Plucking the Retirement goose

By William H. Stewart
Special to the Saipan Tribune

Would any lending institution in the world loan $20 million to an organization that has repeatedly failed to honor its financial obligations and still owes millions? Think about it.

There was an interesting article in the Saipan Tribune on Christmas Day reporting that the government wants to borrow $20 million from the Retirement Fund as sort of “bridge” or “up-front financing” for the $20.4 million in Compact Impact funds expected to be provided by the Department of the Interior over a four-year period.

If you are a retiree or an employee paying into the Fund hoping to retire one day, perhaps you find this idea as worthy of caution as I do. In the past the CNMI government has failed miserably in meeting its financial obligation to the Fund by withholding its legally mandated financial contribution. The accumulated shortfall currently totals about $90 million and now the government wants NMIRF to “lend” it $20 million for use by the Public School System.

The school system does not generate income. It is not financially self-sustaining, nor should it be expected to be so. Rather, the organization is totally dependent either upon grants from the U.S. Treasury or the CNMI government’s budgeting constraints—a government budgeting process that always seems to be reacting to the consequences of some unanticipated or unintended financial crises. Therefore, PSS can’t be expected to ever repay a loan from its own financial resources.

I am certainly sympathetic to the needs of PSS. An educated electorate is the CNMI’s most valuable resource and I don’t doubt that the system needs money. But I suggest that the government get the money the same way many jurisdictions in the United States generates revenue and that’s by imposing a sales tax.

Just why PSS appears to be the recipient of the bulk of the $20 million with no mention of the impact of FSM, Marshallese and Palauan citizens on other Commonwealth infrastructure and social services such as, for example, public health and the hospital is not entirely clear to me. I’ll leave that money squabble between departments for the future.

From a personal point of view (if I had anything to do with the decision) I might be convinced to look favorably upon lending money to the government but only if the loan was secured with some form of fixed assets, such as the Capitol Hill housing area, or certain “selected” public land (not wet land) with the right to “sell off” or lease the land if the government defaults on repayment but certainly the island’s water and sewer system would not be acceptable as loan collateral. That would be an invitation for the government to default. Leave that to someone else, thank you.

The above-mentioned Tribune article pointed out that the Fund wants to ensure that repayment of the loan to the government would occur on a regular and timely basis, “such arrangement would call for an agreement signed between the Fund and the Department of the Interior on the payment terms.”

I guess this is supposed to be some sort of repayment guarantee for the loan in the event the central government defaults on repayment. Or perhaps CDA would guarantee the loan. If it turns out the neither will, ask yourself why? Then you will have the answer as to why the Retirement Fund shouldn’t make the loan either.

Assuming, however, the Fund does decide to lend the money subject to the agreement with Interior, I can just imagine a hypothetical U.S. Congressional hearing when an Interior spokesperson responds to the question as to why Interior is making the annual incremental payment of Compact Impact funds to the CNMI retirement system based on its agreement and not directly to the government itself? And why was a guaranty agreement necessary in the first place? While the House Appropriation Committee has not named its new chairman, nevertheless the inquiry before Senator Cochran (R-Miss.), chairman of the Senate Appropriations Committee, and his staff might go something like this:

“Er, uh, well, you see, Senator the central government wanted the entire four-year payment of $20 million as a lump sun for use by the Public School System, but we will only provide the CNMI $5 million each year over a period of four years because you won’t give us the $20 million all at once, so in a way it’s your fault.”

“Now, uh, the central island government has been, uh, how should I put it, somewhat negligent in meeting its financial obligation to its employees’ Retirement Fund for many years to the tune of (pause for a drink of water—gasp) hundreds of millions of dollars.”

“So, exercising its ability at creative financing, the central government came up with the idea of borrowing $20 million from the Fund which presumably it promised to pay back each year with the $5 million it gets from us Compact Impact money. Of course, that depends upon the appropriation committee releasing the money in the incremental steps which have been authorized for this purpose.”

“This arrangement with the Retirement Fund was necessary since the Fund wanted to be absolutely certain that its so called ‘up front financing’ was returned to the Fund, which has a great deal of unsuccessful experience in trying to get the government to honor its financial obligation to the Fund.”

“Now, Senator, this leaves open the matter of interest payments due from the CNMI government to the Fund—Interior won’t pay the Fund the interest payments due from the central government—that’s somebody else’s problem.”

“Now in response to the matter of education in the Commonwealth, and higher education in particular, and your question regarding the financing of the San Roque College campus I wouldn’t exactly refer to it as a can of worms, but—”

Sometime ago, this paper reported that the Fund signed a memorandum of understanding to provide for a $500,000 bi-monthly payment from the government to cover employer contributions each pay period.

If I’m not mistaken there have been several such agreements as well as meetings between Fund officials and the central government imploring the government to meet its monthly financial obligation, only to have the government renege time and time again on its part of the bargain. Based on this dismal background, what’s to keep the government from obtaining the $20 million from the Fund’s members (which in reality is actually their deferred compensation) and then when repayment is due, the government simply tells the Fund to go whistle for the repayment? This is what has occurred in the past; what’s to keep it form happening again in future?

Do you know anyone who has ever obtained a loan from a bank based only on a memorandum of understanding? I don’t. Do you know of any financial institution that failed to run a credit check on a potential borrower (in this instance, the government) before granting a loan? I don’t. Do you know of anyone who received a loan from a bank, failed to repay it and then returned to the bank requesting still another loan and got it? If you do, please tell me the name of the bank if they are still in business.

Maybe, I missed something along the way—that it’s alright to owe money, and never repay it in full—and then hope to borrow still more money from the same source. To expect this is Alice in Wonderland finance and naiveté in the extreme. In my judgment, as far as the government’s credit rating with the Fund is concerned it’s about as unfavorable as last week’s spoiled fish.

Based on past experience and concerning the government’s failure to meet its financial obligations to the Fund, if you believe that such a loan to the government is a good idea, I have a bunch of stuff rusting and rotting in the backyard I would like to sell you.

Once again, as I have pointed out many times in this column, retirees had better take an active interest in their own financial welfare and take vigorous steps to protect and enhance the Fund. Members must realize that there are those with little or no monetary involvement who tend to view the Fund’s resources (your money) as a “honey pot.”

In a presentation recently made to the Legislature, Fund officials disclosed that the CNMI government’s total outstanding obligation to the Retirement Fund had reached $84.4 million! The amount has no doubt increased since the time of the presentation. The largest unpaid portion of that figure amounted to $70.1 million in total employer share payments that remain outstanding and $8.4 million in total appropriations from Public Law 11-41.

During this particular legislative presentation, officials described the Fund’s mounting problems. These have been compounded and multiplied by unfounded pension liabilities that have grown to more than one-half billion dollars.

Because of the shortfall in these financial obligations and uncollected debts, Fund officials must be increasingly distressed that there might be payless paydays for pensioners and employees, unless the Fund dips into its investments—something it should never do.

Indeed, they have warned that such a possibility may not be far off if the government doesn’t live up to its financial obligation to the Fund. This plea to the government to meet its obligation to the Retirement Fund members falls largely on deaf ears except for a few intermittent and inadequate bi-monthly token payments now and then, which are almost always less that the required amount.

If you want to know what can happen under extreme circumstances if there are too many “payless paydays,” consider the following:

Banks may be forced to foreclose on homes and repossess automobiles; dependence upon food stamps will likely increases; businesses that have extended credit will find the accounts of many creditors uncollectible; for some people, a return to subsistence fishing and farming may become a necessity; students may be withdrawn from college. There will be bounced checks; delayed credit card payments and damaged credit ratings. Perhaps even a return to wearing “hand-me-down” clothes; disconnected cable television; off-island vacation plans postponed, etc.

It would be like “back to the future” except this time it’s “back to the sixties,” a period that few who are now working for the government recall but many already retired remember the hard times all too well. But this time rice won’t be 11 cents a pound, sugar 15 cents, gasoline 35 cents a gallon and round trip air fare to Guam $28. Not by a long shot.

Maybe the article in the paper about a possible loan from the Retirement Fund in the amount of $20 million appearing as it did on Christmas Day was only wishful holiday thinking during the season of giving. Lets hope that’s all it is.

So I’ll make a wish on behalf of all retirees who might agree with me: I wish the government would pay its debt to the Fund in full plus accrued interest.

(The views expressed are strictly that of the author.)