CNMI financial crisis

Editor’s Note: The following is the text of a letter Sen. Paul A. Manglona wrote Gov. Ralph DLG Torres.

Dear Governor Torres:

Two weeks ago you announced that your administration has determined that the CNMI government must immediately implement austerity measures to alleviate the current financial crisis. Thus the implementation of a biweekly 72-hour government work schedule austerity plan that would supposedly save the CNMI millions of dollars in both personnel and operational costs.

According to your Dec. 31, 2018, letter to the presiding officers of the Legislature, our fiscal challenges actually began about a year ago. As your letter stated, due to the decline in revenue collection as previously estimated and the excess expenditures over appropriations contained in Public Law 20-11, the Appropriation and Budget Authority Act of 2018, and the fiscal year 2018 annual report, the CNMI had a deficit of $25,910,717 for the fiscal year ending Sept. 30, 2018.

Initially, according to Secretary of Finance David Atalig’s March 18, 2019, letter to Rep. Ivan Blanco, chairman of the House Ways and Means Committee, the Executive Branch was simply going to proportionately adjust downward the fiscal year 2019 budget by 4.7 percent or $12,048,321 to meet the revenue shortfall and, at the same time, implement cost-containment measures for an additional savings of $10.9 million. On May 02, 2019, you implemented a further reduction of $17.9 million, in addition to the $12,048,321, for a total of approximately $29.9 million. This reduction adjusts the gross CNMI budgetary resources to $228,175,673 and the fiscal year 2019 budget authority to $141,506,276.

If our austerity experience in 2010 when we first implemented the unpaid government austerity holiday has taught us any lessons, it would be to reduce the Commonwealth’s accumulated deficits through a rational readjustment of expectations and public service priorities. The austerity measure of 2010 was very painful and devastating to everyone. Our employees were suffering 16-hour cuts, unpaid holidays, and payless paydays. Medical referral was almost non-existent and our lone hospital was constantly running out of pharmaceutical supplies. Our schoolchildren were going to classes without textbooks. Department of Public Safety had very few working vehicles with little to no money for fuel. One of the most difficult of all was our experience of losing our government retirement program. After learning that our retirees were guaranteed only 75 percent of their pensions, many government employees then opted out of the government retirement program. Clearly, there is no greater evidence than this collapse of our retirement fund program that the consequences of uncontrolled government expenditures and deficit accumulations can be catastrophic.

It is for this reason that I know we can all agree, Mr. Governor, that reliable factual information such as realistic current revenue estimates, true cost of government operations, deficit reduction schedule, strict financial controls, and honest assessments of program impacts should play a significant role in the formulation of our government fiscal policies.

While it is true that simply having these facts available in our possession will not make hard and painful decisions any easier, taking them into consideration during budget deliberations will result in improved government transparency and accountability, thus having greater public confidence in the legislative process.

As far as the CNMI’s realistic current revenue estimates are concerned, the following are some of the questions being raised by our people:

a. Casino Business Gross Receipt Tax:

1. What is the reason for the drastic decrease in CBGRT? In fiscal year 2016, Imperial Pacific International paid approximately $41 million; in fiscal year 2017, $68 million; in fiscal year 2018, $44 million; and in 2019, IPI paid a mere $41,000 since last July. What tax credits were earned by IPI and how much have they claimed in lieu of paying CBGRT?

2. What is the impact of Public Law 20-85 on the government’s collection of fiscal year 2019 CBGRT? Did this new law allow IPI to write-off significant loans given to high rollers as bad debts, in full or in part, from casino gross income when figuring its taxable income, thus resulting in tens of millions in CBGRT losses this fiscal year? Is there anything that the Legislature can amend in this new law to have an accountable application pertaining to casino bad debts, such as requiring collateral as security for these loans to be qualified? What verifiable and aggressive steps are being taken by IPI to collect bad debts given that gambling debts are illegal in China? Further, if the significant drop in CBGRT is mainly attributable to P.L. 20-85, then P.L. 20-10 would certainly put 25 percent of our retirees’ pension back at serious risk of being suspended.

3. Are CBGRT funds, including those previously appropriated, presently being intermingled with CNMI general fund revenues, and are being used as part of its cash flow management? If this is true, wouldn’t this put the payment of the retirees’ 25-percent pension at severe risk since the first $22 million of annual CBGRT is earmarked and continuously appropriated for the retirement pension obligations pursuant to P.L. 20-10? Similarly, I believe, because of fund intermingling, the awarding of the contract for Public School System’s $400,000 air-conditioning appropriation for Dr. Rita H. Inos Jr./Sr. High School and Sinapalo Elementary School recently had to be cancelled. DOF incorrectly determined that there was a lack of funding for the air-conditioning units when it should have stated there was cash flow management dilemma.

b. Exclusive casino annual license fee of $15 million: Are these funds, both appropriated and un-appropriated, also being intermingled with the general fund and are being used to alleviate government cash management problems? House Local Bill 21-7 appropriating Department of Finance-certified monies from this source for interisland medical referral and Rota patients subsistence allowance was also recently vetoed because of DOF’s mistaken determination of a lack of funding availability when it should have indicated shortage of cash flow.

c. Development Plan Advisory Committee report: The Casino License Agreement provided for the establishment of DPAC to report regularly to the Governor’s Office as to the status of IPI’s casino project. What reports have been submitted by DPAC to substantiate IPI’s construction progress and expected delays or changes to implementation dates affecting CNMI’s economy?

d. Marianas Public Land Trust loan: Technically, if the proposed $15 million MPLT loan is executed, we are today factoring into our budget equation future MPLT interest income, which are general fund resources that will be transferred from MPLT into the general fund as the interest income are earned each year.  Pledging interest income for fiscal year 2020 and beyond will greatly assist in offsetting some of our revenue shortfalls. However, the loan’s legality is being questioned because some consider it as deficit spending and borrowing money for government operations.

e. FEMA Assistance: How much public assistance funds (to help defray the costs and losses from Super Typhoon Yutu) is the CNMI expecting to receive from FEMA and, of this pending amount, how much is flexible enough to be made available to offset some of the reductions in our revenue? Also, regarding Super Typhoon Yutu’s 2.5 overtime pay, what is the total cost of the government’s liability, and if any violations were committed, what actions are we taking to address them?

f. $20 million casino Community Benefit Fund: How much of the annual $20 million Community Benefit Fund, a required contribution imposed on IPI pursuant to the Casino License Agreement between the CNMI Lottery Commission and IPI, can be used to subsidize the Public School System, the Commonwealth Healthcare Corp., the Department of Public Safety, the Department of Fire and Emergency Management Services, the Northern Marianas College, and the Settlement Fund minimum annual payment requirements? The next $20 million contribution is due in October of this year. Has there been any financial audit done on these funds ensuring annual compliance with the casino licensee contribution agreement?

These are all valid concerns that our people want us to address. Having these reliable factual information will greatly assist us in explaining to our people the dire economic and financial situation we are all in and the need to work with the difficult but sensible and credible proposed fiscal plan to be undertaken as we all move forward.

Further, on the government expenditure side, realistic figures on the true cost of operations must be factored into the budget formula. There is no doubt that our practice of omitting or knowingly under-budgeting known, unavoidable costs from the budget—including government utilities, medical referral services, Medicaid matching requirements, CHCC indigent care costs, and PSS’ 25 percent earmarking constitutional requirement—has been one of the main reasons for our government’s overspending.

Regarding deficit reduction, we need to put into place effective early warning systems at DOF to alert department heads about potential shortfalls and give them an opportunity to initiate timely corrective expenditure actions. This will aid in preventing future deficits, given our uncertain economic conditions and past government cash management history. What good is it to know back in December 2018 that we have a whopping $25-million deficit if it is too late to do anything about it? Having these warnings will also allow us to better assist critical departments and agencies like CHCC in providing critical health care.

I am confident that, by working together to put our government on a sustainable fiscal course, we have a better chance as policymakers to have a more orderly readjustment or belt-tightening. Most importantly, as I have mentioned above, our people will be behind us and be more willing to accept the tough austerity measures that we impose upon them because they trust that we are seriously and reasonably confronting the magnitude of our fiscal dilemma with the best interest of the people of the Commonwealth in mind.

In closing, I kindly ask for your assistance along with the Secretary of Finance in providing my office with the information discussed above.

Paul A. Manglona (Special to the Saipan Tribune)
Paul A. Manglona is a senator in the 21st Legislature.