South Pacific Fund Has Sinking Feeling

Mariana Islands Is First U.S. Pension System in Bankruptcy

by Michael Corkery, WSJ (excerpts)

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. …

…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….

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.

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