NMI at risk of severe fiscal crisis

As of Sept. 30, 2020, the CNMI’s total outstanding public debt was at $114.1 million, and with limited financial prospects and weak financial management practices persisting, the Commonwealth is at risk of a severe fiscal crisis, according to a U.S. Government Accountability Office report released over the weekend.

GAO said the $114.1 million total public debt, which was about 12% of the CNMI’s Gross Domestic Product ($938.8 million), reflects the CNMI’s inability to borrow from capital markets in recent years.

GAO noted that the CNMI’s financial economy continues to decline, with limited prospects for recovery as its tourism industry struggles and its largest casino, Imperial Pacific International (CNMI) LLC, being closed and unlikely to reopen soon.

With respect to Guam, as of Sept. 30, 2021, GAO found that Guam’s outstanding public debt was almost $2.6 billion, or about 43% of GDP ($6.1 billion).

Guam’s inflation-adjusted GDP declined by almost 2% annually from fiscal year 2016 to 2021. The drop reflected the decline in tourism due to COVID-19.

However, GAO said that Guam’s economy is showing signs of recovery and that the recent opening of the third U.S. military base on the island is expected to stimulate its economic growth.

In its “U.S. Territories Public Debt Outlook: 2023 Update,” GAO provides updates for the CNMI, Guam, Puerto Rico, U.S. Virgin Islands, and American Samoa, on their respective public debts and composition, trends in revenue and expenses, and risk factors that may affect each territory’s ability to repay public debt.

In this study, GAO analyzed audited financial statements for fiscal years 2019, 2020, and 2021, as available; reviewed demographic and economic data for each territory; and interviewed credit rating agencies and officials from the territories’ governments.

The Puerto Rico Oversight, Management, and Economic Stability Act in 2016 contains a provision for GAO to review the public debt of the five territories every two years. This is the fourth report in this series.

With respect to the CNMI, GAO found that the Commonwealth has struggled to finance its pension plan and that government officials told GAO they are uncertain how the government will meet its financial obligations.

GAO said the CNMI’s financial management and reporting has also worsened.

On economic and demographic trends, GAO said the CNMI’s GDP of $938.8 million in fiscal year 2020 decreased by more than 2% annually from 2015 to 2020. It increased by less than 1% annually between 2010 and 2015, but has been declining since.

The 2018 Super Typhoon Yutu and COVID-19 pandemic were cited as contributing factors to the decline in economic activity.

Tourism, the main driver of the economy, has not returned to pre-disaster levels. In addition, the closure of the largest casino, Imperial Pacific Resort, on Saipan has dampened the expectations for economic recovery.

The CNMI reported a net pension liability of $470.4 million, about 50% of GDP, as of Sept. 30, 2020, and continues to struggle to fund its pension plan.

In fiscal year 2020, the CNMI obtained a $24.3-million loan from Bank of Guam to make required contributions that year. CNMI officials have expressed concern about the government’s ability to continue to fund is pension and repay the loan.

Independent auditors determined that in fiscal year 2020, the CNMI did not properly follow pension accounting standards, which greatly reduces the reliability of this information.

In fiscal year 2020, the CNMI contributed $42 million to the fund and financed part of this contribution by a loan.

According to CNMI officials, the government planned to raise the necessary funds through a public bond issuance but was unable to finalize the bond issuance, indicating that its access to capital markets is limited.

As of June 15, 2023, the CNMI government does not have an active credit rating. Moody’s Investors Services withdrew its credit rating for the CNMI government in April 2020.

In 2013, the U.S. District Court for the NMI approved a settlement agreement with the CNMI’s government pension plan, which applied for bankruptcy in 2012.

As part of the settlement, the CNMI agreed to make minimum annual payments to the fund to allow members to receive 75% of their full benefits.

According to the fiscal year 2020 audited financial statement, the most recent available, the CNMI’s primary government had a surplus of $24.7 million, a reversal of the $48.9 million deficit in fiscal year 2019. Despite this, CNMI officials told GAO that the CNMI’s fiscal condition has worsened.

In fiscal year 2020, CNMI’s primary government revenue was a little less than $522 million, an increase of 10% from fiscal year 2019.

Primary government expenses were almost $497.3 million, a 5%-decrease from fiscal year 2019.

Spending on public welfare was almost $120.7 million, about 24% of total primary government spending that year.

The CNMI’s component units recorded total revenues of almost $253.9 million and total expenses of more than $238.1 million in fiscal year 2020, resulting in a surplus of about $15.7 million.

Compared to fiscal year 2019, total component unit revenues and expenses significantly increased in fiscal year 2020. Specifically, revenues increased 40% and expenses increased 44%.

The component units with the largest expenditures in fiscal year 2020 were the Public School System ($87.2 million), the Commonwealth Utilities Corp. ($82.9 million), and the Commonwealth Ports Authority ($33.3 million).

GAO said the CNMI government’s strategy to encourage tourism and economic activity by building casinos and hotels on Saipan and Tinian has not been successful so far, leaving the CNMI without a viable plan to restore its economy through other means.

The CNMI’s inflation adjusted GDP fell by 11.3% in 2019 and another 29.7% in 2020, with sharp declines in tourist spending, casino gambling revenue, and private fixed investment.

With the tourism industry struggling to recover, federal assistance slowing, and weak financial management practices persisting, the CNMI is at risk of a severe fiscal crisis, GAO said.

Tourism is CNMI’s primary source of economic activity. However, the number of visitors to CNMI has been declining since 2018 when Super Typhoon Yutu caused extensive damage to homes, businesses, and infrastructure, including to the Francisco C. Ada/Saipan International Airport.

The COVID-19 pandemic caused a much sharper decline in tourism revenue and economic activity, exacerbated by the subsequent closure of IPI in 2020 after just three years of operating.

Visitors in 2022 increased to 96,521—indicating a slight recovery—though still well below pre-pandemic levels.

These declines in tourism affect tax revenue and other economic activity. Revenues from casino gambling dropped more than 95% in 2020, according to the U.S. Bureau of Economic Analysis.

Furthermore, the loss of casino license fees removes a source of funding for the CNMI’s pension beneficiaries.

As for its financial management, GAO said the CNMI’s audited financial statement submissions have been increasingly delayed since fiscal year 2018 and CNM’s financial reporting issues have recently worsened.

As of June 15, 2023, the CNMI has not released audited financial statements for fiscal year 2021.

The report noted that the CNMI has longstanding issues with following pension reporting requirements and omitting components unit data from its government-wide financial statements. These problems have led its auditors to issue adverse or disclaimer of opinions on CNMI governmental activities and component units every fiscal year since at least 2017.

In fiscal year 2020, CNMI also received a disclaimer of opinion on its governmental activities because it was unable to provide sufficient appropriate audit evidence to support a substantial number of the primary government’s account balances and financial activities due to inadequacies in its accounting records.

CNMI auditors have also identified numerous material weaknesses in internal control over financial reporting that have remained unresolved for several years. Some of these material weaknesses have contributed to CNMI’s adverse and disclaimed audit opinions.

The number of material weaknesses identified by the independent auditors more than doubled between fiscal years 2019 and 2020, suggesting a deterioration in the CNMI’s internal control environment.

In fiscal year 2020, among other reported issues, auditors identified material weaknesses related to inadequate cash management practices, not performing necessary account reconciliations, not ensuring the validity of a number of account balances and transactions, and not maintaining adequate accounting records.

In a February 2023 testimony, Gov. Arnold I. Palacios stressed the need for improvements in the CNMI’s financial management, noting issues with mismanagement and misuse of federal funds.

Palacios cited several recent examples, stating that the government overcommitted about $86 million in federal funds provided by the American Rescue Plan Act and overspent its general fund appropriations by about $38 million in fiscal year 2022.

In 2020, the CNMI’s population was 47,329 people—a decrease of more than 12% since 2010, according to the U.S. Census Bureau. If this trend continues, GAO said, the government will face additional challenges.

For example, GAO said, fewer working-age residents means less employment tax revenue and less economic activity.