Reality Check: A $100 Million Deficit

Options being considered by the panel include reducing rebates by 10 percent which translates into $3 million dollars saving annually; immediate hiring freeze; raising fees and other taxes; and reducing government expenditures. << Gov. Juan N. Babauta. Photo: Frank Whitman

Alarmed that the Northern Marianas commonwealth government is headed toward financial disaster with a cumulative deficit approaching $100 million, Governor Juan N. Babauta formed a blue ribbon panel February 12 with a goal of eliminating the shortfall and preventing it from happening again. It's a colossal task but one that everyone contacted by Pacific Magazine said could be done if members are committed, sincere and keep politics out of their work-a challenge, given that three of the five are politicians and two, Babauta and House Speaker Benigno Fitial, were opposing gubernatorial candidates in the last election.

Chaired by Babauta, other members of the panel are Fitial, Senate President Joaquin G. Adriano, Retirement Fund Board Chairman Joseph Reyes and Chamber of Commerce President Alex Sablan.

Government leaders attributed most of the deficit to "outside influences" and the lack of proper control of government expenditures. The biggest portion of the deficit-$77 million-is owed to the Retirement Fund. Another $12 million is comprised of unpaid government utility bills to the Commonwealth Utilities Corporation (CUC). The rest is unpaid tax rebates and other encumbrances of the government.

Acting Secretary of Finance Bob Schrack said when the commonwealth's economy tumbled in the late 1990s, as Asian markets collapsed, a decision was made not to pay entirely what was owed the Retirement Fund and CUC and use the money instead to meet government payrolls and pay vendors. "CUC and Retirement Fund are part of the government so it's easier not to pay yourself," Schrack points out.

Karl T. Reyes, Retirement Fund administrator, says the Fund needs $1.4 million every 15 days to pay 1,300 retirees, a number that grows every year. He also attributed the shortfall to other taxes earmarked to the Retirement Fund that the government is supposed to remit as they are collected. But Shrack said the Legislature "suspended" those payments as they were appropriated to other projects and programs. At one point during November 2002, the Retirement Fund almost had a "payless payday" saved only when Reyes took it upon himself to withdraw $3 million dollars from government accounts at First Hawaiian Bank, a move that almost cost him his job.

Shrack says the first government deficit of $27 million occurred during fiscal years 1993-94 when the Japanese economy crashed and tourism figures dropped by 700,000 annually. The deficit peaked at the beginning of fiscal years 1997-98 to over $35 million during the Asian currency crisis. The CNMI began showing signs of economic recovery in fiscal year 2000. Ambitious austerity measures cut the deficit to $33 million. But then 9/11 hit, followed by the war in Afghanistan, the Iraq war and SARS epidemic. Revenues plunged and the cumulative deficit shot up to $62 million in 2002.

The Retirement Fund administrator also points out that the $300 million in unfunded liability to the Retirement Fund must also be addressed. That's in addition to the $77 million the government owes the Fund. "That's not all," declares Chamber head Alex Sablan, adding that receivables at the Department of Public Health are believed to be in the tens of millions of dollars. Sablan says the government needs to make every effort to collect whatever it can from health insurance providers and those who have the ability to pay.

The recent announcement to increase certain fees at the hospital is a step in the right direction, although public opposition to those increases is mounting.

Fitial says one of the governor's suggestions to retire the deficit is to float a bond, and continue exploring other avenues to stop what he called "hemorrhaging" of government funds. To pay for the bond, the governor suggested leveraging the $5.2 million in Compact-Impact funds the CNMI would receive annually for 20 years. Such a move-borrow money to pay for operational costs-is prohibited by the Constitution, says Commonwealth Development Authority (CDA) Executive Director Mary Lou Ada. She says executive branch attorneys are trying to segregate what amount of the deficit is considered operational expenditure that would make it legal to pay for from borrowed money.

Other options being considered by the panel include reducing rebates by 10 percent which translates into $3 million dollars saving annually; immediate hiring freeze; not funding new programs; privatizing certain government functions; raising fees and other taxes and reducing government expenditures.

Seventy-five percent of the government's annual budget of $213 million goes for payroll alone. Can government expenditures be lowered without terminating certain government employees? "That's impossible," declares Fitial. Still, it is one idea being floated by the panel-but few politicians are willing to talk about that subject.