The government owes over $230 million in unpaid employer contributions to the Retirement Fund whose unfunded liability, as of fiscal year 2007, was over $570 million. The unfunded liability is the total amount of benefits mandated by law but never funded by the government.
Pangelinan pointed out that “when it comes to public pensions, it’s the taxpayers’ problem — they are liable for the government debt.”
In her affidavit, which she submitted to the Attorney General’s Office, Pangelinan stated that she “explored the applicability of the bankruptcy law to the government with no definite conclusion reached.”
The AGO is representing the administration in today’s Superior Court hearing on the lawsuit filed by the Retirement Fund over the government’s debt.
Last November, the court granted the Fund’s request for default judgment due to the AGO’s failure to make a timely answer to the complaint.
In her affidavit, Pangelinan, D-Saipan, said Chapter 9 of the federal bankruptcy law applies to municipalities.
“In some instances,” she said, “such as the recently passed American Recovery and Reinvestment Act, the commonwealth is considered a state. In other instances it is not. There is no provision in U.S. bankruptcy law for states to seek protection from creditors and restructure their obligations.”
Compelling
She is not sure whether the CNMI could qualify as a municipality under Chapter 9 of the bankruptcy code.
“However, a formal and legal declaration of bankruptcy with its attendant protection from creditors and court oversight of restructuring is a compelling subject, based on the government’s current financial circumstances. The financial size of the CNMI government is no barrier to this process as municipalities larger than the commonwealth have gone through the process.”
As a “municipality” under Chapter 9, Pangelinan said all CNMI government entities would be included such as the Retirement Fund, the college, the ports and airports, etc.
“A restructuring, however, would carry consequences,” she added. “Investors and bond issuers have long memories. The CNMI would feel the effects of such a course many years after emerging from reorganization. All stakeholders would be affected, including retirees, current and future. But Chapter 9 or a similar process could be a way to restructure and reorganize debts and government operations into something more realistic than what exists today.”
According to the senator, a municipality filing for bankruptcy must:
• be insolvent or unable to meet its debts as they mature;
• demonstrate a desire to create a plan to adjust the debts;
• have either obtained the agreement of the majority of each class of creditors affected, or have attempted to work out a plan without success;
• be unable to renegotiate with creditors because this is impractical; and,
• reasonably believe that a creditor may attempt to gain preference.
“It may be that the government has reached this point,” said Pangelinan, the chairwoman of the Senate Fiscal Affairs Committee who has worked on at least four laws involving the Retirement Fund.
In an interview on Friday, she said she submitted her affidavit to offer the Legislature’s perspective regarding the issue of damages that the court is now considering.
“I hope that any actions taken by the court to ensure that the debt is paid will be tempered by the financial realities faced by the government,” she said.
Financial disaster
Pangelinan noted that the Legislature and the administration have “wrestled with this debt for years with no satisfactory and final solution being achieved.”
“We are at a point where the government’s back is literally against the wall,” she said.
The benefits promised to the retirees have become “an expensive and unwieldy burden as the government struggles to function with annual revenues that are $70 million less than it brought in only a few years ago,” she added.
“The CNMI government is not facing a financial disaster; it is in one. It does not pass the tests of solvency. Reorganizing and restructuring the government is the matter at hand and the structure of the [Fund’s benefits plan] is part of the government. How to do this with the least amount of pain to all parties concerned is of primary concern.”
But Pangelinan does not believe that deficient employer contribution is unconstitutional as it diminishes or impairs the members’ benefits.
“Deficient employer contributions affect the Fund by adding to the unfunded liability. [But] the effect of loss of market value of investments also adds to the unfunded liability. [Yet] loss of market value is not considered to diminish or impair members’ benefits. Currently, neither of these [factors] is preventing the Fund from issuing payment in fill and on time to retirees.”
Employer contribution deficiency, she added, is not the only reason why the Retirement Fund’s Defined Benefit Plan is not fully funded.
But, she noted that the Retirement Fund “has no liability whether its investment strategies are sound or not.”
Can’t pay
Pangelinan said the government cannot pay the deficient employer contribution in full immediately.
“A single payment of this size would quite literally shut down the executive, legislative and judicial branches, the Public School System, Northern Marianas College and all functions of government funded by the general fund,” she said.
But the debt must be paid, she added.
“Bringing this to a definitive end, perhaps via a consent degree or court order, would…save the government and the people the ongoing and painful monetary and resource costs of ongoing litigation.”
However, Pangelinan said “assessing additional damages would serve no fruitful purpose except to cause additional damage to an already crippled government. Those additional damages would only add to the amount that the government must get from taxpayers, most likely though decreasing the income tax rebate amounts.”
She suggests that the court, through an order or a consent decree, mandates payments over several years that “could not be violated without personal consequences.”
This, she said, “seems the only feasible option leading to a successful resolution of the debt while allowing the government to continue to carry out its basic functions.”
According to the senator, the administration is “apparently making timely bond payments; one would think it could manage incremental payment of this type as well.”
Other options
In her 22-page affidavit, Pangelinan explored other options that may allow the government to pay its debt to the Retirement Fund.
• The government liquidate its capital assets
However, she said, the La Fiesta Mall and other government assets “are in various states of disrepair, some worse than others, and buyers for these types of structures in the CNMI are rare. Given that one or some of these buildings could be liquidated, the amount realized would likely not be adequate to satisfy the debt being considered by the court.”
Pangelinan said “realizing a fair price would be more difficult if the buyer was aware that the liquidation was a distressed sale by a motivated seller. An auction of seized assets would not likely produce better results.”
• Lease revenues from outside investors
But these, she said, are also not an adequate source of debt payment.
“Leases of public lands for the purpose of foreign investment are currently infrequent and the investors that do so are subject to the same economic vagaries as is the government. The revenue stream realized from these leases through lease payments and taxes is minimal. The economic activity brought to the islands is where the value of these enterprises lay.”
As for the proceeds of the public land leases, she said they can only be used for the operations of the Department of Public Lands.
Surplus funds must be transferred to the Marianas Public Land Trust pursuant to the CNMI Constitution.
• A reduction of force
This, Pangelinan said, is a “double-edged sword.”
“A large decrease in payroll would appear to free up funds for making large payments to the Retirement Fund. But those persons no longer employed by the government would also no longer be paying income taxes and spending money in local businesses. Income taxes, business gross receipt taxes and excise taxes are a major source of government revenue. A sudden and large cutback on employment is not a viable solution for acquiring additional funds.”
Moreover, this “would result in a large reduction of operations with no provisions for basic public services. The impact of a large number of unemployed people would be very difficult for the economy. The private sector is not prepared or able to suddenly absorb a large number of former government employees seeking work, and prospects are likely no better in the [states] given the recession. We are slowly transitioning to a private sector employment economy but it is a process only recently started in earnest.”
In addition, “revenue streams are lost to the Retirement Fund each time a member terminates employment. Those terminated and qualify for retirement would place additional demands on the cash outflows of the Fund.”
Finally, “in the wake of a large reduction in force, the actuarially determined percentage of required employer contribution would increase because fewer employees would be contributing to the resolution of the unfunded accrued liability which, under P.L. 15-14, must be fully funded by Oct. 1, 2045.”
The current actuarial rate is 37.39 percent. The government can pay 11 percent only.
Pangelinan said if the court orders the government to pay the actuarial rate, 1,079, or some 25 percent of government employees, will lose their jobs.
Even if the governor’s austerity measures are also implemented, 578 will still be jobless.
“Once again, this will increase the actuarial rate,” she said. “This is a vicious cycle — it must be broken by finding new sources of funds or by restructuring the [benefit plan] itself.”
• Taxes
Pangelinan said the government may suspend the tax rebates, increase the business gross receipts tax and impose a property tax.
She added, however, that increasing the BGRT “could put enough pressure on some businesses to force their closure, thereby canceling anticipated gains.”
• MPLT
MPLT reported that it had assets of approximately $77 million as of FY 2007.
Tapping this funding source, the senator said, is “an unpopular alternative, but given current circumstances it deserves consideration. I leave it to the expertise of the court as to whether this is a possible source of funds.”
• An orderly downsizing of government operations
This “has never been explored in detail to the best of my knowledge,” Pangelinan said.
But this option will also affect the revenue of the Retirement Fund, she added.
• Floating a bond
This is supported by the administration, key lawmakers and the past and current officials of the Retirement Fund.
However, Pangelinan said, “the government’s solvency issue raises the likelihood that seeking an additional bond is not a feasible option. If it were possible to arrange one, the interest could be so high as to make it unaffordable.”
She added, “I honestly do not believe the government is in a position to borrow money via bonds.”
Other debts
The senator reminded the court that the CNMI government owes other debts — some $100 million in bonds as well as judgments and land compensation claims in millions of dollars, including interest that continues to accrue.
“In the past six years, annual government revenues dropped 32 percent, approximately $70 million. Despite this decline, the government has struggled to preserve the ability to provide for the basic services of public safety, health and education, while making extreme and somewhat desperate measures to funnel millions of dollars into the Commonwealth Utilities Corp.,” Pangelinan said.
“Curing net deficiencies is required by the CNMI Constitution but has not been achieved by the government for many years.”
She reiterated that “any solution could only be reasonably structured over several years.”
Both entities — the central government and the Retirement Fund — need to do their part, she said.
“This is an opportunity for all branches of the government to work together.”
“P.L. 15-70 was the first step in mitigating the consequences of what came before,” she added, referring to the government’s generous retirement benefits.
“The Legislature and the executive branch have been committed to finding answers to full funding for as long as I have been a senator. We’ve worked on reforms, as evidenced by P.L. 15-70, and other pieces of legislation have been written and debated in an effort to finally resolve the problem. This work has been done in an era like no other in the history of the CNMI as precipitous declines in revenue and [Direct Benefit Plan] investment losses of hundreds of millions of dollars have quickly moved the target of fully funding this program further from our reach.”
Public Law 15-70, or the Defined Benefit Plan Reform Act of 2007, requires that any increase in retirement benefits must be approved by voters in a referendum.
It also created the Defined Contribution Plan which, the governor earlier said, “went a long way to reduce Fund liabilities.”
The Defined Contribution Plan, or DCP, requires members to contribute 10 percent of their gross pay, as opposed to 6.5 percent required by most members of the Defined Benefit Plan, or DBP.
But the 10 percent DCP contribution is a pre-tax contribution unlike the 6.5 percent DBP contribution.
For example, Pangelinan said, “if a gross paycheck is $1,000, and the employee is a member of the DCP, the 10 percent DCP contribution is first deducted, then payroll taxes are calculated on the remaining $900. This differs significantly from the DBP. If the gross paycheck is $1,000, and the employee is a member of the DBP, payroll taxes are calculated on the full $1,000, then the 6.5 percent DBP contribution is deducted.”
Moreover, a member of the DCP has the ability to leave with full ownership of his account, employee and employer contributions and all returns on his investments included.
Under the DCP, the government’s employer contribution is only 4 percent.
Last year, the Retirement Fund said 400 government employees converted to the DCP, or less than 15 percent of the 3,000 Fund members eligible to transfer to the new program.
