Wednesday, August 25, 2010

Community Education--House Legislative Initiative 17-1

On the November ballot, voters in the CNMI will be asked to consider three proposed amendments to the CNMI Constitution. Here is information on one of them: House Legislative Initiative 17-1.

This legislative initiative amends Article X of the CNMI Constitution by adding a new section (10). The new provision authorizes the Commonwealth to issue pension obligation bonds (POBs), not to exceed “the Commonwealth’s actuarially determined unfunded accrued liability to the Retirement Fund.” The proceeds of the bonds are deposited into the NMIRF’s “defined benefit plan” trust fund and invested with other monies by the NMIRF. The bonds may be issued only upon 2/3rds approval of each House of the Legislature, in compliance with Article X, section (3). The debt incurred by issuing the bonds may exceed 10% of the aggregate assessed valuation of the real property in the CNMI and may be authorized for operating expenses, as part of the exception from compliance with Article X, section (4).

PROS: 1. Generally, the provision would allow the CNMI government to borrow money to pay the NMIRF. Putting money into the NMIRF would help make sure that the CNMI retirees in the Defined Benefits Plan receive future benefits when due.
Stated another way, the provision would provide authority to the CNMI government that it currently does not have, giving it the flexibility to use pension obligation bonds (POBs) to address the existing NMIRF unfunded liability. POBs are essentially a loan the CNMI would secure and would provide a large amount of money to the NMIRF now to cover part or all of the unfunded liability, thus making sure retirees are paid as their benefits are due.
2. Other jurisdictions have used POBs for their unfunded accrued liability.
3. If the debt (POBs) can be obtained at less than 9% interest per year, the CNMI may realize savings by paying the bond obligation at a cheaper rate than if it paid on the NMIRF judgment, which accrues interest at 9% per annum.
4. If the debt (POBs) can be paid over a longer period of time (typically 30 years), then the CNMI may have a lower monthly payment installment, alleviating some of the financial pressure on the CNMI.

CONS: 1. The CNMI cannot get out of debt by borrowing money. It will either be obligated to the NMIRF or to the POBs investors.
2. POB investors will not be as lenient as the NMIRF in collecting on the obligation. The CNMI could be pushed to bankruptcy.
3. The POB debt created will be owed by future generations of the CNMI, even though the benefit is only to those retirees currently in the Defined Benefit Plan. No more government workers may join the Defined Benefit Plan (DBP).
4. The causes of the unfunded accrued liability are numerous and include excessive benefits to retirees, lawful (and unlawful) double-dipping, non-payment by the CNMI government and questionable investment decisions by the NMIRF. These problems will continue if “easy” money is made available through POBs; the only way to force an end to the causes of the NMIRF’s financial problems is to require that the causes be fixed first.
5. The only limit on the amount of the debt that the CNMI might incur through the POBs is the amount of the “unfunded accrued liability” owed by the CNMI to the NMIRF. If the CNMI government fails to make normal contributions in the future (as it has in the past), that liability can increase. Other events could negatively impact the unfunded accrued liability. The CNMI government could then incur more POB debt. Even recognizing that the CNMI government’s normal contributions will decrease as the size of the DBP participants declines, the potential for debt through issuing POBs on future generations that will not benefit is staggering.
6. The proposed constitutional amended misuses commonly understood financial terms which creates confusion and undercuts the benefit to the NMIRF. Unfunded accrued liability should refer to the NMIRF’s obligation to its retirees for which is does not have funds on hand and for which the retirees have a contractual right to receive. It should not be used to refer to the CNMI government’s unpaid normal contributions to the NMIRF. By misusing the terms in the constitutional provision and referring to unfunded accrued liability of the CNMI to the NMIRF, the proposed Constitutional provision creates an ambiguity as to whether unfunded accrued liability that is due to other purposes (such as non-payment by autonomous agencies or a payment scheme that is inadequate) can be the basis for POBs. For example, the CNMI government’s current unfunded accrued liability to the NMIRF is about $282 million. The NMIRF’s unfunded accrued liability to retirees is about $400 million. As this constitutional provision is written, even if the CNMI obtains POBs to the limit of its obligation of $282 million, the NMIRF will still have unfunded accrued liabilities in excess of $100 million.
7. The proposed constitutional amendment carves out an exception for POBs from the general limit on public debt. Making this exception for the NMIRF to the well-structured Article X limit on public debt opens a “Pandora’s Box” and may encourage reliance on borrowing as a means of addressing financial problems by the government for other perceived financial crises. Increasing revenues and limiting spending are safer and more reliable methods of addressing financial issues.

SUMMARY: Proponents of the provision view this as essential to the health of the NMIRF; opponents view it as extremely detrimental to the health of the CNMI and a large step in the wrong direction.

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