[Senate Hearing 109-417]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-417

 TERRITORIES OF GUAM, AMERICAN SAMOA, THE COMMONWEALTH OF THE NORTHERN 
              MARIANA ISLANDS, AND THE U.S. VIRGIN ISLANDS

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   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

                               __________

                             MARCH 1, 2006


                       Printed for the use of the
               Committee on Energy and Natural Resources

                                 _____

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                             WASHINGTON: 2006        

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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho                JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming                DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee           BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska               RON WYDEN, Oregon
RICHARD M. BURR, North Carolina,     TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida                MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri            DIANNE FEINSTEIN, California
CONRAD BURNS, Montana                MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia               KEN SALAZAR, Colorado
GORDON SMITH, Oregon                 ROBERT MENENDEZ, New Jersey
JIM BUNNING, Kentucky

                     Bruce M. Evans, Staff Director
                   Judith K. Pensabene, Chief Counsel
                  Bob Simon, Democratic Staff Director
                  Sam Fowler, Democratic Chief Counsel
                Josh Johnson, Professional Staff Member
            Al Stayman, Democratic Professional Staff Member



                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bordallo, Hon. Madeleine Z., Delegate to Congress, Territory of 
  Guam...........................................................    19
Camacho, Hon. Felix, Governor, Territory of Guam.................    22
Christensen, Hon. Donna M., Delegate to Congress, U.S. Virgin 
  Islands........................................................    15
Cohen, David B., Deputy Assistant Secretary of the Interior for 
  Insular 
  Affairs........................................................    34
Domenici, Hon. Pete V., U.S. Senator from New Mexico.............     1
Faleomavaega, Hon. Eni F.H., Delegate to Congress, Territory of 
  Samoa..........................................................    13
Talent, Hon. James M., U.S. Senator from Missouri................     2
Tenorio, Hon. Pedro, Resident Representative to the United 
  States, 
  Commonwealth of the Northern Mariana Islands...................    26
Tulafono, Hon. Togiola T.A., Governor, Territory of American 
  Samoa..........................................................     2
Turnbull, Hon. Charles W., Governor of the U.S. Virgin Islands...     8

                                APPENDIX

Responses to additional questions................................    41

 
 TERRITORIES OF GUAM, AMERICAN SAMOA, THE COMMONWEALTH OF THE NORTHERN 
              MARIANA ISLANDS, AND THE U.S. VIRGIN ISLANDS

                              ----------                              


                        WEDNESDAY, MARCH 1, 2006

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Pete V. 
Domenici, chairman, presiding.

          OPENING STATEMENT OF HON. PETE V. DOMENICI, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. The hearing will please come to order. Let's 
see, do we have everybody up here? We're going to get everybody 
up at once. I have to make sure that you understand this is not 
of my doings. I have a hearing, but the Senate runs the Senate, 
so I have to comply with their rules. We have a vote at 10 this 
morning and then we have the Prime Minister of Italy at 10:30. 
So we're going to go through this as quickly as we can and yet 
be deferential to you.
    I'm going to start by first making sure we're all here. 
Governor Togiola Tulafono, American Samoa; Governor Camacho 
from Guam; Governor Turnbull from the Virgin Islands; 
Congressman Faleomavaega, not here yet? Congressman 
Christiansen from the Virgin Islands; Congressman Bordallo from 
Guam; Resident Representative Tenorio, Resident Representative 
of the United States from the Commonwealth of Northern Mariana 
Islands; and Mr. David Cohen, Assistant Secretary of the 
Interior for Insular Affairs.
    I think we're going to have you up there close, too, if you 
will, sir. Do we have room for him at the table?
    I know everybody wants to share a lot with us, and I know 
you have prepared statements, but this is for real today. Keep 
your oral statements short so the next person will have a 
chance to speak. So what I'd like very much to do is to just go 
in the manner that I started, just as I introduced you. No 
deference, I don't mean anything to Representatives or 
Governors, but let's start with American Samoa.
    Please start, Governor Tulafono. You have 5 minutes, sir. 
Your statement will be made a part of the record. Thank you for 
coming.
    [The prepared statement of Senator Talent follows:]
 Prepared Statement of Hon. James M. Talent, U.S. Senator From Missouri
    Mr. Chairman, I want to take this opportunity to welcome Governor 
Turnbull who will be testifying on the economic and fiscal challenges 
facing the Virgin Islands and other United States Territories.
    I believe that the challenges outlined in Governor Turnbull's 
prepared statement and submissions are real and that there is 
sufficient evidence to show that the Government of the Virgin Islands 
has made significant fiscal progress over the course of the last seven 
years. All state budgets including my own, suffered in the aftermath of 
the 9/11 attacks on this country. It should come as no surprise that 
the national recession that followed 9/11 would also have an impact on 
the fragile economies of our insular areas.
    However, geographic isolation from the rest of the United States is 
an additional hardship on the economy of these Territories, making it 
is difficult to attract or maintain businesses and investment in these 
areas without special tax incentives or programs.
    I share the concerns of several of my colleagues on this Committee 
that we need to be careful when we legislate for our fellow citizens in 
the Territories. They do not have voting representation in this body. 
We need to listen to their concerns so that, in our efforts to help 
them, we don't make matters worse.
    In that regard, this Committee needs to take an active role in 
helping our Territories achieve self-sufficiency by growing their 
private sector economies. We should also work closely with other 
Committees, including the Committee on Finance, to enact reasonable 
rules that promote economic development while precluding opportunities 
for tax abuse.
    Mr. Chairman, I want to thank you for holding this hearing. I hope 
it will lead to action from this Committee that will prove helpful to 
our fellow citizens in our Territories.
    Thank you very much.

 STATEMENT OF HON. TOGIOLA T.A. TULAFONO, GOVERNOR OF AMERICAN 
                             SAMOA

    Mr. Tulafono. Thank you very much, Mr. Chairman.
    The Chairman. You're welcome.
    Mr. Tulafono. I would also like to record our gratitude for 
your leadership in the territorial issues and for allowing this 
opportunity for us to meet with you today.
    Talofa and greetings to you, Mr. Chairman, and to your 
honorable members of the Senate Committee on Energy and Natural 
Resources. I am very honored and pleased with this opportunity 
to testify to the committee on economic and fiscal conditions 
in American Samoa.
    American Samoa's economic condition has never been more 
precarious. Historically we have had some growth, but it's been 
in low wage industries and our unemployment rate has been high. 
Our most serious problem is the level of per capita income, 
which is only one-fifth the U.S. average and is falling. The 
family poverty rates in American Samoa were 58.2 percent 
compared with the U.S. rate of 8.7 in the year 2000.
    We're threatened with sudden and severe economic 
dislocation. Our largest industry, tuna canning, could be 
forced to reduce operations or close in the very near future. 
The canneries represent approximately 90 percent of American 
Samoa's private sector and account for one-third of the total 
jobs in the territory. Directly and indirectly the canneries 
account for more than one-half of the total jobs in the 
territory. The immediate threat to this industry is in the 
impending loss of Federal tax exemptions, as you're well aware, 
under section 936, more competitive locations in other parts of 
the world and threats to the duty-free access to the U.S. 
market afforded to our Samoan canneries.
    I want to point out that OIA has provided valuable 
technical assistance in advancing our development. Most 
recently OIA funded a project to review the current U.S. tax 
structure and propose substitute or alternative incentives 
which may replace current section 936 tax incentive for the 
territory. We've shared the findings of that effort with our 
Congressman and, of course, we're very supportive of all the 
efforts put into obtaining any extension of the present tax 
credit program. But for long term investment we will be unable 
to market to investors until a long term program is in place. 
We could use this valuable time to design and establish a 
permanent solution to the need for investment incentives in the 
insular areas. We're not afraid to fend for ourselves if we 
could be put on equal footing with foreign countries who are 
receiving the benefit of favorable trade agreements and 
treatment. That way there's a way the insular areas can forge 
favorable development that will assist their own economic 
development without asking the U.S. Government for cash 
assistance.
    In the 1990's American Samoa made a marked improvement in 
capital construction and maintenance programs. These 
improvements were accomplished with Federal assistance in our 
operations and maintenance, as well as help we received from 
the Federal Government to recover from natural disasters. The 
American Samoa Government continues to experience a positive 
cash-flow and continues to meet its current liabilities. Our 
financial health is stable for now. Our financial management 
systems have helped the American Samoa Government to abide by 
the spirit of our fiscal reform plan and have resulted in 
increased accountability and transparency.
    American Samoa will be current with its--is now current 
with its single audit compliance in the early part of this 
year. For the first time since 1991 we've conquered and 
completed this most formidable task. We continue to work hard 
on these fiscal and financial management reforms.
    I also would like to point out our dedication to increasing 
local revenue. In the last 10 years local revenues have 
increased by 59 percent to an estimated $65 million in fiscal 
year 2006.
    In conclusion, American Samoa has always been grateful for 
the assistance it's received from the Federal Government. Of 
course, as a part of the American family, we've been unstinting 
in our support for America at home and abroad, at peace and at 
war. While we have made progress in our development, we still 
have very serious concerns about the adequacy of our public 
facilities and services, especially in health care, education, 
and our economic well-being. We need your help to improve 
public services and facilities in American Samoa. We need your 
help in preventing and mitigating future economic shocks in the 
cannery industry by establishing a permanent tax credit program 
at the earliest possible time. It's difficult to imagine the 
ramifications of a 50 percent rate of unemployment, especially 
with no unemployment compensation and very limited opportunity 
for migration. We need to find a solution to this issue very 
soon. This is a potential catastrophe that we cannot say after 
the fact we did not see it coming.
    Again, thank you for the opportunity to testify before your 
committee.
    [The prepared statement of Governor Tulafono follows:]
Prepared Statement of Togiola T.A. Tulafono, Governor of American Samoa
                              introduction
    Talofa and greetings Senator Domenici and honorable members of the 
Senate Committee on Energy and Natural Resources. I am very honored and 
pleased with this opportunity to submit written testimony to the 
Committee on economic and fiscal conditions in American Samoa.
                 the state of american samoa's economy:
Samoan History and Society
    The islands of eastern Samoa became part of the U.S. in 1900 and 
1904. American Samoa, located in the Central South Pacific, is the only 
United States territory south of the equator. A central premise of 
ceding eastern Samoa to the U.S. was to preserve the rights and 
property of the islands' inhabitants. American Samoa's constitution 
makes it government policy to protect persons of Samoan ancestry from 
the alienation of their lands, the destruction of the Samoan way of 
life and language, and to encourage business enterprise among persons 
of Samoan ancestry. We, in turn, ceded authority over our lands to the 
U.S. and pledged to it our allegiance. The depth of our commitment is 
evident today, in the high numbers and contributions our people to the 
U.S. military and their service in the present wars.
Modern Economic Development
    American Samoa has had a relatively high population growth rate, 
averaging 2.8 percent annually between 1980 and 2000. The employment 
growth rate was also relatively high over this period. However, most of 
the gains were in quite low wage employment sectors. American Samoa's 
rate of unemployment has been estimated at close to 10 percent over the 
past two decades. Unfortunately, annual unemployment estimates are not 
available for American Samoa. U.S. Census data, however, showed an 
unemployment rate of 5.2 percent in the 2000 U.S. Census for American 
Samoa. The reason for this low number was that subsistence workers 
without paid employment were not included in the labor force in 2000 
U.S. Census data. Some of these workers, a large number according to 
local surveys, may have been looking and available for work. Some of 
the unemployed may have wanted work but were discouraged from looking 
for jobs. If subsistence workers were included in the labor force as 
unemployed, American Samoa's rate of unemployment could range as high 
as 16 percent. (Unemployment data sources: U.S. Census of Population, 
American Samoa, 2000 and the American Samoa Government Department of 
Commerce.)
    American Samoa's most serious economic problem, however, is low per 
capita personal income. Data suggests that per capita income in 
American Samoa is only one-fifth that of the United States. It also 
suggests that American Samoa is losing economic ground with respect to 
the U.S. Between 1979 and 1999, per capita income in American Samoa 
(not adjusted for inflation) increased an average of 4.3 percent per 
year. With inflation rates averaging about 3 percent per year during 
the period, money income in American Samoa has increased only 1.3 
percent annually over the 20-year period. Furthermore, family poverty 
rates in American Samoa were 58.2 percent compared with a U.S. rate of 
8.7 percent in 2000. (Income and poverty data sources: U.S. Census of 
Population for American Samoa, 2000 and various years and U.S. Census 
of Population for the U.S., 2000.)
    In many respects, this income disparity reflects fundamental 
differences in the economies of major industrialized countries and 
insular areas. Economic development is an exceedingly difficult task 
for nations throughout the Pacific Basin and as well as for remote, 
insular economies throughout the world. This difficulty is due in part 
to the economic barriers related to distance to markets and sources of 
supply, considerations of scale, lack of raw materials, and capital and 
labor force deficiencies. These are barriers that are vastly lower or 
nonexistent in major industrialized countries
    It is important to understand the structure of American Samoa's 
economy. Roughly 92 percent of American Samoa's entire economy is based 
directly or indirectly on canned fish exports and federal expenditures. 
This basic inflow of funds is that which the remainder of the 
territory's economy depends.
    American Samoa is not only in a state of long term economic 
stagnation, low growth rates, high unemployment and excessively low per 
capita income. It is now threatened with sudden and severe economic 
dislocation. Its largest industry, tuna canning, could face reduced 
operations or closures in the near future. The canneries represent 
about 90 percent of American Samoa's private sector and about one-third 
of the total jobs in the territory. The threat to this industry is in 
the impending loss of federal tax exemptions, more competitive 
locations in other parts of the world, and other forces adversely 
affecting the industry in American Samoa.
Fisheries
    In the last two decades, American Samoa's cannery industry has 
expanded substantially under declining production and rising foreign 
imports in the U.S. It has been able to do this because of wage levels 
well below those of the U.S. mainland and low fish resource costs. 
American Samoa is permitted conditional duty free access to the U.S. It 
is also exempt from prohibitions on landing the catches of foreign 
vessels in the U.S. Further, the tuna cannery industry in American 
Samoa, which presently employs about 4600 workers, has enjoyed generous 
corporate income tax benefits over the years. Nevertheless, forces in 
the world economy and in the tuna canning industry itself are eroding 
American Samoa's position in the industry. Trends in world trade, 
specifically reductions in tariffs, are lessening the advantage of 
American Samoa's duty free access to the U.S. market. The NAFTA 
agreement will remove the U.S. tariff on canned tuna in 2007. American 
Samoa's minimum wage, while well below the U.S. average, is well above 
competing areas of the world, including Mexico, a signatory to NAFTA 
and the ANDEAN treaty. (The Andean Trade Preference Act exempts canned 
tuna from the duty free goods entering the U.S. However, it does give 
the President the authority to grant duty-free entry of pouch packed 
tuna into the U.S.) A bill has been approved by the U.S. Congress to 
extend the IRS 936 provision for one year to allow time to develop a 
new incentive proposal. It expired at the end of 2005. Also, trade 
discussions are going on to remove some trade restriction on imports 
from Thailand, including those on canned tuna. This action would not be 
taken until late next year, but if passed, would make the outlook for 
the two canneries looks very bleak.
Diversified Industries
    American Samoa has had some success over the years in attracting 
diversified manufacturing. Today a key target industry for development 
is technology based. (e-Commerce), which depends upon skilled workers 
and well-developed Internet-based communication systems. There are also 
pending proposals that present various diversification strategies for 
the Territory that will utilize local natural and human resources, such 
as a local fish processing facility, a fishermen and farmer's co-op, 
and numerous niche markets within the Tourism industry.
The Visitor Industry
    This is another key target area for development. American Samoa's 
visitor industry has suffered a long and erratic period of decline. 
However, the industry has experienced some recovery in recent years. In 
fact in 2000 with 50,671 visitors it had recovered approximately to 
1985 and 1990 levels. Between 1990-2000, there were large changes in 
the mix of visitors. There were declines in tourist, business and 
employment visitors, but there were offsetting gains in visitors 
visiting friends and relatives. Furthermore, this precipitous decline 
started much earlier. It started in the 1970's, when the number of 
tourists visiting American Samoa was over 42,000, about 7 times the 
number of tourists visiting the territory in 2000. An industry that has 
incurred dramatic losses in the past several decades, the tourism is 
making a slow but gradual recovery. Today, the prospects for developing 
EcoTourism as a niche market looks very promising, and the 2005-2009 
EcoTourism Development Plan currently undergoing the process of seeking 
the approval and support of the local government. The plan includes a 
proposal to establish a semi-private Visitor's Bureau.
Government
    American Samoa faces another source of serious economic decline and 
that is in falling real federal expenditures. For example, our DOI 
allocation for operations has remained at $23 million since 1977. This 
means that in real or purchasing power terms that amount has been 
seriously eroded over the last twenty nine years. Government is a large 
part of American Samoa's economy. It provides a net injection of 
federal funds that represents about one-third to one-half of American 
Samoa's economic base. In other words in economic terms federal 
expenditures are as important as the canneries to American Samoa's 
economy. This means that the trend of declining real federal 
expenditures could be an added drag on the American Samoa's longer term 
economic future.
    Government has another role, however. Both the American Samoa 
Government and the Federal Government have important roles in the 
territory's economic development. Local government is responsible for 
accommodating development with highly trained people, Government 
facilities and services and a reasonable investment climate. The 
federal Government can be instrumental in strengthening the economies 
of U.S. insular areas. The Office of Insular Affairs has had an 
important role in several recent initiatives including the American 
Samoa Economic Advisory Commission (ASEAC); the President's Interagency 
Group on Insular Affairs; and a new trade initiative to bring investors 
into the territory in spring 2006 that is being supported by the U.S. 
Department of Interior, the American Samoa Government Department of 
Commerce, and the Governor's Office.
    OIA has also provided valuable technical assistance in improving 
our fiscal systems. Most recently OIA funded a project to review the 
current U.S. tax structure and propose substitute or alternative 
incentive measures that will match or exceed the current Section 936 
tax incentive for the Territory. We have delivered the findings of that 
effort to our Congressman and to this Committee. Naturally, we would be 
grateful for any extension of the present tax credit. We could use this 
valuable time to design and establish a permanent solution to the need 
for investment incentives in the Insular Areas.
    Other federal agencies offer critical economic development support 
assistance.
Secondary Economic Industries
    The foregoing review of fisheries, tourism and Government 
represents an analysis of those sectors of the American Samoa economy 
that drive the rest of the economy. In other words, it is the local 
purchases and payrolls of these primary sectors that provide the market 
for other secondary industries. As classified by the U.S. Census, it is 
a large sector accounting for most of the private business 
establishments (excluding canneries) and employing about 7,000 people 
in American Samoa in 2004.
Infrastructure
    American Samoa has made marked improvement in its capital 
construction and maintenance programs in the decade of the 1990's. Some 
of the improvement was prompted by federal assistance in operation and 
maintenance, as well as assistance received from the federal Government 
for natural disasters. Some is attributable to improved agency 
management and capital improvements program planning. In fact American 
Samoa's infrastructure and services, while not up to industrialized 
nation standards, are the envy of many areas of the Pacific Basin. For 
example, American Samoa has one of the largest and best developed 
industrial parks in the Pacific. Also, the American Samoa Power 
Authority (ASPA) provides power, water and sewer systems to the local 
population, which is among the most reliable in the Pacific.
    Total employment reported for American Samoa at year-end 2005 was 
17,303. Government accounted for 6100 (35 percent) of total employment, 
canneries at 4500 (26 percent) and the remaining 6700 (39 percent) was 
in other areas of the private sector excluding the canneries.
    American Samoa's Gross Domestic Product advanced at an annual rate 
of rate of 3.2 percent increasing from $450.3 million in 1999 to $510.1 
million in 2003. and it is expected to continue increasing in the 
future. While the GDP growth looks favorable, personal income is the 
real measure, and, as indicated it is only a fraction (one-fifth) the 
U.S. average. However, despite the predominance of low wage jobs in 
American Samoa, its per capita income level is well above other Pacific 
island states and nations excluding other U.S. territories like Guam 
and the Commonwealth of the Northern Marianas (CNMI).
    The real challenge is the rising cost of living in 2005, when 
inflation reached a record high of 9 percent. By early 2006, it is 
anticipated that inflation will reach double digits if the price of oil 
continues to increase. In addition, hurricane recovery financial 
assistance received from FEMA, coupled with the increase in minimum 
wage for majority of the workforce, has increased local demand for 
goods and services adding to already strong inflationary pressures.
Capital Improvement Projects

   The level of funds made available by the Department of the 
        Interior (DOI) is formulated on a performance point system and 
        American Samoa received $9,731,000 for fiscal year 2005.
   The awards have been declining over the past few years but 
        are projected to rise for FY2007, FY2008 and FY2009 to 
        $10,000,000 a year.
   This year (Program Year 2005) saw a number of projects 
        completed for a total expenditure of $10,619,090 in six 
        categories.
   Funds came from awards received in several previous fiscal 
        years with expenditures on health (about 1.5 million dollars) 
        and education (about 1.6 million dollars) being the top program 
        areas.
   For next year (FY20051PY2006), total C1P expenditures set at 
        9.7 million dollars). Funds being ear-marked for health (1.7 
        million):

         Education (2.8 million),
         Utilities (2.6 million),
         International sea/air ports (.5 million),
         Public works (.7 million),
         Public safety (.5 million),
         Parks/recreation (.07 million),
         Other public building projects (.3 million) and
         Operational and maintenance set-aside (.5 million)

    I also would like to point out our dedication to increasing local 
revenues. In the last ten years, local revenues have increased by 59 
percent to an estimated $65 million in FY 2006.
    In conclusion, American Samoa has always been grateful for the 
assistance it has received from the Federal Government. Of course, as a 
part of the American family, we have been unstinting in our support for 
America at home and abroad, at peace and at war.
    While we have made progress in our development, we still have very 
serious concerns about the adequacy of our public facilities and 
services, especially in health care, education and our economic well 
being.
    You are, of course, aware of the effects on our entire country of 
an increasingly integrated global economy. This trend might well 
eviscerate American Samoa's economy by causing drastically reduced 
operations in or the departure of our cannery industry. While this 
would directly cause the loss of one-third of our private sector jobs, 
indirect (multiplier) effects would bring the total job loss to more 
than one-half the jobs in the entire territory.
    It is difficult to imagine the ramifications of a fifty percent 
rate of unemployment especially with no unemployment compensation and 
very limited opportunity for migration. We need to begin addressing 
this issue very soon. This is a potential catastrophe that we cannot 
say, after the fact, we did not see coming.
    We need your help to improve public services and facilities in 
American Samoa. We need your help in preventing or mitigating future 
economic shocks in the cannery industry by establishing a permanent tax 
credit program at the earliest possible time. An extension will not 
allow us to market a two year program to new investment from the U.S. 
We want to emphasize our desire to continue to market doing business in 
American Samoa to the U.S. businesses.
    Thank you very much.

                                          TERRITORIAL INDICATORS (2003)
----------------------------------------------------------------------------------------------------------------
                                    Virgin Islands        Amer. Samoa            Guam                CNMI
----------------------------------------------------------------------------------------------------------------
Population......................  109,000...........  58,000 (8% guest    164,000...........  76,000 (50% guest
                                                       workers).                               workers)
Area (sq km)....................  352...............  200...............  541...............  471
Main industries.................  Tourism, rum, oil   Fish processing...  tourism, defense..  tourism, garments.
                                   refining..
GDP.............................  $2.5 Billion......  $510 Million......  $3.0 Billion......  $1 Billion
Per capita income...............  $13,139...........  $4,357............  $12,722...........  $9,151
Federal expenditures............  $187.4M...........  $112.5M...........  $163.4M...........  $57.9M
Federal contribution............  20%...............  49%...............  33%...............  20%
Revenues........................  $817M.............  $197M.............  $658M.............  $283M
Expenditures....................  $871M.............  $171M.............  $703M.............  $303M
Surplus/deficit.................  ($54M)............  $26M..............  ($45.7M)..........  ($21 M)
Unemployment rate...............  9%................  5%................  11%...............  4%
----------------------------------------------------------------------------------------------------------------


    The Chairman. Thank you very much, Governor.
    Senator Bingaman has arrived, as well as Senator Akaka. I 
did not make any opening remarks because of the shortage of 
time, knowing we have a vote, but I would defer if either of 
you would like to make any comments.
    Senator Bingaman. Mr. Chairman, I'll defer also, just to 
hear as much of the witnesses as we can.
    The Chairman. Senator Akaka? Same? All right. We're then 
going to proceed.
    Governor from the Virgin Islands.

  STATEMENT OF HON. CHARLES W. TURNBULL, GOVERNOR OF THE U.S. 
                         VIRGIN ISLANDS

    Mr. Turnbull. Good morning, Mr. Chairman and distinguished 
members of the Senate Committee on Energy and Natural 
Resources. I'm pleased to have this opportunity to testify on 
the economic and fiscal challenges facing the U.S. Virgin 
Islands.
    When I assumed office in January 1999 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. 
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 layoff 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.
    Under my administration, general fund revenues have grown 
from $417 million in fiscal year 1999 to $633 million in fiscal 
year in 2005, an increase of 50 percent. Through fiscal 
discipline, general fund expenditures over the same period 
increased just over 4 percent from $559 million in fiscal year 
1998 to $582 million in fiscal year 2005.
    Our path through structurally balanced budgets was 
temporarily interrupted for 2 years following 9/11 and ensuing 
national recession. But by renewing our commitment to fiscal 
discipline and by focusing on private sector growth, the 
Government returned to fiscal balance in fiscal year 2004, 
earning surpluses in that year and in fiscal year 2005.
    Equally important, we have learned to manage and timely 
account for the funds that we have spent. My administration has 
completed nine comprehensive audits, required by the Single 
Audit Act, in a 6-year period. The fiscal year 2004 audit will 
be issued in a matter of weeks.
    Most importantly, however, we have taken 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. We're using the financial surplus we have generated to 
fund procurement of a new state-of-the-art financial management 
system to replace our dated and inadequate system acquired from 
the Federal Government in the 1980's.
    In spite of this undeniable progress, many challenges 
remain. The continued success of our EDC program has been under 
a cloud since 2004, when Congress enacted, without hearings or 
consultation, changes to our 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--and 
we agree with that--we believe, however, that the changes went 
too far, forcing many legitimate businesses to close their 
doors and causing the loss of many millions of dollars to our 
treasury.
    Indeed, the director of the Virgin Islands Bureau of 
Internal Revenue 2 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 
hard earned fiscal solvency.
    Accordingly, I respectfully urge the distinguished members 
of this committee to reassess 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. I also request the support of this committee for 
our efforts to secure a permanent extension of the rum tax 
formula on which the Federal Government returned to the Virgin 
Islands Federal excise taxes collected on Virgin Islands rum, 
as well as elimination of the discriminatory cap on the amount 
of Medicaid funds provided to the Virgin Islands.
    Mr. Chairman, my administration is prepared to make the 
tough decisions to maintain fiscal discipline, increased 
efficiency of our government, and improve delivery of essential 
services. We don't need a CFO bill, but we do need the help and 
support of this committee as we fight to protect our EDC 
program, grow the private sector, and generate the revenues we 
need to sustain the solvency of our Government. This concludes 
my testimony and I'll be pleased to answer any questions. Thank 
you very much for this opportunity.
    [The prepared statement of Governor Turnbull follows:]
            Prepared Statement of Hon. Charles W. Turnbull, 
              Governor of the United States Virgin Islands
    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 modem 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 Chairman. Thank you very much for that testimony. 
Congressman Faleomavaega, excuse me for fouling up your 
pronunciation. Why don't you go next, please.

STATEMENT OF HON. ENI F.H. FALEOMAVAEGA, DELEGATE TO CONGRESS, 
                  TERRITORY OF AMERICAN SAMOA

    Mr. Faleomavaega. Mr. Chairman, I want to thank you for 
extending this invitation for me to testify. I was going to 
have the honor of introducing our governor, who's also with us 
and traveled 9,000 miles to get here, and I would really 
appreciate it if I could defer to my governor, who's sitting 
right next to me, to testify before I do.
    Senator Bingaman. I believe the Governor testified.
    Mr. Faleomavaega. I'm sorry, Mr. Chairman, I came late. 
That's the problem with being late.
    Well, thank you very much, Mr. Chairman. I want to thank 
you and the members of the committee for extending this 
invitation to have our governors and our congressional 
delegates testify concerning--as an oversight, concerning our 
insular areas.
    As you know, Mr. Chairman, the Department of the Interior 
traditionally has always been the lead Federal agency on issues 
affecting territories and the insular areas. I certainly would 
like to commend Secretary Norton and Secretary Scarlett, and 
our Deputy Assistant Secretary David Cohen, who will be 
testifying later, for bringing together representatives of some 
15 Federal agencies yesterday as part of our interagency group 
on insular areas for which we have met periodically, discussing 
some of the issues affecting the several territories.
    Without saying anything further, Mr. Chairman, as you're 
well aware, sometimes we oversimplify the needs of insular 
areas thinking that one size fits all simply because we're from 
the--as insular areas. We, from American Samoa, certainly 
cannot speak for the other territories, but in American Samoa 
we have had a very unique--some 106 years now of a political 
relationship with the United States, quite separate and unique 
from the other territories because of the strong U.S. Naval 
interest in the 1800's. We finally were able to establish a 
U.S. Naval coaling station in 1900 whereby the traditional 
leaders, both in 1900 and 1904, by written treaties of cession, 
ceded the islands of American Samoa to the United States. And 
it was not until 1929 that Congress finally passed a 
ratification act whereby the administration of these areas--of 
these territories were transferred to the Secretary of the Navy 
and then by executive order by President Truman transferred the 
administration of American Samoa to the Secretary of the 
Interior, as it now stands.
    Over the years we've also developed our own territorial 
constitution, under the authority of the Secretary of the 
Interior via the President. I think we've come up with some 
very unique accomplishments in terms of our political 
developments. Since 1977 we've elected our own Governor and in 
1980 we elected our first congressional delegate to the U.S. 
House of Representatives.
    Mr. Chairman, I intend to introduce some pieces of 
legislation affecting the current administration of the 
territory by the Department of the Interior as it was 
recognized by the Ratification Act of 1929. There are some 
common interests that affect all the insular areas and one area 
that I want to share with you is the fact that through the 
cooperation and working together with Ms. Bordello and Dr. 
Christensen from the Virgin Islands we were able to fund some 
additional assistance through our Medicaid program.
    One of the problems that we're faced with now, Mr. 
Chairman, is that currently there is a restriction where we 
have to come up with a 50/50 matching requirement for these 
Federal funds to be given to the insular areas and, unlike some 
of the States, it goes up as high as 90 to 10--I mean 80 to 20 
and 90 to 10 matching requirements. I would really appreciate 
certainly the help of the Congress and our colleagues in the 
House that we change this matching requirement.
    In the meeting that we had yesterday with the 
interagencies, as I tried to collectively call some of the 
needs that were expressed by the insular areas, I think there's 
also serious problems of lands. It was taken during World War 
II, as it was expressed by leaders of the territory of Guam, 
and we have our own problems with land.
    There are several other issues that I will not bother the 
committee with, but I certainly want to express again to you, 
Mr. Chairman, our appreciation that you called this oversight 
hearing. And I sincerely hope and look forward to working with 
you, at least from those of us who are from the other side, and 
hopefully we would draft an omnibus bill that will cover some 
of the various issues affecting all the insular areas in the 
coming weeks and months.
    Thank you again, Mr. Chairman.
    The Chairman. Thank you very much. Now we're going to go to 
the Honorable Donna Christensen, Delegate from the Virgin 
Islands.

 STATEMENT OF HON. DONNA M. CHRISTENSEN, DELEGATE TO CONGRESS, 
                      U.S. VIRGIN ISLANDS

    Ms. Christensen. Thank you. Good morning, Chairman 
Domenici, Senators Akaka and Murkowski. Thank you for the 
opportunity to make an opening statement at this important 
hearing.
    All of the insular areas are 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 the committee and 
Senate to quickly pass S. 1829 to repeal the section on the 
1936 law whereby Congress regulates property taxes in the 
Virgin Islands, and also to support and help us reverse certain 
changes that were made by the U.S.A. Jobs Act, which Governor 
Turnbull elaborated on in detail in his remarks. I would simply 
concur by saying that this is a critical issue in terms of our 
economical prosperity going forward.
    I'll take this opportunity, though, to focus the rest of my 
statement on another issue that is equally important to me as 
well as the majority of my constituents. Mr. Chairman, you have 
pending before your committee since a year ago this month H.R. 
62, which I sponsored and which twice passed the House of 
Representatives, that would create a chief financial officer 
for the Virgin Islands. I would ask the chairman, and ranking 
members, and members of the committee, that you and the Senate 
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.
    I believe as strongly as I did when I first introduced this 
bill almost 3 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. All of us in Congress know how financial decisions 
made within a political context often do not yield the best 
results.
    I want to say at the outset, also, Mr. Chairman, that my 
introduction of H.R. 62 is in no way an indictment of the job 
that Governor Charles Turnbull and his financial management 
team are doing. In fact, I want to publicly applaud the 
Governor for the job he has done in stewarding the territory 
through very perilous fiscal times. Further, the problems we 
are facing are not unique to the U.S. Virgin Islands, but 
plague many States and other territories and some of the causes 
of our fiscal challenges have been outside of our control, such 
as current catastrophic hurricanes and the tax cuts and credits 
passed by Congress.
    In fact, when Governor Turnbull assumed the office of 
Governor in the Virgin Islands nearly 8 years ago, he inherited 
a Government that was swamped with debt and liabilities. As the 
Governor stated in his final State of the Territory address 
this past January, he and his team rolled up their sleeves and 
went to work with the assistance of the Congress, in particular 
this committee, as well as windfalls from the EDC companies and 
revenues realized from increased oil prices, and he and his 
team were able to end 2005 with a surplus and the territory in 
a strengthened 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 the 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 an act of overt 
colonialism. Members and Mr. Chairman, 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 creates a position that sunsets in 5 years.
    Mr. Chairman, some have also complained that if Congress 
were to pass my bill it would be interjecting yourselves into 
our local affairs, but it is not the Congress that conceived of 
this proposal and sought to impose it upon us, but I, the 
elected representative of the people of the Virgin Islands in 
Congress, buttressed from all indications by the strong support 
of my constituents.
    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. 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 overspending. We 
have come a long way since I first introduced my bill, thanks 
in large part to the tremendous upswing in nearly all segments 
of our local economy. However, the practices and systems that 
led us to the brink of fiscal collapse during the down time 
still remain.
    The financial practices which have led many of our local 
agencies to be put under severe grant restrictions or third 
party fiduciaries 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 deep and far reaching reforms. I know because I have 
served as an official of the Virgin Islands Health Department 
more than 10 years ago and the practices that we're being 
criticized for by a number of our Federal grant managers 
existed then and continue to exist today.
    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--the good times that we appear to be in 
in the present--and help us prepare for darker days that are 
sure to be visited upon us in the future given current fiscal 
Federal deficits, national homeland security needs, and wars 
far away from home that are projected to continue for several 
years to come.
    Again, I thank you for the opportunity to testify and I ask 
you and urge you to pass H.R. 62. Thank you, Mr. Chairman.
    [The prepared statement of Ms. Christensen follows:]
           Prepared Statement of Hon. Donna M. Christensen, 
                     Delegate, U.S. Virgin Islands
    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 U.S.A. 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 Chairman. Thank you very much. Governor Turnbull, we 
won't ask you a question about H.R. 62, we'll just ask you to 
comment in the record for us, in writing, give us your views on 
that.
    With reference to H.R. 1829, I have introduced it here, as 
you know, it is pending. You asked about that. It has been 
introduced by the chairman. We'll see what happens to it here.
    We're going to move quickly now to the Territory of Guam, 
Madeleine Bordallo, Delegate. Glad to have you here, ma'am.

           STATEMENT OF HON. MADELEINE Z. BORDALLO, 
            DELEGATE TO CONGRESS, TERRITORY OF GUAM

    Ms. Bordallo. Thank you very much. It's a real opportunity 
for me to be able to testify, Mr. Chairman, Senator Akaka, 
Senator Murkowski.
    Thank you very much, Mr. Chairman, 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 a very important part of 
overall U.S. policy, and 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 
marketplaces 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 10 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 work force is not adequately 
developed to meet the surge of both military and off-base 
construction. So to meet these labor demands, the Federal 
Government should increase assistance for job training programs 
on Guam. The Agency for Human Resources Development and the 
Department of Labor within the government of Guam locally 
administers the Workforce Investment Act and training programs. 
The Guam Community College offers vocational and technical 
training. These programs should receive increased Federal 
support in order to develop the work force 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 work force, however, will in all 
likelihood not be able to provide all of the labor required to 
meet our 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 re-authorization 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, Mr. Chairman, under 
current law, return workers under the H2-B visa program are not 
counted against the cap, and I urge that this provision be 
continued.
    Infrastructure improvements financed by military 
construction 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 bond sales will be reissued in 
the form of loans aimed to finance reconstruction projects. 
Bond banks serve at least 12 States today. Like those banks, a 
U.S. territory bond bank will use Federal grant money as 
collateral to guarantee the loans. Only by pooling our 
resources can the territories access the capital that we need 
to improve the lives of their residents. I'm committed to 
developing legislation that maybe 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 jurisdiction of Federal contract awards. So I 
will be raising this issue with the Armed Services Committee 
and I am prepared to offer an amendment.
    The Chairman. Madam, your time has expired. Could you put 
your statement in the record?
    Ms. Bordallo. Thank you. I wish to have it entered into the 
record, Mr. Chairman.
    [The prepared statement of Ms. Bordallo follows:]
Prepared Statement of Hon. Madeleine Z. Bordallo, Delegate to Congress, 
                           Territory of Guam
    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 Chairman. Governor, we gave you the wrong time. We told 
everybody 9:30, but we didn't get that word to you here on 
time. So it's your turn now. Proceed, Governor Camacho.

 STATEMENT OF HON. FELIX PEREZ CAMACHO, GOVERNOR, TERRITORY OF 
                              GUAM

    Mr. Camacho. Thank you, Mr. Chairman and Senator Akaka.
    The Chairman. You have 5 minutes.
    Mr. Camacho. Mr. Chairman and members of the committee, 
thank you for inviting me to participate in your hearing on the 
state of the economy and the fiscal affairs of the Pacific 
island territories, specifically the island of Guam. I'm Mr. 
Camacho of Guam.
    My testimony today is to present to you the current state 
of our economy and what the future holds for our island as we 
enter a period of prosperity. 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 and 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 levels of fiscal year 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 fiscal year 2007 these levels 
will more closely approach those achieved in fiscal year 2001, 
prior to being severely impacted by the repercussions of the 
terrorist events of September 11 and subsequent super typhoons 
and other national and global events.
    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 market. 
Our second largest industry is the military, accounting for 
more than 30 percent of the activity. Other industries include 
telecommunications, retail, service, construction, aviation and 
more.
    The recovery from the depressed levels of 2002 was 
initially fueled by a combination of 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. 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 in construction, expanding defense personnel 
numbers, in addition to modestly increasing tourist arrivals, 
increasing civilian employment, consumer and investor 
confidence in spending is a catalyst for continuing expansion.
    While the 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 forecast.
    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 the building permits in 2005 is $168 
million, or a 36 percent increase from the previous year. The 
value of total permits increased by more than 75 percent over 
the last 3 years. Both residential construction and government 
of Guam projects have nearly doubled from 2004 to 2005.
    Our government of Guam projects, planned or scheduled, 
would infuse hundreds of millions of dollars into the local 
economy and provide for the construction of new schools, senior 
centers, public safety buildings, health care centers and an 
expanded runway at our airport, the closure of an old 
landfill--or dump, as we call it--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 and 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. Roughly $100 million in 
construction projects are planned by the Air Force over the 
next 2 years. A contract has been awarded for $29 million for 
the construction of a new Department of Defense high school, 
elementary and middle school. A contract for wharf improvements 
at our naval station exceeding $10 million has also been 
awarded.
    The planned relocation of 8,000 Marines from the Third 
Marine Expeditionary Force from Okinawa to Guam will have a 
major impact on our economy. Numbers are roughly 16,000, 
inclusive of family and support personnel. Mr. Chairman, the 
cost 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.
    The Pacific Air Force has committed to basing a global 
strike force at Anderson Air Force Base. It is estimated that 
approximately 3,000 additional military, civilian and contract 
personnel will be based at our Anderson Air Force Base 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 a result of visitor arrival numbers jumping to 
levels not seen since 1997. Our real estate transactions have 
doubled over the past 3 years and the median sale price of a 
home is at its highest level since our tracking data began in 
1999.
    The Chairman. Thank you very much, Governor. The rest of 
your statement will be made a part of the record.
    Mr. Camacho. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Camacho follows:]
 Prepared Statement of Felix Perez Camacho, Governor, Territory of Guam
  the state of the economy and fiscal affairs in the u.s. territories
    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 risen 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 Chairman. As you know, we have a vote light up, but we 
still have a few minutes, so we're going to go to the Honorable 
Pedro Tenorio, Representative of the Commonwealth of the 
Northern Mariana Islands.

         STATEMENT OF HON. PEDRO A. TENORIO, RESIDENT 
           REPRESENTATIVE TO THE UNITED STATES, THE 
          COMMONWEALTH OF THE NORTHERN MARIANA ISLANDS

    Mr. Tenorio. Thank you. Good morning, Chairman Domenici. 
Senator Akaka, aloha. Senator Murkowski. Thank you for this 
opportunity to be here today. On behalf of Governor Benigno 
Fitial, I extend his apologies for not being able to be here 
with us today.
    This hearing is extremely important. We are hopeful that it 
will be beneficial to our commonwealth and to our sister 
territories as well. We are deeply encouraged by your 
committee's initiative to conduct this historic hearing for we 
have much to share with you regarding the state of the economy 
and the fiscal affairs of the Northern Mariana Islands. This 
also ensures hope that by the end of this hearing you will 
appreciate the enormity of our problems and also the efforts 
and sacrifices we are undertaking to address them head on. 
While we are making progress, we recognize our limitations.
    I'm here today on behalf of the American citizens of the 
Northern Marianas to ask you for your help in our time of 
hopelessness and despair. The CNMI lacks valuable natural 
resources like oil or minerals. This limitation plays a major 
role in the design of our long term economic strategy. Our most 
important objective has been economic and financial self-
sufficiency. By 1992 we had achieved this objective through a 
strategy based on tourism and garment manufacturing as our 
primary economic machines. This made a lot of economic sense to 
us since we are located very close to population centers in 
Asia and we have the ability to export duty- and quota-free 
into the United States. These industries combined provide 
directly or indirectly roughly 80 percent of all employment, 96 
percent of all exports, and 85 percent of all economic 
activity. In addition, they directly provide approximately 50 
percent of the CNMI government's tax base.
    However, both of these industries are extremely fragile and 
are susceptible to external changes. For example, the CNMI 
garment industry is threatened by international trade 
agreements that limit its competitiveness and viability. The 
visitor industry is subject to changes in financial conditions 
in Asian countries. Just last October a major Japanese airline 
decided to terminate its operations in the Northern Marianas 
after operating for more than 23 years.
    These two industries, Mr. Chairman, have declined and have 
generated a negative multiplier effect permeating the entire 
private sector. Garment sales to the United States have fallen 
by 34 percent, tourist arrivals are down 25 percent and gross 
business revenues are down by 23 percent. Tax collections are 
likewise affected, and by 2002 the government experienced a 20 
percent reduction and have generated a $74 million deficit.
    The CNMI government has tried for years now to make ends 
meet through austerity such as deferred maintenance of public 
facilities, delayed or deferred payments of the government's 
share over time and contributions, and delayed or nonpayment of 
utility bills, and to private vendors and government 
contractors. These austerity measures have left our public 
schools and hospital in deplorable and unsafe conditions. The 
CNMI government owes $85 million to the retirement system which 
repeatedly faces shortages and the possibility that it cannot 
meet monthly annuity payments.
    The record high fuel oil prices have left the government-
owned agency, the Utilities Corporation, near bankrupt and 
requiring a minimum $24 million bailout just to keep the lights 
on until the end of this year--this fiscal year. Facing a now-
estimated $100 million deficit, the new administration is 
implementing new and stricter austerity measures which we fear 
would impose significant negative effects on the economy. Our 
government is in the process of laying off personnel, reducing 
work hours, reducing salaries and office operations, and 
reducing many other essential services provided by the private 
sector. These adverse actions will only have the opposite 
effect of increasing unemployment, increasing the growing 
burden of food stamps and Medicaid, and will further erode the 
tax base.
    In short, Mr. Chairman, our once prosperous economy is 
sick. Although being cared for intensively, the prospects for 
recovery are weak and the toll on the people of CNMI is 
increasing. However, with the assistance of the U.S. Congress, 
I am positive that our economy will improve and possibly 
flourish once again.
    I have brought a short list of proposed actions for your 
consideration. These are our lifeline. First, I strongly 
recommend that Congress approve this year S. 1951, sponsored by 
Senator Craig and Senator Akaka, which amends General Note 
3(a)(iv) to grant insular possessions equivalent treatment to 
U.S. free trade partners by extending to all products, 
including textile and apparel, the requirement that original 
products contain at least 30 percent, instead of the current 50 
percent, U.S. and local content. This will keep the CNMI 
garment industry viable for approximately the next 10 years.
    No. 2, the CNMI has estimated that the United States has 
withheld or taxed income of CNMI residents in excess of $71 
million for the period of 1978 to 2002, with $38.8 million in 
interest. Section 703(b) of our covenant with the United States 
Public Law 94-241 and 48 U.S.C. 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. I respectfully request the 
Congress and your committee to immediately direct the U.S. 
Treasury to reimburse the CNMI the amount now due them.
    No. 3, revisit the standing authorization for covenant 
funds, which may include funding for government operations and 
will provide direct assistance to meet the most crucial public 
health needs, including construction, medical equipment, 
personnel and maintenance.
    Mr. Chairman, that concludes my statement. I stand ready to 
work with this committee to develop detailed plans of the 
issues I addressed for submission to Congress and for its 
consideration and to also answer questions from you. Thank you 
very much.
    [The prepared statement of Mr. Tenorio follows:]
Prepared Statement of Hon. 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
    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 nonpayment of 
government 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 4 
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 Chairman. Thank you very much, Representative. Let me 
say, the bill you referred to, we have been pursuing that with 
the Finance Committee, which has jurisdiction.
    Mr. Tenorio. Yes.
    The Chairman. We do not. We'll push it as vigorously as we 
can.
    Mr. Tenorio. Thank you, Mr. Chairman.
    The Chairman. Let me repeat, we don't have jurisdiction 
over the bill that you referred to that you need for 
reinvigorating your economy, but we are pushing it with the 
Finance Committee and we will continue to pursue that.
    Mr. Tenorio. Yes, I understand that. Thank you very much, 
Mr. Chairman.
    The Chairman. Now, we're going to have to close down, but 
David Cohen, let me ask if you would do this, if you would put 
your statement in the record, and if you would add for me--you 
have heard the witnesses, and if you could comment on behalf of 
the administration on the various items that they have 
indicated they are in need of and give us the administration's 
position with reference to the various positions they have 
taken. And, in addition, as you heard their testimony, if you 
can share with us your views on what the committee should be 
considering with reference to the problems that they have 
discussed with us, we would appreciate that, and if you can do 
that as soon as possible.
    Governor Turnbull, if you would comment on the legislation 
that Representative Christiansen talked about, in writing, we 
would like to know your view. We understand there's a 
disagreement and we certainly are going to take that into 
consideration before we pursue it.
    With that, I wish we had more time, it's just that's the 
way it is. Before the year's out we'll get a little more 
involved and see if we can be more helpful. We thank you very 
much for your time and for coming here and appearing with us 
today.
    Senator Akaka, did you have any closing remarks?
    Senator Akaka. Thank you very much, Mr. Chairman. I want to 
thank you for holding this hearing. As you know, this committee 
frequently considers legislation that focuses on specific 
issues in one of the eight territories and also the freely 
associated states and it is also important to step back as we 
are and examine the broad policies and trends that affect all 
of these insular areas, and the questions that the chairman is 
asking fall in this area and we certainly want to be updated on 
all of these. I thank you all for coming. Governors, you've 
traveled far to get here. Others work in the city, but we're 
delighted to have all of you in this hearing.
    And with that, I want to say thank you so much. This 
hearing is adjourned.
    [Whereupon, at 10:23 a.m., the hearing was adjourned.]

    [The following statement from the Department of the 
Interior was received for the record:]
Prepared Statement of David B. Cohen, Deputy Assistant Secretary of the 
                      Interior for Insular Affairs
    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. 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.

                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

                                    American Samoa,
                                    Office of the Governor,
                         Pago Pago, American Samoa, March 10, 2006.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Senator Domenici: I want to thank you and your Committee for 
the opportunity to testify before the Senate Committee on Energy and 
Natural Resources on March 1, 2006.
    We were very pleased and honored to give testimony regarding the 
state of the economy and fiscal affairs in the Territory of American 
Samoa.
    Attached please find responses to the questions raised in your 
letter of March 6, 2006.
    If there is anything else we can provide for the Committee, please 
do not hesitate to contact me.
            Sincerely,
                                     Togiola T.A. Tulafono,
                                        Governor of American Samoa.
[Enclosure.]
              Responses to Questions From Senator Domenici
    Question 1. What plans does your government have to respond to the 
possible loss of the fish processing plants and to promote private 
sector development?
    Answer.
        asg response to possible loss of fish processing plants
   We have completed an OIA funded project to review the 
        current U.S. tax structure and propose substitute or 
        alternative incentives which may replace the current IRC 
        Section 936 tax incentive for the territory. We have shared the 
        findings of that effort with our Congressman and your 
        committee.
   We have applied for a technical assistance grant from DOI to 
        conduct a thorough analysis of the following:

    What would be necessary to retain the canneries as long as 
possible?
    What would be the comprehensive income, employment and population 
impacts of cannery closures?
    What would be the temporary and longer-term economic recovery needs 
of the Territory? What are the best economic development potentials to 
compensate for cannery losses?
    We have good statistical and information programs to help us 
estimate these economic impacts, but we need better tools. We have 
recently established the American Samoa Income and Product Account 
(ASIPA) system. We seek to add an Input-Output Model for economic 
impact analyses and forecasting which is important to cannery analysis.
    In the interim we are estimating the potential effects, as we are 
able and attempting to seek out sources of transitional and other forms 
of assistance including preparing for acceleration of CIP plans for 
recovery efforts.
    We are working hard on a territorial incentive package in 
anticipation of the loss of the section 936 territorial tax incentive 
benefits.
    We have also accelerated our private sector economic development 
programs.
           asg efforts to promote private sector development
  a. External Investment and Development
    OIA is increasing its efforts to encourage private investment in 
the Territory through investment and trade promotion programs for the 
Territories. An Island Business Opportunity Mission (IBOM) is a 
collaborative effort with the DOI, ASG and the private sector to 
attract foreign investors in prioritized industries.
    We are improving our promotional programs with new investment 
brochures, a private sector development website, and a Geographic 
Information System (GIS). In addition we are in the process of 
streamlining our permitting system, the ``One Stop Shop'' project, to 
make setting up a business in American Samoa less onerous and complex 
for entrepreneurs.
    American Samoa has met with companies that have a keen interest in 
locating key businesses in the territory. In February 2006, American 
Samoa hosted an evaluative visit from a U.S.-based company Safelite 
AutoGlass (Safelite). Through a private/public collaboration, a group 
from Safelite traveled to American Samoa to evaluate the possibility of 
locating a call center operation in the territory, an operation which 
would have located at least 200 local jobs in the territory. Safelite 
evaluated the territory's available target workforce, and 
telecommunications capabilities relative to call center requirements. 
American Samoa's available human resources were rated among the best 
that Safelite has reviewed. Unfortunately, our current system of 
satellite-based telecommunications was determined to be inadequate to 
service the call center.
b. Internal Development
    We are very receptive to outside investment while remaining mindful 
and committed to developing our own natural and entrepreneurial 
resources. External investment often comes with large-scale 
immigration, which reduces the potential benefits to our people.
    We are especially interested in local industries in which we enjoy 
a healthy comparative advantage. Among these industries are fisheries 
and tourism. To this end, we have strengthened our programs in local 
finance and small business training including a reinvigorated American 
Samoa Development Bank and Small Business Development Center.
    American Samoa is pursuing aggressively the establishment and 
development of e-commerce in the territory and information technologies 
as a whole. Every commission and task force that has reviewed American 
Samoa's economic development options has suggested focused development 
of this specific sector of the economy.
    Currently, members of the ASG workforce are undergoing training as 
part of the Pacific Information and Communications Technology Academy 
(PICTA), in order to bring technical expertise to the government and 
the territory. Thirty ASG workers will be sufficiently skilled at the 
end of the academy to enable them to test for certifications offered by 
Microsoft, Oracle and Cisco.
    As a result of the Safelite visit earlier this year, which 
identified the shortcomings of the territory's telecommunications 
capacity, American Samoa has begun to pursue aggressively, a connection 
to existing undersea fiber-optic cable which would provide a broader, 
more substantial telecommunications capability than our current 
satellite based system offers. American Samoa has identified at least 
three different fiber-optic cable options from which the territory may 
connect. Further, discussions have begun with the entities that 
administer these cables in order to procure a node for connection and 
service to American Samoa.
    The territory will likely not be able to shoulder the cost of 
connectivity on its own. Therefore, American Samoa is investigating and 
requesting federal assistance in landing fiber optic cable in the 
territory. Federal support, especially with regard to the high cost of 
connectivity is greatly needed in this endeavor. The interest in 
American Samoa for businesses and applications that would utilize this 
connection currently exists. This connectivity would bring those 
interests and more to fruition for the territory.
    The territory also seeks to encourage more privatization of 
government operations where it is beneficial to the territory as a 
whole.
c. The Need for Coordinated Federal Economic Development Support for 
        the Territories
    It would be remiss not to mention the need for Federal economic 
development support.
    This need has been referenced in many Federal reports in recent 
years including the American Samoa Economic Advisory Commission, the 
U.S. Government Accountability Office, and the Intergovernmental Group 
on Insular Areas.
    In general these reports recommend the formation of federal 
territorial economic policy and monitoring, remedying, establishing and 
coordinating federal policies affecting territories.
    Other ideas include consideration of omnibus economic legislation 
for the territories or establishing law or policy requiring impact 
analysis of U.S. trade/investment agreements on territories.
    The demise of Section 936 without remedial Federal programs may be 
the best evidence of the need for coordinated federal policy regarding 
the Territories.
    Question 2. The GAO has provided the Committee with data derived 
from the single audits on the fiscal condition of your government up to 
2003. Would you please provide the Committee with your estimates for 
revenues, expenditures, end of year fund balance and net assets for 
2004 and 2005 so that we can follow the most recent trends?
    Answer. Attached herewith as ``Enclosure 1'' * American Samoa's 
2004 Comprehensive Annual Financial Report which contains the 
Territory's final numbers on revenues, expenditures, end of year fund 
balance and net assets for 2004. Also attached herewith as ``Enclosure 
2'' is American Samoa's 2005 4th Quarter Revised Report to the 
Department of Interior, which contains the most recent information 
requested above for Fiscal Year 2005.
---------------------------------------------------------------------------
    * All enclosures have been retained in committee files.
---------------------------------------------------------------------------
    Question 3. What steps is your government taking to address the 
timeliness of the single audits and the weaknesses reported in those 
reports?
    Answer. ASG has developed a comprehensive audit follow-up system 
which includes the following:

   The Department of Treasury has prepared an action plan for 
        each auditable section. The plan delineates the required task 
        and documentation, assigned deadline for preparatory work, and 
        the specific staff member responsible. The action plan is 
        scheduled according to the auditors work plan, and conforms to 
        the fiscal reform plan set by DOI. Treasury's action plan is an 
        open document shared by the external auditing firm, managers 
        within Treasury, and supervisors within each auditable section. 
        Treasury has appointed an Audit Liaison responsible for 
        managing the progress of the action plan, and for coordinating 
        the collected documentation. The Liaison provides weekly 
        updates to the Treasurer and section managers on the progress 
        of the plan.
   Treasury has built into its audit response schedule a 
        sufficient amount of time to address prior year's weaknesses, 
        and consequently, findings. Our successful efforts to reduce 
        the past qualified opinions typically involve negotiations with 
        the auditors, diligent and immediate research to produce 
        documentation, and additional explanation or justification for 
        an action or entry. The Treasurer has taken an active role in 
        this process by prioritizing all audit-related activity and 
        response at the highest level.
   The number of findings and the dollar amount of the question 
        costs for each consecutive single audit has been reduced. 
        Specifically, of the total findings:

     2001--34% or $390,122 were questionable costs
     2002--9% or $114,125 were questionable costs
     2003--16% or $211,484 were questionable costs
          NOTE: $202,280 of this total was related to a federal case of 
        fraud and embezzlement.
     2004--4% or $51,076 were questionable costs
          NOTE: $35,549 of this total was a previously identified 
        overpayment in the process of being corrected.

          The steady decline of questionable costs over the past four 
        years reflects the serious dedication of ASG to fiscal reform 
        and accountability.
   The Audit Liaison coordinates with the auditors their 
        scheduled visits and the expected outcomes of each visit. The 
        collation of all preparatory work, files, documents, 
        authorizations, entries, system-generated schedules and 
        balances falls within the Liaison's purview. The Liaison 
        facilitates the flow of information and documentation between 
        the auditors and various sections of the government. Meetings 
        and any special arrangements or requirements are attended to 
        and followed up by the Liaison.

    Question 4. We understand that reliable air service has been a 
concern that you have raised with the Administration. Would you please 
describe the issue and your approach in more detail?
    Answer. The Territory of American Samoa faces very serious problems 
with air travel to Hawaii, the U.S. mainland and other parts of the 
world. A single carrier serves American Samoa to the U.S., which 
service has proven infrequent, unreliable and extremely expensive.
    The Government of American Samoa is investigating the possibility 
of requesting that the U.S. Department of Transportation grant approval 
to a foreign carrier to serve American Samoa. American Samoa has 
brought this issue specifically before the Interagency Group on Insular 
Affairs (IGIA), under the auspices of the Department of Interior, for 
assistance. However, this is a long drawn out process and may take 
months, even years to accomplish. One potential approach that has also 
been identified as beneficial to American Samoa is getting Essential 
Air Service support from the federal government in order to provide 
relief to travelers resulting from the monopoly on air service.
    In the meantime, my administration has contacted Hawaiian Airlines 
(HAL) with the hope that it will see the handwriting on the wall and 
bring its fares in line with its cost of serving the territory. As it 
presently stands, HAL has publicly stated that it currently uses, and 
will continue to use, captive markets that produce high revenues to 
support its markets that are losing millions annually. The Government 
of American Samoa is an avid supporter of the free market system; 
however, the situation with HAL contravenes fairness and the results 
are devastating to the territory with reduced travel to and from our 
islands because of artificially inflated airfares.
    The Government of American Samoa will ask that the U.S. Department 
of Transportation consider reversing the deregulation of HAL on its 
American Samoa route. Again, this is a protracted process, and every 
day the citizens of American Samoa suffer. Other alternatives that the 
Government of American Samoa is exploring are in the area of funding 
through DOT in the form of grants that assist small communities in the 
aftermath of deregulation. Grant funds can be used to subsidize 
airfares and improve facilities.
    Question 5. Please describe what type of financial management 
system ASG has, whether it meets your needs, and any plans you may have 
to upgrade it?
    Answer. Sungard Bi-Tech's ``IFAS'' or Integrated Financial and 
Administrative Solution software for the public sector has been the 
American Samoa Government's financial accounting software since the 
beginning of the fiscal year 1997. The American Samoa Government 
deploys the following IFAS modules: General Ledger, Budgeting, 
Purchasing, Encumbrance System, Accounts Payable, Bank Reconciliation, 
Fixed Assets Inventory System, Stores Inventory (Warehouse), Security, 
Human Resources Information System, Payroll, Workflow, Easy Laser 
Forms, 7i Farm. The American Samoa Government will be moving into 
Contract Management, Bid and Quote Management, Online Document in the 
near future.
    The American Samoa Government has recently completed a full upgrade 
of IFAS from Reflections to the web-based 7i platform. We are presently 
running version 7.4 and upgrading to version 7.6 within a few months. 
IFAS is driven by an Informix engine and is supported by an extensive 
fiber-optic network within the Executive Building that houses the 
Executive branch of government.
    The seamless integration of the modules with the General Ledger has 
made IFAS the system of choice for the past nine years. It holds the 
record as the longest running accounting system to be utilized by the 
government. American Samoa is so far satisfied with this financial 
management system as it currently meets our financial and accounting 
needs.
    More recently, IFAS has been deployed to remote sites such as the 
Department of Education in efforts to allow online inquiries on status 
of accounts and to run reports on the numerous Federal Grants managed 
by the department. This trend of connecting the remote sites to our 
mainframe will continue into the future as funding becomes available.
                                 ______
                                 
                  The United States Virgin Islands,
                                    Office of the Governor,
                              Charlotte Amalie, VI, March 21, 2006.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: I want to thank you again for the courtesies you 
and the other distinguished members of the Committee on Energy and 
Natural Resources extended to me during the recent hearings on the 
economic and fiscal challenges facing the United States Territories, 
including the U.S. Virgin Islands. During the hearings, you asked me to 
comment on Delegate Christensen's remarks in support of her bill to 
establish a Chief Financial Officer (CFO) for the United States Virgin 
Islands.
    As I indicated in my written statement submitted for the' hearing 
record, I as steadfastly opposed to H.R. 52, the proposed CFO bill, for 
several reasons. First, the financial condition of the Virgin Islands 
does not warrant limiting representative government in the Virgin 
Islands and the transfer of essential budget functions to an unelected 
bureaucrat accountable to no one. As detailed in my written statement 
and accompanying Appendix A, the Government of the Virgin Islands is 
not facing fiscal insolvency or collapse , Our budgets are in balance 
and we have ended the last two fiscal years with solid surpluses. We 
have ended each of the last five fiscal years with a substantial 
accumulated General Fund surplus. Our 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. At the same time, we have held 
General Fund expenditures to a 4 percent increase, from $559 million in 
ET 1998, the year before I assumed office, to $582 million in FY 2005. 
During this period, through government reorganization and agency 
consolidation, we cut the number of government employees by 20 percent 
while also raising salaries to more competitive levels.
    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 made 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 
immediate stops 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.
    Second, the proposed remedy does not fit the problems identified in 
Delegate Christensen's remarks. Indeed, Delegate Christensen stated 
that, ``[w]hen [she] first introduced her CFO bill, [she] did so 
because [she] believed something had to be done to prevent the Virgin 
Islands from fiscal collapse.'' (Emphasis added). Delegate Christensen, 
however, also conceded that, by relying on the normal processes of 
government, my Administration has been ``able to restore budget 
surpluses and [has] strengthened the [T]erritory's financial 
position.'' Thus, Delegate Christensen has been forced to alter the 
reasons for continuing to press her bill, now citing ``lax financial 
practices,'' without identifying any that might potentially lead to 
``dark days in a blink of an eye.'' The real dangers to our fiscal 
solvency and stability, however, are not the prospects of overspending, 
but rather are the ones that I believe both Delegate Christensen and I 
share: the threat to our private sector economy caused by Congressional 
overreaching in the American Jobs Creation Act and the unfortunate but 
real threat of natural disasters posed by the accident of our physical 
location in the middle of the Caribbean sea. Should our revenues fall 
as a result of either natural or man-made disasters over which we have 
no direct control, we would of course be forced to make adjustments in 
our spending as we successfully managed to do in FY 1999 and FY 2000--
including cuts in essential public services such as education, health 
care and public safety. But, in a democracy, tough choices such as 
these are best made in the hands of elected representatives in a 
republican form of government guaranteed, since 1954, to the people of 
the Virgin Islands by Congress in our Revised Organic Act. Allocation 
of scarce resources to competing social demands by an unelected and 
unaccountable bureaucrat should only be considered if democracy has 
failed or if the government literally cannot operate. Happily, as 
Delegate Christensen has conceded, that is not the case here.
    Third, enactment of a federal bill, neither requested nor supported 
by the elected leadership of the Virgin Islands Government, represents 
a significant step backwards in our political development. Delegate 
Christensen disputes this characterization, arguing that ``[w]hile 
[her] bill would be an act of Congress, it sets up a process that is 
entirely within the hands of Virgin Islanders . . .'' Her argent, 
however, ignores the fact that, if the process were in fact entirely 
within the hands of Virgin Islanders, there would be no reason for 
federal legislation. The Governor could certainly request, and the 
Legislature has full power to enact, local legislation to establish a 
Chief Financial Officer or to establish the. current Office of 
Management and Budget as an independent office.
    Finally, even if the Government of the Virgin Islands were in 
fiscal extremis, the remedy proposed by Delegate Christensen is simply 
unworkable. The essence of H.R. 62--indeed, the bill's fundamental 
purpose is to usurp the authority of the elected Governor under local 
law under the terms of the bill , the CFO would be given the 
responsibilities of the Director of the Virgin Islands Office of 
Management and Budget (VIQMS). Among other duties, he or she would 
assume extraordinary powers norma4y reserved to elected officials of 
budget preparation and program execution, including the power to 
withhold appropriated funds and to revise departmental priorities 
otherwise sat by the Governor.
    There is one major distinction between the powers of the Director 
of the VI0MB under current law and the functions of the CVO under the 
terms of H.R. 62 which is fatal, to the intended purpose of the bill. 
Under current law, the Director Is accountable to the Governor, and 
through him, to the people of the Virgin Islands , Under H.R. 62, the 
CFO is not accountable to the people of the Virgin Islands. If the 
proposed. CFO were to disregard the Governor's policy or budget 
directives, there would be no practical remedy. Neither the elected 
Governor nor the electorate would have an affective way to reconcile 
the priorities of the majority with the power to allocate scarce 
resources. The sole power to decide such inherently political choices 
would rest with an unelected and unaccountable bureaucrat. In short, 
the unwieldy process for selecting the CFO after consultation with 
virtually every interested party in the Territory simply eviscerates 
the prerogatives and authority of the Office of the Governor. More 
compellingly, the exercise of unchecked powers by an unelected CFO, 
accountable to no one, could threaten the very existence of the 
republican form of government put into place by the Revised Organic 
Act, and which Congress and the people of the Virgin Islands have 
steadfastly sought to perfect over the lest half century.
    If the CFO were to impose his or her own priorities, the Governor 
would be left with two unworkable choices: either to defer to, and to 
substitute, the unelected CFO's judgment, or to attempt to create a 
budget impasse with the complicity of the Legislature. There would be 
no practical way, as exists in any democratic form of government, to 
remove the offending CFO; the terms of H.R. 62 would not permit it. if 
on the other hand, the CFO were to defer to the Governor on all policy 
and programmatic decisions, there would be no reason for having created 
the office in the first place. Together, these provisions of H.R. 62, 
no matter how well intentioned, are a prescription for a dysfunctional, 
government in the Virgin Islands.
    As I indicated in my written statement, the Government of the 
Virgin Islands 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.
    Once more, thank you for your' assistance in the past and for your 
courtesies during our last meeting. Please let me know if you have any 
questions with respect to my position, or if I can provide you with any 
further information.
            Very truly yours,
                                       Charles W. Turnbull,
                                                          Governor.
                                 ______
                                 
   Responses of the Commonwealth of the Northern Mariana Islands to 
                    Questions From Senator Domenici
    Question 1. Last year, the Committee held a hearing on S. 1831, 
legislation requested by the CNMI regarding submerged lands and the 
resolution of claims under the Covenant. Does the CNMI still support 
enactment of these two provisions in S. 1831?
    Answer. Yes. Three days ago the United States Supreme court denied 
the CNMI's petition for a writ of certiorari on the CNMI vs. United 
States, 399 F. 3rd 1057. The United States now has paramount ownership 
of some 264,000 square miles of submerged lands in the Northern Mariana 
Islands. Now our only recourse is through the legislative process. 
5.1831 grants the CNMI the same jurisdiction as most coastal States and 
the territories.
    The objective of Section 2 of S. 1831, as I understand it, is to 
resolve the outstanding tax cover-over issue (Section 703(b) of the 
Covenant, Public Law 94-241). Section 703(b) clearly provides for the 
cover-over to the CNMI of income taxes and taxes on articles produced 
in the Northern Mariana Islands, as well as the ``proceeds of any other 
taxes which may be levied . . .'' As written Section 2 of S. 1831 would 
provide the authority to the Secretary of the Interior to request 
assistance from the Department of Treasury to expeditiously resolve the 
longstanding claim of the CNMI on the issue of tax cover-over under 
Section 703(b) of the Covenant.
    Though tax cover-over issue is extremely important to the CNMI, so 
is submerged land. Tying the two together in one piece of legislation 
might be the most advantageous to the passage of both under certain 
circumstances, however since the Administration seemed less than 
supportive of Section 2 of S. 1831 at the hearing last October, it 
might be better to deal with them separately. I will leave it to the 
Committee's best judgment but urge passage of Section 1 as soon as 
possible, and continue to seek the committee's help on resolving the 
tax cover-over issue.
    Question 2. The GAO has provided the Committee with data derived 
from the single audits on the fiscal condition of your government. 
Would you please provide the Committee with your estimates for 
revenues, expenditures, end of year fund balance and net assets for 
2004 and 2005 so that we can follow the most recent trends.
    Answer. The CNMI Secretary of Finance has provided (see 
attachment)* elected pages of the draft copy of the FY 2004 single 
audit report as well as the FY 2005 report of revenues and expenditures 
provided to the CNMI Legislature.
---------------------------------------------------------------------------
    * All attachments have been retained in committee files.
---------------------------------------------------------------------------
    It should be noted that the large increase in the 2004 General Fund 
deficit resulted from recording a $19 million penalty assessed by the 
Retirement Fund and $8.5 million in bad debt expense associated with 
various accounts receivables.
    In January 2006, the new administration reduced the estimated 2006 
revenue available for general government operation from $213 million to 
$198 million due to the continued decline of the garment industry and 
reduced tourism levels.
    Question 3. What steps is your government taking to address the 
timeliness of the single audits and the weaknesses reported in these 
reports.
    Answer. The CNMI Secretary of Finance has provided me with the plan 
of action (see attachment) they are using to address these concerns. 
High priority has been place on compliance with the Single Audit Act 
and addressing questions raised in these audits.
    Question 4. In your testimony you request that the Congress direct 
the U.S. Treasury to immediately reimburse the CNMI the amount (which 
you present as $71 million plus $38.8 million in interest) pursuant to 
Section 703(b) of P.L. 94-241. Please provide the Committee with a 
summary of your discussion with Treasury on this issue including copies 
of important communication and analysis to and from the Treasury 
Department.
    Answer. Unfortunately, we do not have many documents in our office 
relating to this issue. During the administration of former Governor 
Juan N. Babauta, the Office of the Attorney General took the lead on 
this issue and I understand participated in several discussions with 
Office of Insular Affairs and the Department of the Treasury. I had 
previously requested the new CNMI Attorney General, Matthew Gregory, to 
provide me with a status report from those discussions and the work 
completed so far based upon the records in his office. I am attaching 
the reply I received dated March 21, 2006. I am also attaching a copy 
of the opinion issued by the Treasury Department last year on the 
question of cover over of estate taxes to the CNMI.
                                 ______
                                 
               Responses of Hon. Felix Perez Camacho to 
                    Questions From Senator Domenici
    Question 1. The GAO has provided the Committee with data derived 
from the single audits on the fiscal condition of your government up to 
2003. Would you please provide the Committee with your estimates for 
revenues, expenditures, end of year fund balance and net assets for 
2004 and 2005 so that we can follow the most recent trends?
    Answer. I have enclosed a copy of the Government of Guam's Fiscal 
Year 2004 audit for your review.* The Management Discussion and 
Analysis (pp. 4-12) explains the major financial activities and results 
for 2004. Also included are copies of the Government of Guam's Audited 
Fund Balances for Fiscal Year 2004 and Un-audited Fund Balances for 
Fiscal Year 2005.
---------------------------------------------------------------------------
    * A copy has been retained in committee records.
---------------------------------------------------------------------------
    Question 2. Your government has made significant improvement in the 
timeliness of audit reporting and resolving weaknesses. Would you 
please describe the strategies Guam has used to improve accountability, 
internal controls and compliance, and what further steps you intend to 
take in the future?
    Answer. Thank you for recognizing the hard work that the Government 
of Guam has undertaken over the past four years to improve 
accountability, internal controls and compliance with local and federal 
audits. A broad array of strategies, actions, and policies has greatly 
contributed to our progress in this area and also we have also been 
fortunate in some other ways that have helped improve our financial 
operations. We have been able to stabilize the leadership of our key 
financial departments. My Director for the Department of Administration 
has lead the agency for three years. In the previous three years, DOA 
had twelve different directors.
    We stabilized and enhanced our information systems. Our progress in 
this area has allowed us to improve internal controls, improve 
accountability, and manage our financial information more effectively 
and efficiently. We have dramatically enhanced our financial management 
system to improve the timeliness, accuracy, and completeness of our 
financial data. The Department of Revenue and Taxation has implemented 
a point-of-sale system and has provided electronic filing of tax 
returns and tax-related documents to manage our revenues and serve its 
constituencies better. The point-of-sale system also improves our 
controls over cash payments and other revenue receipts from the public.
    The Department of Administration has begun to use performance 
measures to manage its operations. These measures let DOA managers and 
executives know what is being done, how well it is being done, and how 
much it costs to do each task. The use of these performance measures 
significantly improves our accountability and internal controls.
    The three departments responsible for managing our finances--the 
Department of Administration (DOA), the Department of Revenue and 
Taxation (DRT), and the Bureau of Budget and Management Review (BBMR)--
implemented project management and configuration management disciplines 
to improve communications, coordinate their activities better, share 
operational problems and develop cross-agency solutions, and focus 
organizational resources and attention on improving financial 
operations and audit results. The practice of these disciplines has 
allowed the departments to achieve critical strategic goals, implement 
major organizational changes, and significantly improve financial 
operations across departmental lines.
    We developed and implemented a strategic plan for financial 
management improvement. This plan was originally developed in 2003 and 
was updated in 2005. It identifies the key strategic goals we have for 
financial management improvement and lists a series of specific short-
term actions we can take to improve financial operations almost 
immediately. The Department of Administration (DOA), the Department of 
Revenue and Taxation (DRT), and the Bureau of Budget and Management 
Review (BBMR) have been extremely successful at implementing these 
plans and accomplishing our strategic goals. This success has been 
directly responsible for much of our improvement in financial 
operations, accountability, internal controls and compliance with 
professional and federal standards and regulations. Our success with 
implementing financial management improvement plans helped develop a 
sense of empowerment and a willingness to change in our departments 
that was not there before. Our staff and managers are beginning to 
believe they can make a difference in improving their lives and the 
operation of their agencies. Our managers and executives are instilling 
a culture of continuous improvement and personal accountability that 
can lead us to ever better performance and customer service.
    We have also been fortunate to receive significant funding and 
technical assistance from the Office of Insular Affairs at the 
Department of Insular Affairs, the Graduate School, USDA, and its 
regional office, the Pacific Islands Training Initiative (PITI). The 
Office of Insular Affairs has provided funding for technical assistance 
and training from the Graduate School, USDA, and the Pacific Islands 
Training Initiative. Without their continued support over the past 
three years we would not have made as much progress as we have.
    Question 3. The recent and on-going expansion of military activity 
in Guam presents both benefits and challenges for your government. 
Would you briefly describe for the Committee what you see as the major 
challenges, and what steps you are taking to meet them?
    Answer. With the increase of U.S. military assets to Guam expected 
over the next 10 years, the Government of Guam has begun the 
preparation to receive an estimated 8,000 individuals and their 
dependents and ensure that a quality level of service is provided to 
all of our residents.
    According to U.S. Census Bureau estimates, Guam's population is 
expected to increase from 168,564 in 2005 to 180,692 in 2010, this 
without factoring the recently announced increase to the local military 
population. The increases are enough to direct capital improvement as 
locations are expected to develop more rapidly than others especially 
in those areas being looked at to be used for expansion by military 
planners. Older infrastructure has been identified throughout the 
island as needing to be replaced. Major maintenance projects are also 
being looked at simultaneously as older water, wastewater, power and 
transportation systems need to be replaced to maintain or improve 
current and future service levels. The improvements to the junctions 
which adjoin military and civilian facilities have also been slated for 
improvement. Millions of dollars in capital improvement projects have 
been identified in the civilian community with funding being sought for 
more than half of the projects. Because of a limited amount in 
resources, individual agencies within the Government of Guam continue 
to seek funding sources, including bond financing, to support these 
projects which is believed will improve the quality of life for all 
residents. The Government of Guam is taking cost-cutting measures and 
approaches to maximize limited funding opportunities afforded the 
island as a U.S. Territory.
    My office is leading efforts to produce a 10-year Consolidated 
Infrastructure Improvement Forecast. This document will guide the 
Government of Guam and the island's U.S. military commands in 
understanding what is needed in our water, power and transportation 
infrastructure and service areas to respond to this tremendous growth 
and the certain impacts to our community now and into the future. The 
document, to include brief descriptions of the respective 10-year 
Capital Improvement Projects, construction costs and timelines for 
these critical areas is being formulated and is expected to be 
completed in mid-May, 2006.
    We will be working with our military partners in securing funding 
to make the upgrades necessary in anticipation of the increase in U.S. 
forces here.
    Question 4. The GAO review of audits shows that, in 2003, Guam had 
a year end funds deficit of $191 million. How has this condition 
changed since then and how has Guam meeting it cash needs?
    Answer. The Government of Guam current funds deficit is about $345 
Million. In recent discussions with the Guam Legislature, my 
Administration unveiled a Debt Recovery Plan to borrow in order to 
manage our growing debt. The Guam Economic Development and Commerce 
Authority has prepared on my behalf a spreadsheet incorporating debt 
repayment to begin FY2008 and an expenditure plan which factors in cost 
containment. The Plan is currently under review by the government's 
bond counsel and expects feedback in the coming weeks. Also, the U.S. 
Ninth Circuit Court of Appeals has ruled in favor of my Administration 
plans to move forward to secure a Debt Refinancing Bond, which had been 
opposed by the Attorney General of Guam for over two years, to close 
the gap on what is owed the tax payers of Guam.
    As for the Government of Guam's cash situation, the government 
continues to manage its cash carefully to ensure bills are paid 
although many vendors have to wait 90 days or longer to receive their 
payment. The Guam Department of Administration from time to time will 
pay well within this timeframe but it does not happen often enough to 
keep vendors from applying pressure on DOA. Cash management remains the 
key to keeping the government afloat.
                                 ______
                                 
                      United States Virgin Islands,
                                    Office of the Governor,
                                 Charlotee Amalie, VI, May 4, 2006.
Hon. Pete Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: Please find attached the response of the 
Government of the Virgin Islands (GVI) to the questions submitted in 
your March 6, 2006 letter to me regarding the state of the economy and 
fiscal affairs of the United States Virgin Islands.
    Please let me know if you have any questions with respect to the 
GVI responses.
            Very truly yours,
                                       Charles W. Turnbull,
                                                          Governor.
[Enclosure.]
      Responses of Government of the Virgin Islands to Questions 
                         From Senator Domenici
    Question 1. In your statement, you have detailed your concerns 
regarding the EDG businesses. Would you also describe for the Committee 
your outlook for the other key industries in the USVI such as tourism 
and oil refining?
    Answer. While recent changes to the tax laws governing the Virgin 
Islands Economic Development Commission (EDC) program have caused U.S. 
investment in the Territory to slow and EDC-generated revenues to 
decline, traditional sectors of the Virgin Islands economy, including 
tourism and oil refining, have fared relatively well in the last two 
years. The tourism industry, in particular, has been one of the 
strongest performers and a major contributor to the Territory's 
economic performance during this period. The industry employs 30 
percent of the Territory's workforce and generates more than $4 billion 
of economic activity each year. Total visitors to the Territory reached 
a record 2.6 million in Fiscal Year 2004, an increase of 12 percent 
over FY 2003. Total visitors increased to 2.7 million in FY 2005 and 
are projected to top 2.8 million in FY 2006.
    Tourism is expected to continue to grow as a result of the 
Government's investments in the Territory's tourism infrastructure, 
including port development, renovation of historic Island structures, 
and construction of cultural attractions and beautification projects, 
as well as nearly $1 billion in new private sector tourism related 
developments over the next several years. These include major hotel and 
time-share projects on all three islands.
    The oil refining industry has prospered in recent years as a result 
of higher oil prices and increased world demand. The value of refined 
petroleum products manufactured by the Hovensa refinery on St. Croix--
one of the largest refineries in the world--increased by 40 percent in 
Fiscal Year 2004 to reach $6.7 billion. As a result, Hovensa eliminated 
its net operating losses (NOLs) carried over from previous years and 
began paying corporate income taxes for the first time in FY 2005. 
Hovensa is also completing construction of a $200 million 
desulphurization unit at its refinery on St. Croix, which will allow 
the Company to meet EPA standards and better compete with mainland 
refineries.
    The Territory's rum industry is enjoying record production and 
sales into the United States. The territory's rum distillery on St. 
Croix, which generated more than $80 million in federal rum excise 
taxes for the Government's coffers in FY 2005, was recently acquired by 
V&S, a distilling conglomerate owned by the Government of Sweden.
    While the above sectors have done well, economic uncertainties 
still exist, primarily because of the continuing cloud over the EDC 
program. Much of the private sector investment in the Territory in 
recent years has been fueled by EDC beneficiaries who have reinvested 
their EDC profits back into the local economy. These investments have 
included not only the acquisition and establishment of new businesses 
in the Territory, but also construction of new office space and private 
homes. Thus, the key to the Islands' economic future remains a fair 
resolution of the federal tax rules that govern this vital economic 
development program.
    Question 2. The GAO has provided the Committee with data derived 
from the single audits on the fiscal condition of your government up to 
2003. Would you please provide the Committee with your estimates for 
revenues, expenditures, end of year fund balance and net assets for 
2004 and 2005 so that we can follow the most recent trends?
    Answer. Governor Turnbull's written statement submitted to the 
Committee on Energy and Natural Resources on March 1, 2006 included, as 
Appendix A thereto, a revenue, expenditure and fund balance sheet for 
the period FY 1995 to FY 2005.* This chart, which is in a different 
format than Table 1 of the draft GAO report, provided in the opinion of 
Banc of America Securities LLC, the financial advisers to the 
Government of the Virgin Islands who prepared the chart, a more 
relevant, if not more precise, view of the Government's financial 
condition at any point during the 10-year period in question. The 10-
year span, which focuses on recurring revenues and expenditures in the 
Territory's General Fund, provides a longer period than the GAO report 
in which to assess revenue, expenditures and financial trends.\1\
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    * Appendix A has been retained in committee files.
    \1\ The Banc of America chart focuses on the Government's General 
Fund and does not include restricted or special funds. As detailed in 
footnote 2 to the chart, the statement of revenues for each fiscal year 
includes individual income taxes, corporate income taxes, gross 
receipts taxes, real property taxes, excise taxes, stamp taxes, and 
other fees and taxes. Taxes are net of amounts pledged for debt service 
on outstanding bond issues and net of income tax refunds. Amounts 
reflected in ``Operating Transfers from other Funds'' in the audited 
financial statements are thus combined with revenues for purposes of 
clarity and easier trend analysis. The operating transfers are 
generally comprised of gross receipts taxes and rum excise taxes in 
excess of amounts required for debt service or outstanding bonds to 
which they are pledged. The gross receipts taxes and rum taxes in the 
official audited statements are first-recorded in the Government's Debt 
Service Fund and the excess above the debt service requirement is 
transferred to the General Fund as an ``Operating Transfer from Other 
Funds.'' Gross receipts taxes and rum excise taxes, however, are 
generally understood to be recurring revenues for the Government which 
is the reason Banc of America has aggregated such taxes with other 
``revenues'' in its chart. Similarly, the statement of expenditures in 
the chart includes ``Operating Transfers to Other Funds'' and 
``Operating Transfers to Component Units'' which are listed as separate 
line items on the official audited statements. ``Operating Transfers to 
Component Units'' include transfers from the General Fund to 
independent agencies such as the University of the Virgin Islands and 
the Government-owned hospitals. Since these agencies are generally 
funded by appropriations from the General Fund, such transfers are 
similarly aggregated with other ``expenditures'' in the Banc of America 
chart for purposes of clarity and trend analysis.
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    The Banc of America chart, a copy of which is attached hereto, is 
also based on the Government's audited financial statements for Fiscal 
Years 1995 and 1998 through 2003. FY 1996 and 1997 figures are derived 
from unaudited financial statements prepared by the Virgin Islands 
Department of Finance (agreed upon procedures, but no financial audit 
were performed for those years in satisfaction of the Single Audit Act 
requirements by agreement with the Office of Inspector General). FY 
2004 figures are taken from the unaudited financial statements prepared 
by the Department of Finance (it is anticipated that the FY 2004 
audited statement will be released by mid May 2006). FY 2005 figures 
are estimates based on unaudited revenue and expenditure reports 
provided by the Department of Finance.
    As reflected in the Banc of America chart, General Fund revenues, 
net of debt service and tax refunds, have grown from $417 million in FY 
1999 (the first year of the Turnbull Administration) to an estimated 
$633 million in FY 2001, an increase of approximately 50 percent. The 
chart also records that General Fund expenditures increased just 4 
percent over roughly the same period, from $559 million in FY 1998 
(prior to the cost cutting policies imposed in the Turnbull 
Administration's first year) to an estimated $582 million in FY 2005. 
The chart also shows record revenues in FY 2001, which allowed the 
Government to achieve a budget surplus and authorize payment of 
deferred salary increases to government employees beginning in the 
subsequent fiscal year. However, projected revenues in FY 2002 did not 
materialize as a result of 9/11 and the ensuing national recession, 
which, combined with the increased (largely salary-based) expenditures 
authorized in the previous fiscal year, caused the Government to slip 
back into deficit. By holding expenditures relatively flat while 
revenues recovered, the Government returned to surplus in FY 2004 and 
FY 2005. A surplus is also projected for FY 2006.
    The Banc of America chart also shows positive General Fund balances 
for the last 5 years. The chart shows a positive General Fund balance 
at the end of FY 2003 of $97.1 million, increasing to an estimated 
$119.4 million in FY 2004 and an estimated $170.7 million in FY 2005.
    Question 3.What do you see as the key steps to addressing the 
timeliness of the single audits and the weaknesses reported in those 
reports, and to ending the ``high-risk'' designation of USVI 
departments by Federal departments?
    Answer. Prior to the commencement of the Turnbull Administration in 
January 1999, the Government of the Virgin Islands had completed only 
one of the comprehensive audits required by the Federal Single Audit 
Act over a 14 year period. Since then, the Government has completed 
nine such audits (including, agreed upon procedures for FY 1996 and 
1997) in a six year period. The FY 2004 audit is expected to be 
completed and released by the middle of this month. Notwithstanding 
this record, the Government has been late by several months each year 
in issuing the required annual audits, primarily because of the 
lateness of certain of the Government's independent agencies in 
submitting their respective audited financial statements. To remedy 
this problem, the Turnbull Administration is preparing legislation 
which would expressly authorize the Government to withhold locally 
appropriated funds from delinquent agencies until such agencies issue 
their audited statements.
    The Virgin Islands Department of Education (V.I. DoEd) has, since 
2000, been designated as a ``high risk'' grantee by the U.S. Department 
of Education (U.S. DoEd) as a result of identified deficiencies in the 
management of federal grants. Many of these deficiencies have been 
corrected pursuant to a compliance agreement entered into by the U.S. 
DoEd and the V.I. DoEd. The most serious remaining deficiency is the 
lack of an adequate financial management system that can timely track 
the receipt and expenditure of federal funds. This deficiency is not 
limited to the V.I. DoEd, but is government-wide.
    The Government's current financial management system was provided 
by the U.S. Department of the Interior in the late 1980's. It is out-
of-date and inadequate. The Government is currently in the process of 
procuring a state-of-the-art Enterprise Resource Planning (ERP) and 
financial management system after a lengthy and involved RFP process. 
The new ERP system, Phase I of which should be installed and 
implemented by October 1, 2006, will provide the Government's managers 
with the modern software and financial tools to obtain, and act upon, 
real time financial data. Together with the Government's commitment to 
provide increased training for its managers, the new financial system 
will improve the Government's ability to manage both federal and local 
funds. By addressing this deficiency, it is the Government's goal to be 
relieved of its ``high risk'' grantee status by the end of the next 
fiscal year.
    Question 4. GAO's review of the single audits shows the USVI's net 
assets at $300 million in liabilities. WOuld you please describe these 
to the committee and your approach to dealing with them?
    Answer. As a result of GASB 34,\2\ the Government's audited 
financial statements beginning with statements issued for fiscal year 
2002 now include a statement of the Government's assets, liabilities 
and net assets, which together with the statements for fund balances, 
provides a more complete picture of the Government's financial 
condition. The Governments FY 2003 audited financial statement, which 
states that the Government had $300 million in excess liabilities over 
assets for such fiscal year, is somewhat misleading due to the fact 
that the requirements of GASB 34 will not be fully implemented until FY 
2006.\3\ Nevertheless the largest component of the Government's 
liabilities in FY 2003 (and previous years) was $375 million for 
retroactive salary increases for government workers as a result of 
union settlements and compulsory arbitration awards dating back to the 
beginning of the last decade. As reflected in Management's Discussion 
and Analysis Section of the FY 2003 audited financial statement, 
``[c]arryforward expenditures consist mainly of retroactive salary 
increases, which accumulated following Hurricanes Hugo, Marilyn and 
Bertha in the years of 1990 through 1998.'' The Government's policy is 
to keep salaries current based on existing salary scales and to address 
any retroactive liabilities through negotiations with affected unions 
as surplus Government Fund revenues are realized and become available. 
In the absence of this retroactive salary liability, the Government's 
FY 2003 statement would show a positive balance in its net assets 
account.
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    \2\ In June, 1999, the Government Accounting Standards Board (GASB) 
issued Statement No. 34 (GASB 34) (``Basic Financial Statements and 
Management's Discussion and Analysis--for state and local 
governments''), which mandated sweeping changes in the presentation and 
contents of government financial statements.
    \3\ In particular, the Government's FY 2003 statement includes debt 
for the acquisition of certain infrastructure assets but does not 
include the depreciated value of the assets themselves.
---------------------------------------------------------------------------
    The Government's unaudited FY 2004 financial statement shows an 
increase in the Government's excess liabilities over assets to $335 
million, reflecting an increase in the Government's retroactive salary 
liability to $384 million and a one-time charge of $29 million for 
landfill closure costs not yet incurred. In the absence of these 
particular liabilities, the Government's FY 2004 statement, as well as 
the 2005 statement, would be expected to show a positive balance in the 
Government's net assets account.
                                 ______
                                 
    [Responses to the following questions were not received at 
the time the hearing went to press.]

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                     Washington, DC, March 6, 2006.
Hon. Gale Norton,
Secretary, Department of the Interior.
    Dear Madam Secretary: I would like to take this opportunity to 
thank you for sending Mr. David Cohen to testify before the Senate 
Committee on Energy and Natural Resources on Wednesday, March 1, 2006, 
to give 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. 
Enclosed herewith please find a list of questions which have been 
submitted for the record. If possible, I would like to have your 
response to these questions by Friday, March 24, 2006. Thank you in 
advance for your prompt consideration.
            Sincerely,
                                          Pete V. Domenici,
                                                          Chairman.
[Enclosure.]
             Questions From Senator Domenici to Gale Norton
    Question 1. Would you please provide the Committee with a list of 
which Federal departments have assumed control over the expenditure of 
their funds in a Territory, or designated any of the Territories' as 
``high risk'' grantees, with a brief description of the efforts to 
resolve these problems?
    Question 2. Would you briefly describe those DOI activities that 
are designed to improve accountability in the Territories, the role 
which the DOI Inspector General and GPRA have in these efforts, and if 
there are any changes in law that you would recommend to make DOI's 
efforts to improve accountability in the Territorial governments more 
effective?

                                    

      
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