Bond financing for the Fund: Bad idea

Bond financing to get the NMI government off the hook of its financial obligation to members of the Retirement Fund is not a good idea.

Excuse me, but I think there are those in the central government and the Legislature who don’t think things through when it comes to believing that floating a revenue or general obligation bond will solve the dire financial crisis facing the Retirement Fund.

Can someone tell me why the Fund should float a bond (if that’s what’s being considered) when the debt such a bond is intended to pay is not the Fund’s debt but rather it’s the central government’s debt.

If any bond is to be issued—which is a bad idea in my judgment—it should be issued against the full faith and credit of general revenue collections of the central government and not the Retirement Fund member’s employee contributions. It’s the central government’s debt obligation to the Fund—not the other way around. Why should the members of the Fund have their biweekly monetary contributions to their own future retirement ever be obligated for use to service or guarantee bond repayments?

Investigative reporter David Evans, writing for the Bloomberg News Service, reports major problems among organizations which have issued bonds which were originally hoped to solve pension funding shortfalls but instead created more problems that it solved.

He cites the Chicago Transit Authority, which “issued $1.9 billion in bonds. Before the year ended, the pension fund was paying out more to bondholders than it was earning on its new influx of money. Instead of closing its funding gap, the CTA was falling further behind.”

“Public pension funds across the U.S. are hiding the size of a crisis that’s been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy.” It’s an old CYA trick. This “Alice in Wonderland Looking Glass” is used by governors and legislators as an easy way to get off the hook after contributing too little or nothing to their retirement funds, year after year.

Evans points out that “lack of funds explains why dozens of retirement plans in the U.S. have issued more than $50 billion in pension obligation bonds during the past 25 years—more than half of them since 1997.” The so-called bond solution as a quick fix for pension funds becomes a future millstone around the necks of taxpayers.

Bloomberg News Service reports, “Retirement Fund managers don’t have many options for increasing assets. They need adequate funding from local legislatures, which in many cases they don’t get. Beyond that, they’re at the mercy of financial markets.”

“Typically, public pension funds put 60 percent of their assets in stocks, 30 percent in fixed income, 5 percent in real estate and the rest in riskier investments such as hedge funds and commodities. That mix requires the non-bond assets to earn double-digit gains in order to reach expected rates of return.”

“The easiest way for retirement plans to increase cash is to issue pension obligation bonds. For the funds, that means borrowing money at no risk—because the bonds are backed by taxpayers.”

“A government retirement plan can’t go bankrupt, even if it’s insolvent because government treasuries must put up the money if a fund runs dry”, Evans points out.

For investors, these debt sales are similar to ordinary municipal bonds. Because both forms of debt are ultimately backed by taxpayers, credit rating firms give them high grades for safety. The difference for bondholders is that pension bonds aren’t tax-exempt as are capital improvement general obligation bonds. Congress decided in 1986 that pension bond income should be subject to federal income taxes.

Reporter Evans observes, “Government officials say they issue pension bonds believing that their fund managers can earn more money from investing the proceeds than what they have to spend in interest payments to bondholders.”

I say, don’t be fooled. Bond financing to solve the Retirement Fund’s financial problem is not a good idea.

Even those taxpayers who are not members of the Retirement Fund should be opposed to a pension obligation bond. But don’t take my word for it; seek out and ask a knowledgeable, unbiased person—someone with “no dog in the fight.”

Also, if you are a retiree, talk to your legislator and evaluate the depth and scope of knowledge of those who exercise influence over your money and financial future, particularly those who think bond financing is a good solution to the Fund’s problems, which, in the final analysis, the Legislature created. Ask if they have experience in evaluating and purchasing bonds.

It may be that bond financing will get the government off the hook temporarily but my instinct tells me not so with the taxpayer of the future.

Let’s learn from the experience of other funds—there’s no need to reinvent the wheel and learn the hard way that it is a bad idea. For those who want to read more of Mr. Evans article, Google: Bloomberg News Service and search “Chicago Transit Authority” or go to http://www.bloomberg.com/apps/news?pid=newsarchive&sid=alwTE0Z5.1EA.

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[I]Editor’s Note: The author has written more that 50 “op-ed” pieces and essays concerning the deteriorating condition of the Retirement Fund from the point of view of an economist. These can be accessed in the Saipan Tribune’s online archives by entering the author’s name: William H. Stewart. See also the Tribune’s online archives for Oct. 24, 2008 for the article titled: ‘What’s the Possibility of Bond Financing for the Fund?’[/I]

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