By Mar-Vic Cagurangan
The CNMI is facing a financial meltdown due to economic decline compounded by “significant hurdles for recovery,” according to the Government Accountability Office.
“With the tourism industry struggling to recover, federal assistance slowing, and weak financial management practices persisting, CNMI is at risk of a severe fiscal crisis,” the federal watchdog stated in a report released last week.
The CNMI’s $939 million economy is fueled mainly by tourism. However, arrival numbers have been plunging since 2018 following Super Typhoon Yutu which caused extensive damage to homes, businesses and infrastructure, including to the Saipan International Airport.
The Covid-19 pandemic caused a much sharper decline in tourism revenue and economic activity, exacerbated by the subsequent closure of the partially constructed Imperial Pacific Casino in 2020 after just three years of operating.
“The casino has no timeline for reopening under the current operator and the company faces ongoing legal action,” GAO said.
The U.S. Bureau of Economic Analysis reported that revenues from casino gambling dropped more than 95 percent in 2020.
GAO noted that the CNMI rolled the dice on the casino industry to bolster tourism without a backup plan, leaving the commonwealth without a viable alternative to recover its economy through other means.
The CNMI economy was driven by the garment sector in the 1980s and 1990s until the scandal-ridden industry shut down in 2009.
“The CNMI’s inflation-adjusted GDP fell by 11.3 percent in 2019 and another 29.7 percent in 2020 with sharp declines in tourist spending, casino gambling revenue, and private fixed primary government revenues and expenses,” GAO said. “In fiscal year 2020, CNMI’s primary government revenue was a little less than $522 million, an increase of 10 percent from fiscal year 2019."
During the audit period, the CNMI government's expenses were almost $497.3 million, a 5 percent decrease from fiscal year 2019.
Spending on public welfare was almost $120.7 million, making up 24 percent of total government expenditures that year. The next largest spending categories were public safety and law enforcement, representing 17 percent, and health, representing 16 percent.
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“According to our analysis of CNMI’s 2020 financial statements, we calculated that total public debt outstanding was $114.1 million as of September 30, 2020, which was about 12 percent of GDP,” GAO said.
The outstanding debts included a $24.3 million loan obtained from the Bank of Guam in 2020 to make the required pension contribution for that year.
The loss of casino license fees removed a source of funding for CNMI’s pension beneficiaries, GAO said.
The CNMI government has struggled to finance its pensions. In 2013, a federal court approved a settlement agreement with the territory’s government pension plan, which applied for bankruptcy in 2012.
As part of the settlement, CNMI agreed to make minimum annual payments to the fund to allow members to receive 75 percent of their full benefits.
The CNMI reported a net pension liability of $470.4 million, about 50 percent of GDP, as of Sept. 30, 2020. “However, independent auditors determined in fiscal year 2020 that CNMI did not properly follow pension accounting standards, which greatly reduces the reliability of this information,” GAO said.
“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,” GAO said. “As of June 15, 2023, the CNMI government does not have an active credit rating.”
In February, CNMI Gov. Arnold Palacios underscored the need to improve the commonwealth’s financial management, acknowledging issues with mismanagement and misuse of federal funds.
Citing an example, Palacios said 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 2022.
“According to CNMI officials, in October 2021, the government began replacing its legacy financial management system with a new system,” GAO said. “However, as of March 2023, key features of the system have not been implemented. The new system is expected to address some, but not all, of these internal control and reporting issues.”