OPA supports writeoff of $45.5M CUC debt

The Office of the Public Auditor is supporting the bill allowing the Commonwealth Development Authority to write off the $45.5-million debt owed by the Commonwealth Utilities Corp.

Public Auditor Michael S. Sablan in a letter sent Wednesday to Gov. Benigno R. Fitial, even suggested to also forgive the $16 million that CDA loaned to CUC for water and sewer improvements.

Sablan said it appears, in OPA’s analysis of the legislation, that this particular $16,068,750 loan was inadvertently omitted.

“In general, OPA does not support loan forgiveness legislation. OPA believes that condoning loan forgiveness encourages risky and ill-advised loans and discourages responsible behavior,” said the public auditor in his comment on House Bill 15-64.

“While OPA is loathe to support any loan forgiveness, we do recognize that this situation is unique and furthermore, that passage of HB 15-64 will have significant beneficial ramifications for all people residing in the CNMI,” he noted.

CUC, Sablan pointed out, cannot resolve the financial problems without acquiring capital equipment, and it cannot acquire such capital equipment without seriously improving its credit-worthiness.

The public auditor said he is supporting the bill with great reservation and with the caveat that the legislation not be used to support other loan forgiveness measure in less critical situations.

OPA analyzed that the forgiveness of the $147 million would dramatically alter the net deficiency of CUC, changing a negative balance of over $30 million to a positive balance of $116 million.

More important, Sablan cited, the unrestricted surplus would change from a deficit $81 million to a surplus of over $4 million.

“While this would create a much stronger CUC financial statement, there would be no financial impact on CDA because, historically, CDA’s management has deemed the CUC loans to be at risk,” he said.

Sablan said in adherence to proper accounting treatment, CDA created a reserve for bad debt, both for the principal and the accrued interest.

“In other words, the value of the CUC loans and the accrued interest were previously expensed by CDA, and thus, there would be no effect on its current financial statement,” the public auditor stressed.

H.B. 15-64 would authorize CDA to waive the principal sum and interest due from loans extended to CUC. The bill represents the third bailout for the utilities agency.

The first bailout happened in 1987, and the second in 1995.

Sablan said both agreements required CUC to establish full recovery rates, that is, a kilowatt rate that could sustain its operations without resort to intervention of third parties for loans or grants other than those available to any viable financial venture.

Sablan said though it imposed a small surcharge, CUC has not come close to establishing full recovery rates and its continued failure to do so has contributed significantly to its current financial state.

If the proposed bill is passed and CUC still fails to establish full recovery rates, “then passage of the law was naught and CUC will require yet another bailout,” he said.

This potential result, the public auditor explained, could be improved by including some guarantees in the legislation and mandating full recovery rates.

Sablan said based on the accounting treatment, if the loans and accrued interest were ultimately forgiven, then the entire amount owed would first flow through the income statement of CUC and then to the equity (capital) of CUC’s statements of net deficiency.

“This treatment would create a one-time revenue increase for CUC which would total $147,148,404,” he said.