Depletion Of CNMI Settlement Fund Projected By 2019

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Monthly drawdown from investments draining fund’s resources

By Alexie Villegas Zotomayor

SAIPAN, CNMI (Marianas Variety, Feb. 13, 2014) – Owing to the need to draw down from the investment accounts to cover the shortfall for pension payments, it is projected that the CNMI Settlement Fund’s investments will be depleted by 2019.

In Civille & Tang PLLC’s initial report as Settlement Trustee, the trustee sounded the alarm that the Fund’s investment accounts will be depleted over the next five years.

"Because of the required monthly drawdown from the investment accounts, assuming zero investment income from the investment accounts and that the NMI government will continue to make its annual payments, the investment accounts will be completely depleted by 2019," the Settlement Trustee reported.

With a settlement reached in the Betty Johnson case on Sept. 30 that effectively reduced retirement benefits by 25 percent, the Settlement Fund account began with a balance of $128,322,000 inclusive of the $13 million balance of the P.L. 17-82 and P.L. 18-02 withdrawals after the Fund paid out $40,615,807 between October and November last year.

It was déjà vu for the Settlement Trustee as the report appeared to mirror former Fund Administrator Richard Villagomez’ warning of depletion because of the continuous drawdowns from the investment corpus.

For fiscal year 2014, the Fund projects operating expenses of about $51,662,214.

If the government is able to remit $25 million this year, the Fund will still be short $26,662,714.

The report states that the Settlement Fund’s $51.587 million in expenses for fiscal year 2014 are broken down into five categories: $49.425 million, pension and disability payments; $898,082, wages, salaries, and employer expenses; $822,670, consultant and professional fees; $226,600, general administrative expenses; and $215,000, other expenses.

"In order for the Fund to meet its financial obligations, the Settlement Fund is drawing down on its investments accounts each month," reports the Settlement Trustee.

Monthly, pension payments amount to $4.2 million while operational expenses are budgeted at $215,000 a month.

Of the $27.98 million projected shortfall this year, the Trustee reported that shortfalls per months are as follows: $4.415 million, Oct. 2013; $3.374 million, Nov. 2013; $1.706 million, Dec. 2013; $1.498 million, Jan. 2014; $1.498 million, Feb. 2014; $1.498 million, March 2014; $2.748 million, April 2014; $2.748 million, May 2014; $2.748 million, June 2014; $1.915 million, July 2014; $1.915 million, Aug. 2014; and $1.915 million, Sept. 2014.

The trustee also said, "The combination of high outflow of funds coupled with low returns seriously limits the options for earning investment income."

As short as the Fund’s investment horizon is, they can’t take higher risk. The trustee explained, "If an investor does not have a long investment horizon, the short-term volatilities of the stock market may deplete the investor’s asset base before the market recovery takes place."

The trustee said that a long investment horizon would be at least 10 years.

"Given the sustained high rates of cash outflow, short expected life and uncertainty whether the NMI government will continue to meet its annual payment obligations, the Settlement Fund does not have the ability to take on much investment risk in the financial markets," said the Trustee.

The Fund’s portfolio is predominantly "fixed income based."

The most common type of fixed income are bonds issued by federal governments, local municipalities or major corporations.

The Fund, with its short horizon, cannot invest in stocks that reward investors with high returns.

Based on the investment report by the Fund’s consultant Wilshire as of Dec. 31, 2013, the Settlement Fund was invested as follows: Blackrock, $3.084 million; $959,000, JP Morgan; $721,000, mutual funds; and PIMCO/Richmond Capital, $100.757 million.

Unpaid employer contributions

Although the Trustee acknowledged that the government did make its first quarter payment, and it had received employee contributions, it has yet to receive $968,407.75 in employer contributions from the central government and autonomous agencies for the period from Oct. 5, 2013 to Jan. 11, 2014. The outstanding employer contributions were $419,120.19, central government and $549,284.56, autonomous agencies.

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