Future outlook on sustainability
posted 10/31/09
The twelve months of FY 2009 have been a bumpy rollercoaster ride for the Administration as it continued to bear the brunt of the global financial crisis.
Fortunately, the Administration’s investments have been rallying hard since hitting multi-year lows in the first five months of FY 2009, with MISSA losing another $12.87 million. Fortunately, it was compensated by the significant gains in the succeeding months that resulted to a net gain of $2.2million for the whole of FY 2009. For many, this may be an indication that the financial sector and world economy are close to stabilizing, as "the situation may now have stopped getting worse". But for the Administration, the road to recovery is still far from over.
Although the US economy may have suffered most from intensified financial strains and the continued fall in the housing sector, third world and developing countries like the Marshall Islands have been hit hard by the collapse in global trade as well as by rising financial problems of their own. As the country’s supply chain is totally dependent upon global trade, the inflated prices of prime commodities have seriously affected the purchasing power of the RMI residents. Fortunately, oil prices fell sharply and inflation pressures have subsided quickly around the world - but not in the Marshall Islands. Gas prices are still averaging $5 a gallon while prices of prime commodities remain high. Compounded by a very high level of unemployment in the country, the current situation brings a lot of uncertainties as to what lies ahead. With a declining economy, businesses and self-employed individuals will freeze hiring or much worse, resort to downsizing of their manpower in order to survive. A shrinking labor force will mean reduced revenues for the government and lower social security contributions for MISSA.
MISSA’s latest actuarial report is not promising either, although much better than the actuarial report five years ago. But what brought a new sense of urgency to the Administration is the distressing result of the actuarial study that if no drastic changes are made to the present benefit structure now, the Marshall Islands Retirement Fund will be fully exhausted by year 2022.
This new sense of urgency has impacted MISSA’s Board of Directors, management and staff who have now joined hands and doubled their resolve to do what is best for the people of the Marshall Islands. With the future of thousands of present and future beneficiaries at stake, MISSA is now seriously considering the following recommendations by the actuary in order to prolong the life of the Fund beyond 2022:
1. Extend normal retirement age to 65
Effect: Under this scenario, the earliest an active worker could retire would be age 65. Benefits for those in pay status would remain unchanged. The UAAL would decrease by about $11 million and the funded status would increase to about 31%. This change alone would not eliminate deficits in the future, but trust assets would not be exhausted until 2028.
2. Freeze all benefits for active workers
Effect: Although this change would not happen by itself, the purpose of this assumption is to show that the looming deficit cannot be fixed by limiting future benefits only. It will slow down future payments but will not eliminate the deficit between benefit payments and contributions. The UAAL would not decrease but trust assets would not be exhausted until well after 2040.
3. Decrease by 25% all benefits across the board
Effect: The decrease would be applied to both current and future beneficiaries. It is anticipated that current adjustments for early and late retirement that apply to the basic benefit would also apply to this cap. The UAAL would decrease by about $50 million and the funded status would increase to about 37%. This change alone would not eliminate deficits in the future, but would at least stabilize the funded percent for many years into the future.
Since FY2006, the combined amounts of benefits and administrative expenses paid out by MISSA exceeded its collections. This imbalance is expected to continue in the coming fiscal year with benefits expected to increase by 9%-10% while cash collections are projected to decline by 6%-8%. The disparity is anticipated to result to a cash deficit of at least $1.4 million in FY 2010 alone.
However, despite these distressing facts, the Administration remains optimistic that the Fund will survive the crisis.
MISSA’S FOCUS IN THE COMING FISCAL YEAR
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’s local investments continue to grow as interest from TCDs and equity earnings from BOMI were earned in FY 2009. At least another $300 thousand is expected to be received in the coming fiscal year.
Despite the reduction in the number of workers reported by Kwajalein employers, MISSA was still able to maintain positive cash flows in FYs 2008 and 2009, and expects the continued prompt remittances by 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. They 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. This translates to nearly $170 thousand annually.
Majuro’s Pan Pacific Foods (RMI), Inc. (PPF), a tuna loining plant, is also expected to provide the much needed employment opportunities to at least 500 local workers as it stepped into a new production phase in mid-2009. Despite huge losses in their initial year of operation, the company is not giving up. With higher production expected in the coming months, more workers are expected to be hired. 
It can be recalled that MISSA lost a significant chunk of its revenues in late 2004 and subsequent years when PPF’s predecessor, PM & O tuna loining plant closed down and more than 600 local workers lost their jobs. MISSA used to collect about $313 thousand a year from the said company.
MalGov has also impacted positively on MISSA collections as it paid a total of $2.04 million since January 2008. With the payment plan still in place, $1.14 million is expected to be paid by MalGov annually. A third of this amount comprised of Health Fund contributions are remitted to the Ministry of Health.
MISSA’s tax officers and auditors, with the support of the legal counsel, will continue their relentless campaign to collect past due contributions. Delinquent accounts collected in the past two years comprise of about 10% to 15% of MISSA’s total revenues.
The Administration has also embarked into cost saving measures, more particularly in power consumption, utilities, off-island travels and supplies. This translates to about $148 thousand reduction in the budget for FY 2010 when compared to that of the previous year.
Likewise, the Administration has initiated a long-term action plan that will entail more rigorous efforts by MISSA personnel to seek for information that may lead to the discovery of deceased retirees and survivors whose families continue to receive benefits, disabled individuals who have recovered from their disabilities, surviving spouses who have remarried, surviving children who are no longer eligible for benefits and non-citizens who have permanently left the country.
Lastly, although MISSA no longer enjoys substantial cash surpluses that it used to have in the past, the Administration guarantees that there will be no interruption in benefit payments in the coming months. In the event that a significant amount of contributions is not remitted on time, MISSA has TCDs in a local bank worth $4.78 million that can be used as the need arises. These TCDs represent MISSA’s short-term reserves and will be utilized to ensure that retirees and other beneficiaries of the Retirement Fund continue to receive their benefits on time.