SAN FRANCISCO — In an effort to get out from under the weight of unsustainable pension liabilities, the Commonwealth of the Northern Mariana Islands is considering selling bonds backed by islands as collateral, and legalizing gambling.
Lawmakers in the commonwealth’s House of Representatives passed a bill recently that would authorize up to $300 million of pension obligation bonds to pay off its retirement liabilities. It is now in the Senate.
Local reports have quoted lawmakers saying that several islands, including its volcanic island of Pagan, could be used as collateral for the POBs.
Another bill in the House would allow casinos to operate in the population center of Saipan in an effort to generate more revenue to pay for the pensions.
The Northern Mariana Islands “have very strained finances driven partly by the contraction of the economy since the collapse of the apparel industry,” Moody’s Investors Service analyst Ken Kurtz said in a phone interview from San Francisco. “They run persistent, large general-fund deficits of which the pensions are part of the problem.”
The Northern Mariana Islands, a stretch of 14 islands in a 300-mile archipelago that starts north of Guam in the western Pacific Ocean, has been a commonwealth of the United States since 1978. It has a population of around 61,000 people. The majority of the population and economy is centered on the island of Saipan.
The commonwealth had a general fund deficit of $316 million or 189% or revenue in 2010, Moody’s said. Of that, the rating agency said $246 million is tied to the liability to its Pension Trust Fund.
The islands’ have been running a general fund deficit since 1994, according to Standard & Poor’s.
Kurtz said the island territory in Micronesia has been able to maintain its budget in recent years by withholding payments to its pension system. He added that financial disclosure has been a problem for the commonwealth.
Moody’s removed the Northern Mariana Islands from review in September. The review was prompted by a lack of information from government officials.
If the commonwealth decides to sell the pension obligation bonds, they would be taxable and likely pay a high interest rate, relative to today’s market, because of its low rating. Barclays is said to be advising the government on the potential deal.
Barclays declined to comment for the story.
Moody’s rates the commonwealth’s GO bonds at junk level, B2. Standard & Poor’s does not have a rating.
Fitch Ratings has a B-minus rating on the islands’ airport revenue bonds.
Matt Fabian, a managing director at Municipal Market Advisors, said an issuance of POBs by the islands would likely sell at a rate of 5% or more in today’s market, which he said is “not that high” if you consider the long term.
“The rating agencies have always been far more permissive of issuers selling pension obligation bonds than perhaps they should be,” Fabian said. “We see the issuance of pension bonds as an indictment of the issuers’ willingness to pay. They are taking on a long-term, fixed obligation to help their short-term budget condition.”
That is exactly what is happening in the Northern Mariana Islands. But officials may not have much of a choice.
The commonwealth’s economy took a big hit after the U.S. government eliminated tariff advantages, extended U.S. immigration law to the commonwealth through a 2008 law, and began enforcing federal minimum wage statutes, decimating the islands’ apparel industry.
That industry had employed foreign workers at wages below U.S. norms to produce clothing labeled “Made in the USA.”
According to Moody’s, the U.S. territory’s gross domestic product declined by more than 49% from 2003 to 2009 and its population fell 22% from 2000 to 2010.
Its general fund revenues collapsed in tandem, dropping 36% over four years to $138 million in 2009, the rating agency said.
This all happened while its debt to the closed defined-benefit plan with 6,000 members kept growing.
The most recent valuation of the pension system done in October 2009 said the plan was only 39% funded, and Kurtz said that figure is most likely even lower now.
Moody’s 2012 report said the actuarial accrued liability of the system was $911 million and the market value of its investments was $353 million.
The retirement fund tried to declare bankruptcy protection under Chapter 11 of the federal bankruptcy code in April 2012. In June 2012 a U.S. bankruptcy judge in Honolulu ruled the fund was ineligible to file.
Kurtz said the island does have some bright economic spots, including rising tourism and hotel occupancy tax revenues, and it doesn’t have much debt compared to other U.S. territories and commonwealths, such as Puerto Rico or the Virgin Islands, which are much larger economies.
The Northern Mariana Islands have around $100 million of tax-supported general obligation bonds outstanding and a $7 million loan from the retirement systems, which represents 15% of its GDP or 78% of its annual operating revenues, Moody’s said.
In one of the most recent trades of the islands’ debt, $3.4 million of the commonwealth’s GO refunding bonds maturing in 2033 with an initial 5% coupon in 2007 sold in the secondary market at a yield of 6.801% on Sept. 13.
The commonwealth’s full faith and credit secures the GO bonds.
As with other U.S. territories, interest on bonds of the Northern Marina islands is exempt from taxation by any state in addition to the federal tax-exemption.
Pension obligation bonds, which are taxable, would not enjoy that advantage