Hearings and Business Meetings
March 1, 2006
SD-366 Energy Committee Hearing Room 09:30 AM
The Honorable Pedro Tenorio
The Honorable Pedro A. Tenorio
Resident Representative to the United States
on behalf of himself and
the Honorable Benigno R. Fitial
Governor of the Commonwealth of the Northern Mariana Islands
Senate Energy and Natural Resources Committee
March 1, 2006
Good morning, Senator Domenici, Senator Bingaman, committee members, Governor Camacho, Governor Tulafono, and Governor Turnbull. My name is Pedro A. Tenorio; I am the Resident Representative to the United States from the Commonwealth of the Northern Mariana Islands. On behalf of Governor Benigno R. Fitial, I extend his apologies for being unable to be with us today. He is facing many challenges in the CNMI and has asked me to speak on his behalf and on behalf of the people of the CNMI.
It is both an honor and a rare privilege for me to be testifying in your committee in order to familiarize you with the CNMI's economic and financial problems. I have so much to report to you, Mr. Chairman, and I hope that by the end of my presentation that you will appreciate the enormity of our problems and the important role that this Committee will play in helping us minimize the damage and further erosion of our economy, and help us prevent further loss of critical government revenue that provides vital public services and jobs.
This hearing is very timely for the Northern Marianas as well as, I am sure, for our sister territories. As I speak, our economy is rapidly deteriorating and our government is on the verge of bankruptcy. Please allow me to explain.
Brief Overview of Economic Conditions: Then and Now:
More that a quarter of a century ago the people of the Commonwealth of the Northern Mariana Islands exercised their inalienable right of self-determination and freely entered into a political union with the United States. Congress, through the enactment of Public Law 94-241, formally approved the Covenant to Establish a Commonwealth of the Northern Mariana Islands in Political Union with the United States of America. The Covenant placed the people of the Commonwealth under the sovereignty of the United States, and the Constitution and treaties and laws of the United States became applicable to the Northern Mariana Islands.
For many years the economy of the CNMI was a success story. For a period of time the CNMI not only achieved but surpassed its goal of economic self sufficiency. In 1978, at the beginning of our political relationship, we began with a small private sector with minimal business gross receipts, and twelve years later in 1990, CNMI businesses reported 1.2 billion in business gross receipts. Our economic achievement was so great by 1992 that our government was able to voluntarily relinquish its Covenant entitlement of $10.3 million in guaranteed annual federal funds for government operations. By 1996 business gross receipts exceeded 2.6 billion dollars as the private sector was thriving largely due to extensive Japanese investments. Unfortunately during the last seven years, our economy began to decline, first slowly then at an accelerated rate.
While our economy thrived during these early years from foreign investments, we realized that a permanent tax base must be put in place in order to prepare for unexpected changes in the global economy. Largely because of our geographic location and the absence of valuable natural resources like oil, minerals and other commercial resources, the CNMI economy had to be necessarily based upon two industries. Many economic experts advised us to aggressively promote garment manufacturing and tourism, both very attractive and conducive to our islands because of proximity to tourist markets and an abundant workforce from neighboring Asian countries. Since the early years of our Commonwealth government, these two industries have been our government’s most important source of tax revenue. Asian countries are the primary market for our tourism, and our apparel products are imported to the United States due to then existing trade advantages the CNMI had over other nations. We realize, nevertheless, that both industries, however, are still highly susceptible to external factors such as changes in international trade agreements, the economic stability of the U.S. and foreign countries, airline and shipping strikes, political instability in our region, and disastrous typhoons and drought, to name but a few.
Our options for other more viable and permanent investments were limited despite the advantages provided by our Covenant in control of immigration and our exemption from federal minimum wage. In retrospect, the CNMI would not have been as successful economically had these exemptions been terminated early in our political relationship as some in Congress have maintained. We would have been forced to continue receiving the Covenant-guaranteed government operations subsidy, and would not have accomplished so much in infrastructure improvements utilizing locally raised funds.
In 1996, 736,117 tourists visited the CNMI primarily from Japan and Korea. It is estimated that visitors spent approximately $581 million in our retail stores, restaurants, in hotels and other tourist amenities. Our hotels’ average occupancy rate was 85.6%. In 1997 the East Asian economic bubble began to deflate, the number of tourists began to decline, and the length of their stay and the average amount they spent decreased. In August of that year, a Korean Airlines jet crashed on our neighboring island of Guam, and immediately suspended all flights to Guam and the CNMI. In September of 2001, the terrorists’ attacks on the World Trade Center and the Pentagon caused an immediate reduction in the number of tourists to the CNMI. In 2003, the SARS outbreak in Asia severely curtailed travel throughout the region, and our tourist arrivals steeply declined. There is truth to the saying that when Asia develops a cold, the small pacific islands develop pneumonia demonstrating how vulnerable our tourism sector is to events in Asia.
The visitor industry had stabilized with approximately 500,000 visitors annually until October 2005 when Japan Airlines announced a complete withdrawal from the CNMI market attributable to consistent operating losses which forced it to make drastic business decisions. While other airlines are attempting to pick up those routes out of Japan and make up for the loss, little progress has been made and the effects of the JAL pullout appear to be long term. JAL represented 40% or 237,222 seats of the CNMI’s total air seat capacity out of Japan or a potentially permanent loss of 167,000 visitors a year.
The garment industry recorded its best year in 1999 when its total sales to U.S. buyers exceeded $1 billion. Since that time, there has been a consistent downward trend resulting in an overall drop in sales of 34% to date. Declines in production since 1999 are attributed initially to the negative impact due to the implementation of the African Growth and Opportunity Act (AGOA) and the Caribbean Basin Trade Partnership Act (CBTP). Most recently, the elimination of quotas under the World Trade Organization on countries importing to the United States, such as China has greatly added to the loss in sales. The initial advantage provided by General note 3(a) of the Harmonized Tariff Scheduled is no longer an effective factor in maintaining competitiveness with apparel products from foreign countries bound to the United States. In 1999 there were 34 factories in the CNMI. This number dropped to 28 in 2003, and today there are only 19 producing factories with two more set to close in the near future. If there had been no import safeguards implemented by the U.S. last year, that kept our factories operating, it is predicted that by the end of 2007, most if not all our factories would completely shut down.
These declines in garment manufacturing and the sudden withdrawal of a major airline serving our visitor industry have devastating negative multiplier effects in other segments of the CNMI economy as well. In fact, shipping companies, and assorted small businesses such as grocery stores, retail stores, insurance companies, security companies, and all manner of support industries have also suffered, and many of these businesses are expected to downsize and some will even shut down. Rather than going into a detailed description of our economic and financial ills, Mr. Chairman, I am including for the record these reports and statistics for your reference.
The Negative Impact of a Weak Economy on Government Revenue/ Services
The CNMI government is the third largest employer in the Northern Marianas with a combined workforce of about 5000 civil service and contract employees. Since the installation of Commonwealth government in 1978, it has operated our power generation facilities, water systems and water and wastewater treatment facilities, the public school system, the Commonwealth Health Center (our only hospital), health clinics, a community college, three airports, three seaports, and provides for the public safety of the residents, including operation of prison and correctional facilities. Because we have three populated islands, namely Saipan, Rota and Tinian, many government services must be duplicated for each island.
The CNMI government is funded by taxes and the collection of fees for various services. In 1990 CNMI General Fund Revenues accounted for $116.7 million. Revenues peaked in 1997 at $248 million. However, five years later, due to a noticeable decline in manufacturing, visitor arrivals spending, General Fund collections had dropped 20% to about $200 million, in 2002. As revenues declined the government began imposing cost cutting and austerity measures and was able to reduce expenditures. While some measure of budgetary and expenditure control were instituted, they did not substantially improve the financial picture and cash flow, and as to be expected, by the end of September 30, 2002 the CNMI was faced with a cumulative deficit of $74.8 million. I have been informed by the Secretary of Finance that the deficit as of January 2006 exceeded $100 million. Some austerity mechanisms used over the past six years to curtail spending included deferred maintenance of public facilities, delayed or deferred payments of the government's share of retirement contributions, and delayed or non payment of overnment utility bills, private vendors and government contractors. More drastic austerity measures which will subject many people to suffering and increased indebtedness are now being implemented by the new administration as described later in this testimony.
These austerity mechanisms should only be used temporarily as a crisis management tool as long term use only adds to the government's financial fiasco. In addition, short term solutions and strategies to revive our economy have not been effective or fruitful. Sadly, and unfortunately, the CNMI government is now seriously and unavoidably confronted with a potential economic and social calamity unless some external assistance is provided. Our public schools and hospital are in deplorable and unsafe conditions. We have the highest student teacher ratio in the country. Our retirement system repeatedly faces shortages and the possibility that it cannot meet monthly annuity payments. The CNMI’s debt to the Commonwealth Utility Corporation has left it with a lack of operating capital and its own mounting debt, and has led to the lack of power plant maintenance, unscheduled outages, and brownouts. This coupled with the record high prices in fuel oil have left this government owned utility near bankrupt, and requiring a minimum $24 million government bail out just to keep the lights on until the end of the fiscal year. Let me also add that during brownouts and power outages our water system shuts down, closing down schools and offices, creating unsanitary conditions, and creating potential wide spread public health crises. Additionally, the CNMI is facing several fines for violating EPA regulations due to deferred maintenance, delay in the improvement of our water system to conform to federal standards, faulty sewage treatment facilities discharging effluent not meeting federal standards, and lack of construction funds to construct waste incineration in conformance with EPA standards. These are but a few environmental penalties that are being considered by EPA, and more notices for administrative compliances are expected.
CNMI Government's Initiatives to Align Spending with Tax Revenues
Because of the worsening nature of the economy and the lack of realistic prospects for additional revenues to keep the government working and delivering public services, the newly sworn in administration of Governor Fitial has implemented unprecedented and unpopular austerity measures in order to reduce spending and to retire the deficit. Adjustments in the FY2006 operating budget calling for an approximate 20% spending reduction has already been implemented. The Government is now in the process of laying off personnel, freezing new hires, promoting early retirement, and reducing both civil service and contract employees working hours. Government agencies are being consolidated to further reduce costs and contain expenditures of boards and commissions. Autonomous agencies’ budgets are being tapped to provide critical funds to perform needed public services. The government is also drastically reducing the number of government funded phone lines, and cell phones, terminating car leases, rental spaces, and so forth. While these actions will result in curbing expenses and thus saving funds in the short run, they might invariably and undoubtedly make matters worse, somewhat resembling a catch-22 scenario. .
Reducing the number of workers or decreasing pay of remaining workers will strain federally funded entitlements such as food stamps, and would further decrease the already reduced tax base of the government. Reducing expenditures for privately run services such as phone lines or cell phones decreases the income of private sector businesses that rely on government contracts to survive. Business Gross Revenue will decline, tax payments will decline, and costs to the private sector will go up as businesses struggle to remain viable. These factors have not been factored into the economic equation and will result in a chain reaction of negative cash flow and reduced tax revenue. Accurately computing projected government revenue to meet expenses to the end of the year will be a nightmare, and at best only a guesstimate. It is comparable to squeezing any remaining water out of a sponge that has been left out in the sun to dry.
Negative and Undesirable Impacts on the People of the CNMI
The most telling data is that which reflects the status of the average man, woman, and child in the CNMI. The apparel and tourism industries account for either directly or indirectly 80% of all employment, 96 % of all exports, and 85% of all economic activity. Changes in any of these affect everyone.
The CNMI does not participate in some of the most common forms of welfare or assistance in the United States. CNMI residents are not eligible in Temporary Assistance for Needy Families (TANF), nor are they eligible for unemployment benefits. The CNMI does participate in the Nutrition Assistance Program, Food Stamps and Medicaid, but the amount of federal dollars provided to the CNMI for Medicaid is capped.
In the 2000 U.S. Census of the Northern Marianas it was reported that 46% of the population was living below the poverty line with a per capita income of $9,151, and a steady 13% unemployment rate for the permanent population. All data that I have looked at in preparing this testimony indicates that these statistics will only continue to worsen.
In 1992, an average of 565 families per month were enrolled in the Nutrition Assistance Program. By 2005, the average enrollment was 2,276 per month, a dramatic increase of 303%. This number will only continue to increase as the economy worsens, and the CNMI will be obligated to once again appeal to the federal government to accommodate new and desperate recipients of this program.
I fear for the health and safety of the people of the CNMI. Our health care services are already stretched to the breaking point. The Commonwealth Health Center has leaky plumbing, inadequate water treatment facilities, faulty back up power systems, a shortage of doctors and nurses, and a lack of funds to adequately operate the facility. The cost to repair CHC and bring it into compliance is estimated to be $18.35 million.
Medicaid enrollment has steadily grown. Between 1999 and 2004 Medicaid participation increased by 83%. Unfortunately there is no safety net for Medicaid. The cap for 2004 was $2.4 million, and costs totaled $9.3 million. The CNMI government exceeded the required matching by $4.5 million. Money the CNMI does not have.
With the loss of the garment industry, consumer prices are expected to increase dramatically. Overall shipping and wharfage costs in the CNMI have historically been fairly constant due to the large volume of inbound raw materials and outbound finished garment products. With this volume rapidly diminishing, inbound and outbound shipments will be placed on smaller vessels which cost more per ton to ship, and ports fees and handling charges are expected to escalate in order to meet the Commonwealth Ports Authority debt service requirements. By 2010, it is estimated that the cost of consumer goods will increase by 40 %, a burden that few will be able to bear.
Remedies for the CNMI’s economic woes: Our Request to Congress for Assistance
The people of the CNMI are very proud, and have done well as a territory of the United States. We appreciate the work of Secretary Gale Norton and Deputy Assistant Secretary Dave Cohen to introduce new investors and investment opportunities to the CNMI and other territories. They recognize our challenges and have proven their leadership by helping us solve our own problems, but more assistance is needed to promote economic and financial normalcy. Governor Fitial is working untiringly to put the finances of the government back in order, to find new investors and new industries and to rebuild our tourism base. Despite all these efforts and the tough decisions, and enormous sacrifices that all of our people are asked to accept, we deeply feel that federal assistance is the only option that we can realistically seek to put us on the right path towards recovery.
While we have done so much to help ourselves, we must admit that we do not have the means to generate additional financial resources to continue to provide for our people on our own. I am here on behalf of the people to request the assistance of the U.S. Congress. Section 701 of the Covenant anticipates that “the government of the United States will assist the Government of the Northern Mariana Islands in its efforts to achieve a progressively higher standard of living for its people as part of the American economic community and to develop the economic resources needed to meet the financial responsibilities of local self government.”
Mr. Chairman, we had begun to achieve this goal, but due to economic disruptions that have confronted us over the last several years, and to some extent, carelessness and lack of foresight on our part, we are now experiencing the most regressive period of our history. We are gravely concerned that our people will suffer more before things get better and especially if nothing is done soon. It is with tremendous grief, embarrassment and enormous hesitation on my part, personally, and I know on the part of our Governor and our people, to appeal for help, and we believe that appealing to Congress for help is our only realistic recourse right now.
I would like to share with you what we sincerely feel are actions that the U.S. Congress can consider taking, which will greatly help the CNMI economy to stabilize at the present level, will gradually assist in its recovery, and will hopefully flourish once again, and these are:.
1. Approve this year Senate Bill 1951 sponsored by Senator Craig which amends General Note 3(a)(iv) to grant insular possessions equivalent treatment to free trade partners by extending to all products, including textiles and apparel, the current requirements that eligible product contain at least 30% U.S. and local content. This will keep the CNMI garment industry viable for approximately the next 10 years. During this time other industries can be developed in the CNMI to replace it.
2. The CNMI has estimated that the U.S. has withheld or taxed income of CNMI residents in excess of $71 million for the period of 1978 to 2002. The loss of these funds has caused significant harm to the CNMI as taxpayer liability and refunds are based upon recognition of all funds withheld whether in the CNMI or U.S. Treasury. Section 703(b) of the Covenant (Public Law 64-241) and 48 U.S. Code Section 1842, call for proceeds of taxes collected from CNMI residents be covered directly upon collection into the treasury of the CNMI. These provisions have never been fully implemented. Applicable Internal Revenue Code regulations were used to project interest rates on these funds at $38.8 million. I respectfully request Congress to immediately direct the U.S. Treasury to reimburse the CNMI the amount now due them. These funds could either help retire the current deficit or assist with infrastructure inadequacies, construct or repair classrooms and institute workforce development activities to provide a stronger basis for new economic opportunities.
3. Revisit the standing authorization for Covenant funds which may include funding for government operations, and or provide direct assistance to meet the most crucial public health needs including construction, medical equipment, personnel and maintenance. I stand ready to work with the committee to develop a detailed submission to Congress.
4. Assist us with various transportation issues that would remove constraints on foreign airlines landing in the CNMI established by certain bilateral agreements and unrealistic passenger thresholds that prevent the installation of instrument landing systems for Tinian and Rota. These would allow the CNMI to accelerate development of its tourism potential with Asian markets.
My last request from Congress is not about our economic or financial conditions, per se. I am requesting that this body help the people of the Commonwealth of the Northern Marianas achieve their quest for parity with the other territories and grant the CNMI a nonvoting Delegate to the U.S. House of Representatives.
Mr. Chairman, it has been stressful but a pleasure to have testified in your committee wearing two separate hats, as a Resident Representative and as our Governor's Representative. I am prepared today and any day, as my office is here in Washington, to answer any questions the committee members may have.