Fund asked to write off $124M liability

The Fitial administration is pushing for the write-off of $124 million unfunded liability with the NMI Retirement Fund.

At the same time, it is asking the Fund to provide a $40-million revenue bond for the financially bankrupt Commonwealth Utilities Corp.

In a bill titled “the Defined Benefit Plan Rescue and Reform Act of 2006, which was submitted to the House of Representatives Friday, the administration said the proposed measure would provide the CNMI government “with a fresh start.”

It said the government’s accumulated unfunded liability with the Fund totaled $123.7 million since 1995.

It said that based on an actuarial study, the NMI Retirement Fund’s defined benefit plan “is only 46 percent funded” and that “it is saddled with an unfunded liability that is approaching one-half billion dollars [$470 million as of Oct. 1, 2004].”

It means that the Commonwealth government “faces an unfunded obligation whose present value is, on average, $58,537.80 for each of the 8,029 participants” in the Fund’s defined benefit plan.

This obligation was created because of unfunded prior service credits, amendments to the Retirement Fund Act granting members early retirement bonus and increased benefits, and the government’s failure to remit required employer contributions, and the ratio of active members funding the plan “has reached an all-time low” relative to retirees who are drawing the benefits.

“This current fiscal situation has created an unsustainable economic emergency…the Commonwealth lacks the financial resources to pay off a one-half billion dollar unfunded government liability to the Retirement Fund, and that a rescue and reform plan is necessary to restore the Fund to a more sound financial footing,” reads part of the bill.

Payment suspension

In his transmittal letter to the Legislature, Gov. Benigno R. Fitial said that the bill proposes to empower him as governor “to suspend payments” to the Retirement Fund for the remainder of FY 2006 or up to Sept. 30 this year.

To protect employees’ interests, he said that the central government agrees to pay 7.5 percent on any suspended payment until they are paid in full.

The administration hopes to save about $11 million from this payment suspension.

CUC bailout

Part of the bill is requiring the Retirement Fund to “purchase” through the Commonwealth Development Authority a total of $40 million revenue bonds for CUC.

Fitial said Friday that this funding would be used to fix CUC’s power generation plant. He said the bond would be paid by revenues generated by CUC.

The bill provides that the CUC shall adjust rates within 12 months after the effective date of the Act.

The bonds shall bear a simple interest rate of 7.5 percent over 20 years with payments due annually beginning on the first anniversary of the bond, with prepayment, in whole or in part, permitted at any time without penalty.

The bill provides that the governor, on behalf of CDA and CUC, shall pledge to the Fund as security for the bond “all revenue that is derived from charges to CUC consumers.”

Increased employee share

To improve fiscal solvency, the bill aims to increase Fund members contribution from 6.5 percent for class I to 12.5 percent and Class II from 9 percent to 14 percent.

The increase would be gradual at 1-percent increase per fiscal year until the contribution rate reaches the full percentage.

Twin bill

The Fitial administration has also submitted a partner bill, which aims to change the current retirement system from Defined Benefit Plan to Defined Contribution Plan.

Defined Contribution would get rid of government unfunded liabilities since it would only deal with the actual contribution of members.

The governor said that passage of both bills, in addition to the Legislature’s approval of the fiscal year 2007 budget are “initial steps in addressing this financial imbalance.”