2009 Outlook on sustainability
Looking back into FY 2008, the Administration saw the worst months in recent financial history. The world market dipped into a steep plunge that created a global panic. Like any other investor, MISSA was not spared as its $53.95 million offshore investments at the beginning of the fiscal year dropped to $46.33 million as of September 30, 2008.
Although the current global system is highly vulnerable and uncertain at the moment, MISSA’s investment portfolio is designed to ride out market volatility and market cycles. It is prudent, widely diversified and divided into 12 separate asset classes to reduce risk while achieving global market returns. MISSA believes that it has more than adequate time for its investment portfolio to recover. Aside from routine rebalancing, the Administration anticipates no changes in its investment program and strategies in the new fiscal year.
MISSA has a healthy, cash-rich balance sheet at the end of FY 2008. Of its $46.33 million offshore investments, about $17.96 million represent short-term, high quality bonds which are near cash equivalent. In addition, MISSA has Certificates of Deposit (CD) balances with BOMI of $4.55 million which earns interest at 5% per annum.
MISSA’s local investments continue to grow as interest from CDs and equity earnings from BOMI were earned in FY 2008. At least another $1.3 million is expected to be earned in the coming fiscal year.
Despite the 186 reduction in the number of workers reported by Kwajalein employers, MISSA was able to maintain a positive cash flow in FY 2008. The RMI Government, KRS and Chugach Development Corporation – the two main employers in USAKA, and several big employers on Majuro who have consistently paid their contributions on time in the past, are expected to be the same revenue driving forces in the coming fiscal year.
Another significant source of revenue that MISSA expects from Kwajalein is the very generous offer by USAKA on behalf of the Army & Air Force Exchange Service (AAFES) to gratuitously contribute amounts equal to the employer’s share of the MISSA and Health Fund contributions, on behalf of its 100 plus RMI citizen employees.
Under Article VI of the US-RMI Status of Forces Agreement, an agency of the U.S. Department of Defense is exempt from all taxes, customs duties, fees, charges and license requirements of the government of the Republic of the Marshall Islands. AAFES is an agency of the Department of Defense.
In addition, U.S. Government agencies and officials are immune from the jurisdiction of courts of the Republic of the Marshall Islands, pursuant to Section 174 of the Compact of Free Association, as amended. As a result, the Social Security Act is not applicable or enforceable to AAFES.
MalGov has also impacted positively on MISSA collections as it paid a total of $1.1 million since January 2008. With a new payment plan in place, another $1.1 million is expected to be paid by MalGov in FY 2009. A third of this amount comprised of Health Fund contributions, are remitted to the Ministry of Health.
Despite its huge cash reserves, MISSA is continually in search for ways to increase collections and cut on costs and expenses. As in the past years, the Administration will continue its aggressive collection campaign thru house-to-house visits, payroll audits and legal actions. It also aims to maintain benefit payments and administrative expenses at sparing levels by introducing stiffer restrictions on eligibility requirements and more cost control programs.
FY 2009 is expected to be the most challenging year for the Administration. The financial crisis that started as early as late 2007 in the U.S. and the unprecedented increases in world oil prices in mid-2008 created a domino effect worldwide. As a result, the inevitable happened – recession. It brought tremendous financial chaos to the U.S. and certain countries in Europe and in Asia. Consequently, the RMI’s economy reacted accordingly and is expected to continue to struggle with difficulty in the coming year.
Although shipments of goods from overseas continue to flow in on time, consumers are still faced with spiraling price increases on basic commodities.
As inflation continues to reach unparalleled heights, the economic condition in the country is further aggravated by the increasing level of unemployment. Thus, the purchasing power of consumers will proportionately decrease. Relatively, it will translate to lower revenues for businesses and self-employed individuals, and will be further worsened by stiff competition among them. All of these factors will seriously impact the private sector’s capacity to pay present and future taxes and social security contributions on time.
Now, MISSA finds it increasingly more difficult to deal with long-outstanding delinquencies by businesses and certain government agencies in financial distress. Many of such employers have been prosecuted and ordered by the court to pay but to no avail.
Although the Administration, as recommended by its Actuary, has considered the option to increase the combined rates of employer-employee contributions currently at 14% for Retirement Fund and 7% for Health Fund, it believes that it is not yet the right time. Such increase may put additional burden to the current financial difficulties that businesses and workers are facing.
Instead of an increase in contribution rates, MISSA’s Tax Officers and Auditors were urged to double their collection and audit efforts, and remain vigilant against delinquent employers and self-employed individuals.
Another difficult challenge that the Administration continually faces is the constant introduction by certain lawmakers of legislations that, if passed into laws, would be detrimental to the financial viability of the Retirement Fund. Fortunately, the majority of the country’s legislators supported and believed in MISSA’s stand that the present financial position of the Retirement Fund is not yet ready to support any benefit increases.
With all of the above in mind, coupled with the fact that MISSA does not have any significant short-term liability to pay, the Administration firmly believes that benefit payments, expected to increase by about 8%, and administrative expenses will be sustained by contributions and investment income (dividends & interest) in the coming fiscal year without making any drawdown from its investments.
Lastly, the Administration continues to earn the support of the President of the Marshall Islands, his Cabinet, the Nitijela, employers and the general public. Its Board Members remain diligent and prudent in their roles as fiduciaries of the Retirement Fund while MISSA management and staff continue to remain efficient in their respective duties and responsibilities. These factors have been the main reasons why MISSA had its successes in the new millennium.