Fund backs pension obligation bonds

The NMI Retirement Fund is pressing the Legislature to approve a constitutional change that would allow the CNMI government to borrow money to pay the pension program.

Juan T. Guerrero, chairman of the Retirement Fund’s board of trustees, said the proposed pension obligation bonds will serve “as an important bridge for catching up on the obligations owed to the CNMI pension program.”

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

Under a Senate-passed initiative, the CNMI government can issue pension obligation bonds to reduce its unfunded liability to the NMI Retirement Fund. The initiative is awaiting action by the House of Representatives, where it must obtain a three-fourths vote. Once approved by both houses, the proposed constitutional amendment can 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, Guerrero said that pension obligation bonds “can serve as a necessary and significant means of closing an unfunded pension liability gap.” He noted that several states have taken steps to issue or have issued pension obligation bonds over the last five years.

Guerrero said that two measures enacted in the past two years—the creation of the Defined Contribution Plan and the Defined Benefit Plan Reform Act—have helped the Retirement Fund. But he also said the Defined Contribution Plan has caused a new set of problems for the Defined Benefit Plan. The new plan required the diversion of investment funds that would otherwise be used in the Defined Benefit Plan, thereby magnifying the effect of the central government’s failure to pay contributions.

“A pension obligation bond is designed to fill this void,” Guerrero 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.”

Guerrero also asked the Legislature to pass 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.

Gov. Benigno R. Fitial, using similar language, has made the same pleas to the Legislature.