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Fiscal summit aims to address decades of deficit, Covid-19

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THE CNMI government opened its Fiscal Response Summit on Thursday morning with two tasks at hand: assess the size and nature of the CNMI’s current economic crisis and identify potential solutions. The participants of the summit, composed of nearly 50 representatives from the public and private sectors, will present their results in a closing plenary session on Tuesday, April 28, at 1:30 p.m.

“Today we are working toward accomplishing something new,” Gov. Ralph DLG Torres told the session’s listeners in his opening address. “We are, for the first time, trying to right the direction of the Commonwealth finances after an accumulation of obligations, expenses, and practices that have been left unchecked since the Trust Territory government.”

Graduate School USA, or GSU, a Washington D.C.-based non-profit guiding the summit whose financial management services are funded by the Department of the Interior, clarified during the opening session that it was brought onboard to collect and report information about the CNMI government’s economic state — not to assign blame.

GSU senior program manager Jason Aubuchon said that while the summit — held over Zoom — involves analyzing data taken from government audits dating back to 1986, the focus is not to audit the government, but to lay out “the current size of the problems, making sure that [attendees] have the details that they need to be able to pull together a fix.”

The CNMI government is on track to end FY 2020 at a $65 million deficit. That would bring the government’s total accumulated deficit to $150 million. This year’s budget originally amounted to $233 million. GSU recommends that the FY 2020 budget be reduced by 28% to $168 million so that the CNMI government can, at the very least, avoid digging itself deeper into the hole.

As laid out in the Commonwealth Fiscal Response Briefing Paper prepared by the governor’s Fiscal Response Task Force (which includes Aubuchon and fellow GSU staffers Debbie Milks and Kevin O’Keefe), such a significant reduction in the budget could be achieved through “a broad range of fiscal policy options” involving expenditure reductions, revenue enhancements, re-allocation of public funds, and financing options that may involve seeking federal support.

The fiscal summit attendees have the unenviable task of weighing these options, which are likely to trigger a substantial rise in unemployment and the defunding of programs across the public and private sectors.

GSU economic advisor Kevin O’Keefe told Variety that the local government’s fiscal problems date back far before the global pandemic.

“I don’t think that a crisis would have been entirely avoided in the absence of Covid-19,” he said. “The clock was ticking on an inability of the government to meet its payroll coming into the year. Covid has accelerated that.”

GSU attributed the CNMI government’s economic woes to six key factors: “a rapid growth in expenditures in the period since FY 2013; a dated tax and revenue system that relies heavily on relatively volatile tourism and gaming sources to support ever-growing government services to the people; judicially mandated pension obligations; expenditures persistently under-budgeted, especially for medical referrals, overtime, utilities and banking fees; the prevalent practice of earmarking revenue sources — thereby adding binding regulations to the fiscal operations of the Commonwealth; and moderately high outstanding liabilities relative to the size of the CNMI economy.”

GSU financial advisor and CPA Debbie Milks said that there have only been a handful of years in which the CNMI completed a fiscal year without any accumulated deficit: 1988, 1989, and 1990.

“I was here in the CNMI at the time,” she said. “Lots of hotels were coming up, there was a huge economic boom and expenditure habits just hadn’t quite caught up with those revenues that were coming in.”

“They caught up quickly,” she added.

O’Keefe agreed that the CNMI’s spending problems span decades.

“It’s more than 30 years where the pattern of tending to overspend persists and the pattern of having an accumulated deficit persists,” he said, adding that this approach is “particularly inappropriate” given the CNMI’s heavy reliance on the tourism industry.

“Any jurisdiction or any country that has a narrow economic base has to expect that there will be volatility, and therefore cannot have a pattern of overspending year after year. They have to have a pattern of saving during the good years.”

But in the CNMI’s “good years,” government expenditures tend to rise with revenue. And when the tourism market stalls and that rise in revenue falters, the rise in expenditures is slow to adjust.

According to data provided by GSU (Graph 1), revenue and expenditures rose together from 2015 through 2016, but revenue began to dip well below expenditures over the course of 2017 and is projected to dip even lower, to $191 million, at the end of this year. The CNMI expected to spend $250 million in FY 2020, hence the $65 million annual deficit.

 

And while FY 2020 is on track to creating one of the most significant annual deficits in CNMI history, it’s worth noting that the Commonwealth’s accumulated deficit once dipped about $60 million over the course of only two years. Those years were 2018 and 2019 (Graph 2). The CNMI closed FY 2017 with an accumulated deficit of $39 million; that negative number rose to $94 million by the end of FY 2019.

Press Secretary Kevin Bautista said “a lot has happened” since the current administration took office in 2015, from periods of significant economic growth to crippling natural disasters.

In regards to increased expenditures over the recent years, Bautista told Variety that the administration intended to convert the surge of revenue into job opportunities in the public and private sectors. GSU found that since 2013, the CNMI government’s personnel expenditures had increased by 136%.

Bautista added that the government’s reserves were drained by a spike in medical referral costs, overtime costs, and up-front costs associated with Super Typhoon Yutu, and that the resulting deficit was “accentuated by Covid-19” and the loss of revenue from shutting down flights.

“It forced us to look at ourselves as a government…. We have to look back and see what [the CNMI has] inherited from the [Trust Territory] years.”

During the Fiscal Response Summit’s opening plenary, O’Keefe told listeners that “Covid-19 qualifies as a major cyclical shock to the CNMI; one that's, I think, quite possibly the greatest of any of the jurisdictions that I've ever worked with before.”

“And it's probably substantially larger than what most states and local governments are facing in the mainland of the United States.”

That said, the federal government is certainly suffering from a financial crisis of its own. Forbes recently reported that the federal budget deficit is projected to hit $3.7 trillion by the end of FY 2020, “the deficit’s largest size as a portion of the economy since World War II.”

And according to information from the U.S. Congressional Budget Office, the U.S. has finished every fiscal year hundreds of billions of dollars over budget since 2002. With the exception of 1998, 1999, 2000 and 2001, the federal government has deepened its own federal deficit every year since 1969.

During the opening plenary session, O’Keefe recalled a situation somewhat similar to that of the CNMI, which he encountered two decades ago: during the SARS epidemic of the early 2000’s, a GSU team was dispatched to the Cook Islands, where the small, tourism-based economy was withering without Asian visitors.

Before SARS, the Cook Islands were already in debt with no money in the bank. They also possessed a narrow economic base dominated by tourism.

“The Cook Islands had a very major self-inflicted crisis that was nearly as large as what the Commonwealth is currently facing now,” O’Keefe recounted. “They suffered from a long period… [in which] they tended not to set money aside and they relied on borrowing, even for operations benefits. So there are a lot of similarities with the CNMI.”

“The kinds of cuts that they had to contemplate were about 30% of their overall spending, and they had to keep those cuts in place almost permanently. There was a gradual recovery in the size of government over a 10-year period.”

O’Keefe added that ultimately the crisis forced the Cook Islands to make positive changes from which they continue to benefit.

“The kinds of things that they had to do — reducing the size of government, increasing taxes, changing the way the government interacted with the private sector, releasing some government departments to become either corporations of private entities — all of those changes that they undertook have pretty much resulted in them being a stronger economy.”

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