What’s the possibility of bond financing for the Fund?

I understand the NMI government is considering the possibility of floating a pension obligation bond for the Retirement Fund.

Generally there are two types of bonds issued to raise funds for a community. Revenue bonds are normally issued by a municipality or other government entity that is legally empowered to take on public indebtedness usually for the purpose of financing a specific public works project and supported by the revenues generated from the project. This type is financing is also referred to as a municipal bond.

Another type of method to raise money for a government is the general obligation bond. This bond is secured by the taxing and borrowing power of the government entity that issues them.

All bonds are rated by evaluating the possibility of default by a bond issuer (in this case the NMI government). The ratings are based on an analysis of the issuer’s (the government) financial condition and revenue generating potential to retire the bond. Bond rating services are provided by such rating agencies as Standard & Poor’s and Moody’s Investors Service. Bond ratings start at AAA (being the highest investment quality) and usually end at D (in payment default).

In terms of issuing a pension obligation bond, the Retirement Fund’s ability to generate money is primarily dependent upon three sources: (1) The NMI central government in the form of employee participation through continued “voluntary” payroll deduction in what remains of the defined benefit program;

(2) The government’s employer contribution which is now millions of dollars in arrears as a result of the government’s failure to honor its contractual obligation to its loyal employees;

(3) Since 1994, Public Law 8-31 has required the government to remit to the Fund 20 percent of the hotel occupancy tax and 30 percent of the container tax. The government has not adhered to this law and legally owes the Fund from these sources. This is not a good sign if there is any hope to have the last two sources to also support a bond repayment guarantee. Indeed, the NMI central government has been in violation of 1 CMC 2553 for failure to remit statutorily required employer contributions.

For those government employees now participating in their own volunteer savings plan—and for all new employees who follow in the future—these people will be contributing to their own retirement in the new NMI government encouraged 401K and other IRA contributions and would be insignificant in generating revenue to service bond indebtedness. For all intents and purposes, they have been removed from any revenue generating potential necessary to meet the interest and principal payments required for bond finance.

For all those employee members of the new defined contribution plan, the only amount the government contributes is 4 cents on the dollar of the total of each employee’s individual voluntary 401K or IRA savings—hardly a significant amount provided by the government. That paltry amount barely compensates for inflationary loss in purchasing power.

Since the inception of the new defined contribution plan—which in my judgment has done great damage to the Fund’s investment portfolio—there have been no new members participating since January 2007. Since there is no new injection of money being contributed by new employees entering government service, it follows that as the future unfolds (particularly as relates to bond maturity) there will be an ever decreasing number of employees contributing to the benefit plan. This will result from “cash-outs”, attrition, etc.

For the past several years the Executive Branch of the Commonwealth government has consistently and intentionally neglected to adhere to 1CMC, Div. 8, Chapter 4, Section 8342 and 1 CMC, Div. 8, Chapter 7, Section 8371 (a) thru (f) as related to its required employer contributions and other payments to the Fund.

The central government hasn’t even adhered to its MOU agreements to pay into the Fund at least half a million dollars every two weeks. Surely, the above will be a negative factor in the bond rating process, not to mention the current general economic slowdown.

I don’t know what the NMI’s bond rating is but I suspect it is not the best. Particularly in view that the central government has a rather poor track record in meeting its financial obligations as relate to the very revenue source it presumably would obligate to satisfy its bond indebtedness.

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Editor’s note: The above essay is only one of a series of articles expressing the author’s concern over the long-term financial security of NMI retirees, their widows and widowers. Other articles may be examined in the Saipan Tribune Archives by indicating “Retirement Fund” in the search bar.[/I]