News on CNMI's Bankrupt Pension Fund . . .
South Pacific Fund Has Sinking Feeling
Mariana Islands Is First U.S. Pension System in Bankruptcy
By MICHAEL CORKERY
The Northern Mariana Islands, a U.S. territory in the Pacific Ocean, managed to recover from brutal World War II battles, but its public pension fund couldn't recover from the financial crisis. The islands' retirement system on April 17 became the first U.S. public pension fund to seek bankruptcy protection.
The reasons cited for the pension fund's collapse are numerous, ranging from exceedingly generous benefits, to inadequate contributions to the fund by the islands' government, to what some retirees allege in a lawsuit was bad investment advice from the fund's advisers, Bank of America Corp.'s Merrill Lynch. Complicating matters, the Merrill executive who most-closely dealt with the fund reportedly fell overboard while fishing in waters off Hawaii last September, and has yet to be found.
Leading into the financial crisis, three-quarters of the fund's managed assets were invested in stocks, according to the lawsuit filed by the retirees in October 2009 in Superior Court of the Northern Mariana Islands. That compared with a median U.S. public-pension-fund stock allocation of 61% in the spring of 2007, according to Wilshire Trust Universe Comparison Service.
A Merrill spokesman said the retirement fund "worked to meet the financial demands of the promised benefits by pursuing a strategy to increase its rate of return." He added, "We discussed the risk involved with this strategy."
The turmoil is a reminder of how the financial crisis is reverberating around the world. Cities, states and even far-flung U.S. territories still are scrambling to refill employee retirement systems drained by losses.
In September 2007, the fund had $510 million in assets. In 2008, it had lost $115 million on its investments.
Despite the crisis losses, Merrill says its investment strategies earned the pension fund $344 million over a 22-year period.
In late 2010, the fund dumped Merrill as its adviser and hired Wilshire Associates. The fund has moved most of its assets into less risky bonds, which carry lower returns. It now has $256 million to cover $1 billion in liabilities over the next 20 or so years. Officials estimate it could run out of money by 2014.
Even before the pension fund collapsed, the islands' economy was in shambles as Chinese garment factories closed and government revenue dried up. To raise cash, government officials in Saipan, the most populated of the Northern Mariana Islands and captured by U.S. forces from the Japanese in 1944 after a series of bloody battles, are talking with Japanese investors about dumping tsunami debris on one of the deserted Mariana Islands.
About 10% of the islands' 53,000 residents are pensioners or government workers who are owed a pension when they retire. The population includes a mix of transplants from the U.S. mainland, Asians and descendants of the original Chamorro people.
Many public employees collecting government pensions in the Northern Mariana Islands, which became a U.S. territory in the 1970s, don't collect Social Security. Pension payments are a big source of income.
In bankruptcy-court filings, the pension fund has proposed cutting benefits by more than half.
"People are going to be desperate,'' says Gloria Hunter, whose main income is her government pension that she says totals a little more than $25,000 a year.
Doug Brennan, who manages a Toyota dealership on Saipan, now requires larger down payments from retired government workers because of the pension troubles. "We are being very careful with our loans," says Mr. Brennan, who heads the local Chamber of Commerce.
For years, government officials expanded pension perks in the Northern Mariana Islands. Children of retirees, for example, can collect a portion of their pensions when their parents die. One retiree adopted 10 of his grandchildren and great-grandchildren so they could qualify for pension payments, said a person familiar with the matter.
The fund lent money to islanders to buy homes and to the government to upgrade a courthouse, according to a people familiar with the matter.
Today, about half of the home mortgages the pension fund doled out are delinquent, according to Wilshire Associates. The pension fund has a lien on the courthouse in Saipan because its loan is also delinquent.
Pension officials recently tried to sell the fund's mortgage portfolio but couldn't find any buyers. Any deal is complicated by the fact that only people of Northern Mariana descent can acquire property on the island, making it difficult for an investor to foreclose on a property.
In the retirees' dispute with Merrill, Mike Dotts, a lawyer for the retirees, said a judge has moved the case to arbitration before the Financial Industry Regulatory Authority, a Wall Street regulator.
After the retirees sued Merrill in 2009, the pension fund's board of trustees refused to join the lawsuit, saying overly generous benefits and the government's failure to make contributions are the real culprits. "Cadillac pension benefits with Pinto payments'' is how the board's chairman described the problem in a letter to the lawyers representing Merrill and the retirees. He added that other underfunded retirement systems had similar asset allocations.
But Superior Court Judge Kenneth Govendo in Saipan observed that the trustees and the fund's administrator had an "undeserved reverence" for Merrill.
"Indeed, they seem to be cheerleaders for Merrill Lynch even though its investment strategy has turned out to be an irresponsible disaster for the fund,'' the judge wrote a 2009 ruling on a separate lawsuit filed by the pension fund against the government for failing to make contributions.
The judge added that the trustees "merrily allow Merrill Lynch to think for them and subject the retirees to a heart attack every month when the value of the fund is published."
Merrill's role as an adviser to the islands' pension fund dated back to the 1980s. Last September, the U.S. Coast Guard called off a search for 57-year-old Kenan Knieriem, a first vice president at Merrill based in Honolulu who advised the fund in recent years. The incident is still under investigation by the Coast Guard and the Federal Bureau of Investigation, a Coast Guard official said.
Mariana Islands Is First U.S. Pension System in Bankruptcy
By MICHAEL CORKERY
The Northern Mariana Islands, a U.S. territory in the Pacific Ocean, managed to recover from brutal World War II battles, but its public pension fund couldn't recover from the financial crisis. The islands' retirement system on April 17 became the first U.S. public pension fund to seek bankruptcy protection.
The reasons cited for the pension fund's collapse are numerous, ranging from exceedingly generous benefits, to inadequate contributions to the fund by the islands' government, to what some retirees allege in a lawsuit was bad investment advice from the fund's advisers, Bank of America Corp.'s Merrill Lynch. Complicating matters, the Merrill executive who most-closely dealt with the fund reportedly fell overboard while fishing in waters off Hawaii last September, and has yet to be found.
Leading into the financial crisis, three-quarters of the fund's managed assets were invested in stocks, according to the lawsuit filed by the retirees in October 2009 in Superior Court of the Northern Mariana Islands. That compared with a median U.S. public-pension-fund stock allocation of 61% in the spring of 2007, according to Wilshire Trust Universe Comparison Service.
A Merrill spokesman said the retirement fund "worked to meet the financial demands of the promised benefits by pursuing a strategy to increase its rate of return." He added, "We discussed the risk involved with this strategy."
The turmoil is a reminder of how the financial crisis is reverberating around the world. Cities, states and even far-flung U.S. territories still are scrambling to refill employee retirement systems drained by losses.
In September 2007, the fund had $510 million in assets. In 2008, it had lost $115 million on its investments.
Despite the crisis losses, Merrill says its investment strategies earned the pension fund $344 million over a 22-year period.
In late 2010, the fund dumped Merrill as its adviser and hired Wilshire Associates. The fund has moved most of its assets into less risky bonds, which carry lower returns. It now has $256 million to cover $1 billion in liabilities over the next 20 or so years. Officials estimate it could run out of money by 2014.
Even before the pension fund collapsed, the islands' economy was in shambles as Chinese garment factories closed and government revenue dried up. To raise cash, government officials in Saipan, the most populated of the Northern Mariana Islands and captured by U.S. forces from the Japanese in 1944 after a series of bloody battles, are talking with Japanese investors about dumping tsunami debris on one of the deserted Mariana Islands.
About 10% of the islands' 53,000 residents are pensioners or government workers who are owed a pension when they retire. The population includes a mix of transplants from the U.S. mainland, Asians and descendants of the original Chamorro people.
Many public employees collecting government pensions in the Northern Mariana Islands, which became a U.S. territory in the 1970s, don't collect Social Security. Pension payments are a big source of income.
In bankruptcy-court filings, the pension fund has proposed cutting benefits by more than half.
"People are going to be desperate,'' says Gloria Hunter, whose main income is her government pension that she says totals a little more than $25,000 a year.
Doug Brennan, who manages a Toyota dealership on Saipan, now requires larger down payments from retired government workers because of the pension troubles. "We are being very careful with our loans," says Mr. Brennan, who heads the local Chamber of Commerce.
For years, government officials expanded pension perks in the Northern Mariana Islands. Children of retirees, for example, can collect a portion of their pensions when their parents die. One retiree adopted 10 of his grandchildren and great-grandchildren so they could qualify for pension payments, said a person familiar with the matter.
The fund lent money to islanders to buy homes and to the government to upgrade a courthouse, according to a people familiar with the matter.
Today, about half of the home mortgages the pension fund doled out are delinquent, according to Wilshire Associates. The pension fund has a lien on the courthouse in Saipan because its loan is also delinquent.
Pension officials recently tried to sell the fund's mortgage portfolio but couldn't find any buyers. Any deal is complicated by the fact that only people of Northern Mariana descent can acquire property on the island, making it difficult for an investor to foreclose on a property.
In the retirees' dispute with Merrill, Mike Dotts, a lawyer for the retirees, said a judge has moved the case to arbitration before the Financial Industry Regulatory Authority, a Wall Street regulator.
After the retirees sued Merrill in 2009, the pension fund's board of trustees refused to join the lawsuit, saying overly generous benefits and the government's failure to make contributions are the real culprits. "Cadillac pension benefits with Pinto payments'' is how the board's chairman described the problem in a letter to the lawyers representing Merrill and the retirees. He added that other underfunded retirement systems had similar asset allocations.
But Superior Court Judge Kenneth Govendo in Saipan observed that the trustees and the fund's administrator had an "undeserved reverence" for Merrill.
"Indeed, they seem to be cheerleaders for Merrill Lynch even though its investment strategy has turned out to be an irresponsible disaster for the fund,'' the judge wrote a 2009 ruling on a separate lawsuit filed by the pension fund against the government for failing to make contributions.
The judge added that the trustees "merrily allow Merrill Lynch to think for them and subject the retirees to a heart attack every month when the value of the fund is published."
Merrill's role as an adviser to the islands' pension fund dated back to the 1980s. Last September, the U.S. Coast Guard called off a search for 57-year-old Kenan Knieriem, a first vice president at Merrill based in Honolulu who advised the fund in recent years. The incident is still under investigation by the Coast Guard and the Federal Bureau of Investigation, a Coast Guard official said.