Formally, it is known as false economy. Figuratively, it is called penny wise but pound foolish. It applies to a decision or action that at first seems to save money, but ends up costing more in the long run. Such is the VI Legislature’s rollback of the GVI’s contribution to the GERS pension plan – from 26.5% to 23.5% of payroll cost. Previously authorized by the VI Code, the GERS Board set the higher rate to be effective October 2025. The 11.0% employee contribution rate was not affected.
The higher rate –estimated to increase GVI contribution by $13.5 million annually– is an important part of the GERS Rescue plan, which is built around the $3.8 billion GERS Funding Note. It was scheduled in anticipation of lower contributions from the Note in the years 2026 through 2039; and was estimated to add $351 million in employer contributions, over the remaining 26 years of the Rescue Plan.
The GERS pension plan is structured to pay retirement benefits with contributions from GVI and its employees; which are assessed as a percentage of payroll cost. When retirees were far fewer than employees, pension benefit cost was a modest percentage of payroll cost. Over time -- as employees became retirees -- the number and benefit cost of retirees have increased; while the number and payroll cost of employees have been constrained by operating and fiscal realities. Consequently, the percentage of payroll cost needed to pay benefits has increased steadily: 14.2% in 1993; 38.4% in 2003; 63.1% in 2013; 64.6% in 2023.
If contribution rates are not increased commensurately, contribution amounts will not cover benefits fully. In the six years –2020 through 2025-- that current rates have been in effect, contributions were $730 million less than benefits. The shortfall was made up with $473 million from the Funding Note, and $257 million from liquidation of investment assets. Prolonged underfunding leads to insolvency, when all investments have been liquidated. Insolvency is always costlier to cure than to prevent; as evidenced by the hefty cost of the 2022 GERS bailout plan.
No convincing rationale has been presented for revoking the rate increase. The $13.5 million cost, which was announced ten months ahead of the effective date –-allowing time to be budgeted -- is at most 1.5% of GVI’s 2026 General Fund budget; and is likely less than the effective cost of the increased GVI minimum salary. So, the rollback cannot credibly be a justified based on lack of funding.
There is still time to limit the damage. In the immediate term, the Legislature could – and should – restore GVI’s contribution rate to 26.5% effective October 2026; allowing ample time to incorporate the cost in the FY2027 budget. This will partly make up for expected reduction in contributions from the Funding Note.
But the reality is that GERS is structurally underfunded. It is a defined benefit plan that is funded on a pay-as-you-go (PAYG) basis; instead of the actuarial basis required to fund such plans sustainably. Problem is; actuarially determined employer contribution (ADEC) would cost GVI much more than the current formula -- $2 billion more over the last decade. For further perspective: FY2025 ADEC, adjusted for Funding Note contribution, is about 43% of covered payroll – almost twice the 23.5% GVI contribution rate.
It has long been apparent that GERS is not sustainably funded. For decades, auditors and actuaries have documented the rapid growth of its unfunded liability; which at times has exceeded the Territory’s GDP. Since GVI cannot afford the defined benefits, then it must restructure the plan to align benefits with its resources. Similarly situated, the trend in the public sector is toward hybrid pension plans; comprising both defined benefit (DB) and defined contribution (DC) elements. Most private sector employers have abandoned DB plans.
As a matter of urgency, the GVI must transition the GERS to a hybrid plan: retaining the traditional defined benefit component, while integrating a defined contribution component. DC plans are advantageous to plan sponsors because they avoid unfunded liabilities; and they are attractive to younger and more mobile workforce, because they are typically portable.
The GVI should take advantage of the reprieve provided by the Funding Note to redesign future benefits to include a defined contribution element. It must not allow the System to slide into insolvency; again.
This is an opinion piece from the author, not a news report. It does not reflect the views of the station.
