2 1,209.0 37% 2025 57.5 175.0 - 261.0 21.8 88.8 1,247.6 37% 2026 58.9 179.4 - 262.7 22.5 91.8 1,292.6 38% 2027 60.4 183.9 - 265.3 23.2 95.3 1,343.7 39% 2028 61.9 188.5 - 268.0 23.9 99.2 1,401.6 40% 2029 63.5 193.2 - 270.6 24.6 103.7 1,466.7 42% 2030 65.1 198.0 - 273.3 25.3 108.7 1,539.8 43% 2031 66.7 203.0 - 276.1 26.1 114.3 1,621.6 45% Annual Net Investment Return: 7.5% Employer Contribution Rate: 17.5% of payroll, increasing 2.5% per year to 35% after 7 years Employee Contribution Rate: 8.5% of payroll, increasing 1% per year to 11.5% after 3 years Suspend COLA Exhibit D 21 Projection of Market Value of Assets (In Millions) Year ending Sept. 30: Contributions Disbursements Return on Assets Market Value of Assets Funded Percentage (AVA/AAL) Employee Employer Additional Government Benefit Payments Expenses 2011 $1,246.0 46% 2012 $30.8 $63.5 - $222.4 $14.9 $88.1 1,191.2 44% 2013 35.3 72.5 - 227.6 15.3 84.3 1,140.3 41% 2014 40.0 81.9 - 228.2 15.8 81.0 1,099.3 38% 2015 44.9 91.8 - 231.4 16.3 78.3 1,066.7 36% 2016 46.1 102.1 - 234.2 16.7 76.1 1,040.1 34% 2017 47.2 112.9 - 235.7 17.2 74.5 1,021.8 33% 2018 48.4 124.1 - 237.9 17.8 73.5 1,012.2 33% 2019 49.6 135.8 - 241.3 18.3 73.1 1,011.2 32% 2020 50.8 148.1 - 246.5 18.8 73.3 1,018.1 32% 2021 52.1 160.8 - 249.4 19.4 74.3 1,036.5 32% 2022 53.4 164.9 - 253.0 20.0 75.7 1,057.5 33% 2023 54.7 169.0 - 256.0 20.6 77.3 1,081.9 33% 2024 56.1 173.2 - 257.8 21.2 79.3 1,111.5 34% 2025 57.5 177.5 - 261.0 21.8 81.6 1,145.3 34% 2026 58.9 182.0 - 262.7 22.5 84.2 1,185.3 35% 2027 60.4 186.5 - 265.3 23.2 87.3 1,231.1 36% 2028 61.9 191.2 - 268.0 23.9 90.9 1,283.3 37% 2029 63.5 196.0 - 270.6 24.6 94.9 1,342.4 38% 2030 65.1 200.9 - 273.3 25.3 99.5 1,409.2 40% 2031 66.7 205.9 - 276.1 26.1 104.6 1,484.2 41% Annual Net Investment Return: 7.5% Employer Contribution Rate: 17.5% of payroll, increasing 2% per year to 35.5% after 9 years Employee Contribution Rate: 8.5% of payroll, increasing 1% per year to 11.5% after 3 years Suspend COLA Exhibit D 22 Benefit Analysis for Salary over $65,000 Exhibit D 23 Benefit Study to Eliminate the $65,000 Salary Cap As requested, we have analyzed the potential impact of eliminating the $65,000 salary caps for both benefit accruals and contribution purposes The proposed changes in benefits and contributions are as follows: Future Cost of Living Adjustments (COLA) for all participants are suspended indefinitely Contributions will be made at the current rates for all salaries including amounts over $65,000 For Regular and Public Safety employees: – The benefit accruals for salary up to $65,000 will remain unchanged – For salary above $65,000, the benefit accruals will be 1% of salaries over $65,000 For purposes of this study, we have assumed that these proposed changes will be effective October 1, 2012 For Legislature and Judges, their benefits will remain unchanged As previously reported, our projections show that the Plan will become insolvent during the Plan Year ending September 30, 2023 assuming no changes are made to current plan of benefits and contribution rates Based on our projections, the proposed changes described above are projected to delay the Plan insolvency by two years from the Plan Year ending September 30, 2023 to September 30, 2025 In addition, the proposed changes are estimated to decrease the Plan’s Annual Required Contributions (ARC) as a percent of pay from 58.4% to 50.0% of pay Although these proposed changes have a positive effect on the funding status of the plan, they are clearly not enough to solve the short-term solvency and long-term funding issues facing the Plan Exhibit D 24 Benefit Accruals over $65,000 Example Tier 1 Regular Employee: Salary history: Base benefit unchanged: Final average salary of $65,000 x 12 years x 2.5% = $19,500 Salaries over $65,000* = $3,000 for 2014 + 4,000 for 2015 + 7,000 for 2016 $14,000 x 1% = $140 * salaries over $65,000 are only counted after 9/30/2012 Total accrued benefit = $19,640 per year Year Salary 2005 $50,000 2006 51,500 2007 66,000 2008 66,600 2009 67,000 2010 65,000 2011 65,000 2012 65,000 2013 60,000 2014 68,000 2015 69,000 2016 72,000 Exhibit D 25 Membership Summary Year Ended September 30 Category 2006 2011 2011 after layoff Active participants in valuation: Number 10,739 10,376 9,376 Average age 45.1 45.7 45.3 Average years of service 14.0 13.9 13.3 Average salary $36,744 $38,885 $38,693* Retired members and beneficiaries: Number in pay status 7,282 7,592 7,918 Average age 68.8 69.4 68.9 Average semi-monthly benefit $928 $1,104 $1,124 PRELIMINARY DATA AS OF SEPTEMBER 30, 2011 * After reflecting salary over $65,000, the average salary increases to $40,080. Exhibit D 26 13.7% 14.2% 14.0% 13.6% 39.0% 37.4% 44.2% 36.4% 17.5% 17.5% 17.5% 17.5% 8.5% 8.5% 8.5% 8.5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% Normal Cost 20-year Amortization Employer Employee 51.4% 26.0% 52.7% 26.0% 58.4% 26.0% 2011 (after reflecting salary over $65,000 and suspension of COLA) 2011 (after layoff and suspension of COLA) PRELIMINARY RESULTS FOR YEAR BEGINNING OCTOBER 1, 2011 Actuarial, Employer and Employee Contribution Rates 2011 (before layoff) 2011 (after layoff) 26.0% 50.0% Exhibit D 27 Projection Parameters Projection Assumptions: After the decline in the active population due to the Economic Stability Act of 2011, the active population is assumed to remain level at 9,376 employees. Total payroll for the year ending September 30, 2012 is projected to be $362.8 million. This amount is based on 9,376 employees and reflects the $65,000 salary limits for Regular and Public Safety employees. Without the $65,000 salary limit, the total payroll is projected to be $375.8 million. Total payroll is assumed to increase 2.5% per year. Administrative expenses for the year ending September 30, 2012 are assumed to be $14.9 million increasing 3% per year. Benefit payments for the first 15 years are projected based on the preliminary 2011 valuation results. Benefit payments after 15 years are assumed to increase 2% per year to account for retirements from new entrants after 2011. With the COLA suspension, benefit payments after 15 years are instead assumed to increase 1% per year. Assets are assumed to earn a 7.5% return each year. Benefit changes and contributions for salary over $65,000 were assumed to be effective October 1, 2012. Caveats: The closer the plan gets to insolvency, asset illiquidity may become an issue and earning the assumed return may become more difficult. Projections, by their nature, are not a guarantee of future results. The projections are intended to serve as estimates of future outcomes, based on the information available to us and the assumptions described herein. Emerging results may differ significantly if the actual experience proves to be different from these assumptions. 28 Projection of Market Value of Assets $0.0 $0.2 $0.4 $0.6 $0.8 $1.0 $1.2 $1.4 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Billions Market Value as of September 30: Baseline Suspend COLA and 1% benefit accrual over $65,000, with contributions over $65,000 Exhibit D 29 Projection of Market Value of Assets (In Millions) Year ending Sept. 30: Contributions Disbursements Return on Assets Market Value of Assets Funded Percentage (AVA/AAL) Employee Employer Additional Government Benefit Payments Expenses 2011 $1,246.0 46% 2012 $30.8 $63.5 - $222.4 $14.9 $88.1 1,191.2 40% 2013 31.6 65.1 - 228.1 15.3 83.8 1,128.3 36% 2014 32.4 66.7 - 234.0 15.8 79.0 1,056.6 33% 2015 33.2 68.4 - 240.0 16.3 73.4 975.3 29% 2016 34.0 70.1 - 246.2 16.7 67.2 883.7 26% 2017 34.9 71.8 - 252.6 17.2 60.2 780.8 22% 2018 35.8 73.6 - 256.4 17.8 52.4 668.4 19% 2019 36.7 75.5 - 261.4 18.3 43.8 544.7 15% 2020 37.6 77.4 - 268.4 18.8 34.4 406.8 11% 2021 38.5 79.3 - 273.3 19.4 23.9 255.8 7% 2022 39.5 81.3 - 279.2 20.0 12.5 89.9 2% 2023 40.5 83.3 $91.4 284.5 20.6 - - 0% 2024 41.5 85.4 183.1 288.7 21.2 - - 0% 2025 42.5 87.5 186.2 294.3 21.8 - - 0% 2026 43.6 89.7 187.7 298.5 22.5 - - 0% 2027 44.7 91.9 191.1 304.5 23.2 - - 0% 2028 45.8 94.2 194.4 310.6 23.9 - - 0% 2029 46.9 96.6 197.9 316.8 24.6 - - 0% 2030 48.1 99.0 201.3 323.1 25.3 - - 0% 2031 49.3 101.5 204.9 329.6 26.1 - - 0% Baseline (Current Plan) Annual Net Investment Return: 7.5% Employer Contribution Rate: 17.5% of payroll up to $65,000 Employee Contribution Rate: 8.5% of payroll up to $65,000 Exhibit D 30 Projection of Market Value of Assets (In Millions) Year ending Sept. 30: Contributions Disbursements Return on Assets Market Value of Assets Funded Percentage (AVA/AAL) Employee Employer Additional Government Benefit Payments Expenses 2011 $1,246.0 46% 2012 $30.8 $63.5 - $222.4 $14.9 $88.1 1,191.2 44% 2013 32.7 67.4 - 227.6 15.3 84.0 1,132.4 40% 2014 33.6 69.1 - 228.2 15.8 79.6 1,070.7 36% 2015 34.4 70.8 - 231.4 16.3 75.0 1,003.2 33% 2016 35.3 72.6 - 234.2 16.7 69.9 930.0 30% 2017 36.1 74.4 - 235.7 17.2 64.4 852.0 27% 2018 37.0 76.3 - 238.0 17.8 58.6 768.1 24% 2019 38.0 78.2 - 241.5 18.3 52.2 676.7 21% 2020 38.9 80.1 - 246.8 18.8 45.3 575.4 18% 2021 39.9 82.1 - 249.8 19.4 37.6 465.9 14% 2022 40.9 84.2 - 253.5 20.0 29.4 346.9 10% 2023 41.9 86.3 - 256.6 20.6 20.4 218.3 6% 2024 43.0 88.4 - 258.6 21.2 10.8 80.7 2% 2025 44.0 90.7 $67.9 261.9 21.8 0.5 - 0% 2026 45.1 92.9 148.3 263.8 22.5 - - 0% 2027 46.3 95.2 148.2 266.5 23.2 - - 0% 2028 47.4 97.6 148.0 269.1 23.9 - - 0% 2029 48.6 100.1 147.8 271.8 24.6 - - 0% 2030 49.8 102.6 147.5 274.6 25.3 - - 0% 2031 51.1 105.1 147.2 277.3 26.1 - - 0% Suspend COLA and 1% Career Average Benefit Accrual over $65,000 Annual Net Investment Return: 7.5% Employer Contribution Rate: 17.5% of total payroll (including over $65,000) Employee Contribution Rate: 8.5% of total payroll (including over $65,000) Exhibit D 3438 Kronprindsens Gade  GERS Complex, 3rd Floor St. Thomas, VI 00802-5750 Bus.: 340.776.7703  Fax: 340.776.4499 #3005 Orange Grove  Christiansted  St. Croix, V.I. 00820-4313 Bus.: 340.718.5480  Fax: 340.718.5498 www.usvigers.com