The govt, Legislature’s continued long-term neglect

All retirees and employees of the government who are members of the Retirement Fund should be aware of an important meeting scheduled for today (Friday, April 25) at 10:30am in the House Chamber. The Fund’s actuary, Buck Consultants, will address the rapid diminishment of the Fund’s financial solvency, and thus the future of the member’s pensions. Various projections will no doubt be discussed concerning how much longer the Fund can continue to pay pensions should the government continue to avoid paying what it owes the Fund and thus all members. If you are able, go witness your government at work; it’s your money and your representatives.

This is an important briefing considering the serious financial condition of the Fund and the approximately 2,000 or more people in the community who have already retired, many of whom depend on their twice monthly payments for their livelihood. There are probably two and one half times more people currently working for the government than those retired who contribute a portion of their monthly salary into the Fund’s defined benefit plan in anticipation of that future time when they may not be able to work because of ill health or some other reason.

Both groups, those retired and those still working, placed their trust in the government and the Fund’s administration to maintain the sanctity and integrity of the Fund and its assets.

According to census figures for the year 2000, government employment totaled 4,996 which, at the time, I would imagine a large number participated in the Fund by contributing a portion of their salary toward their retirement as payroll deductions—MONEY THEY HAD ALREADY EARNED.

The hard work and dedication exhibited by the current Fund’s administration and staff as displayed in the day-to-day management of the member’s money must be acknowledged with thanks. Regrettably, I am afraid the same can’t be said of some members of the Legislature and central government—past and present—who have permitted the Fund to lapse into its present diminished financial condition. Failure of the legislature and the central government to correct this urgent situation by not paying the money due the Fund is now causing a major meltdown of the member’s invested resources which is seriously jeopardizing the future financial security of all members, both present and future.

If you are retired and paying off a home or an improvement loan; making payments to the bank for a vehicle; providing money toward the education of a family member; planning an off-island trip; meeting unusual medical expenses—or whatever—you had better pay close attention to your—and I stress the word “your”—money. Years ago you entrusted the government and the plan it sold you with a portion of your paycheck for purposes of investing it the Fund’s investment portfolio.

Sadly, the central government has not been paying its legally required monthly employer’s contribution and other mandated obligations due the Fund with the result that the Fund has no new money to invest and unfortunately must now “dip” into the money that had been invested, which was once hoped would remain invested to generate interest for use to pay pensions in the future. Tragically, this is not being done.

This serious situation, unless corrected immediately, is certain to adversely effect many retirees, together with all widows and widowers of deceased members who depend upon their monthly allotment.

The central government’s employer contributions (when paid to the Fund) as well as the allotments of all participating employees cannot lie idle. They must be invested to earn more money. When the government fails to pay its obligation as it has for several years—or when the Legislature fails to allocate money that it has authorized by law—the retirees, both present and future, will suffer as a result of having been deprived of this money and the interest which could have been earned for them. A year ago the government owed the Fund $85 million in employer contributions alone, not to mention other money owed the Fund; it’s a lot more now.

Since the money that’s invested and the interest it’s generating can’t be seen it may be hard for some to grasp this fact as being too abstract to conceive and who erroneously believe that if you can’t see it or touch it, it doesn’t really exist. Not true.

Because there are gains and losses in the market, as anyone who watches the news on CNN will know, the Fund’s investment portfolio fluctuates up and down—it is rarely static. Additionally, the monthly payouts don’t always remain constant from one period to another. Both sides of the financial equation are fluid—ever changing—which can certainly be dramatically examined on an annual basis.

Fund administrators have been trying for several years to collect from the government money rightly owed the Fund with little success. Apparently, preservation of the Fund has been, and continues to be, a very low priority of the central government and Legislature. Many misinformed politicians and government officials believe the Fund has millions of dollars available. This is not true. The money that the Fund does have must be invested—and remain invested—for those retiring five, 10 years from now and beyond. Presently the Retirement Fund operates under the handicap of an unfunded government liability of many millions of dollars. The problem is not with the administration of the Fund and its employees who do a good job, but with the government’s failure to pay its obligation and in particular with legislative inaction.

During the “boom” years billions of dollars were available to the government from a variety of sources (see below) and yet those in power failed miserably to invest in an efficient power system. They failed to provide 24-hour islandwide potable water; they let the level of medical care diminish, and neglected many other issues otherwise considered as a reflection of Third World economies. Is it any wonder that the politicians also failed to honor the government’s obligation to retirees? I’ll let you be the judge.

Over the 1986 to 2004 time frame, the NMI government’s internally generated revenue was $3.07 billion. During this period the total expenditures on capital improvement projects in the Commonwealth as generated by their own internal sources was a meager 3.2 percent. Over the above period, other government expenditures were wages and salaries $1.6 billion (64 percent) and all other expenditures of $807.5 million (32.8 percent). The vast majority of the total expenditures made on capital improvement infrastructure projects resulted not from locally generated revenues but largely as a result of U.S. financial assistance in the form of program grants and loans and Covenant Funds.

Over the period 1986 – 2004 the total reported business gross revenue generated by the private sector was $31.3 billion. This business income also generated tax revenue for the government. Add to the above $393.6 million in section 702 Covenant grants from the federal government (from the 2nd Agreement in 1985 to the 3rd Agreement for funding extending until FY2000) and it can readily be concluded that U.S. financial assistance has accounted for the bulk of the islands’ infrastructure costs.

The above sums do not include the myriad of Federal program grants provided the islands in the form of education, health and human services, transportation, housing and energy assistance, food stamps, etc., all provided by the U.S. government which meant the island government did not have to spend its own money to provide these programs. Since the inception of Commonwealth status the precise amount of Federal program assistance over and above Covenant funds is unknown but my estimate is more than a billion dollars. Again, these were funds for programs the CNMI did not have to finance from its own internally generated sources.

With the kind of money available to the government as summarized above, in my judgment there is absolutely no excuse for the central government and the Legislature to have permitted the Retirement Fund to disintegrate to the level it has with the real possibility of causing a disastrous financial loss to a couple thousand retirees.

Editor’s Note: With several decades of international experience as an economist and investment advisor for development banks and finance institutions in North Africa, the Bahamas, Thailand’s Board of Investment and the Inter-American Development Bank, the author offers a perspective and point of view on issues not always provided by the government or Fund administrators.
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