Brown: $10M letter of credit not a public debt

Attorney general Pamela Brown yesterday said that the CNMI government is not incurring public debt when the Commonwealth Utilities Corp. obtained a $10-million letter of credit from the Bank of Guam.

Brown issued her legal opinion as the CUC attempts to strike a long-term fuel contract with Mobil Oil Mariana Islands Inc. to address Saipan’s emergency power situation.

Brown also responded to an inquiry by House Vice Speaker Timothy Villagomez, who earlier warned that Gov. Juan N. Babauta and the CUC could be violating the CNMI Constitution for entering into credit agreement with the bank without first obtaining legislative approval.

Article 10, Section 3 of the Constitution provides that public debt may not be incurred without the affirmative vote of two-thirds of the members of each house of the Legislature.

The CUC reportedly reached an agreement with the bank after Babauta took over the CUC through a declaration of a state of emergency on Thursday last week.

Brown said that public debt is incurred when the “full faith and credit of the central government is pledged as security in a financial obligation.”

“In public debt transactions, the government is pledging its authority to tax the people directly to make up any shortfall in revenues as security in the transaction,” she explained.

Brown said the constitutional limitations on public debt are inapplicable to the CUC-BoG agreement because the central government was not a party to the transaction, and this was made clear to the bank.

She said that the full faith and credit of the central government was never a component of the CUC-BoG transaction; thus, the government did not incur public debt.

“The obligation between CUC and the bank was identical to that between any other corporation and lending institution. Should the CUC default on this obligation, the only recourse available to the Bank of Guam was against the corporation and its assets,” she said.

Brown had issued a similar opinion last year, when the Northern Marianas College’s board of regents was obtaining a loan from the U.S. Department of Agriculture for the purchase and renovation of La Fiesta.

Based on a copy of the CUC-BoG agreement, the money will be used to purchase fuel. It says that 50 percent of the amount is payable upon signing and the balance will be issued over three quarters at a 1.5-percent fee per annum.

The agreement lists that the first lien would be set against all business assets, including the revenues of CUC. It provides that the borrower will deposit sufficient revenue into an account with the bank to cover 30 days of fuel cost. It also calls for the “subordination” of the Commonwealth Development Authority’s loans to the Bank of Guam.

The bank also requires the borrower to submit an audited financial statement no later than 120 days after the fiscal year ends.

The agreement also calls for an issuance of an opinion from the borrower’s counsel and the CNMI Attorney General’s Office stating that the loan is legal and binding and does not violate any existing agreements or laws.

The governor and BoG executive vice president and chief operating officer William D. Leon Guerrero signed the agreement on May 20, a day after Babauta’s emergency declaration.