Commonwealth of the Northern Mariana Islands
Serious Economic, Fiscal, and Accountability Challenges Gao ID: GAO-07-746T April 19, 2007The Commonwelth of the Northern Mariana Islands (CNMI) is a self-governing commonwealth of the United States that administers its own local government functions under its own constitution. CNMI consists of 14 islands in the North Pacific with a total land area about 2.5 times the size of Washington, D.C. In recent years, CNMI has experienced serious economic and fiscal challenges, and several indicators point to a fiscal crisis in fiscal year 2006. This testimony highlights the recent economic trends in the CNMI economy, its weakening fiscal condition, and its financial accountability challenges. Our conclusions are based on work performed for our December 2006 report on U.S. insular areas and our February 2007 testimony on CNMI before the Senate Committee on Energy and Natural Resources, which was updated to include audited financial information through fiscal year 2005 and some recent developments in fiscal year 2006 based on information available as of February 2007. Today, we are also including additional information on CNMI's fiscal year 2006 status recently provided to us by CNMI's Secretary of Finance. We conducted our work in accordance with generally accepted government auditing standards.
The government of CNMI has long-standing financial accountability problems, including the inability to achieve unqualified ("clean") audit opinions on its financial statements, and numerous, long-standing material weaknesses in internal control over financial reporting and compliance with laws and regulations governing federal grant awards. CNMI received $65.6 million in federal grants in fiscal year 2005, and its audited financial statements are used by federal agencies for overseeing and monitoring the use of federal grants. With CNMI's continued inability to achieve clean opinions on its financial statements and the continuing material internal control weaknesses over financial reporting, there is limited accountability over its federal grants. Furthermore, the lack of timely and reliable financial information hampers CNMI's ability to monitor programs and the reliability of financial information, such as revenues and expenditures, in order to make informed decisions. The U.S. Department of the Interior 's Office of Insular Affairs (OIA) has ongoing efforts to support economic development in CNMI and assist CNMI in addressing its accountability issues. A focused effort is called for where direct and targeted attention is concentrated on the challenges facing CNMI to help CNMI achieve economic and fiscal stability. OIA plays a key role in this effort by helping CNMI and the other insular areas improve their business climates, identify areas of potential for private sector investment, and market insular areas to potential investors. In response to our recent report, OIA expressed its commitments to continuing its comprehensive approach and to implementing other innovative ideas to assist CNMI and the other insular areas to continue to improve financial management and accountability and to support economic development.
GAO-07-746T, Commonwealth of the Northern Mariana Islands: Serious Economic, Fiscal, and Accountability Challenges
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U.S. Government Accountability Office:
Testimony Before The Subcommittee On Insular Affairs, Committee On
Natural Resources, U.S. House Of Representatives:
For Release on Delivery Expected at 10:00 a.m. EDT:
Thursday, April 19, 2007:
Commonwealth Of The Northern Mariana Islands:
Serious Economic, Fiscal, and Accountability Challenges:
Statement Of Jeanette M. Franzel:
Director, Financial Management And Assurance:
GAO-07-746T:
Madam Chairwoman and Members of the Subcommittee:
I am pleased to be here today to discuss the Commonwealth of the
Northern Mariana Islands' (CNMI) serious challenges in strengthening
its economy, fiscal condition, and financial accountability. CNMI is a
self-governing commonwealth of the United States that administers its
own local government functions under its own constitution. CNMI
consists of 14 islands in the North Pacific with a total land area
about 2.5 times the size of Washington, D.C. In recent years, CNMI has
experienced serious economic and fiscal challenges, and several
indicators point to a fiscal crisis in fiscal year 2006.
Today, I will highlight the recent economic trends in the CNMI economy,
its weakening fiscal condition, and its financial accountability
challenges. Our conclusions are based on work performed for our
December 2006 report[Footnote 1] on U.S. insular areas and our February
2007 testimony on U.S. insular areas and our February 2007 testimony on
CNMI before the Senate Committee on Energy and Natural
Resources,[Footnote 2] which was updated to include audited financial
information through fiscal year 2005 and some recent developments in
fiscal year 2006 based on information available as of February 2007.
Today, we are also including additional information on CNMI's fiscal
year 2006 status recently provided to us by CNMI's Secretary of
Finance. We conducted our work in accordance with generally accepted
government auditing standards.
Summary:
The government of CNMI faces serious economic, fiscal, and financial
accountability challenges. The government's ability to strengthen
CNMI's economy has been constrained by CNMI's lack of diversification
in industries. CNMI's economy is highly dependent on two industries:
garment manufacturing and tourism. The garment manufacturing industry
is facing the challenge of remaining internationally competitive
against low-wage nations given recent changes in trade agreements.
CNMI's tourism sector experienced a sharp decline in the late 1990s,
and a series of external events, such as unfavorable economic trends of
nearby countries and changes in airline practices, have further
hampered the sector. Both the garment and tourism industries employ
noncitizen workers who are paid wages lower than the U.S. minimum wage.
The fiscal condition of CNMI's government steadily weakened from fiscal
year 2001 through fiscal year 2005, the most recent year for which
audited financial statements for CNMI are available. CNMI's fund
balance, which generally reflects the amount of resources available for
current government operations, went into a deficit balance during
fiscal year 2002 and continued to decline through the end of fiscal
year 2005. CNMI has also shown significant declines and negative
balances in its reported net assets, which is another measure of fiscal
health. In order to finance its government activities in an environment
where expenditures have exceeded revenues, CNMI has increased its debt.
In addition, several indicators point to a severe fiscal crisis during
fiscal year 2006. The CNMI government implemented several drastic cost-
cutting and restructuring measures, including "austerity holidays"
consisting of biweekly furloughs, during which government workers are
not paid and many government operations are closed to reduce personnel
and operating costs during fiscal years 2006 and 2007. Based on
unaudited data recently provided to us by CNMI's Secretary of Finance,
it appears that both revenues and expenditures for fiscal year 2006
have significantly decreased from fiscal year 2005 levels.
The government of CNMI has long-standing financial accountability
problems, including the inability to achieve unqualified ("clean")
audit opinions on its financial statements, and numerous, long-standing
material weaknesses in internal control over financial reporting and
compliance with laws and regulations governing federal grant awards.
CNMI received $65.6 million in federal grants in fiscal year 2005, and
its audited financial statements are used by federal agencies for
overseeing and monitoring the use of federal grants. With CNMI's
continued inability to achieve clean opinions on its financial
statements and the continuing material internal control weaknesses over
financial reporting, there is limited accountability over its federal
grants. Furthermore, the lack of timely and reliable financial
information hampers CNMI's ability to monitor programs and the
reliability of financial information, such as revenues and
expenditures, in order to make informed decisions.
The U.S. Department of the Interior 's Office of Insular
Affairs[Footnote 3] (OIA) has ongoing efforts to support economic
development in CNMI and assist CNMI in addressing its accountability
issues. A focused effort is called for where direct and targeted
attention is concentrated on the challenges facing CNMI to help CNMI
achieve economic and fiscal stability. OIA plays a key role in this
effort by helping CNMI and the other insular areas improve their
business climates, identify areas of potential for private sector
investment, and market insular areas to potential investors. In
response to our recent report, OIA expressed its commitments to
continuing its comprehensive approach and to implementing other
innovative ideas to assist CNMI and the other insular areas to continue
to improve financial management and accountability and to support
economic development.
Narrow Economic Base and Intrinsic and External Factors Limit Economic
Progress in CNMI:
Several factors constrain CNMI's economic potential, including the lack
of diversification, scarce natural resources, small domestic markets,
limited infrastructure, and shortages of skilled labor. The United
States exercises sovereignty over CNMI, and in general, federal laws
apply to CNMI. However, federal minimum wage provisions and federal
immigration laws do not apply.[Footnote 4] CNMI immigration policies
and the demands for labor by the garment manufacturing industry and
tourism sector have resulted in rapid population growth since 1980 such
that the majority of the population are non-U.S. citizens. (See
attachment I.) According to U.S. Census Bureau data for 2000, the most
recent census data available, about 56 percent of the CNMI population
of 69,221 were not U.S. citizens.
According to U.S. Census Bureau data for 2000, the median household
income in CNMI was $22,898, a little more than half of the U.S. median
household income of almost $42,000 for 2000. The percentage of
individuals in poverty in 2000 was 46 percent, nearly four times the
continental U.S. rate of 12 percent in that same year.
CNMI's economy depends on two industries, garment manufacturing and
tourism, for its employment, production, and exports. These two
industries rely heavily on a noncitizen workforce. This workforce
represents more than three quarters of the labor pool that are subject
to the CNMI minimum wage, which is lower than the U.S. minimum wage.
However, recent changes in trade laws have increased foreign
competition for CNMI's garment industry, while other external events
have negatively impacted its tourism sector.
Decline in Garment Industry Tied to Trade Law Changes:
Recent developments in international trade laws have reduced CNMI's
trade advantages, and the garment industry has declined in recent
years. Historically, while garment exporters from other countries faced
quotas and duties in shipping to the U.S. market, CNMI's garment
industry benefited from quota-free and duty-free access to U.S. markets
for shipments of certain goods in which 50 percent of the value was
added in CNMI. In recent years, however, U.S. agreements with other
textile-producing countries have liberalized the textile and apparel
trade. For example, in January 2005, in accordance with one of the 1994
World Trade Organization (WTO) Uruguay Round agreements, the United
States eliminated quotas on textile and apparel imports from other
textile-producing countries, leaving CNMI's apparel industry to operate
under stiffer competition, especially from low-wage countries such as
China.[Footnote 5] According to a DOI official, more than 3,800 garment
jobs were lost between April 2004 and the end of July 2006, with 10 out
of 27 garment factories closing. U.S. Department of Commerce data show
that the value of CNMI shipments of garments to the United States
dropped by more than 16 percent between 2004 and 2005, from about $807
million to $677 million, and down from a peak of $1 billion in 1998-
2000. In 2006, reported garment exports to the United States fell
further, by 27 percent compared to 2005, with exports declining to $495
million. The reported level of shipments to the United States in 2006
was comparable to levels of sales in 1995-1996, prior to the
significant build-up of the industry. (See attachment II.) In December
2006, the largest and oldest garment factory closed. Given that the
garment industry is significant to CNMI's economy, these developments
will likely have a negative financial effect on government revenue. For
example, reported fees collected by the government on garment exports
fell 37 percent from $38.6 million in 2000 to $24.4 million in 2005.
External Events Affect Tourism:
CNMI's tourism sector experienced a sharp decline in the late 1990s,
and a series of external events have further hampered the sector.
Tourism became a significant sector of economic activity in CNMI by the
mid-1980s and continued to grow into the 1990s. According to the
Marianas Visitors Authority, the number of visitors reached about
736,000 visitors in 1996 then sharply declined in 1998 and has not
recovered since then. According to the Marianas Visitors Authority, the
number of visitors sharply declined in 1998 and the sector has not
recovered. The Marianas Visitors Authority reported 435,500 visitors in
2006. The reported visitor arrivals in 2006 were 59 percent of the peak
level in 1996.
Due to its proximity to Asia, Asian economic trends and other events
have a direct effect on CNMI's economy. For example, the Asian
financial crisis and the cancellation of Korean Air service to CNMI
following an airplane crash on Guam in August 1997 contributed to the
decline. Visitors from Korea, the second largest source of tourists,
decreased by 85 percent from 1996 to 1998. After a modest recovery in
2000, tourism faltered again with the September 11, 2001, terrorist
attacks on the United States. In 2003, according to CNMI officials,
tourism slowed--with a double-digit decline in arrivals for several
months--in reaction to the SARS epidemic and to the war in Iraq.
Tourism in CNMI is also subject to changes in airline practices. For
example, Japan Airlines (JAL) withdrew its direct flights between Tokyo
and Saipan in October 2005, raising concerns because roughly 30 percent
of all tourists and 40 percent of Japanese tourists arrive in CNMI on
JAL flights, according to CNMI and DOI officials. The Marianas Visitors
Authority's June 2006 data show that the downward trend in Japanese
arrivals is not being offset by the growth in arrivals from other
markets such as China and South Korea. At the same time, CNMI has
experienced an increase in Chinese tourists in recent years, which
offers the potential to rebuild the industry.
CNMI's Reported Fiscal Condition Continues to Weaken:
The fiscal condition of CNMI's government steadily weakened from fiscal
year 2001 through fiscal year 2005, the most recent year for which
audited financial statements for CNMI are available. In addition,
several indicators point to a severe financial crisis in fiscal year
2006. CNMI's reported governmental fund balance declined from a
positive $3.5 million at the beginning of fiscal year 2001 to a deficit
of $84.1 million by the end of fiscal year 2005, as CNMI's expenditures
for its governmental activities consistently exceeded revenues in each
year since fiscal year 2002. (See attachment III.) Most of CNMI's
governmental activities, which include basic services such as public
safety, health care, general administration, streets and parks, and
security and safety, are reported in its governmental activities, or
government funds. The fund balance (or deficit) for these activities
reflects the amount of funds available at the end of the year for
spending. A significant contributing factor to the gap between
expenditures and revenues is that actual expenditures exceeded budgeted
expenditures for each fiscal year during the period 2001 through 2005.
Another measure of fiscal health is the measure of net assets for
governmental activities, which represents total assets minus total
liabilities. The primary difference between the fund balance measure
and net assets is that the net assets include capital assets and long-
term liabilities, whereas the fund balance figure focuses on assets
available for current period expenditures and liabilities that are due
and payable in the current period. CNMI has experienced a negative
trend in its balance of net assets for governmental activities, going
from a reported positive $40.6 million balance at the end of fiscal
year 2001 to a negative $38 million balance[Footnote 6] at the end of
fiscal year 2005. (See attachment IV.)
In order to finance its government activities in an environment where
expenditures have exceeded revenues, CNMI has increased its debt and
has not made the required contributions to its retirement fund. CNMI's
reported balance of notes and bonds payable increased from $83 million
in fiscal year 2002 to $113 million in fiscal year 2005, representing
an increase of 36 percent. CNMI's balance owed to its pension fund
increased from $72 million in 2002 to $120 million in 2005,
representing an increase of 67 percent. CNMI has also been incurring
penalties on the unpaid liabilities to the pension fund. The total
amount of assessed penalties was $24 million as of September 30, 2005.
Although CNMI's audited fiscal year 2006 financial statements are not
yet available, indicators point to a severe fiscal crisis during fiscal
year 2006. In a May 5, 2006, letter to the CNMI legislative leaders,
Governor Benigno R. Fitial stated that "the Commonwealth is facing an
unsustainable economic emergency—.I regret to say that the nature and
extent of these financial problems are such that there is no simple or
painless solution." CNMI implemented several significant cost-cutting
and restructuring measures during fiscal year 2006. For instance, in
August 2006, CNMI enacted its Public Law No. 15-24 to implement
"austerity holidays" consisting of biweekly furloughs, during which
government employees are not paid and many government operations are
closed. This measure was taken to help alleviate the financial crisis
by saving millions of dollars in both personnel and operational costs.
The measure declared one unpaid holiday per pay period for the
remainder of fiscal years 2006 and 2007, reducing the government's
normal pay period to 72 hours every 2 weeks. In June of 2006, CNMI
enacted Public Law No. 15-15 to authorize the CNMI government to
suspend the government's employer contributions to the retirement fund
for the remainder of fiscal years 2006 and 2007. In addition, CNMI has
passed laws to restructure loans among its component units, reform the
rate of compensation for members of boards and commissions, increase
the governor's authority to reprogram funds, and extend the date for
full funding of the retirement fund's defined benefit plan--the
unfunded pension liability was estimated at $552,042,142 as of October
1, 2004. CNMI has also created a defined contribution retirement plan
for government employees hired on or after January 1, 2007. These
measures are immediate and dramatic, and are indicative of severe
financial problems that will likely call for long-term solutions.
Based on unaudited data recently provided to us by CNMI's Secretary of
Finance, it appears that both revenues and expenditures for fiscal year
2006 have significantly decreased from fiscal year 2005 levels. The
significant decline in revenues is likely due to declines in the
garment manufacturing and tourism industries. Although these unaudited
data are showing a balanced budget for the year with no significant
changes to the cumulative deficit balance, these data are unaudited and
could change due to adjustments identified in the audit process.
CNMI's Financial Accountability Remains Weak:
CNMI has had long-standing financial accountability problems, including
the late issuance of its single audit reports, the inability to achieve
unqualified ("clean") audit opinions on its financial statements, and
numerous material weaknesses in internal controls over financial
operations and compliance with laws and regulations governing federal
grant awards.
CNMI's Compliance with Single Audit Requirements:
As a nonfederal entity expending more than $500,000 a year in federal
awards, CNMI is required to submit a single audit report each year to
comply with the Single Audit Act, as amended.[Footnote 7] Single audits
are audits of the recipient organization--the government in the case of
CNMI--that focus on the recipient's financial statements, internal
controls, and compliance with laws and regulations governing federal
grants. Single audits provide key information about the federal
grantee's financial management and reporting and are an important
control used by federal agencies for overseeing and monitoring the use
of federal grants.
For fiscal years 1997 through 2005, CNMI did not submit its single
audit reports by the due date, which is generally no later than 9
months after the fiscal year end. CNMI's single audit submissions were
significantly late for fiscal years 1997 through 2004, ranging from 22
months late for fiscal year 2004 to 2 months late for fiscal year 1998.
CNMI's late submission of single audit reports means that the federal
agencies overseeing federal grants to CNMI did not have current audited
information about CNMI's use of federal grant funds. CNMI made
significant progress in 2005 by submitting its fiscal year 2005 single
audit report less than 1 month late. According to CNMI's Secretary of
Finance, the fiscal year 2006 single audit is progressing well and it
is anticipated that the single audit report will be submitted to the
Federal Audit Clearinghouse on time, by June 30, 2007.
CNMI Unable to Achieve "Clean" Audit Opinions Due to Persistent,
Significant Weaknesses:
The CNMI government has been unable to achieve unqualified ("clean")
audit opinions on its financial statements, receiving qualified
opinions on the financial statements issued for fiscal years 1997
through 2005. Auditors render a qualified opinion when they identify
one or more specific matters that affect the fair presentation of the
financial statements. The effect of the auditors' qualified opinion can
be significant enough to reduce the usefulness and reliability of
CNMI's financial statements.
CNMI has made some progress in addressing the matters that resulted in
the qualified opinions on its financial statements for fiscal years
2001 through 2003. However, some of the issues continued to exist in
2004 and 2005. The auditors identified the following issues in fiscal
year 2005 that resulted in the most recent qualified audit opinion: (1)
inadequacies in the accounting records regarding taxes receivable,
advances, accounts payable, tax rebates payable, other liabilities and
accruals, and the reserve for continuing appropriations; (2)
inadequacies in accounting records and internal controls regarding the
capital assets of the Northern Marianas College; and (3) the lack of
audited financial statements for the Commonwealth Utilities
Corporation, which represents a significant component unit of CNMI.
Auditors for CNMI rendered qualified opinions on CNMI's compliance with
the requirements for major federal award programs from 1997 through
2005. In fiscal year 2005, the auditors cited noncompliance in the
areas of allowable costs, cash management, eligibility, property
management, procurement, and other requirements.
CCNMI's Secretary of Finance told us that he expects that the single
audit report for fiscal year 2006 will show improvement from the 2005
reporting in the area of qualifications to the audit opinion.
Weaknesses over Financial Reporting and Compliance with Requirements
for Major Federal Programs:
CNMI has long-standing and significant internal control weaknesses over
financial reporting and compliance with requirements for federal
grants. Table 1 shows the number of material weaknesses and reportable
conditions for CNMI for fiscal years 2001 through 2005. The large
number and the significance of reported internal control weaknesses
raise serious questions about the integrity and reliability of CNMI's
financial statements and its compliance with requirements of major
federal programs. Furthermore, the lack of reliable financial
information hampers CNMI's ability to monitor programs and financial
information such as revenues and expenses and to make timely, informed
decisions.
Table 1: Reported Weaknesses Identified in the Auditors' Reports for
Fiscal Years 2001 through 2005:
Fiscal year: 2001;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Material
weaknesses: 10;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Reportable
conditions: 0;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Total: 10;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Material weaknesses: 4;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Reportable conditions: 13;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Total: 17.
Fiscal year: 2002;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Material
weaknesses: 9;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Reportable
conditions: 1;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Total: 10;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Material weaknesses: 2;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Reportable conditions: 14;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Total: 16.
Fiscal year: 2003;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Material
weaknesses: 10;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Reportable
conditions: 2;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Total: 12;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Material weaknesses: 1;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Reportable conditions: 15;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Total: 16.
Fiscal year: 2004;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Material
weaknesses: 8;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Reportable
conditions: 5;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Total: 13;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Material weaknesses: 2;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Reportable conditions: 31;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Total: 33.
Fiscal year: 2005;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Material
weaknesses: 9;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Reportable
conditions: 4;
Internal control over financial reporting in accordance with government
auditing standards (report on financial statements): Total: 13;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Material weaknesses: 2;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Reportable conditions: 36;
Compliance with requirements applicable to each major program and
internal control over compliance with OMB Circular No. A-133 (report on
federal awards): Total: 38.
[End of table]
CNMI's 13 internal control reportable conditions for fiscal year 2005,
9 of which were material weaknesses, indicate a lack of sound internal
control over financial reporting needed to provide adequate assurance
that transactions are properly recorded, assets are properly
safeguarded, and controls are adequate to prevent or detect fraud,
waste, abuse, and mismanagement. For example, one of the material
internal control weaknesses that the auditors reported for CNMI's
government for fiscal year 2005 was the lack of audited fiscal year
2005 financial statements of the Commonwealth Utilities Corporation
(Corporation), a significant component unit of CNMI. Because the
Corporation's financial statements were unaudited, the auditors could
not determine the propriety of account balances presented in the
financial statements that would affect CNMI's basic financial
statements. CNMI's auditors also reported other significant material
internal control weaknesses that have continued from previous years,
such as improper tracking and lack of support for advances to vendors,
travel advances to employees, liabilities recorded in the General Fund,
and tax rebates payable. Due to the lack of detailed subsidiary ledgers
and other supporting evidence, the auditors could not determine the
propriety of these account balances. According to the auditors, the
effect of these weaknesses is a possible misstatement of expenditures
and related advances and liabilities, which also resulted in a
qualification of the opinion on the fiscal year 2005 CNMI financial
statements. Consequently, CNMI's financial statements may not be
reliable.
As shown in table 1, auditors also reported 38 reportable conditions in
CNMI's compliance with requirements for major federal programs and the
internal controls intended to ensure compliance with these requirements
for fiscal year 2005, 2 of which were material weaknesses. One of the
material internal control weaknesses affecting compliance with federal
programs related to the failure to record expenditures for the Medical
Assistance Program when they were incurred. Specifically, the auditors
identified expenditures in fiscal year 2005 for billings from service
providers for services rendered in previous years. The effect of this
weakness is that expenditures reported to the grantor agency, the U.S.
Department of Health and Human Services, are based on the paid date and
not, as required, the service date. In addition, actual expenditures
incurred during the year are not properly recorded and, therefore,
current year expenditures and unrecorded liabilities are understated.
The other material weakness affecting compliance related to the lack of
adherence to established policies and procedures for managing and
tracking property and equipment purchased with federal grant funds. As
a result, CNMI's government was not in compliance with federal property
standards and its own property management policies and procedures. The
other 36 reportable conditions concerned compliance with requirements
regarding allowable costs; cash management; eligibility; equipment and
property management; matching, level of effort, and earmarking;
procurement and suspensions and debarment; reporting; subrecipient
monitoring; and special tests and provisions that are applicable to
CNMI's major federal programs.
Efforts to Assist CNMI in Its Economic and Accountability Challenges:
OIA has ongoing efforts to support economic development in CNMI and
assist CNMI in addressing its accountability issues. OIA has in the
last 3 years sponsored conferences in the United States and business-
opportunity missions in the insular areas to attract American
businesses to the insular areas.
OIA's efforts in helping to create links between the business
communities in the United States and CNMI are key to helping meet some
of the economic challenges. In our December 2006 report,[Footnote 8] we
concluded that the insular areas would benefit from formal periodic OIA
evaluation of its conferences and business-opportunity missions,
including assessments of the cost and benefit of its activities and the
extent to which these efforts are creating partnerships with businesses
in other nations. We recommended that OIA conduct such formal and
periodic evaluations to assess the effect of these activities on
creating private sector jobs and increasing insular area income. OIA
agreed with our recommendation.
To promote sound financial management processes in the insular area
government, OIA has increased its focus on bringing the CNMI government
into compliance with the Single Audit Act. For example, OIA created an
incentive for CNMI to comply with the act by stating that an insular
area cannot receive capital funding unless its government is in
compliance with the act or has presented a plan, approved by OIA, that
is designed to bring the government into compliance by a certain date.
In addition, OIA provides general technical assistance funds for
training and other direct assistance, such as grants, to help the
insular area governments comply with the act and to improve their
financial management systems and environments.
DOI's OIA and IG, other federal inspectors general, and local auditing
authorities assist or oversee CNMI's efforts to improve its financial
accountability. OIA monitors the progress of completion and issuance of
the single audit reports as well as providing general technical
assistance funds to provide training for insular area employees and
funds to enhance financial management systems and processes. DOI's IG
has audit oversight responsibilities for federal funds in the insular
area.
OIA staff members make site visits to CNMI as part of OIA's oversight
activities. In our December 2006 report,[Footnote 9] we recommended
that OIA develop a standardized framework for its site visits to
improve the effectiveness of its monitoring. We also recommended that
OIA develop and implement procedures for formal evaluation of progress
made by the insular areas to resolve accountability findings and set a
time frame for achieving clean audit opinions. OIA agreed with our
recommendations and noted that it had already made some progress during
fiscal year 2006.
Conclusions:
CNMI faces daunting economic, fiscal, and financial accountability
challenges. CNMI's economic and fiscal conditions are affected by its
economy's general dependence on two key industries, which have
experienced significant declines in recent years. In addition, although
progress has been made in improving financial accountability, CNMI
continues to have serious internal control and accountability problems
that increase its risk of fraud, waste, abuse, and mismanagement.
Efforts to meet formidable fiscal challenges in CNMI are exacerbated by
delayed and incomplete financial reporting that does not provide
officials with the timely and complete information they need for
effective decision making. Timely and reliable financial information is
especially important as CNMI continues to take actions to deal with its
fiscal crisis.
OIA has ongoing efforts to assist CNMI in addressing its accountability
issues and to support economic development in CNMI. OIA officials
monitor CNMI's progress in submitting single audit reports, and OIA
provides funding to improve financial management. Yet, progress has
been slow and inconsistent. The benefit to CNMI of past and current
assistance is unclear. Federal agencies and CNMI have sponsored and
participated in conferences, training sessions, and other programs to
improve accountability, but knowing what has and has not been effective
and drawing the right lessons from this experience is hampered by a
lack of formal evaluation and data collection.
Strong leadership is needed for CNMI to weather its current crisis and
establish a sustainable and prosperous path for the future. During
2006, the CNMI government took dramatic steps to reverse prior patterns
of deficit spending. The CNMI government will need to continue to work
toward long-term sustainable solutions. A focused effort is called for
in which direct and targeted attention is concentrated on the
challenges facing CNMI, with feedback mechanisms for continuing
improvement to help CNMI achieve economic, fiscal, and financial
stability. OIA plays a key role in this effort. In its comments on our
December 2006 report, OIA pointed out that it provides "a crucial
leadership role and can provide important technical assistance" to help
CNMI and the other insular areas improve their business climates,
identify areas of potential for private sector investment, and market
insular areas to potential investors. It also noted that improving
accountability for federal financial assistance for CNMI and other
insular areas is a major priority. OIA has stated its commitment to
continuing its comprehensive approach and to implementing other
innovative ideas to assist CNMI and the other insular areas in
continuing to improve financial management and accountability.
Leadership on the part of the CNMI government and OIA is critical to
addressing the challenges CNMI faces and to providing long-term
stability and prosperity for this insular area.
Madam Chairwoman and Members of the Subcommittee, this concludes my
statement. I would be pleased to answer any questions that you and
other Members of the Subcommittee may have at this time.
[End of section]
Attachment I:
Figure: Reported CNMI Population by Citizenship:
[See PDF for Image]
Sources: U.S. Census Bureau; CNMI Central Statistics Division.
[A] U.S. citizenship was not conferred to residents of CNMI until 1986.
However, the CNMI Central Statistics Division has classified persons
born in CNMI together with persons born in the United States or other
territories as "U.S. citizens" for 1980.
[B] The 2000 decennial population census is the most recent population
census information available.
[End of figure]
[End of section]
Attachment II:
Figure: Reported U.S. Apparel Imports from CNMI:
[See PDF for Image]
Sources: U.S. Dept. of Commerce, International Trade Administration,
Office of Textiles & Apparel.
[End of figure]
[End of section]
Attachment III:
Figure: Reported Revenues, Expenditures, and Fund Balance for CNMI's
Government Activities:
[See PDF for Image]
Source: GAO analysis of single audit reports covering fiscal years
2001, 2002, 2003, 2004, and 2005.
[End of figure]
[End of section]
Attachment IV:
Table: CNMI's Fiscal Condition:
Data: Own source revenues;
Fiscal years ending September 30,: 2001: 227,709,651;
Fiscal years ending September 30,: 2002: 215,650,986;
Fiscal years ending September 30,: 2003: 225,412,808;
Fiscal years ending September 30,: 2004: 235,754,891;
Fiscal years ending September 30,: 2005: 244,183,778.
Data: Federal contributions;
Fiscal years ending September 30,: 2001: 49,348,134;
Fiscal years ending September 30,: 2002: 71,964,627;
Fiscal years ending September 30,: 2003: 57,560,034;
Fiscal years ending September 30,: 2004: 63,006,595;
Fiscal years ending September 30,: 2005: 64,346,950.
Data: Total revenues;
Fiscal years ending September 30,: 2001: 227,057,785;
Fiscal years ending September 30,: 2002: 287,615,613;
Fiscal years ending September 30,: 2003: 282,972,842;
Fiscal years ending September 30,: 2004: 298,761,486;
Fiscal years ending September 30,: 2005: 308,530,728.
Data: Total expenditures;
Fiscal years ending September 30,: 2001: 258,177,431;
Fiscal years ending September 30,: 2002: 314,985,333;
Fiscal years ending September 30,: 2003: 303,986,379;
Fiscal years ending September 30,: 2004: 352,488,419;
Fiscal years ending September 30,: 2005: 343,370,293.
Data: Revenues less expenditures[Surplus/(deficit)];
Fiscal years ending September 30,: 2001: 18,880,354;
Fiscal years ending September 30,: 2002: (27,369,720);
Fiscal years ending September 30,: 2003: (21,013,537);
Fiscal years ending September 30,: 2004: (53,726,933);
Fiscal years ending September 30,: 2005: (34,839,565).
Data: Total net other financing[A];
Fiscal years ending September 30,: 2001: 6,511,003;
Fiscal years ending September 30,: 2002: 3,510,667;
Fiscal years ending September 30,: 2003: 0;
Fiscal years ending September 30,: 2004: 39,493,350;
Fiscal years ending September 30,: 2005: 7,625.
Data: Governmental funds beginning year balance[B];
Fiscal years ending September 30,: 2001: 3,540,878;
Fiscal years ending September 30,: 2002: 19,609,305[C];
Fiscal years ending September 30,: 2003: (4,249,748);
Fiscal years ending September 30,: 2004: (35,011,807)[C];
Fiscal years ending September 30,: 2005: (49,245,390).
Data: Governmental funds end of year balance;
Fiscal years ending September 30,: 2001: 17,219,852;
Fiscal years ending September 30,: 2002: (4,249,748);
Fiscal years ending September 30,: 2003: (25,263,285);
Fiscal years ending September 30,: 2004: (49,245,390);
Fiscal years ending September 30,: 2005: (84,077,330).
Data: Net assets, end of year[D];
Fiscal years ending September 30,: 2001: 40,575,181;
Fiscal years ending September 30,: 2002: 30,760,955[E];
Fiscal years ending September 30,: 2003: 15,596,170;
Fiscal years ending September 30,: 2004: (18,656,437);
Fiscal years ending September 30,: 2005: (38,131,589).
Data: Change in net assets;
Fiscal years ending September 30,: 2001: --;
Fiscal years ending September 30,: 2002: (9,814,226);
Fiscal years ending September 30,: 2003: (15,164,785);
Fiscal years ending September 30,: 2004: (34,252,607);
Fiscal years ending September 30,: 2005: (19,475,152).
Calculations: Federal contributions as a percent of revenues;
Fiscal years ending September 30,: 2001: 17.8;
Fiscal years ending September 30,: 2002: 25.0;
Fiscal years ending September 30,: 2003: 20.3;
Fiscal years ending September 30,: 2004: 21.1;
Fiscal years ending September 30,: 2005: 20.9.
Calculations: Government revenue as a percent of GDP[F];
Fiscal years ending September 30,: 2001: --;
Fiscal years ending September 30,: 2002: .30;
Fiscal years ending September 30,: 2003: --;
Fiscal years ending September 30,: 2004: --;
Fiscal years ending September 30,: 2005: --.
Calculations: Government expenditures as percent of GDP[F];
Fiscal years ending September 30,: 2001: --;
Fiscal years ending September 30,: 2002: .33;
Fiscal years ending September 30,: 2003: --;
Fiscal years ending September 30,: 2004: --;
Fiscal years ending September 30,: 2005: --.
Source: GAO analysis of single audit reports covering fiscal years
2001, 2002, 2003, 2004, and 2005. The estimate of GDP, in the amount of
$946,854,877, came from Final Trip Report on Benchmark Estimates of
2002 Gross Domestic Product in the Commonwealth of the Northern Mariana
Islands, U.S. Census Bureau, Feb. 11, 2005.
Note 1: Financial data reflect CNMI's financial statements for its
governmental activities, which include most of CNMI's basic services.
These financial data do not include CNMI's component units, which are
legally separate but related to CNMI. These financial data also do not
include CNMI's fiduciary funds, because those funds cannot be used to
finance CNMI operations.
Note 2: CNMI's audited financial statements received qualified opinions
from its external auditors and therefore, these amounts are subject to
the limitations cited by the auditors in their opinions and to the
material internal control weaknesses identified.
[A] Other financing includes transfers in and out of other funds.
[B] The end-of-year fund balance for the prior fiscal year may not
agree with the beginning-of-year fund balance for the succeeding fiscal
year due to amounts being restated in subsequent financial statements.
We could not readily identify explanations for these restatements
because comparative information was not always available or disclosures
were not made in subsequent financial statements.
[C] Governmental funds finance most of the basic services provided by
the government.
[D] Net assets are capital assets and other assets, such as cash and
receivables, less liabilities.
[E] The amount reported is the restated amount from the 2003 Single
Audit Report, corrected because of excluded and misstated amounts.
[F] GDP estimates are not available for 2001, 2003, 2004, and 2005.
[End of table]
Attachment V:
GAO Contacts:
For further information about this testimony, please contact Jeanette
Franzel, Director, Financial Management and Assurance at (202) 512-9471
or , or David Gootnick, Director, International Affairs and Trade at
(202) 512-4128 or . Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
testimony. The following individuals made important contributions to
this report: Norma Samuel, Emil Friberg, Jr., James Wozny, Sandra
Silzer, Nicole McGuire, Meg Mills, and Seyda Wentworth.
Congressional Relations:
Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400,
U.S. Government Accountability Office, 441 G Street NW, Room 7125,
Washington, D.C. 20548:
Public Affairs:
Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800,
U.S. Government Accountability Office, 441 G Street NW, Room 7149,
Washington, D.C. 20548:
(194695):
FOOTNOTES
[1] GAO, U.S. Insular Areas: Economic, Fiscal, and Financial
Accountability Challenges, GAO-07-119 (Washington, D.C.: Dec. 12,
2006).
[2] GAO, Commonwealth of the Northern Mariana Islands: Serious
Economic, Fiscal, and Accountability Challenges, GAO-07-436T
(Washington, D.C.: Feb. 8, 2007).
[3] OIA's mission is to promote sound financial management processes,
boost economic development, and increase the federal government's
responsiveness to the unique needs of the insular areas.
[4] The U.S. House of Representatives and the Senate recently passed
H.R. 2, "Fair Minimum Wage Act of 2007" as well as H.R. 1591, "U.S.
Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq
Accountability Appropriations Act, 2007" either of which, if enacted,
would make the federal minimum wage provisions applicable to the CNMI
with a phased-in implementation., and
[5] GAO, U.S.-China Trade: Textile Safeguard Procedures Should Be
Improved, GAO-05-296 (Washington, D.C.: Apr. 4, 2005).
[6] The net asset amount at September 30, 2005, when compared to the
fund balance amount as of the same date, includes an additional
positive balance of $46 million resulting from capital and deferred
assets of approximately $180.8 million less long-term liabilities of
$134.8 million.
[7] 31 U.S.C. Chp. 75.
[8] GAO-07-119.
[9] GA0-07-119.
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