Exposing the Risks of House Legislative Initiative 17-1

A letter from Tina Sablan and Glen Hunter:

“We must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude.” – Thomas Jeffferson

On November 2, voters will be asked to make a decision on House Legislative Initiative 17-1, which proposes to change the CNMI constitution in order to authorize the CNMI government to issue pension obligation bonds.

Currently, Section 4 of Article X limits public indebtedness to not more than ten percent of the aggregate assessed valuation of real property in the CNMI, and further prohibits public indebtedness for operating expenses of the CNMI government. House Legislative Initiative 17-1 proposes to add a new Section 10 which would permit the government to issue pension obligation bonds, and would exempt these bonds from the public indebtedness limitations provided in Section 4.

In other words, if this initiative passes, the government would be authorized to issue pension obligation bonds that exceed ten percent of the aggregate assessed valuation of real property in the commonwealth, and would in effect be borrowing for operations. The only limitation on public indebtedness provided in this initiative is that the cumulative amount of pension obligation bonds issued “shall not exceed the Commonwealth’s actuarially determined unfunded accrued liability to the Retirement Fund.”

As of 2008, that amount already exceeded a staggering half a billion dollars. It could grow, for any number of reasons: the legislature could pass more laws increasing retirement benefits without identifying a source of funding; the stock markets could tank; the government could fail to pay employer contributions; the government could fail to pay the ever-growing $300 million judgment awarded to the Fund, etc. The initiative provides no numerical ceiling on what the amount of borrowing could be.

No safeguards

Proponents of the pension obligation initiative have claimed that the initiative is written with certain “safeguards” in place to ensure that pension obligation bonds would only be issued “when the time is right” and pursuant to feasibility studies and expert advice. They have also presented POBs as just “one possible option” out of many options being explored to address the government’s obligations to the Fund.

First, no such purported safeguards actually exist in the initiative. The findings of the initiative suggest that such a feasibility study should be done prior to the issuance of any pension obligation bond, but there is nothing in the actual binding text of the initiative that requires that such a study would be done. There is also nothing in the initiative that would require the government to heed the expert advice against the issuance of pension obligation bonds. Indeed, our government has a history of ignoring the advice and warnings of experts, having failed for years to pay employer contributions on time and at the recommended actuarial rate. The $300 million judgment awarded to the Fund in Superior Court nearly a year and a half ago, of which not a single penny has been paid to date, is directly the result of our government’s refusal to abide by expert studies and advice.

Other safeguards are missing from House Legislative Initiative 17-1. For example, nothing would prohibit the legislature from increasing retirement benefits either before or after the issuance of a pension obligation bond. (House Legislative Initiative 16-13, which is also on the ballot this year, proposes to restrict the legislature’s ability to increase retirement benefits before the retirement system is fully funded, but its passage is uncertain since the question is vague and poorly constructed.) In addition, after the issuance of pension obligation bonds and the infusion of money into the Fund, nothing in this initiative would prohibit future government borrowing or so-called “investments” from the Fund to satisfy other government obligations, as the government has done in recent years with both the Retirement Fund and Marianas Public Lands Trust.

Despite proponents' claims to the contrary, it is difficult to escape the impression that the pension obligation bond is the only option that the administration and Fund officials are banking on. While taxpayer dollars have been spent on a heavily one-sided “public education” campaign to convince voters to pass the pension obligation bond initiative, no payments whatsoever have been made toward the $300 million judgment awarded to the Fund, and efforts to come up with a sensible payment plan or to pursue any of the numerous revenue streams and assets previously identified by Fund officials and concerned citizens seem to have been all but scrapped.

Dismissive, vague, and misleading claims

The POB proponents’ responses to questions about how in the world our bankrupt CNMI government could possibly take on new, massive, and inflexible debt, have generally been dismissive (“Who cares how the government pays off its debt?”), vague (“Experts will help the government figure that out.”), or misleading (“This is not new debt.”).

Without presenting any solid basis for their assurances, POB proponents have promised that no new taxes would be introduced in order to make bond payments, and suggested that the government’s employer contributions to the Fund would be a sufficient source of payment for bond obligations. They have compared issuing a pension obligation bond to refinancing a debt that bears a high interest rate with one that bears a lower interest rate, and have claimed that the CNMI could realize cost savings. But as actuarial consultants Gabriel, Roeder, Smith and Company have noted, “[T]he long-term, actual investment performance of the retirement plan is what determines the final savings or cost of issuing the POB … [I]t is not possible to know in advance whether the POB will produce any long-term savings at all.” (“Questions to Consider Before Issuing Pension Obligation Bonds,” GRS Insight, Vol. 4, Issue 1, February 2004).

“Serious risks”

Earlier this year, the Center for State and Local Government Excellence, a nonprofit, nonpartisan research organization, released an issue brief examining the viability of pension obligation bonds. The authors of the brief, all professors and researchers in management sciences, public affairs, and retirement studies, noted “serious risks” associated with issuing POBs, including financial risk (if the cost of borrowing exceeds investment returns over the duration of the debt), the inflexibility of the debt that would be incurred and the required annual payments, and political temptations to increase retirement benefits upon issuance of POBs, even if underfunding still exists. The authors also analyzed rates of return on POBs issued since 1992, and found that by mid-2009 “most POBs have been a net drain on government revenues” and that “POBs could well leave plan sponsors worse off than they were before they issued the POB.” They concluded that although POBs could theoretically be a useful tool for fiscally healthy governments with well-funded pension plans, in practice “the governments that issue POBs are those facing the greatest fiscal stress that are the least able to shoulder the additional risks from a POB.” (“Pension Obligation Bonds: Financial Crisis Exposes Risks,” Munnel et al., January 2010.)

There is no question that our government is facing severe fiscal stress. Even the proponents of House Legislative Initiative 17-1 acknowledge that. Our government has a long history of deferring payments and neglecting its obligations to the Retirement Fund, CUC, vendors, Worker’s Compensation, insurance, civil service employees’ merit increases, and numerous judgments against the government, not least of which is the $300 million judgment awarded to the Fund. Our government has also technically defaulted or come close to default on at least two of its bond obligations (the airport and seaport improvement bonds), after years of failure to satisfy revenue-to-bond payment ratio requirements and to issue timely financial reports. In addition, we face the largest fiscal deficit in the history of the CNMI: as of September 2009, that figure stood at $300.8 million, and has only grown since then.

Can we afford more debt?

Whether we are government retirees or not, we all should care about the costly ramifications of changing our constitution in order to allow our government to borrow far beyond its means. We should recognize that pension obligation bonds are an extremely risky business, and that our government is in no position now or in the near future to shoulder that risk. We should recognize that the interest payments on these bonds will indeed represent more new debt that we cannot afford. We should recognize that our government has a history of making disastrous fiscal policy decisions that arise at least in part out of a failure to seek expert advice and to ignore expert advice even when it is sought. We should learn from the mistakes of other state and local governments that have issued pension obligation bonds over the past two decades, and today find themselves mired in more debt than before. We should think not just for ourselves but for future generations as well.

Before we vote on House Legislative Initiative 17-1, we should ask ourselves if there is any evidence at all to suggest that our government is in a position now, or in the near future, to be incurring more debt. Limits on public indebtedness were enshrined in our Constitution for good reason. During this time of unprecedented fiscal crisis created by years of runaway government spending and recklessness, we should be looking for ways to strengthen those safeguards, not take them away. Given that our government has so abjectly failed to exercise sound fiscal discipline, or to undertake obvious and sensible measures to streamline government operations, improve accountability, and enforce existing laws that generate revenue, can we really afford to allow ourselves to be dragged into more debt? We have already borrowed ourselves into insolvency, and critical public services are now in jeopardy. Taking on more public debt and more investment risks in order to attempt to mask our fiscal crisis would be akin to a gambler who has lost all his money, maxed out all his credit cards, and seeks to borrow more money so he can try to recover what he has lost. We all know how that story ends.

/s/ Tina Sablan and Glen Hunter

Fina Sisu

11 comments:

The Saipan Blogger said...

Passing this will just quicken the exodus of people from the islands. If you are a taxpayer and don't want to help pay this back, you can just leave. I'm sure many will, starting with the lawmakers who use the fortunes they make while in office to buy houses in the mainland United States.

Anonymous said...

Without a pension obligation bond the NMIRF will run out of money in 5-7 years.

The CNMI economy is not expected to recover from the effects of federalized minimum wages and immigration (and Article XII and governmental bumbling) for 10-20 years.

Without an infusion of cash to bridge the gap, we are condemning our retirees to lives of poverty and indignity when the NMIRF collapses.

Why would anyone want the NMIRF to fail?

Yes on H.L.I. 17-1.

Anonymous said...

bridge? hmm, i have heard the future POB described that way somewhere before.

it is a bridge alright, but not as you describe it. the POB would be a bridge to complete government insolvency.

here is a report on a study that looked into PR's pension system.

http://www.senadopr.us/Informes%20de%20Agencias/13409.pdf

it is a good read.

i think the same holds true for us here and now.

not "hopes" and "beliefs" but hard cold facts and thorough analysis.


-----

as an aside:

federalization immigration and minimum wage are not the culprits for why we are int he economic mess we find ourselves in.

just you saying that begs to question why anyone would do as you command and vote yes to 17-1.

any sane individual can look over the past 25 years (emphasis on the past 5) and see the path of destruction wrought by our own elected officials.

just looking at the fund itself, its current condition is as much a result of federalization as the rash on your butt. our government has raped the fund of millions of dollars through LOCAL legislation, increased benefits without funding available, FULLY STOPPED payments into the fund for 2 years, NEVER paid the full actuarial rate, issued questionable local loans with pension dollars, paid high cost operating expenses (travel, attorneys, etc.), allowed for high risk investments by the money managers, overlooked harsh scrutiny of the assets and proper reporting, loaded the board with political appointees with little or no pension or economic and financial experience, and so much more.

federalization. i asked for it and thank god i got it.

you and the fund can be sore as ever about the halting of local government corruption on the immigration front by the passage of federal immigration takeover but that has had no bearing on the current condition of the fund. that won't change no matter how many times you keep saying it. i am aware of your past tactics and this administrations and i know that you believe, as did Hitler, that if you keep telling a lie over and over again you believe it will become truth. sadly you are incorrect. a lie is a lie.

Anonymous said...

If this is passed the fund will collapse anyway as the Govt will not pay into the fund,It is already stated that the Fund payments will go into paying back the bond.
Also what safeguards are there that the bond money would be used for the retirement fund or that other "bonds" will not be taken out to fund other "nonsense" things?

Anonymous said...

Why punish the manamko for the government corruption, incompetence, and political overspending (patronage jobs) of the past, present, or even future?

Unless we get the money from somewhere, the NMIRF will run out of money in five to seven years.

It's that simple.

If you want to clean up the corruption, go ahead. Be my guest. But there's not enough money in the entire CNMI government to pay the pensions and essential services.

That's why Kilili supports H.L.I. 17-1.

Biba Kilili!

Anonymous said...

"bridge the gap"....lol. Is this another bridge to nowhere? You got to give it up for these folks, they have hutzpah. You might as well take money and burn it if 17.1 passes.

The Saipan Blogger said...

Actually, the government hasn't paid into the fund in 4 years, not 2.

And the money that should have gone into the fund? What was it spent on? The governor hired 1000 people to ensure his reelection.

It's not your money! said...

What kind of safeguards are in place to ensure that money raised by the POB will actually be spent to restore the Fund to solvency? The CNMI government is addicted to stealing and spending other people's money. Time for an intervention. Make the zombie kleptocrats on Capital Hill live within their means. Allowing them to borrow money for operating funds is like allowing a drug addict to write his own prescriptions. VOTE NO ON 17-1!

Anonymous said...

Congressman Torres, or much more likely his legislative staffer, has written a letter today that clearly and succinctly addresses so many of the arguments put forth by opponents of the initiative.

See Stanley T. Torres, “Letter to the Editor: Misinformation,” Marianas Variety, Tuesday, November 2, 2010, available at http://www.mvariety.com/2010110131577/letter-to-the-editor/letter-to-the-editor-misinformation.php.

See also Emmanuel T. Erediano, “Retirement Fund: Yes on HLI 17-11, 16-13,” Marianas Variety, Tuesday, November 2, 2010, available at http://www.mvariety.com/2010110131597/local-news/retirement-fund-yes-on-hli-17-11-16-13.php.

It is a measure of their desperation that opponents such as the “teacher” are ending their Variety blog comments against the two NMIRF initiatives with “Biba Kilili!” when, in fact, our delegate fully supports both initiatives (as do his three challengers).

Kindly read the two links above from today's Variety before voting on this issue.

HLI 16-13 and 17-1 are essential steps in the ongoing reform of the NMIRF. Don't punish our retirees. Please vote YES on these two measures.

Anonymous said...

noni 6:23am:

i fail to see any new and compelling evidence in support of the POB initiative. please point it out.

if it is merely that the messenger has changed and the proponent is now Stanley, i hate to tell you this but Stanley is looney.

as the first commenter on that site states:

taking financial advice from Staley Torres is akin to taking law and order advice from Tony Soprano.

also you may want to take a look at Stanley's voting record in regards to the fund out here he is a dinosaur up there and has retirement fund crap all over his hands from his votes on legislation to rape the fund and send it into insolvency with idiotic loan schemes and increased benefit plans.

as for Rich Villagomez article, why would we heed his message. he is part of the current problem along with Stanley.


you have serious issues. i hope you take a long ride off your short bridge solution.

if i had to choose between heeding advice from Bill Stewart, Ruth Tighe, Tina Sablan, Tony Pelligrino, Jane Mack, every recent report issued on POBs in 2010 or
Stanley, Ben Fitial, Viola, Rich, Oscar Rasa and Juan M Sablan, it would be a simple choice to go with the first group.

who would you want on your financial edition of jeopardy team noni? lol

Anonymous said...

I'll take my advice for what is best for NMIRF retirees from Kilili, thank you.

Biba Kilili!