Cover Story
A Brewing Storm
Can Felix Camacho Fix Guam?
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| An overflow crowd watches Governor Felix Camacho’s inauguration ceremony on television. Photo: Frank Whitman |
The U.S. territory is poised to begin what by all accounts looks to be its biggest period of economic growth in history. At least $10 billion and by some estimates as much as $15 billion in U.S. federal spending will pour into the 160-square mile territory over the next 10 years. The island could enjoy a boom the likes of which have never been experienced in the Western Pacific Islands.
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In addition to an election legal challenge in the U.S. Supreme Court by opponent Robert Underwood, here’s some of what Camacho faces: The territorial government is operating with a deficit that some lawmakers believe is massive. There are hundreds of millions of dollars in unpaid bills to vendors, taxpayers and government retirees. The territory’s unfunded liability to the government’s retirement system has reached a staggering $1.4 billion. And visitor arrivals, particularly from the all-important Japan market, have gone flat after a period of steady growth.
There is some good news on the civilian front. Foreign investment has returned to the Tumon tourist district and residential real estate prices have risen dramatically sparking an increase in housing construction; and the promise of billions of dollars in U.S. military construction funding to support 8,000 U.S. Marines who will be deployed to the island from Okinawa has boosted the optimism of Guam’s business community.
In early 2007, however, Camacho finds that he is confronted with sobering economic indicators that the recovery of the past two years has hit a plateau.
The Guam Visitors Bureau reported that tourist arrivals during 2006 dropped by 1 percent compared to the previous year. The island’s public auditor reports that revenue generated by the territory’s only commercial port, based on the amount of cargo moving through it, decreased 5 percent during fiscal year 2006. Similarly, airport revenues during FY 2006 fell by 4 percentage points.
While construction activity is evident around the island, according to the Guam Department of Labor 4,090 people worked in the industry in September 2006—180 fewer than a year earlier. And indications from military officials are that construction related to the Marine relocation will not begin any earlier than 2010.
According to data submitted to the Guam Legislature by Camacho with his fiscal year 2008 budget proposal, revenues to the government’s general fund—which hit a disastrous low of $320 million in fiscal year 2002 and had climbed to $443 million in FY 2005—dropped to $417 million for fiscal year 2006. The government budget for fiscal year 2006 was $435 million—leaving an $18 million shortfall.
The Camacho administration is burdened with a other financial obligations. A recent court decision awarded $90 million in federally-mandated Earned Income Tax Credits to working-poor taxpayers for years past and obligates the government to pay the credits each year. Another court action awarded $123 million to government of Guam retirees—a valued, and vocal, voting bloc—to settle a 13-year-old lawsuit over the payment of a since-discontinued Cost of Living Allowance.
A U.S. federal court decree mandates closure of the Ordot garbage dump. Government of Guam officials are asking for an extended timetable. They concede that the government cannot meet the original October 2007 deadline for the construction of the new landfill and the closure of Ordot. The process is likely to cost between $20 million and $50 million.
Camacho also inherited debts of $129 million to the government employees’ retirement fund (not to mention an unfunded liability of $1.4 billion) and $30 million in electricity bills. And the government owes taxpayers more than $142 million (possibly more than $200 million) in income tax refunds.
In 2003, as part of his strategy to tackle the tax refunds and other government debt, Camacho proposed securing more than $400 million on the bond market. The plan was frustrated by then-Attorney General Douglas Moylan who claimed the move would put total government of Guam debt above a statutory ceiling. The matter went to court and though rulings favored Camacho, Moylan appealed and the case was heard by the U.S. Supreme Court on January 10 with a decision expected no sooner than June (though the court’s timetable is unpredictable).
The Guam Public School System—by far, the government’s largest department—has had particular difficulties. GPSS was budgeted to have received $28.8 million for October and November (the first two months of FY2007), but received only $18.4 million. As a result, paychecks were issued to employees, but payroll deductions to employees’ insurers, lenders and the like were not made until weeks later. A perennial teacher shortage motivated law makers to increase teacher salaries by 14 percent, which although included in the budget exacerbated the cash flow problem.
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| Governor Camacho says tax collectors must be more aggressive, and he wants more management authority over the budgets of certain departments. Photo: Frank Whitman |
The school system is also faced with a new law making the department civilly liable if it fails to provide students certain minimal standards including certified teachers, textbooks and clean, working restrooms—all ongoing problems requiring significant funding. In addition, the Camacho administration, through an innovative funding program, is building four much-needed, new schools, which will require funding for maintenance and operations when complete.
The University of Guam, as of early February, was owed $10 million from the both the previous and current fiscal year. It has frozen hiring, eliminated unnecessary travel and reduced division budgets to 80 percent as part of a 10-point
austerity program.
Guam’s court system was shorted $1 million in fiscal year 2006 and is already owed $1.3 million for FY 2007. The money was designated for indigent defense, the drug courts and a range of vendors. As a separate branch of government, the court budget cannot be put in the same category as other agencies. Though it is working with the administration, the judiciary is prepared to “take it to the next level,” said Daniel Tydingco, director of policy, planning and community relations.
Financial optimism and election promises have been replaced by the specter of a debilitating deficit. Sen. Rory Respicio of the Guam Legislature has become an advocate on the issue, claiming that administration officials had not been forthcoming with accurate data for informed budget decision-making. He has introduced legislation requiring the current fiscal year budget be revised, that the Legislature has its own office of finance and budget to make independent revenue forecasts, and that government officials be sworn in when testifying before the Legislature on financial matters (making them criminally liable for untrue statements).
Camacho officials peg the government’s deficit at $511 million. Respicio claims it is at least twice that and that in any case, the numbers “are very, very large.”
In order to avoid the customary last-minute scramble to pass a budget at the end of September, agencies were required to submit their fiscal year 2008 budget requests to the Legislature by January 31. Camacho characterized his $457 million FY 2008 budget as “conservative” and in fact, it is about the same as that for 2007 (less than expected).
If the U.S. Supreme Court ruling prevents Camacho from securing a bond, the pressure to reduce spending will be increased. “If we can’t borrow then we have to simply ensure that as we budget out every fiscal year, certain amounts are set aside to pay down the debt,” says Camacho.
Camacho also says tax collectors must be more aggressive, ensuring that work done on military bases is taxed properly. He pegs uncollected taxes at $120 million. He has also requested more management authority over the budgets of departments that had been made autonomous, particularly the public school system. “More than 50 percent of all our revenues are dedicated to education, which I have no control over,” he said. “We are now a pass-through; the revenues come in and we pass it through to GPSS with no accountability of how it’s spent and what priorities are.”
Public Auditor Doris Flores Brooks, an elected position since 2002, said accountability is improving in the government but sees the bigger problem as revenue “seepage”—tax exemptions granted to a number of businesses and military contractors operating outside the local government’s radar. Most hotels and insurance companies have tax exemptions. She recently found a $1 million tax exemption because a company was helping to maintain the island’s baseball stadium.
“We have deteriorated our revenue base to the point where there’s more seepage than revenues coming in,” she said. “We have all this economic activity and it doesn’t translate into the revenues that Guam used to enjoy. If the Marines come, the future of Guam will be bright. But we have to shore up now.
