Pension obligation bonds eyed to resolve Fund’s unfunded liability

Gov. Benigno R. Fitial has urged the Legislature to endorse a constitutional change allowing the CNMI government to issue pension obligation bonds to reduce its debt to the NMI Retirement Fund.

Fitial said the bonds can serve “as a necessary and significant means of closing an unfunded pension liability gap.”

As of Sept. 30, 2007, the CNMI government owed the pension program over $132 million in employer contributions, excluding penalties and interest.

Senate legislative initiative 16-10 proposes to authorize the government to borrow money to pay for the unfunded liability. The initiative has cleared the Upper House, and is awaiting action in the House of Representatives, where it must obtain a three-fourths vote. Once approved by both houses, the proposed constitutional amendment could be placed on the ballot for ratification in 2009 at the earliest.

In a letter to Senate President Pete P. Reyes and House Speaker Arnold I. Palacios, Fitial cited two measures now in place to support the Retirement Fund—first, the creation of the Defined Contribution Plan, and second, the Defined Benefit Plan Reform Act.

Citing a report by the Fund’s actuarial consultant, the governor said these two measures reduced the Fund’s projected accrued liability in 2045 from $2.8 billion to a post-reform $607 million—a 78 percent decrease.

“Pension obligation bond financing will serve as an important third reform for the CNMI pension program,” Fitial said. “When worldwide bond market conditions stabilize and the conditions for borrowing improve, the Commonwealth needs the ability to enter the bond market and reduce its unfunded pension liability through POB financing.”

He also noted that the CNMI is not alone in issuing pension obligation bonds. Puerto Rico, and the states of Illinois, Wisconsin, and Oregon have taken steps to issue or have issued POBs in billions of dollars over the last five years.

In addition to the pension obligation bonds, Fitial urged the Legislature to approve two House bills designed the streamline the NMI Retirement Fund. House Bill 16-138 seeks to transfer the administrative functions of the Workers Compensation Commission to the Department of Commerce. House Bill 16-139 proposes the transfer of the administrative functions of the privatized government health and life insurance program to the Department of Finance.

Fitial said he agrees with the Fund board of trustees that both programs no longer belong in the Fund.

At present, the Fund’s board of trustees also serves as the board of the GHLI Program and for WCC.