‘Selected’ problems and events impacting all NMI retirees

[B][I]First of a two-part series[/I][/B]

A recent presentation by Buck Consultants, the Retirement Fund’s actuarial experts, regarding the condition of the Fund was followed up by an article in the Jan. 21 issue of the Saipan Tribune where a statement appeared quoting the governor as follows, “Government failure to remit all required contributions [to the Fund] might have been a plus.” There followed a statement that the Fund experienced losses of 28 percent on its investments.

Meaning, as I interpret the statement, that had the central government paid its legal obligation to the Fund when due, and in the amount legally required, that the Fund’s investment in the stock market would have been lost as a result of the recent decline in the market.

It should be realized and well appreciated that because the central government did not remit to the Fund the actuarially determined amount required by law and also failed to make the required employer contributions in the legally obligated amount since the year 2002—including the employer’s contribution for those NMI government employees who work on federally financed programs and projects—the Fund had to take steps to manage its investment portfolio in such a way to be able to meet its fiduciary responsibility to retirees by having money available at the proper time and in sufficient amounts to pay their monthly pensions. Upon the advice of Fund consultants, investments had to be leveraged toward the more riskier equity investments rather than those considered more conservative. If the Fund had been receiving the monthly actuarial determined rate and the employer contributions from the government there would have been no need to purchase the more volatile equity investments with the result that the losses that were sustained by the Fund would have been much less and, indeed, perhaps not lost at all.

As is well known, the Fund has had to tap into its investment portfolio to obtain the money to pay pensions. The central government has forced the Fund to do this because of their nonpayment and as a result the Fund is rapidly reducing the size of its investment base.

In short, and in my judgment, the losses experienced by the Fund can be traced directly back to the central government and the resulting payment deficiencies that occurred as a result of the government not making payments to the Fund in the proper amount and at the proper time. It’s time the central government and the Legislature realize the magnitude such neglect has had on the member’s future financial security.

In any event, the central government is still indebted to the Fund and while hopefully one day it will be paid, there is no denying the fact that the dollars at that time will have far less purchasing power. For example, last year a dollar was worth more than that same dollar is today in terms of its purchasing power. Consider last year’s cost of a bag of rice—or anything else—and you will know what I mean.

The same diminishment in purchasing power of the money the government owes the Fund applies equally as well. One of the goals of the Fund’s investments—at the very minimum—is to earn a return equal to, or greater than, the rate of inflation, thereby preserving the purchasing power of the dollar as a hedge against inflation.

The major agencies of the government who are deficient in making their employer contributions to the Fund are (amounts rounded): CUC, $1.4 million; NMC, $4.4 million; PSS, $7.4 million; Tinian Municipal Treasury, $1.1 million; Finance, $150 million; and all others, $0.3 million. Total $165 million.

The individual members of the various boards of directors of the NMI’s independent agencies should be aware they have a fiduciary duty to uphold and can be held individually responsible for failure to exercise that duty. If you are a board member and don’t believe that, you had better check with the agency attorney if there is one.

I mention this as it could relate to nonpayment of the employer’s contribution to the Retirement Fund as a result of management deficiencies. Since all fiduciaries have potential liability for the actions of their co-fiduciaries and knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary can be liable as well.

Moving on. As I look at the historical data of the value of the Fund’s invested assets in 2008 of $396 million, the values are back to about where they were 10 years ago. That’s not good.

The central government has contributed significantly to the Fund’s diminishment. First, by not only failing to meet its legal financial obligations but also by the very fact that it engineered the diversion of some employees from their previous retirement benefit plan to the voluntary contribution plan (for some employees). This resulted in the serious loss of employee and employer contributions of 1,156 individuals who would otherwise be contributing to the Fund’s benefit plan, not to mention the $4.1 million withdrawn when participating in the contribution plan. This will be discussed in greater detail in tomorrow’s continuation.

Currently, there are no new members joining the benefit plan and it is slowly dying as a result of direct and premeditated action by the central government. This fact alone makes the possibility of bond financing unlikely, not to mention the government’s poor credit rating.

Meanwhile, the government continues to think it’s possible to float a pension obligation bond to salvage the Fund. Have any “trial balloons” been sent up by the administration to obtain an independent assessment of this belief? Otherwise, the continued statements by those who—truth be known—probably have not ever invested a single dollar to purchase a bond do a great disservice to retirees by holding out the false hope for redemption as a method to right a wrong perpetrated on the members by the central government. Ask yourself one simple question: Would you purchase a CNMI government backed bond?

Finally, is there some way the “dead horse” idea of floating a pension obligation bond can finally be put out of its misery by burying it once and for all?

The government has underpaid its contribution to the Fund up to March 2006, then with the help of the Legislature gave itself a “no-pay” holiday for 18 months (FY ‘06-’07). How’s that for a financial cop-out on a contractual obligation? Do you think a bondholder would tolerate such inexcusable delays in payment? I don’t think so, and yet there are those in government who continue to deceive Fund members into thinking such bond financing is possible. If they continue to believe that, I have a whole bunch of stuff out back in the weeds I’d like to sell them.

Meanwhile, the government’s failure to pay its debt of $165 million, which continues to increase as time goes by month after month, has resulted in the Fund filing a lawsuit against the central government. The status hearing for this action is scheduled for Feb. 13 in the Superior Court.

[B][I]To be continued.[/I][/B] [I] Editor’s Note: For other essays by the author concerning the Retirement Fund from the point of view of an economist visit the Saipan Tribune’s archives.[/I]

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[I]William H. Stewart is an economist, historian and military cartographer.[/I]