‘Retirement bill unconstitutional’

Members of the House minority bloc dismissed yesterday as unconstitutional the administration’s proposals to write off the $124 million retirement liability and suspend payment of the government’s employer contribution.

“It’s unconstitutional,” said minority leader Arnold I. Palacios and Rep. Joseph Deleon Guerrero. They said the proposed Defined Benefit Plan Rescue and Reform Act of 2006 should actually read as “Defined Benefit Plan Raid and Pillage Act of 2006.”

“It’s not a rescue; it’s a raid of the Retirement Fund. It’s ripping it to pieces. It’s pushing it to bankruptcy,” said Palacios.

“You’re asking me to forget about your $124 million debt, and after ruining your credibility as a loan recipient, you’re now asking me to my face to loan you again $40 million? It doesn’t make sense,” said Palacios.

“That’s pillaging,” said Deleon Guerrero, who was with Palacios during a media interview yesterday.

UNCONSTITUTIONAL

They said the bill is unconstitutional for three reasons—it’s a breach of contractual relationship, it impairs the Fund’s capacity to pay benefits, and it violates the Fund board’s fiduciary duty over investment options.

They said the proposal would violate Article 3 Section 20 [a] of the Constitution, which provides that “membership in an employee retirement system of the Commonwealth constitute a contractual relationship. Accrued benefits of the system shall be neither diminished nor impaired.”

“Those funds [$124 million] belong to the Retirement members. To write off that debt, which was really caused by the government’s failure to pay in the first place, is government’s violation of that contractual relationship,” said Deleon Guerrero.

Further, Deleon Guerrero said that suspending the government’s employer contribution as proposed by the Fitial administration for the remainder of fiscal year 2006, would cripple the Retirement Fund, and its ability to pay member benefits.

“There’s no doubt that writing it off would impair the Fund’s capacity to invest and run its program as mandated,” he said.

Founded in 1980, the Fund is mandated to be self-sustaining after 40 years or by 2020.

On the bill’s proposal asking the Fund to invest $40 million on the Commonwealth Utilities Corp., Deleon Guerrero said this limits the board’s authority to decide where to invest its assets.

“The bill cites a 7.5 percent fee rate. It would cause the board to violate its fiduciary duty to make a prudent decision to invest,” said the lawmaker.

COMPOUNDING PROBLEMS

Deleon Guerrero and Palacios said the bill would actually create more problems.

They cited that the bill, which provides that the Commonwealth Utilities Corp. adjust its rates, would result in increased rates, which would further increase in view of CUC’s repayment of the $40 million loan.

“They want CUC to recover full cost. Right now, with the fuel surcharge, we are paying 14.5 cents per kwh. Economist.com says that cost of production would be at 22 cents per kwh. We don’t know how much would be added on to repay the $40 million loan. In other words, it’s an exorbitant fee for everybody. If CUC couldn’t afford the cost, what would happen to the Fund?” asked Deleon Guerrero.

Further, not paying the government’s employer contribution would only create more liability, he said.

“You’re compounding the problem. The actuarial rate would further go up,” he added.

REFORMS

Palacios said the bill also contains “reforms” such as extending the deadline for the Fund to become a self-sustaining agency from 2020 to 2045.

“That’s good. That way, we can catch up with the debt payment. So we don’t have to write it off,” he said.

Palacios cited some alternatives to solve the current fiscal crisis: reduce the tax rebate, freeze employee hiring, and adjust pay scale of excepted employees.

“Why can’t the administration touch the rebate? Let the government use our taxes. Why do we implement taxes to begin with? Isn’t it to fund government operations? Get the taxes, don’t write off debts,” he said.

A reduction of the government workforce, which would mean reduced personnel cost, can happen if the government really stops new hiring, Palacios said.

He said he is glad the administration has began to implement a 10-percent wage reduction among excepted employees or non-civil personnel.

“That’s pay-scale adjustment. If you can do these things, these will have great impact,” he said.