This was the consensus among experts regarding the CNMI government’s proposal to float a bond.
Economist William Stewart said if any bond were to be issued it should be issued against the full faith and credit of general revenue collections of the central government and not the Retirement Fund member’s employee contributions.
“It’s the central government debt obligation to the Fund, not the other way around,” he said.
He said if the CNMI government doesn’t have a good credit rating then a bond can be costly for all taxpayers.
According to Stewart, “There are just some things you can’t escape no matter how hard you try and one is the reputation you get when failing to pay your debts when you should be trying to keep your credit and investment reputation intact. The central government’s neglect in meeting its financial obligation to the Fund and continued refusal to pay the millions it owes to members can have a long-term, negative effect on all taxpayers. Like everything else — the poorer your reputation in paying your debts — the higher the cost of raising money will be in the end,” he said.
Stewart said Puerto Rico’s experience showed why pension obligation bond is not the answer.
A report by Conway, Mackenzie Inc. revealed that the pension obligation bond or POB issuance is costing the Puerto Rico pension agency more than what it is actually earning on invested proceeds.
Former Retirement Fund consultant, Wilshire Associates managing principal Maggie Ralbovsky said POBs will work if the following conditions are met: (1) the issuer — CNMI government in this case — has good credit worthiness and therefore investors are willing to lend to the issuer at a reasonable rate; (2) market appetite for credit is favorable, meaning there is money sitting around waiting to take on risk; and (3) the recipient — the Retirement Fund in this case — can invest the money at a higher rate than the issuer’s borrowing date.
Ralbovsky said the CNMI government has poor credit worthiness, having defaulted on multiple past judgments and obligations.
Market participants, she added, are “seeking safety and selling low credit issues, being spooked by Europe and etc. Remember that CNMI’s fiscal condition is worse than Greece, and it does not have a plan to resolve the condition either.”
According to Ralbovsky, the interest rate for the bond would be at least 10 percent per year.
“If the government wants to issue $200 million in debt, the annual interest payment would be $20 million. Investors will see clearly that the CNMI government cannot afford such payment and therefore, nobody would be willing to lend to you.”
For Ralbovsky, in order for the bond to work, it should be guaranteed by the federal government, which may not be possible.
But Commonwealth Development Authority loan manager Oscar Camacho believes a bond “is a good idea to pay what is due the Retirement Fund.”
He added, “Anything money that comes to the Fund should be welcomed and not refused even if it comes from a POB. Of course it will work to the benefit of the Fund; but will it work? Given conditions now in the investment markets, it will not work since it will not be possible to get one approved.”
He, however, said the government should be given a chance and the ability to float one when the time is ripe.
But Camacho said now is not the right time. “It is wishful thinking.”
