‘POB a pie in the sky’

An investment expert has cautioned the Legislature against floating pension obligation bonds to address the immediate funding needs of the CNMI government, describing it as a “pie in the sky.”

Wilshire Associates principal Maggie W. Ralbovsky, CFA, made this clear to members of the Legislature in a letter on Monday, analyzing the impact if the Commonwealth pursues its plan to float a bond to raise the money needed to pay its millions of dollars in obligation to the Settlement Fund.

Ralbovsky believes that issuing the POB to fund the government’s annual payments to the Settlement Fund is not a feasible solution, as what many believe.

“Even if such bonds can be issued, the cost of the bonds would far outpace the investment returns that could be generated in the investment program. The CNMI is essentially using taxpayers’ dollars to pay more expensive debt than the current cheaper debt to the Settlement Fund. This is not a rational proposition,” she said.

Given the short window the Settlement Fund created for the government to improve its financial position, “I do not believe this precious time should be spent on ‘pie in the sky’ initiative,” she said. The limited investment horizon is estimated at an average of 2.4 years.

For Ralbovsky, structural reform is needed to unlock the potential of the CNMI and to rejuvenate its economy.

The goals of issuing POBs are generally to borrow at affordable interest rates, lengthen the payment period, and therefore lower the annual payment requirements. And if successfully implemented with affordable interest rates, POBs may reduce the pressure on the general fund’s annual budget.

However, Ralbovsky believes it is not feasible for the CNMI to float a pension obligation bond at this time.

First, she cited the CNMI’s credit rating of B2, originally issued by Moody’s Investor Services in 2003. A B2 rating, she said, is below investment grade.

However, Ralbovsky indicated that CNMI can use a method called “market comparables” to gauge how thinly traded bonds might be priced.

She selected the situation of Puerto Rico bonds because Puerto Rico is below investment grade rated and is a frequent issuer. Being a frequent issuer, she said, provides the benefit of price discovery and readily observable market prices.

“Recent market trading data showed that BB2 rated Puerto Rico G.O. bonds were trading at 9 percent yield and its pension obligation bonds—which is taxable—were trading at 13 percent yield. Given that the CNMI debt is likely to be rated below those of Puerto Rico’s, and that the CNMI has not been a frequent issuer and therefore does not possess market awareness, the yields of any new CNMI debt would likely be higher than what Puerto Rico’s current bonds were trading at if the CNMI were even able to issue this debt,” she explained in her March 3 letter to lawmakers.

Ralbovsky added that because court judgments have priority over other creditors, including bondholders, therefore “any potential investors in the CNMI debt would be junior to the Settlement Fund in the claims to the CNMI general fund.”

Given the size of the judgment—about $750 million—this would be viewed as “materially negative” by any potential investors.

“And if they were to decide to still invest in the CNMI debt, there is likely a demand for even higher interest rates than the CNMI debt ratings may suggest,” she added.