‘Pension obligation bond not solution to save Fund’

Borrowing millions of dollars to pay the government’s debt to the NMI Retirement Fund—as pushed by some lawmakers—will not help save the pension program, a consultant told members of the Senate and House of Representatives yesterday afternoon.

Some lawmakers are hoping that floating a $200 million to $300 million bond can help extend the Fund’s lifespan, which Wilshire Associates principal Maggie Ralbovsky now estimates to last just three years.

This projected shorter lifespan compared to five years only a year ago is a result of “material changes” affecting the program, including a court order requiring a $100-million reserve for Fund members, the central government’s continued failure to remit its employer contributions, and the volatile stock market where a large part of the Fund’s assets are invested.

“You’d rather not waste your time on that [pension obligation bond]. It’s not going to be helpful. It’s not an option,” Ralbovsky said.

Ralbovsky, accompanied by NMI Retirement Fund administrator Richard Villagomez, counsel Viola Alepuyo and other Fund officials, made a presentation yesterday in the House chamber about the health of the pension system.

Senate President Paul Manglona (Ind-Rota) said the idea is not to borrow the whole $591 million or $600 million to allow the Retirement Fund to stay alive until 2045, but to borrow a portion of that amount just to help extend the life of the Fund by five or 10 years until the CNMI government can find other ways to fund the pension program other than through borrowing.

Manglona said that borrowing can be paired with other measures such as reducing Fund members’ benefits by 10 percent, for example, and increasing government payment to the Fund.

But Ralbovsky repeatedly said a pension obligation bond is not a solution, and there’s no way the CNMI can get a $600 million loan.

If this is the amount to be borrowed, officials said it could have an annual interest rate of 12 percent, which is some $72 million.

“The only reason people can benefit from a loan is if their investment programs can earn more than their borrowing costs. If your borrowing cost is at 12 percent, there’s no way this program can earn 12 percent a year…It’s a losing situation so that is not a solution,” Ralbovsky said.

Manglona said a pension obligation bond should still be considered an option.

He said because the CNMI Constitution does not allow government borrowing, an initiative needs to be acted on now in time for the next election so that when the time comes in two to three years, the CNMI need not wait for the next election.

House Vice Speaker Felicidad Ogumoro (Cov-Saipan) asked Fund officials for their specific recommendation as to which Fund benefits should be cut, but there was no straight answer from the Fund.

Wilshire’s Ralbovsky, for her part, she cannot answer the question but offered her observation.

“The most important thing is to relieve the near-term drawdown so that the investment program can have a decent chance to invest in a decent program on the horizon,” she said.

She also said the pension program can decide to make some members now receiving pension—especially those only around the age of 40—to wait for another 10 years, for example, to receive benefits again so that the Fund can recover.

“The more we can push back, the better. It’s not about how much we cut everybody but rather the select group who don’t have to receive benefits today can wait for another 10 years,” she said.

Ralbovsky and other Fund officials said other states trying to save their pension systems have looked at and implemented new or increased taxes.

Manglona said making increased payments to the Fund should be made through constitutional amendment rather than by law, which lawmakers can change.

Wilshire, in its presentation to lawmakers, said in order for the pension program to last 10 years, “market returns need to be over 25 percent every year for 10 years” but this has zero probability considering the volatile market.

It said the government should also be required to contribute $58 million every year for 10 years, which again is close to zero probability because of the CNMI’s current financial condition.

Ralbovsky said the remaining option is to “share the pain” by “restructuring retirees’ benefits.”

“Wilshire believes the Fund now must face the reality and should not miss the window of restructuring its liabilities. If this window is again lost, the Fund is expected to cease benefit payments within three years. Then, the liabilities will still need to be restructured and possibly to a much lower level,” Ralbovsky said.

Voters’ nod

Just in November last year, voters rejected an initiative allowing the government to borrow money to pay the government’s debt of over $300 million in unpaid employer’s contributions to the Fund

House minority leader Joseph Deleon Guerrero (R-Saipan) introduced a similar initiative early this year, but this measure has yet to pass the House.

The CNMI Constitution does not allow government borrowing, so it needs an initiative to change this provision.

But even if the initiative passes soon, it will have to wait for the next election in 2012 to put it before voters. The initiative’s author said this time around, there should be more presentations to educate the public about the importance of floating bonds to pay the government’s debt with the Fund.

Fund counsel Viola Alepuyo said the current House and Senate leadership can again form a working group composed of the Legislature, the Fund and the Executive Branch that will look closely at ways to help the Fund.

After the presentation at the Legislature, Fund officials and Wilshire met with retirees last night.