If it is not restored, the reduced rum excise tax “cover over” rate -- from $13.25 to $10.50 per proof gallon -- will significantly impair the GERS Rescue Plan. The Plan was created three years ago by Act 8540 to avert imminent GERS insolvency – then predicted for 2023 -- and to stabilize the pension system for the long term. The lower rate creates a worrisome crack in the foundation of the Plan.
To recap, the heart of the Plan is the GERS Funding Note, which promised to contribute $3.8 billion to the GERS over 30 years (2022-2051). It is founded on two key assumptions: approximately 22.5 million proof gallons of Virgin Islands-produced rum imported into the U.S. annually; and a U.S. rum excise tax rate of $13.25 per proof gallon (ppg). These assumptions equate to $8.9 billion in rum tax revenues over 30 years, to be transferred to the GVI*. Priority lien obligations --mostly bond debt payments, and subsidies to VI rum companies-- amount to $4.9 billion. This leaves $4.0 billion residual, of which GERS is to receive $3.8 billion. *[Per the Revised Organic Act of the VI]
All else remaining the same, the lower $10.50 ppg tax rate will reduce total rum revenues to $7.1 billion and reduce the contribution to GERS to $2.2 billion – after fully satisfying the priority obligations. That is $1.6 billion (42%) less than the anticipated $3.8 billion; significantly impairing the promise of the Plan.
GVI’s remedial options are limited, because it does not control the factors of the funding equation: the U.S. Congress sets the tax rate, and the U.S. market for VI-produced rum determines the tax base. It is also worth recalling that Act 8540 transferred all GVI's rights to rum tax revenues to the Matching Fund Special Purpose Securitization Corp. for 30 years. The MFSPSC is a legally separate and autonomous instrumentality of the GVI. Its sole mandate and function are to receive and distribute VI rum tax revenues, according to the Act and the Funding Note. Neither the GVI nor the MFSPSC can alter the financing terms.
This is not an argument for doing nothing. Rather, it is a call for proactive planning to address the exposed vulnerability of the Plan. At minimum, while lobbying for a 10-year extension of the $13.25 ppg rate retroactive to 2022, GVI should also initiate planning on the assumption that the rate will revert to $10.50 ppg for the last 20 years of the Funding Note (2032–2051).
Given the GVI's precarious financial condition and outlook, it is time to consider transitioning GERS from a defined benefit plan to a defined contribution plan, or possibly to a hybrid model. This strategy has been increasingly implemented by state and local governments. Defined contribution plans are attractive to plan sponsors because they do not create long-term liabilities, and they are generally more attractive to younger and more mobile workforce.
The Funding Note, despite its vulnerability, has provided life-saving breathing space to GERS. We must use the respite to safeguard its long-term viability.
