Affidavit Statement: “The benefits promised to retirees from the Defined Benefit Plan increased over the years. No substantive mathematical calculations were made to be certain that increases in benefits were being paid for by corresponding payroll deductions or employer contributions.”
Retiree Member Response: Actuarial reports produced by Fund consultants were available for government review. That they were perhaps not read — or otherwise not comprehended by responsible elected government officials or members of the CNMI Legislature is an indictment of those officials and is inexcusable government neglect of the responsibilities of their elected or appointed duty to not only the members of the Fund but the entire commonwealth electorate who could ultimately bear the cost of such negligence.
Affidavit Statement: “The constitutional prohibition of diminishing or impairing benefits limits what can be done to reduce the price the Defined Benefit Plan charges to the taxpayers of the commonwealth.”
Retiree Member Response: Any charges which may ultimately accrue to the taxpayers of the CNMI is the fault the architects of the DBP in the Legislature who designed the plan in the first place. This should be acknowledged.
Affidavit Statement: “The effect of loss of market value of investment is also to add to the unfunded liability. Then loss of market value of investments is not considered to ‘diminish or impair’ member’s benefits. Currently, neither of these effects is preventing the Fund from issuing payment in full and on time to its annuitants.”
Retiree Member Response: If “neither of these effects prevent the Fund from issuing payment in full and on time” — what about those members who are qualified to retire but so far have been prevented from doing so as a result of a “freeze” on processing applications (see below). That the Fund’s portfolio has continued to meet pension demands would seem to imply that it can continue to do so indefinitely. Not true.
An appropriate comparison might be — if your cut off a limb you can still live for awhile — but only until the blood drains away. It is an analogy every bit applicable to what is happening to the member’s Fund.
Carry the analogy forward — money removed from the “investment interest generating base” which should be used to pay pensions obviously is no longer available to earn money (as interest) as it should. The Fund’s “investment blood” is draining away from the principle which in turn grows more anemic with each withdrawal while the transfusion for a financial cure has already been delayed for years.
Affidavit Statement: “Assessing additional damages would serve no fruitful purpose except to cause additional damage to an already crippled state.”
Retiree Member Response: The question remains should there not be some punitive damage accessed to the responsible branches of government for inexcusable neglect of their social responsibility? What is the lesson for society at large for such failure? What guarantee can be made that such blatant negligence will not be repeated in the future? Not to levy some form of penalty for such gross derelict of responsibility as well as an absence of any acceptance of responsibility to the electorate should not go unpunished in my judgment.
Affidavit Statement: “The CNMI government likely cannot liquidate enough capital assets to cure the deficient employer contributions to the Defined Benefit Plan (to satisfy the court’s judgment).”
Retiree Member Response: As has been repeatedly pointed out there is more involved than lack of payment of the employer’s contribution. Other payment deficiencies include: since FY 1994 payment to the Fund of 30 percent of the container excise tax and 20 percent of the hotel occupancy tax in part to fund the members’ group health and life insurance program and the cost of living allowance.
In terms of liquidation of assets, or assignment to the Fund, there are government owned houses on Capital Hill, Navy Hill and elsewhere in the CNMI as well as hotel and golf course lease payments, air and sea port revenue as just an example of several “selected” sources of payment to the Fund.
Affidavit Statement: “In spite of the decline in annual revenue of approximately $70 million, the government has struggled to preserve the ability to provide for the basic services of public safety, health and education while making extreme somewhat desperate measures to funnel millions of dollars into Commonwealth Utilities Corp., an absolute necessity.”
Retiree Member Response: The government has been extremely wasteful and citing a single example it unwisely invested millions in the purchase of the San Roque shopping mall which has not generated a single dollar and is now wrecked and in ruins — a blight on the landscape.
The millions the government claims to have invested in CUC has still not resulted in a reliable power generating facility at reasonable rates; the community lacks 24-hour, island-wide, potable water; inadequate public educational and medical facilities and/or staff.
The following is a brief review of the government’s financial resources which over the period described would indicated that a portion could have been used to make payments to its retirement fund — but it neglected to do so resulting in the situation the central government now finds itself.
During the period 1986 to 2004 (the period for which have data) the CNMI government’s internally generated revenue was $3.07 billion. During this period the total expenditures on capital improvement projects in the commonwealth as generated by their own internal sources was a meager 3.2 percent ($78.4 million). Over the above period, other government expenditures were wages and salaries $1.6 billion (64 percent) and all other expenditures of $807.5 million (32.8 percent). The vast majority of the total expenditures made on capital improvement infrastructure projects resulted not from locally generated revenues but largely as a result of U.S. financial assistance in the form of program grants and loans and Covenant funds.
The CNMI’s locally generated revenue permitted the local government to employ more people. According to census figures, at the time of the enumeration, government employment figures for 1990 were 3,116 and ten years later in the year 2000 government employment totaled 4,996. The increase over the ten-year period was more than 60 percent. Of course, as the economy and population increased between census years the increase in government employment was partially due to such growth.
Over the period 1986-2004 the total reported business gross revenue generated by the private sector was $31.3 billion. Add to the above $393.6 million in section 702 Covenant grants from the federal government (from the 2nd Agreement in 1985 to the 3rd Agreement for funding extending until FY 2000) and it can readily be concluded that U.S. financial assistance has accounted for the bulk of the islands’ infrastructure and “freed-up” huge sums permitting an increase in government employment and conversely its payroll setting the stage for an ever increasing number of retirees.
The above sums do not include the myriad of federal program grants provided the islands in the form of: education, health and human services, road improvement, transportation, housing and energy assistance, food stamps, etc, all provided by the U.S. government which also required government administrators — again adding still more contributing members to the defined benefit retirement program Since the inception of commonwealth status the precise amount of federal program assistance over and above Covenant funds is unknown — but my estimate is more than 1/2 billion dollars. Again, these were funds for programs the CNMI did not have to finance from its own internally generated sources which in turn “freed-up” more local revenue for the government’s payroll amounting to $1.6 billion over an 18 year period for an average of $88.9 million per year.
Yet with all of the huge sum available the central government failed miserably to honor its contractual agreement with its retired employees.
Affidavit Statement: “The government’s debt to the Defined Benefit Plan, particularly now, has been greatly added to through no fault of the government. This does not diminish in any way the responsibility of the CNMI government to make any required contributions to the Plan, but it does somewhat soften the often ‘one-sided’ view that the employer contribution deficiency is the reason that the Defined Contribution Plan is not fully funded.”
Retiree Member Response: The issue involves more than the government’s non payment of the employer’s contribution. Other payment deficiencies include: (since FY 1994) payment to the Fund of 30 percent of the container excise tax and 20 percent of the hotel occupancy tax in part to fund the members’ group health and life insurance program and the cost of living allowance.
Affidavit Statement: “The Retirement Fund is not honoring the applications for annuity payments to persons who have recently left employment and qualify for retirement. If this is true, then the Constitution prohibition against retirement benefits being diminished or impaired may be undermined. If this true the board of the Fund would seem to be defending the fund, rather that the retirees.”
Retiree Member Response: I certainly hope the Fund trustees are upholding and exercising their fiduciary duty to defend the Fund.
I’m told the board passed a resolution to cease processing retirement applications of members with deficient employers’ contributions in Nov. 2007. Since then, the resolution was clarified to allow members to retire if their employer paid the full amount of unpaid employer contributions. Every autonomous agency with employees wishing to retire, have complied with this requirement. Only the executive branch refuses to pay the government’s share, so none of their employees can retire.
The Constitution prohibits impairment or diminishing retirement benefits. Since some employees are not yet retired, the board has done neither to their benefits. I’m told a distinction does exist between a “retiree” and an “applicant.”
Affidavit Statement: “The commonwealth does not assess taxes on real property. This is not a source of revenue.”
Retiree Member Response: Article X, Section 5 of the Commonwealth Constitution does provide that: “no tax may be levied upon any ‘owner occupied’ single family residential, agricultural or unimproved real property unless approved by three-fourths of the votes cast in an election conducted in the senatorial district in which the tax is to be levied.”
However, it would appear there is no prohibition upon imposing taxes on other forms of real estate, i.e., commercial buildings, multi-family structures, residential rentals or other improved property not expressly prohibited by the Constitution.
In any consideration of eventually levying a tax on real estate it must be recognized that tax revenues expended to make surface road improvement together with the provision of utilities, etc. — such government expenditures contribute to higher values of various sites in proximity to such improvements.
Thus, government expenditures contribute to higher land values. It follows — or should — that the added value resulting from such public investment should be recovered in the form of a tax on the assessed value of the land. Something which is done in very many areas throughout the world.
While I personally do not advocate a tax on real estate it could eventually be an issue in any equation concerning land economics and taxation. This is an is a matter which should be addressed.
BILL STEWART
Economist and former 2002 dues paying member of the Commonwealth Association of Retired Persons
