The State of Yap is facing a potential government shutdown due to an impasse over the administration’s supplemental budget request.
The entire government stands to be sent home because the Office of Administrative Services (OAS) and Office of Planning and Budget’s budget division are at the center of a budget debate between the executive and legislative branches.
“If we’re forced to shut down the OAS,” Yap Gov. Henry Falan said, “the entire government will be unable to process the state payroll and all other financial transactions.”
Falan submitted the request to Speaker Vincent Figir on March 5.
During multiple public hearings in May and June, the chairs of the Yap State Legislature’s Committee on Finance and Committee on Government Health & Welfare raised legal questions that led to the questioning of the directors and deputy directors of the Department of Health Services, Office of the Attorney General and Office of Administrative Services, the main offices at the core of the controversy, while the drastic budget cut directly impacts the entire executive branch.
According to the law, the administration presents a line-item budget to the YSL every year for approval and enactment on Oct. 1. Once approved, the funds are managed according to the total funds assigned to each department, not by line item.
The committees said the budgets must be used as approved by line item in accordance with Yap’s budget and financial management laws.
Falan agreed that both laws need immediate review.
“It is vital that the legislature works with us to ensure that the government is not shut down and innocent employees are not sent home with no pay,” Falan said. “But the committees charged with handling the situation by the speaker appear to not fully grasp the necessity of acting quickly to ensure that these matters are resolved now.”
Several issues that emerged during the last few months have muddied the waters for the FY21 budget that was approved last October. Some date back to 2017 when decisions were made during the prior administration based on budget requests for FY18.
Falan inherited that budget when he came into office in January 2019.
“The legislature’s Committee on Finance agrees that it is not a question of not having the money,” Falan said. “The state has two trust funds to pull the money from in times of need. But my administration is being accused of making decisions that were not aligned with the constitution and laws of our state. Yet we’re conducting the business of the state as it has always been conducted.”
First, in the case of the attorney general’s office, Falan decided to combine the salaries of vacant positions into two to attract more qualified candidates for attorney general and assistant attorney general.
The law provides that the cabinet directors’ salaries cannot exceed the lieutenant governor’s salary that is set at $21,000.
An attorney in Palau informed Falan that entry-level law school graduates are paid $60,000 on that island nation and it would be impossible to find an experienced lawyer willing to work for the amount being offered by Yap.
“On July 28, all government employees were paid with the exception of the attorney general and assistant attorney general, who were not,” said Falan. “I am considering finding the money to send them back to their homes outside FSM.”
If Yap cannot recruit qualified lawyers for those positions at the salary established by law, Falan said he might be forced to close the office.
“This is not only unfair, it is unprofessional and it is debilitating to me when I have no legal counsel to conduct the work of that office,” Falan said.
“Is this what they really want? Perhaps it is. They have been undermining my administration from the start by taking away powers like this that are constitutionally and legally within the purview of the executive branch.”
Secondly, in 2020, the chief of staff at the hospital requested an increase in the doctors’ salaries in order to fill open positions for contractual doctors that were going unfilled due to non-competitive salaries. DHS was unable to compete in the marketplace for the talent they required at the salary levels they were offering, Falan informed the legislature.
The doctors on staff signed temporary contracts that expired in February 2021 while awaiting the YSL’s decision on their request for a salary increase. But their overtime and on-call remuneration were high and had tapped out the DHS’s FY21 budget due to the lack of doctors.
The legislature responded that a review of the situation was needed before they could move forward with the request.
And third on the list of YSL’s concerns is OAS and its finance office.
In 2017, the then-acting director of OAS discussed a plan with then governor, Tony Ganngiyan, to increase the salaries of personnel in the finance office the following fiscal year. The increase was approved by the governor and personnel office and activated in 2017 prior to the legislature’s approval of the FY18 budget.
However, OAS’s incremental funding request was not approved by the YSL in the line-item budgets presented to them over the next three fiscal years. As a result, employees in those two offices are being paid above the levels approved by the YSL. The legislature deemed the pay increases illegal.
Exacerbating the situation is the issue of available funds that were at the core of the FY21 budget hearings.
In the month leading up to the start of FY21, the YSL informed Falan that all successive budgets remained capped at the 2019 level for the next three years at least.
But by then, the Covid-19 pandemic had struck. Assuming that tax and other revenues would drop significantly when the border closed, the legislature slashed all budgets in half across the board and mandated the government to tighten its belt.
Falan’s administration subsequently revised the FY21 budget.
“We crossed off all open positions in each department; we looked at expected attrition due to retirement and other factors; we reviewed our requests for supplies and equipment and cut back where we could; we examined the agreements of contractual employees to determine when they would expire and what we might do with those positions when that occurred; and more,” Falan explained.
“After substantial consideration, discussion and internal review, we made adjustments that required very difficult decisions. No current employees would be affected other than restrictions on salary increases and promotions. We would need to watch our fixed and variable costs closely. But there would be no layoffs.”
The YSL approved the bare-bones FY21 budget.
In early March, with a clearer view of the closed border’s actual impact on the state’s revenues, Falan transmitted a supplemental budget request to the speaker “to implement some of the activities essential to government operations in fiscal 2021.”
The administration’s team determined that funds were sufficient to reinstate some of the budget cuts under local revenue and to fund essential activities.
Local revenues were subsidized by the U.S. and other sources for Covid relief.
“Not one penny of state money has been spent on Covid relief,” the governor assured the legislature.
In May, the governor submitted a supplemental budget of $556,250. Of that, $421,483 would be funded from local revenue and the remaining $134,767 would come from a Compact Health Sector grant that was approved by JEMCO and OIA and was awaiting drawdown to supplement the doctors’ salaries.
The amount of the supplement was still within the bounds of the 2019 budget cap.
The governor received a courtesy copy of the finance committee’s May 7 report that was addressed to Figir. Attached to the report was a revised bill noting the committee’s recommended changes based on their review of the governor’s proposed supplemental budget.
Surprised but pleased at receiving the committee report, a courtesy that is rarely if ever given to a governor, Falan informed his cabinet that the committee had approved only $33,619 of his supplemental request.
In rejecting the governor’s full budget request, the committee explained that vacancies and salary increases were “not recommended initially for FY21 annual budget funding.” But, they added, a review of the FY22 budget “may include considerations for funding recommendations for some of these personnel proposals.”
In other words, they were deemed new requests for the current year but could be proposed for the following year.
“They were not new requests,” Falan told his cabinet. “They were in our original FY20 budget. I do not understand why the committee interpreted them this way.”
Addressing the personnel issues, the committee notes "the differences between position titles listed by the various agencies and the master list of government official position titles maintained by the Division of Personnel.”
They urged the administration to ensure that personnel budget proposals are in line with the master list of titles and personnel regulations.
However, the approval was requested by the Department of Public Works & Transportation for $3,000 to fund the rescuers and fire fighters’ uniforms and $3,000 for fixed assets for Construction and Engineering Management.
The Office of the Attorney General received approval for $8,000 for four new computers.
The Department of Health Services was given the approval to expend $19,619 for two new doctors that include $17,999 plus 9 percent fringe benefits of $1,620 for the remaining four months of the fiscal year.
All other requests by the governor to fund the salaries for the doctors, attorney general’s office and finance for the remaining four months of the fiscal year were denied.
The YSL passed the bill on May 14 and sent it to the traditional Council of Pilung and Council of Tamol for review.
The councils transmitted the bill and letters of approval to Falan on May 31.
The bill was set to become law on June 10 if the governor did not sign it. He did not.
On May 25, Falan submitted another revised supplemental budget request to Figir, this time reducing the amount to $156,825 to prevent a shutdown.
The detailed accounting included with the reduced request stated that funding would run out for the attorney general’s office and the doctors on June 19; for the finance office on Aug. 14; and personnel on Sept. 11.
“If we don’t have the fund[s] to compensate staff of these two divisions [finance and budget], I will have to ask that they stop working due to lack of compensation,” Falan stated in his appeal. “Shutting down these two offices will have an adverse impact on the whole government due to the fact that paychecks, contracts, purchase orders, travel and other financial transactions will not be processed.”
He also noted that while the doctors’ contracts were based on the YSL-approved pay level, they would still be short in personnel funds by June 19.
The supplemental budget is to ensure payroll continuity through the end of the fiscal year on Sept. 30.
The funding, he reiterated, would come from the JEMCO-approved and OIA-granted Compact Sector Grant, not from the state’s general fund.
A meeting was held on June 2 with the finance committee, Lt. Gov. Jesse Salalu and the directors of the OPB and OAS.
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At a meeting the following day, they informed the governor that the committee was equally concerned about the government shutdown, and acknowledged the availability of funds for the supplemental requests.
The committee chair said funding was not at issue. Rather, it was the YSL’s mandate to present a concrete plan to correct the personnel and finance offices’ illegal actions.
In response to Falan’s May 31 plea to the YSL to honor his latest request, public hearings were scheduled for June 8.
The frustrated governor told his cabinet that he would not veto the bill, lest “there will just be more hearings and more discussions and more meetings and nothing will be resolved.”
The finance committee chair noted during the hearing that the government cannot be obligated to pay funds that are not approved by the YSL.
The attorney general and the legislature’s legal counsel are at odds over the interpretation of the law and the way in which the budget is presented for approval and managed by the departments.
The legislature’s legal counsel, Leelkan Dabchuren, said shutting down the entire OAS is not consistent with the state’s Financial Management Act.
The departments are bound to account for their expenditures according to the approved line items, she said. They are not authorized, according to the Government Ethics Act, “to move funds around.”
The attorney general disagrees with her interpretation, saying that once the budget is approved and the funds are appropriated, the department heads are authorized to manage the funds according to actual need.
Based on the clashing interpretations of the law, the YSL said it will make a decision based on what it has learned from the June 8 hearings.
“We need the legislature to partner with us as collaborative branches of our government to find a solution to this problem,” Falan said. “Every time we offer possible solutions, they tell us what they don’t like but we need to find a common way out of this inherited morass so we can arrive at a unified, functional system of government.”
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