Government’s failure to meet financial obligation to Fund

There are just some things you can’t escape no matter how hard you try and one is the reputation you get when failing to pay your debts when you should be trying to keep your credit and investment reputation intact. The central government’s neglect in meeting its financial obligation to the Fund and continued refusal to pay the millions it owes to members can have a long-term negative effect on all taxpayers. This adverse impact could come to pass over future bond ratings whenever the government seeks to raise capital through the issuance of general obligation or revenue bonds.

Like everything else, the poorer your reputation in paying your debts is, the higher the cost of raising money will be in the end. Ultimately, in terms of bond financing this added cost translates into shortsightedness on the part of the government as eventually the cost will be transferred to the taxpayers one way or the other. This is one of the possible adverse effects of the NMI government’s continued stiffing of the members of the Retirement Fund’s defined benefit plan (DBP). Here’s why.

If you are a retiree or a government employee planning on retiring or even if you are a disinterested taxpayer—I know this is not the most interesting reading—but bear with me, it’s about money.

Governments often raise money by issuing revenue bonds to finance certain projects. These bonds are based on the guarantee of repayment entirely from revenue generated by a particular government-owned, income generating activity involving capital expenditures for infrastructure such as a power plant or air or sea port. Usually, any government agency that is run similar to that of a business (at least in theory) that generates its own operating revenues and expenses is in a position to issue revenue bonds should the Legislature agree to undertaking such public indebtedness.

Another type of borrowing that some governments use to raise money are known as general obligation bonds. These are also used when governments pledge future tax revenues to repay bond holders. Usually, but not always, tax revenues generated by imposing a real estate tax are pledged to make the repayment. Obviously this is not possible in the NMI at this time—but wait awhile when the politicians start scraping the bottom of the barrel for additional revenue.

Credit rating agencies such as Fitch, Moody’s, Standard & Poor’s and others assign credit ratings to governments for certain types of debt obligations as well as to debt instruments (bonds). A credit rating for an issuer (government) takes into consideration the government’s credit-worthiness, that is, its past history in paying (or not paying) its debts and its ability to pay back a loan. These factors in turn affect the interest rate applied to the bond and its desirability as an investment for those who purchase the bonds.

A bond is a promise to repay with interest on specific dates the money that an investor has loaned a government (or company). For the investor, government bonds are usually considered safe and conservative as they can provide a predictable income stream when stocks perform poorly. They are therefore preferred instruments when an investor does not want to place his or her money at risk in some other investment such as the corporate stock of some companies (remember Enron, Global Crossing, Tyco International and WorldCom frauds).

Here’s where the NMI government’s neglect of the Retirement Fund’s defined benefit plan comes in which could be much to the disadvantage of not only the retirees but all taxpayers as well.

If the NMI government doesn’t have a good credit rating which can be influenced by many factors—among them failure to pay its legal obligation to the Retirement Fund—then it can be costly for all NMI taxpayers in the future when the need for bond financing is desired for certain projects at a time when the government’s own revenue is either limited or unavailable from traditional sources. Such knowledge is essential for political leaders claiming to be capable of exercising “self-government.”

We live in complicated and interconnected times—not at all like the old days. When the government influences a policy or program in one area such as failure to meet its financial obligation to its own defined benefit Retirement Fund, this action can have unanticipated, unintended, long-range and expensive consequences on government bond ratings.

Bond rating companies might take one look at the “payment holiday” law the NMI Legislature passed relieving the central government of its financial obligation to make its employer contributions to the Fund for a period of time and say, “Whoa! If a law can be passed in the NMI permitting the government to avoid paying its financial obligation, they can do the same thing with us. A law could be passed not to honor the terms of a bond commitment as previously agreed.”

Thus, there is the potential for greater risk to the bond holder (real or imagined) of the possibility of non-payment for which the NMI government has already provided ample evidence. Blaming the problem on previous administrations or someone else might work sometimes with the voters but the excuse won’t work with investors.

Taxpayers ultimately pay in the form of higher fees and interest costs on public debt often in amounts of millions of dollars. Some government borrowers are often required (forced) to buy insurance policies to safeguard their bonds in the event they fail to pay their debit. This is another added cost. You guessed it—these insurance policies are very expensive and you already know who pays in the end.

The highest bond rating and therefore the best is AAA, while a rating of BB+ to D signal increasingly greater levels of credit risk. However, the rating system may be undergoing change as even U.S. Treasury bonds may be downgraded—but that’s another story.

Wait, there’s more.

On the subject of insurance there’s still another example of the negative result of government policy on the members of the Retirement Fund’s DBP and it concerns the member’s “self-financed” group life insurance program. If there is no functioning Retirement Fund, there can be no reduced “group” insurance premiums. Currently the typical life insurance group rate per month for a single person is about $30. For health and medical coverage for a family of two, the group rate could cost about $250 per month. When the Fund’s group rate is no longer available and retirees have to engage their individual private source for coverage, look for huge increases in cost. More importantly, chances are that pre-existing medical conditions such as diabetes, heart conditions, cancers, etc., will not be covered by private companies. Think about that as still another unintended consequence of the actions of the central government and the Legislature.

The Fund’s actuarial consultants recently briefed the Legislature on the short and long term deteriorating financial condition of the Fund as based on the government’s neglect which could—in just a few years from now—simply cause the Fund to close down, possibly within eight to 10 years or even less. This event will surely have a serious impact upon the member’s existing life insurance policies and requires immediate answers to the following questions:

1. Has any thought been given to continuing the member’s life insurance program for those participants in the Fund’s defined benefit plan after it dries up and pensions are no longer paid?

2. How will the members pay their insurance premiums when there is no Fund from which their “pre-paid” deductions can be made?

3. Most important, how will each member’s previous investment in the group life insurance program be fairly (repeat fairly) accommodated to compensate for the long-term premiums they paid in over many years of payroll deductions?

If the NMI government has considered these ramifications of their policy to stiff the Fund’s members, I’m not aware of it.

Knowing a bit how insurance companies work and the predatory instinct of some (not all), the above issue has the very real possibility for taking unfair advantage of the situation to the extreme detriment and expense of the retirees if not fully evaluated beforehand.

Remember this, except for the impact of external forces on the economy over which the NMI had no control, if the government was so expert in the management of its internally generated money, it wouldn’t be in the financial mess it’s in today. I refer to the $3.07 billion in NMI revenue between 1986 and 2004 and the $393.6 million in Covenant money.

Long after those officials responsible have departed the political scene, the above issues loom with potentially serious results because of the lack of foresight on the part of the central government and the Legislature, past and present, and their joint neglect of the Retirement Fund’s defined benefit plan. Sad indications of the government’s inability to “pLAN AHEAd.”