Fund receivership hinges on pending bankruptcy bill

The NMI Retirement Fund’s unfunded liability has grown to $574.5 million, bringing the agency’s funded level to less than 40 percent, which is way below the 70 percent threshold that allows any private pension fund to file for bankruptcy.

Mark Aguon, administrator of the NMI Retirement Fund, said the pension fund “is currently just below 40 percent funded.”

Juan T. Guerrero, chairman of the NMI Retirement Fund’s board of trustees, said filing for bankruptcy—which is among the first steps before the pension fund can be placed under receivership—may be an “inevitable consequence of the government’s continued non-payment of statutorily required employer contributions.”

However, the bill that would have allowed the NMI Retirement Fund to file for bankruptcy when its total unfunded accrued liability exceeds 60 percent of the total obligation of the fund has yet to be passed—over a year after it was introduced.

House Bill 16-36, co-authored by Floor Leader Joseph N. Camacho and Rep. Joseph C. Reyes, is under review by the House Committee on Health, Education and Welfare.

“It is encouraging that the Legislature seems to be aware of, and understanding of our dire fiscal emergency; however, we are still awaiting the passage of House Bill 16-36 which would allow for precisely this situation,” Guerrero told Saipan Tribune.

The NMI Retirement Fund Working Group chaired by Rep. Ray N. Yumul is currently drafting an omnibus bill that aims to stabilize the Fund.

The Retirement Fund’s total assets, including investments and loans, stood at $304.5 million as presented to the board during its March 19 meeting. In fiscal year 2007, total assets were around $514 million.

This does not include nearly $233 million in unpaid employer contributions, plus statutory penalty.

“It is crucial that the board exhaust every means to collect these funds from the plan sponsor, the CNMI government. If we can collect even three-fourths of this unpaid amount, our assets available for benefits would be over $450 million,” Aguon said.

The Retirement Fund’s total liability of $879 million was determined by the fiscal year 2007 actuarial report, and this number has not yet been revised.

“Unfunded liability is the difference of total liability and total assets. In the above case, unfunded liability would be $879 million minus $304.5 million equals $574.5 million,” said Aguon.

This is 65 percent of the Retirement Fund’s total liability.

“The board is doing everything within its powers to prevent the need to declare bankruptcy, and eventual receivership, as well as possibly ceasing refund payments, which heavily impacts our current cash standing,” Guerrero said.

The board chairman said the Retirement Fund cash flow problem is a CNMI-wide emergency, and this is the reason the pension agency urged the Legislature and the administration to form a joint, non-partisan working group to devise a solution to shore up the problems in the Fund.

“It is our hope that this non-partisan working group, chaired by Rep. Ray Yumul, with the consensus of all parties, will devise a plan to begin to identify and address weaknesses within the Fund and do what is necessary to strengthen the Fund,” Guerrero added.

The NMI Retirement Fund does not have a magic number that will signal when to declare bankruptcy.

Aguon said if the NMI Retirement Fund were a private business, declaring bankruptcy would be the point when the expenses exceed revenues for a protracted period. In general economic theory, that would be the point where marginal costs exceed marginal revenue.

“Clearly, we have already reached that point; first, when the government passed Public Law 15-15 and revenues in the form of employer contributions were mandated to be zero! Our second revenue source, portfolio performance, was severely hindered by the global recession that wiped out in excess of 20 percent of our assets in a mere six months. One of these events happening is disastrous. Both happening at the same time makes it inconceivable that the Fund can continue to operate at status quo,” Aguon said.

If the NMI Retirement Fund were a private pension fund, then it would be under the purview of the U.S. Pension Benefit Guarantee Corp., a federal corporation created by the Employee Retirement Income Security Act of 1974, ERISA.

PBGC operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income, assets from pension plans trusteed by PBGC, and recoveries from the companies formerly responsible for the plans.

The PBGC generally would begin to target any pension fund whose funded level falls below 70 percent. In addition, the Pension Protection Act of 2006 requires plans that are below 80 percent funding to report annually to the PBGC. Essentially, they are on watch list status.

“For comparison, the NMIRF is currently just below 40 percent funded. Among the PBGC’s regulatory enforcement powers is the authority to perfect and enforce a statutory lien if an employer has not made required minimum funding contributions, and unpaid amounts total more than $1 million. Clearly, the recent actions of the board to restrict retirement, file a lawsuit against the plan sponsor, as well as consider additional benefit reductions, are comparably miniscule to what the PBGC would do, if this Fund were run as a private plan,” Aguon said.

The Retirement Fund warns that the CNMI pension program may be wiped out in five years or as early as three years due to the government’s unpaid obligation and the impact of the global economic crisis on the NMI Retirement Fund’s investment portfolio.

For fiscal years 2006 and 2007, a law legalized the suspension of payments to the Fund. Although the suspension was lifted in FY 2008, the government is still delinquent in its payments.

Government contributions are to fund current operations, pension and other benefit costs, as well as to service the long-term actuarially accrued liability.