** NEW TIME** Full Committee Hearing- Oversight Hearing

The purpose of the oversight hearing is to receive testimony regarding the state of the economies and fiscal affairs in the Territories of Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, and the United States Virgin Islands.

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Witness Panel 1

The Honorable Felix Camacho

Governor of Guam

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Witness Panel 1

The Honorable Felix Camacho

The State of the Economy and Fiscal Affairs in the U.S. Territories

Testimony presented to the Committee on Energy and Natural Resources, United States Senate

by

Felix Perez Camacho
Governor of Guam

Mr. Chairman and Members of the Committee, thank you for inviting me to participate in your hearing on the state of the economy and fiscal affairs in the Pacific Island Territories, specifically the island of Guam. My name is Felix Perez Camacho, Governor of Guam. My testimony today is to present to you the current state of our economy and what the future holds for our great island as we enter a period of prosperity.

Mr. Chairman, I would like to express my appreciation to you and to the members of the Committee for holding this hearing to better understand the needs and concerns of the Pacific Island Territories on this most important issue for the people of Guam and our Pacific Island brothers and sisters.

I stand before you less than a week after my annual report on the State of the Island of Guam. It offered a synopsis of where we’ve been, what we had to overcome, how far we’ve gone and, most importantly, where we are headed. As I told my people and as I share with you here on Capitol Hill, the State of our island is growing stronger.

Guam is expected, absent major adverse disturbances, to continue its recovery and expansion of economic activities in Fiscal Years 2006 and 2007 as it has in each fiscal year following the depressed level of FY 2002. Given the number of private, federal defense and government of Guam construction projects already planned, permitted and contracted it is likely that the pace of the economic expansion will continue to accelerate.

Economic activities and tax revenues are anticipated to continue to recover so that by FY 2007 these levels will more closely approach those achieved in FY 2001 prior to being severely impacted by the repercussions of the terrorist events of September 11, 2001, subsequent super typhoons and other national and global events.

Guam’s Chief Economist reports to me that the economy definitely is trending toward pre-9-11 strength, ending a half-decade of decline and offering hope to my people, who have worked so hard to overcome the challenges that came at the dawn of the Twenty-first Century.

I must premise the following details with an overview of Guam’s economic structure. Our visitor industry accounts for more than 60 percent of total activity with our strongest markets pegged on the Japan and Korea outbound traveler. Our second largest industry is the military, accounting for more than 30 percent of activity. Other industries include telecommunications, retail, service, construction, aviation and more.

At the bottom of the recession in early 2003 when I came to office, all industries were in decline, the War on Terror and the storms kept tourists away and federal and military relations were strained.

The recovery from the depressed level of FY 2002 was initially fueled by a combination of a gradual but significant rebound in tourist arrival numbers and by substantial federal typhoon assistance in a variety of forms including temporary employment and reconstruction assistance as well as private insurance payments. As activity has stabilized, further economic growth is being paced by other sources of financial stimulus.

Substantial capital investment commitments are in place for private businesses, Government of Guam and Federal Government projects. The simultaneous combination of increasing public and private capital investment and construction, expanding defense personnel numbers in addition to modestly increasing tourist arrivals, increasing civilian employment, consumer and investor confidence and spending is the catalyst for continuing expansion.

While a number of large defense activities and infrastructure improvements are under consideration or being planned for Guam, the realization and timing of the implementation of these projects is cause for substantial uncertainty and variability in the estimates of growth levels in the coming years. As decisions on these activities are finalized and projects scheduled, there will be a better ability in the future to produce more precise forecasts.

Various economic indicators are showing that the Guam economy continues to recover and simultaneously is expanding. Building Permits provide an important leading economic indicator of the type and level of construction activities planned and likely to occur as well as the type of activities and employment which may occur in the buildings once completed. The dollar value of building permits in 2005 at $168 million is a 36 percent increase from 2004, the highest level since 2000. The value of total permits increased by more than seventy-five percent over the last three years. Both residential construction permits and Government of Guam projects have nearly doubled from FY 2004 to FY 2005.

Government of Guam projects planned or scheduled will infuse hundreds of millions of dollars into the local economy and provide for the construction of new schools, senior centers, public safety buildings, health centers, an expanded runway at the International Airport, the closure of the old landfill and the opening of a new one, an overhaul to the water and wastewater systems and major renovations to the power system. These improvements, while adding to the demand for more jobs in construction and other technical fields, also help to improve Guam’s quality of life.

Federal Government construction projects on military bases are not included in the building permit data. In lieu of this, construction budgets and projects contracted provide important indicators of future construction. About $100 million in construction projects are planned by the Air Force over the next two years. A contract has been awarded for $29 million for the construction of a new Department of Defense high school and Elementary & Middle school. A contract for wharf improvements at U.S. Naval Station Guam exceeding $10 million dollars has also been awarded.

The planned relocation of up to 7,000 Marines from the III Marine Expeditionary Force in Okinawa to Guam will have a major impact on our economy. The costs and timing of this relocation and related activities has not yet been fully outlined as plan details are being discussed between the U.S. and Japanese governments. Pacific Air Forces has committed to basing a Global Strike Task Force (GSTF) on Andersen AFB. It is estimated that approximately three thousand additional military, civilian and contractor personnel would be based at Andersen AFB as a result. The action would begin in 2007 with facility construction projects and be completed around 2016, at a cost of more than $2 billion.

Major renovations to and expansion within the visitor industry is the result of visitor arrival numbers jumping to levels not seen since 1997 and increased spending per tourist. Real estate transactions also have doubled over the past three years and the median sale price of a home is at its highest levels since data tracking began in 1999.

To place the Guam economy into perspective and to show how significant improvements are affecting my people, I want to turn your attention to the workforce situation. From the December reporting period the month before I came to office until the last reporting period in 2005, more than 3,700 private sector jobs have been added to the workforce – a 10 percent increase to the job market! Weekly earnings in eight of 13 reporting industries also have increased over the same period and the pace of the economic expansion is such that our industries are concerned about the availability of a skilled workforce to meet growing job demands. Local labor officials are networking with the private sector and U.S. Immigration authorities to address the anticipated shortfall.

Summary

Mr. Chairman and members of the Committee, Guam has rose to the challenge of building our island from the chaos and destruction of its darkest moments following natural disaster and man-made despair; but there is so much more that is being done to ensure that Guam stays on a course to prosperity. Together as a people, we have achieved so much and, together, we are poised to bring our island into a period of unprecedented prosperity. I share your values, your priorities and your concerns as leaders of our great Nation and today, I ask you to stand with the people of Guam as we take our island to new heights and build a greater Guam better and stronger than we’ve ever seen.

Thank you for your attention. I welcome any questions.
The Honorable Pedro Tenorio

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Witness Panel 1

The Honorable Pedro Tenorio

Testimony of

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

before the

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.
The Honorable Charles Turnbull

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Witness Panel 1

The Honorable Charles Turnbull

Statement

of the

Honorable Charles W. Turnbull

Governor

of the

United States Virgin Islands

Before the

Committee on Energy and Natural Resources

United States Senate

Washington, D.C.

March 1, 2006

            Mr. Chairman and distinguished Members of the Senate Committee on Energy and Natural Resources, I am pleased to have this opportunity to testify on the economic and fiscal challenges facing the United States Virgin Islands.

            Our economic and fiscal challenges are many. We are a small group of islands geographically isolated from the mainland of the United States and global commercial markets. We have no reservoir of natural resources to develop industry and manufacturing. We do not have full constitutional and political rights, including the right to vote for President; and we do not have voting representation in the United States Congress which wields plenary authority over our economic lives.

            We are vulnerable to hurricanes and natural disasters. We are disproportionately affected by national and international economic conditions. Our ability to develop our economy and generate the revenues required to provide essential public services depends, to a large extent, on provisions of tax and trade law controlled, and subject to arbitrary change, by the United States Congress.

            Notwithstanding these structural impediments, the Territory of the United States Virgin Islands has, since its acquisition in 1917, made significant progress under the American flag. While our per capita income is barely half of the U.S. median, we have the highest standard of living in the Caribbean and provide our people the broadest-array of public services of any country in the region. We are proud of our American citizenship and we are honored to have the privilege of serving in the United States armed forces around the globe to help defend the liberty of all Americans.

            Our path to political and economic equality has not always been smooth, and it has not come without struggle. Our institutions are relatively new. We are still in the process of perfecting our democratic form of government. We have only had elective governors since 1970. We have only had authority to devise a government of our choosing, through the calling of a constitutional convention, since 1976.

            Like many states and local governments, we have experienced fiscal problems over the years as a result of our historical underdevelopment, a relatively small economic and fiscal base, the immense structural damage caused by two major 100-year hurricanes over the last 15 years, and changes in federal tax laws which have slowed U.S. investment into the Territory.

            I assumed office in January 1999 when the fiscal condition of the Virgin Islands Government, following the destruction of Hurricane Marilyn, was at a low point. The accumulated General Fund deficit was $288 million. The structural deficit for the then current fiscal year was projected to exceed $100 million. Vendors were owed over $100 million and taxpayers were owed similar amounts in income tax refunds dating back to 1995. Most of the Government’s budget was committed to payroll costs, leaving insufficient funds for maintenance, supplies and materials required to ensure quality public services, as well as investment in, and the modernization of, our public infrastructure. The Government owed hundreds of millions of dollars to hardworking government employees for negotiated salary increases with no plan for payment. Revenue collections were on a steady decline, the Federal Government was owed nearly a quarter of a billion dollars in FEMA loans, and the specter of bankruptcy loomed large on the horizon.

            To prevent a financial collapse, we rolled up our sleeves and went to work. We made tough and painful decisions to restore fiscal discipline and reduce government spending. We imposed a strict hiring freeze, and downsized the Government without resorting to the massive layoffs that some people had urged. We cut our budget, refinanced our debt, reorganized the Government, attracted new businesses and capital investment to the Territory, and increased Government revenues.

            The success of our plan to grow the economy and cut government spending is reflected in the audited financial statements the Government prepares in accordance with the federal Single Audit Act. General Fund revenues, net of debt service, have grown from $417 million in FY 1999 to $633 million in FY 2005, an increase of 50 percent. [The increase in actual revenues is even higher but Government Accounting Standards require that certain tax revenues used to secure the Government’s bonds be recorded as revenues in the Debt Service Fund rather than the General Fund.] The same audited financial statements record that, over the same period, General Fund expenditures increased just over 4 percent, from $559 million in FY 1998, the year before I assumed office, to $582 million in FY 2005. Over the same period, the growth of all State budgets increased almost nine times as much, or an average increase of more than 35 percent. Indeed, facing spiraling deficits, my Administration took swift action to cut spending 10 percent in Fiscal Year 1999 and an additional 7 percent in FY 2000. As a result of this fiscal discipline, we were able to narrow our structural deficit in FY 2000, and we achieved a significant surplus in FY 2001. This fiscal strengthening allowed the Government to increase spending in that year for long deferred or underfunded needs. This path to structurally balanced budgets was temporarily interrupted for two years following 9/11 and the ensuing national recession. By renewing our commitment to fiscal discipline and by focusing on private sector growth, the Government returned to fiscal balance in FY 2004, earning surpluses in that year and in FY 2005. The disciplined fiscal stewardship of my Administration is reflected in the 10-year revenue and expenditure chart attached hereto as Appendix A. This chart also shows that, while the Government experienced accumulated General Fund deficits for each of the four years prior to the commencement of my Administration, we have generated accumulated General Fund surpluses in each of the last four fiscal years.

            The cuts in government spending were not easy and did not come without pain or political cost. We could not afford to fund every important program or to fill every critical position left open as a result of attrition. Yet, over the last seven years, we were able to shrink the size of government by 20 percent without resorting to mass layoffs. We cut spending while preserving the most essential services for the neediest in the Territory. I was not hesitant to wield my veto powers in order to restrain overspending by the Legislature. We paid overdue debts and long delayed salary increases to our hardworking government employees. But with 20 percent fewer employees in our government workforce, total employee compensation has grown less than five percent since 1999.

            Equally important, we have learned to manage and timely account for the funds that we have spent. Prior to assuming office, the Virgin Islands had completed only one of the comprehensive annual audits required by the Federal Government over a fourteen-year period. Today, my Administration has completed nine such audits in a six-year period and the Fiscal Year 2004 audit will be completed and issued in a matter of weeks, putting the Government into compliance with the requirements of the Federal Single Audit Act. Under my Administration, this task has become an important, regular and ordinary responsibility of government service. In addition, my Administration has, over the course of the last several years, resolved the vast majority of the outstanding audit recommendations performed by the federal Office of Inspector General. And we have vastly improved the Government’s overall audit compliance record on a going forward basis. Most importantly, however, we are taking steps to provide our financial managers with the modern financial tools they need to obtain, and act upon, real time financial data and to improve our financial management of both local and federal funds. I am pleased to report to you today that we are not waiting for long promised federal assistance. We are using the financial surplus we have generated to fund the procurement of a new state-of-the-art financial management system to replace the outdated and inadequate system acquired from the federal government in the 1980’s.

            Lastly, but not least important, we have strengthened the financial condition of the Government by eliminating, consolidating and refinancing our debt, including cancellation of nearly a quarter of a billion dollars of FEMA disaster loans. The FEMA debt relief alone, which involved creative and never-before-tried remedies under little known federal statutes, has saved the Virgin Islands over $30 million a year in annual debt service payments.

            As a result of our fiscal and budgetary successes, the Virgin Islands is now positioned to make new, but measured investments in our schools, health care system, roads and transportation system, environmental, tourism and public infrastructure as well as the social services required by the neediest in our community. While we have made important improvements in our physical plants and social infrastructure over the course of my Administration, including the construction of new schools, wastewater treatment plants, health care and transportation improvements, the solid improvement in our financial condition will allow us to accelerate and increase our investment in these and other critical areas over the next several years.

            In spite of this undeniable progress, many challenges remain. The strengthening of our Government’s financial position has been fueled, in large part, by the success of our Economic Development Commission (EDC) program and the consequent growth of our private sector. Under this program, which was reorganized and revitalized in the second year of my Administration, the Virgin Islands provides tax incentives to qualified investors who establish businesses in the Territory and make qualified investments. A recent study by PricewaterhouseCoopers LLP found that this program generates almost one third of our total income tax revenues and creates, directly or indirectly, nearly 10 percent of total employment in the Territory. Indeed, the EDC program has the potential to completely transform the economy of the Virgin Islands, lessen our dependence on the Federal Government, and narrow the income gap between our residents and those on the mainland.

            The continued success of our EDC program, however, has been under a cloud since 2004 when Congress enacted, without hearings or consultation, changes to the federal tax laws that govern the relationship between the Virgin Islands and the United States. While these changes were aimed at preventing tax abuse by persons who neither lived nor worked in the Virgin Islands, we submit that the changes went too far, forcing many legitimate businesses to close their doors and causing the loss of many millions of dollars to the Virgin Islands Treasury. Indeed, the Director of the Virgin Islands Bureau of Internal Revenue two weeks ago estimated that, based on last quarter’s tax payments, the Territory could lose as much as $80 million in the current fiscal year. Losses of this magnitude will inevitably erode our budget surpluses and put at risk our recently hard-earned fiscal solvency. It will, at the very least, force a return to the fiscal austerity of the early years of my Administration and require further deferral of needed investments in our social and public infrastructure.

            Over the past year, we have been working with the Congress to “rebalance” the tax rules governing the EDC in order to allow legitimate businesses to operate in the Territory while still precluding any possibility of tax abuse. The position of the Government of the Virgin Islands on these rules is set forth in a memorandum attached hereto as Appendix B. In this endeavor, I am pleased to report that we have the full support of the Department of the Interior, which testified in support of the changes we proposed at a Treasury hearing last July. We also have the support of individual members of the Senate Finance Committee, as well as the support of Members of this Committee who have visited the Virgin Islands and seen first hand the contributions of this important program to the economy and people of the Virgin Islands.

            Mr. Chairman, I would like to note for the record that this distinguished Committee used to have jurisdiction over the tax systems in the U.S. insular territories. Indeed, the Revised Organic Act of 1954, as originally enacted, included the basic tax rules that were designed to lead to financial self-sufficiency for the Virgin Islands. The 1986 Tax Reform Act altered these rules but provided, after extensive consultation with the Government of the Virgin Islands, new incentives that formed the backbone of our EDC program. The American Jobs Creation Act of 2004 (“Jobs Act”), however, sharply cut back on those incentives and put at risk our hard-won fiscal gains and future economic development.

            Accordingly, I respectfully urge the distinguished Members of this Committee to reassert the historic role of this Committee on federal tax issues involving the insular territories. In particular, I urge this Committee to support our request for a legislative amendment to the Jobs Act to ensure fair and reasonable residency and income rules for our EDC program. In addition, in order to give voice to our underrepresented citizens, I respectfully request that this Committee seek, in the future, sequential referral from the Committee on Finance of all tax matters affecting the insular areas, including, most importantly, issues relating to the taxing jurisdiction of the Virgin Islands and other United States Territories.

            Similarly, the Revised Organic Act provided in 1954 that all taxes imposed by the United States on all products imported from the Virgin Islands into the United States shall be “covered over,” or returned to the Treasury of the Virgin Islands. Under this provision, the United States returned to the Virgin Islands all of the federal excise taxes collected on Virgin Islands rum shipped to the United States. In 1984, Congress capped the amount of rum excise taxes returned to the Virgin Islands at $10.50 per proof gallon of rum, even though the federal excise tax on rum has since risen to $13.50 per proof gallon. Beginning in 1999, Congress increased the cap on the cover-over amount to $13.25 per proof gallon on a temporary basis, which requires Congress to affirmatively extend the rum tax formula on a regular basis. While the temporary extensions have played an important role in improving our fiscal situation, the uncertainty caused by the temporary nature of the increase makes it more difficult for the Government to develop long range budget plans and to use such revenue streams to securitize the bonds we issue to finance our public infrastructure. Accordingly, I respectfully request this Committee to reassert its original jurisdiction over such issues of tax jurisdiction and to work with the Committee on Finance to seek a permanent extension of the rum tax cap.

            I also note that our ability to assure adequate health care to our residents is hampered by the discriminatory cap on Medicaid funds provided to the Virgin Islands and the other U.S. Territories. Medicaid is a federal-state program to provide for the health care needs of the poorest and neediest persons in our country. The quality of health care should not depend on whether an individual lives in California, Alaska or in a United States Territory. While Congress approved last year an increase in the amount of Medicaid funds provided to the Virgin Islands, such increases only narrow the gap between the funds allocated to the Virgin Islands and funds we would be entitled to if the Virgin Islands were treated as a State under the Medicaid formula. Again, I respectfully urge this Committee to work with us to make further improvements in the Medicaid formula and to ensure that our neediest residents receive no less favorable treatment than the neediest residents in the United States.

            Last fall, Lt. Governor Vargrave A. Richards testified before this Committee in support of S. 1829, legislation introduced by the distinguished Chairman of this Committee and the distinguished Ranking Member to repeal a 1936 federal statute which limits the authority of the Virgin Islands Government to assess and collect local property taxes. That statute, originally enacted in furtherance of a legislative objective long since relegated to the dust bins of a bygone colonial era, was generally believed to have been repealed by the Revise Organic Act of 1954. A recent court decision, however, breathed new life into the statute, overturning local laws designed to protect homeowners and generally wreaking havoc in the administration of our property tax laws. Accordingly, I respectfully urge this Committee to act quickly on this legislation, which is supported by the Department of the Interior, in order to assure that the Government is able to properly exercise its fiscal responsibilities, and to timely assess and collect property taxes in the Territory.

            Mr. Chairman, I have focused my testimony today on the need to correct some of the structural impediments and other inequities that exist in our current relationship with the United States. Notwithstanding these impediments, I am proud of the progress we have made over the course of the last seven years to strengthen the economy of the Territory and improve the financial performance of the Virgin Islands Government. At the same time, I would like to provide a few brief comments on a House-passed bill (H.R. 62), referred to this Committee, which would remove the authority to manage essential budget functions from the elected Virgin Islands leadership, and place that authority for five years in the hands of an unelected bureaucrat who — as a practical matter — could not be removed from office and would not be accountable to anyone.

On behalf of the Government and people of the Virgin Islands, I would like to express my steadfast opposition to H.R. 62. This bill passed the House under suspension of the rules on March 14, 2005, without consultation with the Government of the Virgin Islands, without hearings, and without a committee report. In relying upon the record made in the previous Congress, the House ignored the fact that our Government has been in structural budget balance, that revenues are strong, and that expenditures are under control. The premise of this bill is that the people of the Virgin Islands are incapable of managing their affairs under a republican form of government, and that representative democracy has failed in our Territory. This premise is profoundly wrong and offensive as a matter of theory, and it is simply wrong as a matter of fact.

The bill would create the office of Chief Financial Officer (CFO) of the Government of the Virgin Islands. The CFO would assume the duties of the Director of the Virgin Islands Office of Management and Budget (VIOMB), and all VIOMB employees would report to him or her. Under the Virgin Islands Code, the Director has extraordinary powers of budget preparation and execution. Among other duties, the Director has the authority to mandate revision of the spending and operations plan of every department and agency. The Director also has the power under certain circumstances to modify or withhold appropriated expenditures at any time.

Under current law, the Director serves at the pleasure of the elected Governor. Under H.R. 62, the CFO would serve a fixed term of five years, and could not be removed from office except for “cause.” The bill establishes neither a procedure nor a standard for removal from office. The practical effect would be that the CFO, absent criminal abuse of office, would have absolute control of fiscal and budget policy throughout his or her tenure.

Since I assumed office in January 1999, the Government has achieved significant improvements in financial performance and fiscal management. The budget is in balance. Revenues have increased while spending has been kept under control. Indeed, the Government has achieved budget surpluses in recent years. In contrast to practices prior to my Administration, the Government regularly completes audited financial statements. As a result of the Government’s overall improvement in financial performance, the country’s leading bond agencies have upgraded the ratings on our recent bond issues for Federally-mandated environmental infrastructure and other capital projects.

            The Government is committed to making the tough decisions to maintain fiscal discipline, increase the efficiency of government, and to improve the delivery of essential public services to the people. The Government is not facing fiscal insolvency or collapse. There simply is no basis for removing from political accountability the essential functions of budget preparation and execution.

            This concludes my testimony. I would be pleased to answer any questions.
The Honorable Madeleine Bordallo

Delegate from Guam

Read statement

Witness Panel 1

The Honorable Madeleine Bordallo

Congresswoman Madeleine Z. Bordallo

Statement to Committee on Energy and Natural Resources

Hearing on “State of the Economies and Fiscal Affairs in the Territories of Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, and the United States Virgin Islands”

March 1, 2006 at 9:30 a.m.

366 Dirksen Senate Office Building

Mr. Chairman, Ranking Member Bingaman, and Members of the committee:

Thank you for calling this hearing on the economic and financial state of the U.S. territories. Ensuring that the U.S. territories continue to develop and strengthen economically should remain an important part of overall U.S. policy. I appreciate the opportunity to share my views on both the challenges facing Guam and the many opportunities within reach for our island.

Today I will address three specific issues for which I believe this Committee should exercise oversight. These issues touch upon the need to improve public utilities and infrastructure in the territories to better the business climate and quality of life on our islands. Workforce development and support for greater access to the federal marketplace for small businesses are also important priorities for which I seek this Committee’s support.

Tourism and the military presence on Guam drive the island’s economy and will continue to serve as areas of growth for the foreseeable future. Our visitor arrivals are on the increase. We hope this positive trend continues so that our visitor and hospitality industry will continue to grow and diversify. Additionally, the military presence on Guam will significantly increase in the years ahead. Recent bilateral talks between the United States and Japan yielded an agreement to reposition Marines from Okinawa to Guam. This means that up to 8,000 Marines will arrive on Guam over the next several years, beginning in 2008.

A significant investment of federal dollars is planned to accommodate the Marines and to support additional naval and Air Force assets on the island. An exact dollar figure for the level of investment has not been announced. Recent estimates reported by various media outlets range on the conservative side from $3 to 4 billion over the next ten years. This level of investment promises to create many new jobs and the increased military activity will stimulate a sustained period of economic growth.

There is concern that Guam’s workforce is not adequately developed to meet the surge of both military and off-base construction. To meet these labor demands, the Federal Government should increase assistance for job training programs on Guam. The Agency for Human Resources Development (AHRD) and the Department of Labor within the Government of Guam locally administers the Workforce Investment Act (WIA) and job training programs. The Guam Community College (GCC) offers vocational and technical training. These programs should receive increased federal support in order to develop the workforce needed to meet the demands in the future years. Additionally, I believe that the establishment of a Job Corps center on Guam would help fulfill future labor demands.

Increasing federal support for local job training and vocational education programs is one way to meet demand for labor. Guam’s aggregate workforce, however, will in all likelihood not be able to provide all of the labor required to meet future needs. Presently, U.S. law prohibits the use of foreign labor on military construction projects on Guam. This restriction is unique to Guam and serves as a constraint which should be reviewed. While there may be security concerns regarding military construction projects, these concerns can be met in a number of ways, including limiting foreign labor to non-sensitive projects and recruiting the H2-B visa labor pool from reliable allies. We will be developing this approach with the appropriate committees of jurisdiction. Additionally, I want to state for the Committee my support for the reauthorization and raising of the national H2-B visa cap. That cap should be set at a level that better reflects the needs of American businesses. In that vein, under current law, return workers under the H2-B visa program are not counted against the cap. I urge that this provision be continued.

Infrastructure improvements financed by military constructions funds will not address all of Guam’s critical infrastructure, essential services, and economic development needs. Financing from other sources must be sought and received. Securing this financing, however, is not easy. Alone, Guam cannot attract the capital and does not have a sufficient debt ceiling to underwrite the loans that we require for these infrastructure improvements. The other territories face similar challenges in gaining access to capital to finance infrastructure improvements.

Establishing a U.S. Territories Bond Bank that pools territorial resources and issues combined debt in the form of tax-exempt bonds is a possible solution to this challenge that I support. Proceeds from these bonds sales would be reissued in the form of loans aimed to finance reconstruction projects. Bond banks serve at least twelve States today. Like those banks, a U.S. Territory Bond Bank will use federal grant money to as collateral to guarantee the loans. Only by pooling our resources can the territories access the capital we need to improve the lives of their residents. I am committed to developing legislation that may be deemed necessary for the implementation of the territorial bond bank proposal.

One of the concerns our local government has is the tax status of off-island contractors who may be performing work on the military bases and whose corporate domicile is off-island. This is a complex issue that relates to our status as a mirror code jurisdiction. We have been exploring this issue and believe that a mechanism, whether initiated through administrative action or by legislation, is needed to inform the local tax jurisdictions of federal contract awards. I will be raising this issue with the House Armed Services Committee and I am prepared to offer an amendment to the National Defense Authorization Act so that each State and Territorial Tax Commissioner is notified of federal contracts awarded for work in their jurisdiction that may be subject to state, territorial, or local tax law. Compliance with this proposed requirement should be relatively simple as federal contact award data is already collected and logged into the Federal Procurement Data System (FPDS). Additionally, most federal agencies, including the Armed Services, customarily send courtesy notifications to Members of Congress of contracts awarded for work in their district. My proposal would simply require that the notification generated for this purpose also be reported to the appropriate State or Territorial Tax Commissioner. The State and Territorial Tax Commissioners would be responsible for enforcing the local tax law and by doing this we have created a mechanism by which federal contractors can be notified of their tax obligations.

Last year, Congress enacted legislation that I proposed along with Congressman Faleomavaega and Congresswoman Christensen that effectively designates our entire islands as Historically Underutilized Business Zones. The HUBZone program, administered by the U.S. Small Business Administration, is an important federal contracting tool that may be used to ensure that small businesses have competitive access to the federal marketplace. Prior to the enactment of this legislation last August, Guam had only four HUBZone certified firms. Today, 54 firms on Guam are HUBZone certified, an astounding 1300 % increase in just seven months. In fact, one of the first HUBZone certified companies has since been awarded two HUBZone set-aside federal contracts. Utilizing the HUBZone small business contracting preference and set-aside rules is the best way to ensure that local businesses can be empowered by the hundreds of millions of federal contact dollars planned for Guam in coming years. I urge the Committee to support the HUBZone Program and to encourage federal agencies to promote small businesses by utilizing this initiative.

In closing, I want to reiterate that the improvement of public infrastructure, workforce development, and support for greater access to the federal marketplace for small businesses are the three policy areas for which federal support is needed to further develop and diversify Guam’s economy. Thank you again for the opportunity to testify today. I appreciate the opportunity to share my views on Guam’s continued economic development.
The Honorable Donna Christensen

Read statement

Witness Panel 1

The Honorable Donna Christensen

Statement of

the Honorable Donna M. Christensen

hearing on the economies and fiscal affairs in the Territories of Guam, American Samoa, the Commonwealth of the Northern Mariana Islands,

and the United States Virgin Islands

Energy and Natural Resources Committee

U.S. Senate

March 1, 2006

Thank you Mr. Chairman and Ranking Member for the opportunity to make an opening statement at this important hearing on the financial challenges facing the governments of the U.S. Insular Areas.

Whether, one is looking at the CNMI and the possible loss of their garment industry or American Samoa and potential loss of Section 936 benefits or the tax changes in my own territory of the Virgin Islands, we are all facing challenges to our local economies which could have a catastrophic effect on government and the revenues they receive.

In the case of the Virgin Islands, I want to begin my remarks by asking for the committee’s help in repealing section of the 1936 regulating property tax in the Virgin Islands and reversing certain changes that were made by the USA JOBS Act, P.L. 108 which has the potential of crippling our very successful Economic Development Commission program. This a program which grants certain tax benefits to persons who make investments in our territory.

Because both the federal and our own local government was not as vigilant they should have been in weeding out those who sought to use our successful program, which Congress provided to us to help us become more self-sufficient and to grow our economy, to avoid paying their fair share of taxes, Congress tightened the requirements for being considered a Virgin Islands resident as well as what type of income can qualify for reduction under the program.

We believe Congress went farther than was needed in its attempt to deal with abuses in the program and as a consequence the entire program, which accounts for 20% of government revenues, is at serious risk. Because we are not fortunate to have representation in this body, we have looked to you, Mr. Chairman and the members of this committee to be our champions in the Senate, as has been your historic role.

We have been working with a number of your colleagues on the Finance Committee to restore the language that was in the original Senate passed version of the JOBS Act which our EDC beneficiaries tell us is the absolute minimum requirement in terms of the number of days they would be required to be on the island in order to qualify as a Virgin Islands resident.

Governor Turnbull in his remarks will elaborate on this issue in greater detail but I will conclude by simply saying that this is the number one issue for us in terms of our economic prosperity going forward.

Now to another issue that is equally important to me as well as to a majority of my constituents! You have pending before your committee, Mr. Chairman, legislation which I sponsored and which twice passed the House of Representatives that would create an office of Chief Financial Office for the Virgin Islands. The bill, H.R. 62, last passed the House a year ago this month, and has been pending before this committee ever since.

Because there hasn’t been a hearing scheduled on this bill in all this time, I want to take this opportunity Mr. Chairman to urge you and your colleagues to pass H.R. 62, because of the critical role I believe it can play in strengthening the Virgin Islands ability to better manage its scarce resources.

We live in a time when no one can afford to waste one single penny.   I believe – as strongly as I did when I first introduced this bill almost three years ago -- that a Chief Financial Officer for the Virgin Islands can serve as an immeasurable resource tool for first rate financial management of our scarce territorial resources, freed from the constraints of day-to-day political pressures. We -- all of us in this body know all to well – how financial decisions made within a political context often does not yield the wisest results.

I want to say at the outset, Mr. Chairman that my support for and introduction of, legislation to create a Chief Financial Office for the Virgin Islands is in no way an indictment of the job that Governor Charles W. Turnbull and his financial management team has done in managing the finances of the Territory.

In fact, I want to publicly applaud the governor for the job he has done in stewarding the territory through very perilous fiscal times.

When Governor Turnbull assumed the office of Governor of the Virgin Islands nearly eight years ago, the territory was “technically insolvent” and on the brink of fiscal collapse.

He inherited a government that was “swamped with debt with total liabilities exceeding $1.12 billion, including a cumulative General Fund deficit in excess of $250 million and an annual deficit approaching $100 million.

As the Governor stated in his final “State of the Territory” address this past January, he and his team “rolled up their sleeves, went to work.” And with the assistance of Congress, particularly this committee, as well as “windfalls” from the EDC companies and revenues realized from increased oil prices, he and his team were able to restore budget surpluses, and strengthened the territory’s financial position.”

But as commendable a job as the Governor has done all is not as it could and should be with regard to our fiscal ship and we can and should do better!

Opponents of my bill, including the governor, argue that having a Chief Financial Officer, who is appointed by the Governor but does not serve at his pleasure, will be a step-backward in our political development and would be an act of overt colonialism. Nothing could be further from the truth!

While my bill would be an act of Congress, it sets up a process that is entirely within the hands of Virgin Islanders. And most importantly, it creates a position that sunsets in five years.

When I first introduced my CFO bill as it is known, I did so because I believed that something had to be done to prevent the Virgin Islands from fiscal collapse.

Even with all of the work that Governor Turnbull has done, as recent as six years ago, our economy was not performing as it is today.

After carefully looking at the path that the District of Columbia took to pull itself out of its fiscal nightmare and consulting with District officials including the current DC Chief Financial Officer, as well as my friend and colleague, Eleanor Holmes Norton – who testified in support of my bill in the House –

I came to the conclusion that what we needed was an expert impartial financial manager, whose charge was to simultaneously foster sound financial management while preventing “over-spending.”

We have come along way since I first introduced my bill thanks in large part to a tremendous upswing in nearly all segments of our local economy.   However, the practices that led us to the brink of fiscal collapse during down times still remain.

Mr. Chairman, I want to repeat that my proposal is not an indictment of Governor Turnbull or any member of his team.

The lax financial practices which have led many of our local agencies to be put under severe grant restrictions by agencies of the federal government existed long before the Turnbull Administration came into being and will continue to exist long after it is gone unless we institute new practices.

I know, because I served as an official of Virgin Islands Health Department some years ago and the practices that we are being criticized for by a number of our federal grant managers existed then and continue to exist today.

Mr. Chairman some have said that if Congress were to pass my bill you would be interjecting yourselves in our local affairs; a specious charge if I ever heard one.

It was not the Congress that conceived of this proposal and sought to impose it on us, but the elected representative of the people of the Virgin Islands in Congress who has been calling for this proposal, buffeted from all indications, by the strong support of my constituents as I seek to return fiscal credibility back to the V.I. government, especially as it relates to federal agencies and their funding of projects and services in the territory.

Mr. Chairman it has not been easy for me to watch the fiscal health of the territory steadily decline since I have been in office. Since the middle 1990s, successive administrations and Legislatures have – for good reasons -- not been able to maintain sound fiscal management and financial policies.

While some of the reasons for this condition have been outside of our control, such as recurrent catastrophic hurricanes and the tax cuts and credits passed by Congress, much of the blame for this condition can be traced to the unfortunate reality that the Territory’s managers and lawmakers have not substantively addressed the imbalance between the needs and demands of the community and its revenues.

While our economic future looks bright at the moment, if we continue the ways of the past our bright future can turn to dark days in a blink of an eye.

While, my bill is not a panacea, I believe that it will help chart a course for fiscal management that will keep us in good stead during good times as the present and help us prepare for darker days which are sure to be visited upon us in the future. I urge you to support passage of H.R. 62
The Honorable Togiola Tulafono

Governor

American Samoa
The Honorable Eni Faleomavaega

Witness Panel 2

Mr. David Cohen

Read statement

Witness Panel 2

Mr. David Cohen

Statement

of

David B. Cohen

Deputy Assistant Secretary of the Interior for Insular Affairs

Before the

Senate Committee on Energy and Natural Resources

Regarding the

State of the Economies and Fiscal Affairs of the Territories of

American Samoa, the Commonwealth of the Northern Mariana Island, Guam and the United States Virgin Islands

March 1, 2006

Mr. Chairman and members of the Committee, thank you for the opportunity to offer thoughts on the economies and fiscal affairs of American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam, and the United States Virgin Islands.

In summary, while there is room for optimism in the long run, three of the four territories are facing economic challenges, and all four are facing fiscal difficulties. We are not certain how these will unfold, but they require attention.

Before discussing the specific case of each territory, I will highlight the challenges they face in common. Although the four territories are distinct from one another, they share important characteristics. Each has very limited land and resources. Each has a small population, and a limited pool of expertise to address the community’s critical needs. Each is located in an area that is highly prone to destructive typhoons, cyclones, or hurricanes. Each is relatively new to self-government.

Because of remoteness and a lack of resources, each territory faces high transportation costs to import the basic necessities. Each territory is heavily reliant on air links to the outside world, but these links are often characterized by a lack of competition, high prices, and unreliable service. With the exception of Guam, each of the territories has the challenge of providing a full range of government services that cover multiple islands. These services must be provided with a very limited pool of trained and experienced personnel. There are low levels of immigration to the territories from which to supplement the pool of talent and resources. Each territory has a fairly limited private sector that is dominated by one or two major industries. Minimum wage rates are high in comparison to the low-wage regions of the world in which they are located. As a result of all of these factors combined, each of the territories has a standard of living that is lower than that of any state—in most cases significantly so.

These challenges are exacerbated by the generally poor quality of critical infrastructure in the territories. Guam and the U.S. Virgin Islands are both subject to consent decrees that require improvements in their drinking water and wastewater systems. Saipan, the largest island in the CNMI and its civic, business, and government center, is the only community of its size in the United States that does not have 24-hour access to potable water. Each territory faces serious solid waste disposal issues. Guam is under a Federal consent decree to shut down its current landfill and build a replacement.

Most of the power grids and generating systems in the territories are old, inefficient and vulnerable to the tropical cyclones that regularly occur in the Caribbean and the Pacific. The territories depend, almost entirely, on imported fossil fuels for their energy needs. Increases in the price of oil have added significantly to the financial burdens all the territories must endure. Fuel costs, in addition to problems with maintenance and financial management, have led to rolling blackouts on Saipan.

American Samoa

Of the four territories, American Samoa has the narrowest economic base and the most static economy. The territory’s private sector is anchored by two tuna canneries that have been in business in the territory for more than five decades. According to a December 8 2005 letter by Congressman Eni Faleomavaega the canneries account, directly or indirectly, for over 80 percent of the private sector economy of the territory.

It is easy to illustrate the importance of the canneries to the economy of American Samoa. In 2004, according to the U.S. Department of Labor, the canneries directly employed 4,738 workers (38.6 percent of all surveyed workers in the territory), paid an average hourly wage rate of $3.60, and accounted for 24.5 percent of the territory’s total wage bill for all workers. The American Samoa Government (ASG), on the other hand, employed 5,124 persons (41.8 percent of all surveyed workers in American Samoa) at an average hourly wage rate of $7.99, and represented 58.9 percent of the territory’s total wage bill in 2004. The third largest employer in American Samoa, the trade and services sector, made up only 8.3 percent of the total wage bill while employing 10.3 percent of all surveyed workers. Not included in these statistics are workers who are exempted from coverage of the Federal Fair Labor Standards Act.

Because of the territory’s reliance on the canneries, if they leave American Samoa precipitously, the economy of American Samoa would be devastated. The demise of the canning industry would leave American Samoa with no viable industry and no major employer other than the local government and the merchants that sell to it and its employees. At least in the short run, this would leave American Samoa almost wholly dependent on direct assistance from the Federal government. It would likely result in an increase in Federal assistance to the territory, as well as significant migration by U.S. national residents of the territory to Hawaii or other west coast states in search of work and benefits. In addition, without the high volume of tuna shipments from the territory, the cost of shipping essential goods into the territory would likely increase. This would cause prices to rise at a time when aggregate income in the territory would be falling, exacerbating the challenges even further.

In the long run, it is likely that the advancement of free trade regimes under which foreign nations receive access to the U.S. market on terms comparable to what American Samoa currently enjoys will eventually cause the canneries to leave. In addition to its isolation from major trade routes, American Samoa is at a great competitive disadvantage in labor costs as compared to countries such as Thailand and the Philippines. The American Samoa canneries have reported that labor rates in 2001 for those two countries were 67 cents and 66 cents per hour, respectively. The canneries paid an average of $3.60 an hour in 2004. To counter the wage rate disadvantage, the canneries have relied on the possessions tax credit under section 936 of the Internal Revenue Code and on duty-free access to the U.S. market.

The possessions tax credit for the canneries expired at the end of 2005, but a one year extension is provided in the House version of the Tax Reconciliation bill, which is about to be considered in conference. On November 9, 2005, the Secretary of the Interior sent a letter to the Chairs of the House Committee on Ways and Means and Senate Finance Committee expressing the Administration’s support for a temporary extension of the possession tax credit to allow the American Samoa Government to develop a diversified private sector economy. American Samoa is really in a race against the clock before the trade advantages currently enjoyed by the American Samoa tuna canneries are expanded to other countries and regions. The territory urgently needs to wean its economy from excessive dependence on the canneries before they actually depart.

As we face the prospects of a post-cannery American Samoa, it is noteworthy that the residents of the territory today have the lowest per capita gross domestic product (GDP) of any state or territory in the American political family. Preliminary estimates of the U.S. Census Bureau in 2005 (based on 2002 data) showed American Samoa’s GDP at $558.8 million, or $9,041 per capita. American Samoa’s per capita GDP is equal to only 34.4 percent of the lowest of the states and 22.8 percent of the national average.

Fiscally, the ASG continues to face challenges, but is making progress. In response to the Department of the Interior’s concerns about financial management issues and the broader goal of advancing fiscal discipline in the territories, the Secretary of the Interior and the ASG entered into a Memorandum of Agreement in 2002 which requires a fiscal reform plan for bringing annual operating expenses in line with revenues. In 2005, the Office of Insular Affairs issued a high-risk grantee declaration for the ASG. The declaration, a statement of warning, was centered primarily on the independent auditors’ opinions of financial statements that identified severe and material weaknesses in internal controls over reporting and compliance with Federal grant program requirements. The conditions for lifting the high-risk designation include a requirement that the local government produce its annual single audits in a timely fashion with no material qualifications for at least two consecutive years. As of September 30, 2005, the ASG identified a cumulative unaudited surplus of $8.8 million, but a more recent report for fiscal year 2006 showed a first quarter shortfall of $4.86 million. As these numbers suggest, the fiscal health of the ASG remains unpredictable.

Commonwealth of the Northern Mariana Islands

The CNMI economy is besieged by changes in regional tourism markets and the advancement of free trade. During the last two decades, the garment industry has been one of the two pillars of the CNMI economy, along with tourism. The garment industry succeeded, and even surpassed tourism at its peak in the late 1990s, because of two trade provisions: (1) quotas on imports from low-cost producers of garments, and (2) duty-free export of goods manufactured in the CNMI to the United States. Also, the CNMI has benefited from its ability to control its immigration and establish its own minimum wage. With virtually no military installations and very limited military spending, the CNMI’s ability to import labor and set its own minimum wage has been essential to its economic survival.

With its labor, immigration and export advantages, the CNMI established a successful garment manufacturing industry in the 1980s. At its peak in 1999-2000, the industry shipped well over $1 billion worth of garments to the United States and employed around 16,000 mostly foreign workers directly. It also paid roughly $79 million in taxes and fees into the CNMI treasury, about 35 percent of total public revenues at the time. In 2004, shipments to the United States were down to $807 million, followed by $677 million in 2005. Since the taxes and fees the garment-makers pay to the CNMI treasury are a fixed percent of sales, losses in sales volume show up directly in public revenues.

Import quotas were lifted on January 1, 2005 under provisions of a new global trade regime for textiles and clothing under the agreement that established the World Trade Organization in 1994. Some quotas were re-imposed on China by President Bush on a temporary basis and then through a bilateral agreement with China, but these quotas will expire after 2008. In the mean time, in anticipation of the new trade regime, the garment industry had already begun consolidation and some relocation of operations, causing decline in both production and the payment of taxes and fees. It now looks increasingly likely that the garment industry in its current form will not survive in the long term.

During slowdowns in tourism since the 1990s, arising from the Asian financial crisis, the effects of the terrorist attacks on the United States, SARS, and other factors, the garment industry kept the economy and government afloat. In fact, of all four territories, the CNMI has so far been the most self-sufficient in terms of local tax revenues. The decline of the garment industry could change that.

Between April 2004 and February 2006, nine of the 27 garment factories on Saipan have closed, leaving 18 still operating. An estimated total of 3,842 jobs have been lost.

What makes the CNMI’s challenges more compelling is that both of its major industries are declining at the same time. Just as the CNMI’s tourism industry was recovering from a period of stagnation and decline, it was dealt a serious blow in October 2005 when Japan Air Lines (JAL) discontinued its scheduled flights between Japan and Saipan. Since Japanese tourists make up about 73 percent of all tourists and JAL carried about 40 percent of all Japanese tourists to the CNMI, JAL’s decision cut about 29 percent of tourists to the islands. As a result, total arrivals in 2005 were down to 506,846. At its peak, just before the 1977-98 Asian financial crisis, the CNMI welcomed 736,117 tourists, according to the Mariana Visitors Authority.

Still, the CNMI tourism market has made some progress since JAL’s pullout. For example, Northwest Airlines, which has had a daily flight between Tokyo and Saipan, will increase that frequency to 10 flights per week in April.

Like American Samoa, the per capita GDP of the CNMI is lower than that of any state. In 2005, the U.S. Census Bureau’s preliminary estimate of the CNMI’s GDP was $1 billion. With a total population of 75,066, the CNMI’s per capita GDP was an estimated $13,350, a figure 50.9 percent of the lowest state per capita GDP, and 33.7 percent of the national per capita GDP.

Fiscally, the CNMI is experiencing declining revenues and government cutbacks. For fiscal year 2006, the outgoing Governor proposed a total budget of $213 million. This figure was revised downward to $198.5 million by the current Governor, with the consent of the Legislature. CNMI economic challenges should be expected to result in continued fiscal challenges as well.

Guam

Like the CNMI, Guam relies heavily on two major industries. In Guam’s case they are tourism and national defense.

From 2001 to 2003 several factors adversely affected Guam’s economy. These included the Asian financial crisis, the effects of the terrorist attacks on the United States on September 11, 2001, and those arising from regional economic and financial and public health concerns. In 2003, tourists to Guam numbered fewer than one million for the first time since 1993. Since then tourism has been on the rise. In addition, there have been unusually destructive typhoons in the last five years which have caused significant damage to the urban infrastructure as well as the natural environment. It may be years, perhaps decades, before some of this damage can be repaired.

In contrast to the CNMI, present-day regional and global changes seem to be working in Guam’s favor. The overall economic outlook appears much brighter than at any time in recent years.

Guam’s major business, tourism, is on the rebound, mainly because of the resurgent Japanese economy. Because nearly 80 percent of the tourists visiting Guam annually are from Japan, improvements in that country’s economic and financial fortunes have a direct effect on Guam. JAL’s decision to realign its service between Japan and the Mariana Islands has resulted in some flight cutbacks, but it did not halt scheduled service altogether, as it did to the CNMI. Also, other carriers, mainly American carriers, have picked up some of the routes JAL left behind. As recent figures show, Guam’s tourism appears poised for growth.

In 2005 as a whole, Guam received 1.2 million tourists, up 5.8 percent from the year before. With the Japanese economy rebounding and a record 18 million Japanese planning to travel in 2006, according the Japan Travel Bureau, the likelihood is that Guam will benefit from some of this increase.

Guam’s other major source of income, the military presence on Guam, is also on the rise. The Department of Defense recently unveiled plans that call for the transfer of up to 6,000 Marines and their dependents from Okinawa, Japan, to Guam over the next six years. This move would increase the number of military personnel on Guam to over 10,000 and raise Department of Defense spending levels on the island substantially.

Base improvements, including those in anticipation of the Marines moving to Guam, have added fuel to local construction industry. It just may be that the military’s transfer of personnel and dependents to the island will take Guam back to its economic heyday.

Although Guam has a stronger economic base than the either American Samoa or the CNMI, its per capita income continues to be lower than of any state. In 2005, the U.S. Census Bureau estimated that Guam’s GDP was roughly $3.7 billion and, with a total population of 162,326, had a per capita GDP of $22,661. That amount would be 86.3 percent of the lowest for a state, and 57.1 percent of the nation as a whole.

Fiscally, Guam has struggled with continuing deficits for the last decade. In fiscal year 1996, GovGuam had a surplus of $19.6 million that helped pare down its cumulative deficit of $165.2 million that it carried over from the previous year. Despite recent efforts, from early retirement programs to closing down whole government agencies (the Department of Commerce) and other measures, the deficits have persisted.

In the Governor’s Executive Budget for fiscal year 2006, the cumulative deficit reached $361.9 million. Some of this shortfall is the result of GovGuam meeting the needs of citizens after natural disasters, some of it is attributable to slower than anticipated growth in revenues, and some of it attributed to the inability of leaders in the relevant branches of government to reach consensus on the need to reduce the size of government. It is not clear how or when this large deficit will be eliminated, but the overall future of the economy looks better than any time in the last decade.

United States Virgin Islands

The economy of the U.S. Virgin Islands is relatively more diversified and has performed more favorably in recent years than the economies of the Pacific territories. However, the fiscal and economic health of the territory face a potentially serious short-term challenge, the magnitude of which is difficult to predict.

In 2001, new territorial law added incentives for attracting new businesses to the islands. Service businesses, such as financial services providers, were sought to help diversify the economy. This incentive program is operated by the territory’s Economic Development Commission (EDC), and is commonly referred to as the EDC program.

The enhanced provisions of 2001 attracted many businesses to the U.S. Virgin Islands, bringing large amounts of startup capital funds to build infrastructure and housing units. The Government of the Virgin Islands credits the EDC businesses with bringing approximately $100-120 million annually to the Virgin Islands treasury. This is a significant portion of its $600 million in total annual revenue. These figures do not include taxes paid by employees of these companies or by other businesses and employees that rely upon the economic activity generated by the EDC businesses.

When Congress enacted the American Jobs Creation Act of 2004, however, it cast into doubt the future of the EDC program. The statute appeared to disqualify many EDC beneficiaries, especially those that had relocated to the Virgin Islands after the program was expanded in 2001, from receiving the benefits of the program. The U.S. Department of the Treasury and the Internal Revenue Service recently issued regulations to provide guidance on certain provisions of the statute. Regulations on other important provisions of the statute are still being prepared. Virgin Islands officials are concerned that a significant number of EDC beneficiaries may close their Virgin Islands operations as a result of the statute and regulations. The result of such closure would be a corresponding loss of tax revenues, jobs, construction activity, other economic activity, and charitable giving, the magnitude of which is difficult to estimate.

Although the Virgin Islands has succeeded in attracting some high net worth individuals in recent years, the territory on average has a lower per capita income than in any of the states. In 2005, the U.S. Census Bureau estimated that the U.S. Virgin Islands had a GDP of $2.8 billion and a per capita GDP of $25,815 which would be 98.3 percent of the lowest of the states, and 65.1 percent of the nation as a whole.

Role of the Public and Private Sectors

It is clear that the territories will not be able to address the significant challenges they face unless they significantly strengthen their economies. This cannot occur unless the private sector in each of the territories is strengthened sufficiently to wean the economy from unsustainable reliance on the public sector. That is why the Secretary of the Interior has stated that her top priority for the territories is to promote private sector economic development. Under the Secretary’s leadership, the Department of the Interior has been implementing a comprehensive program to advance this priority.

Despite the many challenges they face, the territories still have competitive advantages in certain areas. The adaptable companies can prosper in the territories. The Office of Insular Affairs has devoted significant effort to finding those companies and to facilitating interaction between these companies and the territories’ relevant private sector and government representatives. We have conducted extensive research through our Island Fellows Program, in which M.B.A. students from prestigious institutions such as Wharton and Harvard have identified industries and companies that fit well with the unique needs and competitive advantages of the territories. The Secretary has hosted two conferences at which these companies have met with potential local business partners and government officials from the territories. A third conference is scheduled for November. We have also organized Business Opportunities Missions, taking business people to the territories to conduct on-site due diligence. Our first Business Opportunities Mission, to Guam, Saipan and Palau, was led by Deputy Secretary Lynn Scarlett in May 2005. During the period of March 5-10, Deputy Secretary Scarlett will lead General Electric, Microsoft, Marriott, and other top companies on a Business Opportunities Mission to the Virgin Islands. A Business Opportunities Mission to American Samoa is planned for May.

As a result of our facilitation efforts, a number of business opportunities in the territories have either been consummated or are being actively pursued. The most important result of our program, however, is the realization by territorial leaders that there is no alternative to this type of effort to strengthen the private sector, and that they need to be leading it themselves.

Because of the special fiscal and economic challenges faced by the territories, several successive administrations, like this Administration, have supported tax and trade provisions that help the territories generate sufficient economic activity and tax revenue to meet the most basic needs of their people. Notwithstanding these incentives, each of the territories continues to experience economic and fiscal difficulties.

Longstanding special tax provisions for the territories manifest an important underlying principle of Federal territorial policy; namely, the Federal Government does not treat the territories as sources of revenue. The Federal government has a strong interest in maintaining and enhancing the economic and fiscal well-being of the territories.

A fiscal and economic crisis in any of the territories would weaken the effect of investments that United States taxpayers have already made in the areas of housing, education, health, social welfare, fiscal management and other areas. For example, the U.S. taxpayer has already made sizeable investments in the territories to ensure that housing needs for the poor are addressed, that schools have the resources to retain accreditation, that minimum health and environmental standards are met, that critical infrastructure is constructed and that basic standards of social welfare are satisfied. Active Federal agencies have been the Departments of the Interior, Housing and Urban Development, Education, Health and Human Services, Agriculture, Transportation and Homeland Security, and the Environmental Protection Agency.

It should be noted that three of the territories are on the United Nations Committee on Decolonization’s list of only 16 non-self-governing entities in the world. Although the United States rightly rejects this characterization, America’s critics would not hesitate to use any deterioration in living standards in the territories to buttress their attempts to de-legitimize United States sovereignty in the territories.

Mr. Chairman, there are many good reasons for the average American to care about the well-being of the territories. Let me add one more: The tremendous sacrifice that men and women from the territories have made to keep our country free. Mr. Chairman, I made the sad calculation a couple of months ago that a resident of American Samoa was over 15 times more likely to have been killed in action in Iraq than a resident of the nation as a whole. This, our smallest territory, has lost seven men and women in the conflict, approximately one for every 9,000 people who live in the territory. The Governor’s own daughter recently returned from a one-year tour of duty in Iraq. Throughout the islands, families are making tremendous sacrifices to defend freedom. The U.S. Virgin Islands has lost four servicemen in Iraq. Guam has lost four. The Northern Mariana Islands has lost three soldiers, and I attended the funeral for each one.

Mr. Chairman, this Administration is committed to working with you to ensure that the Federal policy towards the territories contributes positively to communities that have contributed so much to our nation.

Hearings and Business Meetings

NEW TIME Full Committee Hearing- Oversight Hearing

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Witness Panel 1

The Honorable Felix Camacho

The Honorable Pedro Tenorio

The Honorable Charles Turnbull

The Honorable Madeleine Bordallo

The Honorable Donna Christensen

The Honorable Togiola Tulafono

The Honorable Eni Faleomavaega

Witness Panel 2

Mr. David Cohen