Good idea, bad idea: Which is it?

By WILLIAM H. STEWART
Special to the Saipan Tribune

When one reads a summary in the paper of a bill pending before the Legislature one doesn’t know if all the facts were presented the reader or not. Thus, with that caveat in mind, I would like to address an issue that should be of great concern to all active retirees and their dependents as well as those government employees currently paying into the Retirement Fund but not yet retired.

The issue concerns two articles involving the Fund which appeared in the Monday, May 8 issue of the Saipan Tribune entitled: “Fund Asked To Write-off $124 million Liability” and “Defined Contribution Plan Proposed”—both subjects of a purposed reform bill entitled: “Defined Benefit Plan Rescue and Reform Act

of 2006.”

Question: Does anyone ever think of asking the retirees whose money is being discussed as to what they think of proposed changes in the Retirement Fund? If not, why not?

If you—dear reader—are a retiree or currently paying into the Fund and you think the proposed changes incorporated in the bill mentioned above is a good idea or a bad idea, and you have a vested interested in the Fund along with your financial security, you should let your representative know how you feel—one way or the other. It’s the American way.

If you are a retiree concerned about your future income, or an individual planning to retire sometime in the future, you should definitely make yourself knowledgeable about the proposed changes which, if enacted into law, will have far-reaching, permanent consequences on your future financial situation.

One part of the proposed law would have the Fund “write off” the government’s $124 million debt to the members and the second part would have the Fund finance a $40 million “bailout” for a bankrupt CUC.

As a “Doubting Thomas”—I almost wept when I read the above—I have two questions:

(1) Considering the government’s past record of “non-payment” of its contributing employer’s financial obligation, why should anyone believe that the new proposal would be any different than that of past experience in terms of the dependability of future contributing payments even though (as I read it) under the new system the government would provide 4 cents for every dollar a member employee contributes to his or her retirement?

(2) Would you agree that the Fund should provide a $40 million “bailout” for CUC and saddle the members with that financial “white elephant”? Am I mistaken but did I read somewhere that CUC defaulted on its loan from CDA? A “bailout” for an organization with a proven financial and “legislative” record of mismanagement and incompetence! An organization that doesn’t even provide the very basic adequate maintenance to its equipment. Why not pass a law requiring CUC to bail itself out by levying full cost recovery utility rates and get out of the power subsidizing business? That’s the solution I would offer.

If the potential revenue stream for CUC is indeed financially viable, then why hasn’t a private financial institution been approached for a loan? If such an institution has been contacted—and refused—why should the Fund provide the financing when there are better, safer investments on Wall Street and elsewhere for the members’ money, not to mention U.S. government securities? I recommend TIPS bonds—and if you don’t know what the acronym signifies—then you don’t have any business making investment decisions about other people’s money (Hint: it’s not a tip to a food server).

According to the May 8 article in the paper, the bill pending before the legislature also provides that the bonds “shall bear a simple interest rate of 7.5 percent over 20 years.” Why “simple interest”? Why not “compound interest” as most loans are structured? The suggested percentage rate does not even allow for adjustment for inflation which can greatly diminish the purchasing power of the payments over 20 years. You know what inflation is by now—it’s oil priced at over $70 a barrel when only a few years ago it was $40 or less. Inflation is an erosion of your money’s purchasing power.

If you really want to know what inflation is —and what it can possibly do to the purchasing power of your money in the future—ask your retired parents. They will tell you that 35 years ago, rice was 11 cents per pound; sugar, 15 cents; gasoline 35 cents a gallon. The dollar of that time is only worth about 15 cents today. That’s why any loan must be repaid with an inflation premium considered.

CUC should be “bailed-out”—but not at the expense of jeopardizing the retirees’ annuities—at least in my judgment. When an organization or government has a debt that it has not paid, and requests that its financial obligation be forgiven and “written off,” it has damaged its credibility and credit-worthiness for all time. Such an action sends a signal that it can’t be trusted to honor any future financial obligation and its credit rating will have been irreparably damaged. Make no mistake about it.

There’s more to consider:

The proposed law provides that “all new public employees and eligible existing government employees would have their own “portable individual retirement accounts” on or after Jan. 1, 2007.”

Would such accounts apply to existing retirees? If so, it could be a financial and accounting nightmare for any administering agency.

The bill describes defined contribution plan “as a plan in which savings are accumulated in an individual retirement account for the exclusive benefit of the member or beneficiaries.” This presents the question—does the government anticipate having to contribute the estimated average of $58,537.50 now in arrears to each of the estimated 6,000 (non-retired) members and those also qualified within the remaining 2,000 retirees so these members will have the benefit of having the money placed in their individual savings account? If not, why not? It’s money due them by the government’s own admission—and it totals about $468 million!

Thus, it isn’t clear if the government would pay their “late” employer’s

Contribution ”up-front”—which is now in arrears—and deposit this money in each members’ private savings account.

As pointed out previously in this column, should collateral be pledged and accepted for a loan by the Fund to the government(i.e., CUC), in my judgment it should be in the form of “fixed assets,” with the revenue generated there-from applied toward servicing the debt. For example, Capitol Hill housing and that of other areas, or perhaps the air and sea port. These are examples of acceptable collateral for a $40 million “bailout” loan to the “government”—and not, repeat not, directly to CUC.

Certainly the government must find a solution to the problems of both the Retirement Fund and CUC. Any reasonable person would agree. The question is, is this the best and only solution available?

As for the loan to CUC, the utility brought its problems on itself, the Fund had nothing to do with it. The problems facing the Fund, and by extension the members, are of no fault of their own. CUC’s problems stem from not seeking full cost recovery in establishing its rates. Presumably the loan would be secured by revenue bonds? What revenue? Their hasn’t been a positive cash flow at CUC for years—probably never.

Since CUC needs $40 million, let the organization apply to a commercial or merchant bank. If they won’t lend the money—why should the Retirement Fund?

If the Retirement Fund is in a financial mess as a result of the central government’s neglect—who made it so? Not the Fund administrators. What guarantee is there that any new government “fix” will not ultimately also result in the long term detriment of the members. You know—”same old, same old.”

And what’s the rush for a solution to the government’s unfunded liability to the Retirement Fund? It’s been on the “back-burner” for years—why not wait a little longer and let it simmer awhile. If anything, keep the government’s debt on the books, don’t write it off, and declare a moratorium on any additional interest accruing from the present time onward. That way the Fund meets the government halfway during the present financial crises.

To let an unfunded liability grow annually to reach a total of $470 million can only be considered irresponsibility in the extreme. Who is to say that history won’t repeat itself if the government is let off the hook this time.

As my dear ol’ granny might say, “That’s one of the things wrong with history.”

(William Stewart is a forensic economist, historian, and military cartographer.)