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State of the Commonwealth
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Posted on May 02 2008
By Benigno R. Fitial
Special to the Saipan Tribune
Before I begin my address, let us pause for a moment of silence to remember and honor our 10 fallen service members who have perished in the Iraqi war zone. Four have been added to the list since I spoke last year:
– PFC John Derek Flores
– CPL Victor M. Fontanilla
– CPL Joe Junior Gogue Charfauros
– Seaman AnaMarie SN. Camacho
The service and sacrifice of these young men and women will never be forgotten.
* * *
I am here today to report on the State of the Commonwealth. I will start with our economy, then review the government’s response to our declining revenues, and conclude with a discussion of the Commonwealth Utilities Corp. and federal legislation.
[B]The Commonwealth’s Economy[/B]Last year I talked about Kumho Asiana’s ambitious plans for its LaoLao Bay Golf Resort. Yesterday I had great pleasure in attending the groundbreaking ceremony for this $60 million luxury golf resort project. They are now on their way to build up to 120 high-end villas, and a new clubhouse and teahouse. These three drawings will give you some perspective on the venture. The first drawing is the entrance to the hotel in LaoLao. The next faces the green on the 18th hole with the hotel on the left side. The third drawing shows the view of the hotel from above the 18th hole.
The confidence of Kumho Asiana in the Commonwealth is reassuring evidence of our eventual economic recovery. Kumho Asiana is a multi-billion dollar conglomerate, with more than two dozen subsidiaries, and is now the fifth largest family-run company in South Korea.
Our efforts to increase investment over the last two years have produced other successes as well.
Just a few days ago MRDC took an important step toward obtaining the permits necessary before construction can begin on its Tinian project. MRDC plans to build the 405-room hotel casino Matua Bay Resort on the island and a 18-hole championship golf course—at an estimated cost for the first phase of $179 million. The company hired one of Japan’s most distinguished architects to design the hotel casino resort. Here are some drawings reflecting his creativity. The round structure in front is the casino itself layered into several floors. The interior is a spacious innovative design.
The Bridge Investment Group recently announced that it has scheduled its groundbreaking ceremony for its project in June. When completed, the Tinian Oceanview Resort and Condominiums project will consist of a 301-room hotel and 268 condominium rooms at an estimated cost of $40 to $60 million.
Under its new owners, the former Nikko Hotel—now the Palms Resort Saipan—will undergo extensive renovations beginning early this summer. By focusing on one wing at a time, Palm Resorts Saipan plans to keep the hotel open during this period.
Our visitor industry is showing positive signs of fighting back from the decline in arrivals last year. In December Northwest started a new daily daytime flight from Osaka to Saipan. By this one flight alone, we anticipate an increase of more than 20 percent in Japanese visitors during 2008.
Asiana last year added four additional daytime flights from Seoul to Saipan and, later in the year, added flights from Busan to Saipan four times a week. We have seen rapid, double digit growth in South Korean arrivals over the past two years and we expect more progress in the coming years.
I was very impressed to hear that the Rota community turned out in the early morning hours earlier this week to welcome the first of 40 charter flights from Japan to that island. These flights are sponsored by Kinki Nippon Tours and Continental Airlines. The Rota charter flights are fully booked, which will bring about 8,000 tourists to Rota.
We are continuing as well to develop the growing markets in both China and Russia. I am confident that visitor arrivals this year will be at least 15 percent greater than the arrivals in 2007, providing a needed boost for our hotels and other businesses catering to tourists.
Looking beyond next year, we hope that the Commonwealth will share in the economic benefits resulting from the military buildup on Guam. I have directed all CNMI agencies to cooperate fully with the different environmental studies of our islands being conducted by federal officials. We anticipate receiving a draft Master Plan for the CNMI later this year. We read in the media about possible military uses on Tinian, Pagan, the most northern islands, and recently Goat Island. The Lt. Governor and I believe that the military planners should discuss these issues with Commonwealth representatives before—not after—they formalize their draft Master Plan.
Our expedited drawdown of federal CIP funds will also contribute to improved economic activity in the next few years. Between January 2006, when this administration took office, and April 30, 2008, the Commonwealth drew down a total of $51 million—46 percent of the cumulative balance available for our use. Within the next six months, we will be implementing about $39 million of our CIP funds towards projects that will stimulate our economy. By Spring 2009, the CNMI will have an infrastructure plan in place to satisfy the requirements necessary to qualify for future water and waste water infrastructure funding from the federal government.
[B]Response to Declining Government Revenues[/B]Now let me turn to the serious problem of declining government revenues.
I have just received approval from the U.S. Secretary of the Treasury for our plan to implement the federal stimulus legislation. As a result, the Commonwealth expects to receive about $16.1 million to cover our payments to eligible CNMI residents. Under the law, tax rebates will be paid in the amount of $600 per individual, $1,200 for joint filers, and $300 per eligible child. Our plan is to begin issuing the first batch of checks by the end of this month.
The Commonwealth Treasury will certainly welcome any increase in revenues due to this large infusion of cash into our economy. Even so, it is unlikely that this will be enough to offset the anticipated negatives for the current fiscal year.
It remains my strongly held view that this government should not engage in deficit financing. As shown by this chart, we have consistently tried to keep our expenses in line with revenues. I regret that it looks as though we are unable to do that in the current fiscal year. We have been unable to reach agreement on an austerity program with the Legislature. We have tried to adjust to the declining revenues without reducing the essential public services in the CNMI. Let me illustrate some of the difficulties. The current projected expenditures in 2008 are $171 million and that will have to be reduced. For 2009, the budget will be set at $160 million. All three branches of government have lived with reduced funding in recent years. But the Executive Branch has been reduced the most. From expenses of $109 million in 2005, the Executive Branch has been reduced to $83 million for 2008—a reduction of nearly 25 percent.
We have tried to protect our most essential public services from significant reductions. But we have been able to do that only with respect to our public school system.
Looking ahead to fiscal 2009, the Executive Branch is reduced further from $83 million to $74 million. The Legislative Branch is allocated an increase in funding. In summary, we have made significant reductions in the Executive Branch, but we are trying to protect essential public services.
As a result of these budgetary decisions, we have reduced the number of government employees, especially in the Executive Branch. The number of employees in the government declined from 4,137 at the beginning of fiscal year 2006 to 3,216 at the end of fiscal year 2007 (last September)—a reduction of about 22 percent. We have reduced that number to about 3,116 in 2008.
Despite these limitations, I am proud of the way in which many agencies have stepped up to the challenge. Let me mention a few of them:
The Department of Labor is a totally new and impressive department. For the first time in nearly 15 years, it is current in the handling of labor cases. The status of nearly all foreign workers has now been determined and those that are not employed are being repatriated. The Department has a new computer system that upgrades its ability to keep track of all transactions in the foreign worker labor pool. It has a new website where our citizens can see what jobs are available. It has a new system for citizens to bring their complaints to the Labor Department. The enforcement of the new law has been vigorous but fair, and has produced immediate results. Foreign workers who try to enter the CNMI on phony documents are now put on a return plane home. Persons who do not have real businesses are being denied the right to hire a foreign worker.
The Department of Finance after months of difficult negotiations finally reached agreement with the Internal Revenue Service that resulted in the payment to the CNMI of $26.4 million of income tax payments. The receipt of these funds enabled us to issue long overdue refund and rebate checks to our taxpayers in December 2007. For this year I am assured that refund and rebate checks due this year will be paid.
The Office of the Attorney General has established an Office of White Collar Prosecution staffed with two attorneys and four investigators. I supported the creation of this Office in order to emphasize our determination to prosecute government corruption. I recognize that developing these cases is often difficult, where they involve proof of criminal intent and eyewitnesses or participants are reluctant to testify. The new unit has had several successes to date—involving the Lawncare case, the Kagman High School Fraud, and the ongoing prosecution of a large-scale CUC billing scam. I expect more such prosecutions in the future.
The Northern Marianas College has a new president whose efforts I fully support. We are determined to help the college maintain its certification. I have dedicated $380,000 to NMC to fund critical staff requirements and renovation and repairs. I am exploring a plan to leverage federal CIP funds so as to provide the needed operational funds for the college. During the past year, the college played a leading role in establishing the strategic workforce action team (SWAT) aimed at bringing together the agencies committed to providing more, and better, training for our young people ready to enter the workforce.
The Commonwealth Health Center opened its Center for Public Health and Dialysis—the most modern center of its kind in the Western Pacific. The Health Center was inspected and again certified by Medicare as providing quality healthcare. I am committed to the delivery of high quality, affordable healthcare services in the CNMI.
The Defined Contribution Plan for government employees has been in successful operation for more than a year. The plan now has more than 500 participants. We are committed to strengthening the Defined Benefit Plan. We have worked with the Retirement Fund and CDA to agree upon an initiative to authorize the issuance of pension obligation bonds. The proceeds from these bonds will reduce the government’s unfunded liability to the Retirement Fund. I ask the Legislature to enact this initiative.
[B]Commonwealth Utilities Corporation[/B]Now let’s talk about CUC.
[B]Current Rehabilitation of Power Plant Facilities[/B]We are near the end of a rehabilitation project to address the serious maintenance and repair needs of our three power plants. We thank the Department of the Interior, Office of Insular Affairs, for the $6.5 million grant in mid-2007 to help us address the many problems of Power Plant 1.
CUC and its contractors have worked with a schedule defining the tasks and setting deadlines for the eight engines in Plant 1. As reflected by this chart, the completion date is set for September of this year. The red bars show pending rehabilitation. The green bars show completed work. The yellow bars show ongoing work. We are on schedule. With this program we will have increased the total megawatts from 28.7 to 81.2 in six months. When this work is done, CUC will be able to produce electricity up to 90 percent of its capacity—an efficiency level not seen for many years.
[B]Fuel Costs and Customer Rates[/B]We all know how fuel costs have increased over the past two years. At this time last year, the cost of a barrel of crude oil was about $70. You can see from this chart that it is now approaching $120. CUC was permitted under its charter to set rates that would reflect the increased cost of its fuel and did so until the Legislature intervened.
Last year the Legislature voted to override my vetoes of six proposed laws. Four of these bills negatively affected CUC’s cash flow. The most important of these was Public Law 15-94, which substantially reduced the electric rates and charges for residential customers.
I vetoed this legislation because I feared it would drive CUC into insolvency. As a result of these laws, CUC is presently operating at a deficiency of $1.2 million per month. It was unable to find money to pay for a full shipment of fuel in April. There are no funds available in the Commonwealth to subsidize CUC.
Since the new Legislature convened in January, we have urged it to repeal Public Law 15-94. The House of Representatives agreed with this approach. But the Senate declined to go along. I still believe that the quickest means of providing some relief to CUC is to repeal Public Law 15-94. I appreciate the recent action of the Legislature in passing Bill No. 16-79, which provides for a six month suspension of Public Law 15-94. I plan to sign this bill promptly.
[B]Action by the Public Utilities Commission[/B]Three of the five members of the Public Utilities Commission have been appointed, enough to provide a quorum and to get organized. I will be proposing candidates for the two additional positions in the near future.
The Commission has authority under its statute to provide interim rate relief. The CUC is now in the process of preparing a request for rate relief that is needed to put the agency back on an economically sustainable basis. It could be filed as early as next week.
The Commission is an independent agency. It will make its own determination of what evidence must be provided to support a reasoned and appropriate decision. The agency is authorized to retain such professional assistance as it needs to do the job. I am confident that the members will perform their tasks with distinction and expedition.
[B]Short-term Needs of CUC[/B]CUC has serious short-term cash needs even if relief is provided by the Legislature or by the Commission. Appropriations are needed to assist CUC over the next three or four months. The Secretary of Finance and I will be conferring with the Legislature about how best to achieve that objective.
[B]Privatization of CUC[/B]Privatization of CUC still remains one of my important objectives. But I recognize that certain steps need to be taken before we can seriously revisit the privatization question. First, we need to complete the rehabilitation program and make certain it has achieved its goals. Second, we need to consider further a performance management contract as a useful first step in professionalizing our management of the utility. Third, we need to make certain that we produce a RFP that addresses all of the problems identified by the Public Auditor in upholding the protest to our last RFP on this subject.
Lastly, we need to persuade the Legislature that privatization must be presented in a way that ensures all qualified candidates a fair and equal chance at success. In that connection, I believe that there is no place in such a process for preferences for local concerns. I would like to see the Legislature eliminate all such preferences across the board, but certainly in any privatization effort involving the critical services now performed by CUC.
We have an RFP outstanding with respect to alternative energy sources. More than a dozen companies have expressed their interest in submitting proposals across a wide range of green technologies—wind, solar, biodiesel, ocean waves, and geothermal. The present schedule provides for submission of proposals by May 16, 2008. We believe that this RFP can withstand any protest and look forward to having the various proposals evaluated carefully and professionally.
[B]Federal Legislation[/B]During the past year I have spent much of my time in dealing with the federal proposals relating to minimum wage and immigration in the Commonwealth—as a witness in three congressional hearings and in many meetings with members of Congress and their staffs to explain our position on the issues.
I was greatly assisted in these efforts by the Commonwealth’s business community. I would like to thank the former and current presidents of the Chamber of Commerce—Juan Pan Guerrero and Jim Arenovski—for their willingness to step up to this challenge and represent their members so ably. In addition, I would like to thank Lynn Knight, president of the Hotel Association of the NMI, for her dedicated contributions on behalf of the Commonwealth.
Let me briefly summarize where we stand.
[B]
Minimum Wage[/B]
When Congress increased federal wage levels nationwide last year, it directed that the Secretary of Labor file a report in early 2008 examining the impact of a second 55-cent increase scheduled for May 2008 for American Samoa and the Commonwealth. The Department’s report was based on the best available data. It concluded that “it seems likely that the current economic decline may be made worse” with any future minimum wage increase for the CNMI.
Members of the Senate Energy Committee have supported the deferral of this increase, both during and after the hearings on February 28, 2008, in which I testified. However, deferral has been opposed by both Senator Kennedy and Representative Miller. In a letter to the Secretary of Labor, they were very critical of the department’s report. In particular, they complained about the lack of reliable data to support the department’s conclusions regarding likely injury to the economies of the Commonwealth and American Samoa. In light of this opposition, we are not optimistic about obtaining this deferral.
As an alternative, I have developed, along with my good friend, Congressman Faleomavaega of American Samoa, a program for economic relief for both insular areas. It is our way of dealing with our current economic problems and to offset the likely consequences of a second increase in the minimum wage level. We have asked the Appropriations Committee to support an amendment to provide $15 million each to the Commonwealth and to American Samoa.
We do not know what the eventual outcome will be in the Appropriations Committee. But we have done our very best to protect the Commonwealth’s interests.
I intend to pursue these issues with Interior Secretary Kempthorne. We will ask the Secretary to obtain funds to conduct regular and detailed studies of the economic factors affecting the insular areas—the same kind of economic studies that are available to every state and local community on the mainland and in Puerto Rico. Without such reliable data, we will never to able to counter criticisms like those from Senator Kennedy and Representative Miller regarding the Department of Labor report.
[B]Immigration and Labor Legislation[/B]The House of Representatives approved Senate Bill 2739 a few days ago—on April 29, 2008. It now goes to the President for signature. I will not make any final decision on the Commonwealth’s response until the legislative process is finished.
The legislation in its present form is far more damaging to the Commonwealth than the proposals that were originally considered by the Senate and House Committees. We continue to believe that the legislation will do serious damage to our economy—increasing the likelihood that we will remain in an economic depression for many years to come.
In any situation like this, there are three courses of action that can be pursued individually or simultaneously—litigation, negotiations regarding the regulations, or seeking new legislation. I am in the process of consulting with the Legislature, the business community, the indigenous community, and other interested parties about these options.
Many have urged me to challenge the federal legislation in court. They are concerned about its impact on our economy, where about 75 percent of our workforce consists of foreign workers. They do not believe that this legislation is authorized by the Covenant. They believe that it denies our right of self-government over our local economy and workforce. They believe it is contrary to the U.S. Constitution, because no local community on the mainland has been, or could be, subjected to such controls over its local economy.
We all know that litigation is a difficult and controversial alternative. There is both vigorous support and articulate opposition to this course of action in the community. I respect this range of views.
The second option is preparing to participate to the fullest extent in the drafting the regulations implementing the new law. We cannot afford to sit back and wait for the federal agencies to solicit our opinion regarding the regulations.
One group has already responded to this challenge. Representatives from Guam and the CNMI have joined forces in the new Marianas Integrated Immigration Task Force. The members represent the visitor industry bureaus and the hotel associations of both communities, joined by Mel Gray, director of the CNMI Division of Immigration. They are concentrating on the law’s provisions for a joint visa waiver program in which both Guam and the CNMI can participate. Unless the regulations implementing these provisions are drafted in a sensible manner, neither Guam nor the Commonwealth will be able to develop the full potential of the Chinese tourist market.
I welcome the plan of the Chamber of Commerce to establish a committee of its members to undertake a similar task, with a focus on the foreign worker provisions of the new law. The goal is to ensure, to the extent possible, that the legislation as implemented will do as little damage to the CNMI as possible.
The third option—amending this legislation—should become available when the Congress considers immigration reform for the nation. This is likely to happen next year with a new Administration and a new Congress. We believe that the unique problems of this small island community—and its unique guest worker program—will be better understood by the immigration experts in the Judiciary Committees of the two houses of Congress than was the case in the shaping of the legislation that was just approved by the Congress.
[B]A Lesson for the Future[/B]Our experience with Congress during the past 16 months produces one important message for the Commonwealth.
During the last eight years we have done a dismal job in Washington in educating members of Congress and their staffs about the Commonwealth—its location, history, and needs. During the past 16 months, representatives of the business community and my administration have met with representatives of more than 45 members of Congress. Time and time again, they were told that these offices (and the members) had never heard of the Commonwealth. Under the circumstances, it is not surprising that we were not able to muster any significant support in dealing with our minimum wage and immigration issues.
We must do better in the future. We must assign a higher priority to ongoing relationships with members of Congress and their staffs. We cannot afford to relax and respond only when an emergency arises. It may be that having a Delegate in Congress will help address this problem, if we elect someone who has the energy and ability to put into the new job. But the problem is larger that any one person. This November a new Congress will be elected. We need to be ready with a program for welcoming the newcomers to Washington and for educating them about our Commonwealth.
[B]Conclusion[/B]We are a strong and resilient community. We have taken many major blows over the past few years. I intend to face our challenges during the next year with only one goal in mind—to protect the interests of this Commonwealth and achieve the potential envisioned by the Covenant.
Thank you.
