ON Nov. 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.”
No ceiling on borrowing
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.
TINA SABLAN & GLEN HUNTER
Fina Sisu, Saipan
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