Guam
Halting Guam's Downward Spiral
Financial Crisis Requires Drastic Measures
The financial crisis that Guam Governor Felix P. Camacho and the 27th Guam Legislature inherited when they took office on January 6 can be summed up simply: there is not enough money for the government to continue operating as it has in the past. Every other aspect of that problem is more complex.
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Guam’s primary source of tax dollars and livelihood— tourism—accounts for about 60 percent of the economy. The visitor industry’s peak year was 1997, when 1.38 million tourists generated $27.6 million in hotel occupancy taxes for government coffers. The August 1997 crash of Korean Airlines flight 801 in Guam killed 228 people on board and was the first in a series of blows to the island that led to declining tourist arrival numbers—and revenue. In 2002, the island welcomed 1.06 million tourists and, more importantly, generated only $16.18 million in hotel occupancy taxes. In 1996, with an 85 percent hotel occupancy rate, hotels charged an average room rate of $130. In 2002, with a 57 percent occupancy rate, the average cost of a room for a night dropped to $98, according to the Guam Hotel and Restaurant Association. Less money being charged for fewer rooms has accelerated the downward spiral.
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In addition to the decline in tourism dollars, the decline in Japanese investment has caused real estate prices to plummet. That drop in value was demonstrated when real estate developers Tanota Partners purchased 100,000 square meters of beachfront property at the edge of the Tumon tourist district in November 2002 for $7.5 million from Japanese investors who paid $63 million for the property in the early 1990s. “If we’d waited another month, we could have had it for $5 million after the typhoon,” says Alfred Ysrael, Tanota founder, former Guam senator and longtime Guam business man. “The real estate prices have continued to drop.”
Guam’s construction industry has also suffered. $322 million in building and construction permits were issued as recently as 1998, in the aftermath of Supertyphoon Paka. That number dropped to $117 million in 2001. As a result of the decline, the industry was faced with a labor shortage as business picked up following December’s Supertyphoon Pongsona. The industry is expected to get a boost as the military upgrades its facilities.
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The economic contribution of Guam’s other industry—the U.S. military—dropped as the military downsized during the 1990s. One of the biggest blows occurred in early 2000 when about 1,900 civil service jobs were lost as the Navy contracted with the less-generous private sector to provide base support operations.
“Those were high-paying jobs in the middle class of our community,” said Senator Ben Pangelinan, speaker of the Guam Legislature. “It took almost two tourism-related jobs to equal one federal civil service job.”
Other economic indicators track the loss of outside revenue. Already increasing steadily year-to-year, bankruptcy filings jumped from 288 to 376 in one year—2001 to 2002. Several notices of mortgage foreclosure appear in the local newspaper daily. The most recent unemployment figure available is 11.2 percent—7,070 people—in March 2002, but an almost equal number of people—6,840—aged 18 to 59 are listed in the Department of Labor’s Guam Economic Review as “not in labor force.” It is widely accepted that many Guam residents have left the island in search of greener economic pastures and figures from the Guam Airport Authority indicate that 17,000 more passengers have departed than arrived during the last five years.
As the crisis built during the latter part of former Governor Carl Gutierrez’s eight-year administration, friction between the governor and the legislature prevented any financial reform. “Budgets passed because they included things that were political tradeoffs,” says Pangelinan. Despite the problems in the economy, “the government of Guam made no changes and no reductions in its workforce. It was inevitable that we get to where we’re at.” And when Gutierrez, in February 2002, outlined drastic steps to confront the crisis, senators were skeptical. “We saw no commitment to cutting costs,” he adds.
At the beginning of December 2002, the government was not current in vendor payments, in contributions to the government retirement fund (which has an unfunded liability of more than $1 billion) and tax return checks for as much as three years. Having won the November election, Camacho and Lieutenant Governor Kaleo Moylan were preparing to tackle the crisis they knew was continuing to build, when Pongsona struck.
Pongsona hit Tumon and the hotels particularly hard as they were preparing to welcome visitors during the highly profitable December and January holidays. Though a few hotels scrambled in an attempt to reopen rooms and salvage some holiday business, that attempt proved futile as the tourists were diverted to Saipan and Guam’s industry essentially shut down as repairs were begun. The hotel occupancy tax and tourist-generated portion of the gross receipts tax slowed to drizzle. In addition, most island business ground to a halt for a week as gasoline sales were halted because of the fuel fires at the port. And many businesses, due to storm damage, were unable to reopen for weeks or months, if at all; all of which diminished the flow of tax money into the already-barren coffers of GovGuam.
The money that follows typhoons from federal disaster relief, insurance claims and charitable organizations has been a much-appreciated boon to Guam’s economy over the years. But after the initial emergency relief, much of it is slow in coming as claims are evaluated and losses verified. In addition, much of the money goes elsewhere for materials, equipment and supplies. And tax loss deductions will decrease the money flowing into the government treasury.
The new Camacho administration has taken four approaches to deal with the crisis. The first is a reduction of expenses. The work week for about one third of the government’s 12,600 employees was reduced from 40 hours to 32 hours. Departments sent notices to employees that they may be furloughed. Department reorganization and consolidation has been promised. Privatization and outsourcing of government services is under review.
The second effort is to generate revenue, namely through the controversial increase of the gross receipts tax from 4 percent to 6 percent, which took effect on April 1.
On March 19, the governor unveiled his strategic initiatives to stabilize and grow Guam’s economy. The plan includes the third element of his plan—aggressive attempts to stimulate the tourist industry, to diversify the economy, to encourage military activity on the island and to ensure that the island applies for, and gets, all money from federal programs to which it is entitled.
And finally, on April 16, the governor was granted the authority to apply for $218 million in “bridge financing” to get the government through the current crisis. Of the money, $139.2 million is to be used to pay income tax refunds for 2002 and prior years, $30.45 million is to be used to pay government agencies’ arrears to the government-owned Guam Power Authority, $25.28 million is to bring government retirement fund payments up to date, $15.39 million is for 2002 payroll tax withholding payments for government agencies, $5 million for vendor payments and $2.7 million for school repairs.
Though the legislature has passed most of what Camacho requested, many of the governor’s efforts have met with resistance and obstacles.
At a rally sponsored by the Guam Federation of Teachers, speakers decried the fact that though teachers’ hours were not cut, the hours of counselors, librarians, nurses and teacher aides had been reduced. Employees and parents raised concerns about discipline and student safety. One teacher said the department already lacked adequate books and supplies. Some custodians and cafeteria workers, whose jobs are slated to be outsourced, circulated a petition asking that the education superintendent be removed from her position.
Others believe the efforts at cost cutting are inadequate thus far. “None of the cost reductions are permanent at this time,” says Pangelinan. “I can’t envision the government running on a 32-hour work week for more than a couple of months. We have to reduce the size of the government and the government workforce.”
Members of the business community, in particular, have voiced opposition to the 50 percent increase in the gross receipts tax. Three bills have been introduced to repeal the increase, but none have made it out of committee. Members of the Committee to Get Guam Working and the Guam Chamber of Commerce have drawn up their own tax repeal bill under Guam’s Voter Introduction Program. Once the proposed legislation gathers the signatures of 5 percent of Guam’s eligible voters, it must be considered by the legislature.
“Businesses are already operating at losses or break-even points,” says Joseph Camacho, managing director of DFS Guam testifying before the legislature. “Tax increases at this time will result in layoffs, business closures and the delay of future investment in Guam.”
The government needs the additional immediate revenue, counters Pangelinan. “We thought it was the most efficient way of raising additional revenue without, I believe, as big a burden as the business community is making it out to be.”
While the Guam Visitors Bureau has been trying to stimulate tourism in the wake of Pongsona, the travel industry worldwide, including Guam, has been hit by the war in Iraq and the scare caused by SARS. Both events have kept the number of visitor arrivals to Guam at depressed levels and airline flights to Guam have decreased.
The governor’s budget proposal for fiscal year 2004 includes $42.17 million for debt servicing ($18.6 million of which is for general obligations the administration is hoping to secure this year). Though senators and members of the public are concerned about increasing Guam’s already enormous public debt, the politicians, businesspeople and others see it as necessary. Without sufficient government cost-cutting “this borrowing will not contribute to the resolution of our problems,” says Pangelinan. “It will only exacerbate them. But, I believe there is the political will in the legislature to make those changes.”
However, on May 6 Standard and Poor’s downgraded Guam’s general obligation bond rating from already-junk quality BB to B. The firm cited Guam’s chronic budgetary imbalances, a high debt burden and tourism-dependent economy. “It’s not a good time to be getting into the bond market, especially with a junk bond rating.” says Mick Pexa, president of Asia Pacific Investors Inc. The rating alone will probably add at least $15 million in insurance premiums to the transaction.
Then on May 13, Guam Attorney General Douglas Moylan announced that he would not approve the bond issue. Guam law requires that public debt not exceed 10 percent of the total assessed value of island real estate. Property valuations are to be conducted every three years; the last was done in 1993. Moylan says he is unable to certify that the loan would be legal. Whether the bond can be marketed without the AG’s approval is to be determined, but the question will probably concern investors.
One bright spot in Guam’s economy is the increased military activity on the island and in the region. All indications are that the buildup will continue. That is resulting in new construction projects and more local employment. Military personnel on leave have been a welcome boost to the island’s businesses.
“We have to be creative,” says Ysrael. “We have to confront the problems.”
