Dealing with the CNMI Retirement Fund challenge

This week the CNMI Superior Court hears evidence to determine damages that will be awarded to the local pension system. The damages will be assessed against the CNMI government for nonpayment of employer contributions totaling $209 million as of December 2008.

This unpaid employer contributions took many years to accrue.

The solvency of the Retirement Fund’s defined benefit plan program has always been a top priority for Gov. Benigno R. Fitial since Day 1 of his administration.

Early on in the administration, it was determined that the problems adversely affecting the Fund were twofold:

Unaffordable growth of the actuarial accrued liability: From the year 2000 to 2005, the liability grew from $809 million to a little over $1.0 billion (yes, $1.007 billion dollars). Imagine—a $1.0 BILLION dollar liability and growing at an average rate of over $30 million every year since 2000. In 2005—with the CNMI having an estimated population of 80,000 people—each and every one of us in the CNMI (man, woman, and child) essentially owed the Retirement Fund $12,500 each, and shared in additional costs of $30 million every year if nothing was done about the increasing liability.

Unpaid employer contributions: In January 2006, unpaid employer contributions already exceeded $100 million.

A simple explanation to explain the difference in the debts above is that the liability is your long-term debt and the unpaid employer contributions is your short-term debt, similar to your loan installment payments.

The employer contributions are made to “pay down” the liability.

Of the two above, capping or slowing the growth of the liability was the greater urgency, if not emergency.

In June 2006, Public Law 15-13 passed and closed the CNMI government’s employee retirement defined benefit plan program to new members. A defined contribution plan will take its place as the new CNMI government’s employee retirement program. In June 2007, PL 15-70 passed and reformed the defined benefit plan. The Retirement Fund’s Actuarial Report of 2007 (presented January 2009) advises that the liability has decreased from $1.00 billion in 2005 to $879 million in 2007—a decrease of $121 million. The liability has been capped and a decreasing trend has been established, thanks to the new DC plan and the Defined Benefit Plan Reform Act of 2007.

As to the remittance of the unpaid employer contributions, there has been every intention to pay for what has been unpaid for years. However, in January 2006, the CNMI government was not only faced with the challenge of paying the Retirement Fund; it also had the responsibility of dealing with a $30 million decrease in resources at a time when the Commonwealth Utilities Corp. could not pay for its own fuel when fuel costs soared to record highs. The public health, welfare, and safety of all CNMI residents were threatened. The choice was made to do what was good for all 80,000 CNMI residents. To date, with decreasing resources, the choice for the good of all CNMI residents continues to be made.

“When will the CNMI government pay the employer contribution?” is a question that is often asked. The CNMI government is already paying a part of the actuarially determined employer contribution. The CNMI government is currently paying 11 percent of every dollar paid to employees who continue to be members of the defined benefit plan. The currently required employer contribution by the Retirement Fund is 39 percent of every dollar paid to employees who continue to be members of the defined benefit plan.

A summary of actual dollars due for employer contributions as recommended by the Retirement Fund’s Actuarial Report for years 2005 to 2008 is as follows:

* 2005 Employer contributions due $61 million

* 2006 Employer contributions due $51 million

* 2007 Employer contributions due $35 million

* 2008 Estimated) Employer contributions due $50 million

Since FY 2006 and with resources averaging about $160 million annually, paying the actuarially recommended employer contributions could be addressed, but at what cost to all CNMI residents? Severe cutbacks in education, health services, and public safety would be the inevitable result.

The Fund’s defined benefit plan’s solvency cannot be addressed in the short-term with the CNMI government’s limited budgetary resources and not without grave risk to public health, welfare and safety.

We must forge a long-term solution:

1) Continue reform: Continue the reform that was started since 2006, to ensure the long-term preservation of core benefits to current retirees and those active employees who continue to be active members of the defined benefit plan.

2) Pension obligation bond: Get legislation passed to allow a referendum to change the CNMI Constitution so that the CNMI government can float a pension obligation bond. Proposed legislation continues to be stalled in the Legislature.

3) Increase employer contributions gradually: Increase employer contributions with budgetary resources permitting and without risk to the CNMI public’s health, welfare, and safety. The CNMI public’s health, welfare, and safety need to be everyone’s overriding concern.

4) Defer benefits on a graduated scale: It is unfair that there are CNMI government employees who cannot receive well deserved benefits due to unpaid employer contributions. When a person retires is determined by qualified years of service. Whether he or she receives benefits should be determined by whether they have paid their full amount of employee contributions. The Retirement Fund should consider reducing benefits in a more equitable manner. The current policy in place is 100 percent of benefits to all current retirees and zero benefits to all those for whom employer contributions have not been made. Consider the following (this is by no means a final product) for all current retirees receiving benefits, current retirees not receiving benefits due to unpaid employer contributions, and for future retirees:

* First $10,000 in benefits 100 percent

* 2nd $10,000 in benefits 80 percent

* 3rd $10,000 in benefits 70 percent

* 4th $10,000 in benefits 65 percent

…and so forth. Decrease in benefits will be deferred and paid for sometime in the future. This proposal will allow everyone to receive benefits, extend the life of current Retirement assets to meet obligations, and allow time for CNMI government to stabilize financial resources and recover. A deferral of benefits does not mean that those benefits are lost but rather payment of those benefits are postponed.

It is hopeful that the court, in its decision, will have a long term vision of restoring solvency to the Retirement Fund. A decision that will yield short-term results will doom the defined benefit plan’s solvency. The court must recognize that only through a financially stable CNMI government can the solvency of the Fund be restored. A decision pushing the CNMI government into insolvency or putting at risk the Public’s health, welfare, and safety would only lead to the Fund’s own quick demise. [B][I](Antonio S. Muna)[/I][/B] [I]Antonio S. Muna is executive director of the Commonwealth Utilities Corp. and Gov. Benigno R. Fitial’s former Special Assistant for the Office of Management and Budget.[/I]