FY2004 audit reveals NMIRF's unfunded pension liability of $516.9 million
(March 14, 2006)
The audited financial statements of the Northern Mariana Islands Retirement Fund as of September 30, 2004 showed the Fund comprised the largest balance of net assets of any government agency. According to conducted by J. Scott Magliari & Company, since 1996 when the Fund had net assets of $211.7 million, the Fund has grown to a total of $373.7million – an average annual growth rate of 9.6%.
Unfortunately, even with this impressive growth rate, the audited financial statements reveal an entity with serious financial problems. These problems have culminated in the creation of an unfunded pension liability totaling $516.9 million as of the end of FY 2004 . This unfunded portion is shown as a contingent liability to the Fund and is not directly reflected in the financial statements. The reason for this is that the Fund must rely upon estimates and assumptions in the calculation of future funding needs. These estimates and assumptions include: future life expectancy of members, future earnings of the fund, future contributions by the general fund, future inflation factors, average retirement age of the members, future administrative costs of the Fund, future survivors of the members and future turnover of non-vested government employees.
As a result of these cumulative future estimates and assumptions, the unfunded pension liability can fluctuate substantially. As an example, the current unfunded liability is a reduction of $57.5 million from the prior year. This reflects an overall improvement in the Funds investment portfolio.
The magnitude of the cumulative unfunded pension liability, however, reflects certain basic weaknesses in the structure of the fund. These include the failure of the general fund to promptly remit the full amount owed to the Fund.
As of September 30, 2004, the cumulative non payment of approximately $92 million in required general fund contributions to the Fund has severely restricted the amount of funding that the Fund can place in long-term investments. Had these contributions been paid when due, the unfunded deficit realistically would have been reduced by approximately 20% due to the principal contributed and the potential earnings which would have been generated. The lack of timely general fund contributions was a direct factor influencing the Board of Directors’ decision to sell a portion of its Home Loan Portfolio to a private sector bank to raise $3.0 million in cash for distribution to members.
With regard to benefits, the Fund had a total of 2,389 beneficiaries, including retirees, survivors and the disabled. This group received a total of $48.4 million in paid benefits, or about $20,000 per person for the year. Since 1997 the number of beneficiaries has grown by 51% while the total contributing membership of the plan [government workers] has only grown by 6%. In 1997, there were 3.42 workers for every beneficiary; by 2004 this ratio decreased to 2.4. In effect, the Fund today has fewer workers contributing in relationship to the number of beneficiaries. Fiscal pressures to downsize the number of government workers will further strain the Fund’s ability to meet its obligations to its beneficiaries unless contribution rates are significantly increased or beneficiary benefits drastically reduced, or both.
Administrative expenses of the Fund in Fiscal Year 2004 totaled $1,646,748. This is a reduction of $45,611 from 1998. The financial discipline and cost containment measures imposed by the Fund’s Board of Directors and Management are commendable and provide a good example for all government agencies.
For the 2004 fiscal year the Fund received an unqualified, clean audit opinion from the independent auditing firm of J. Scott Magliari & Company. Additionally, the auditors did not report any audit findings. This is a major achievement for the Fund. OPA commends the staff, management, and Board of the Fund for this achievement and for the production of a very informative Management Discussion and Analysis which is contained in the audit report.
