[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
CURRENT ECONOMIC, SOCIAL, AND SECURITY CONDITIONS OF THE COMMONWEALTH 
                    OF THE NORTHERN MARIANA ISLANDS 

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



                           OVERSIGHT HEARING

                               before the

                    SUBCOMMITTEE ON INSULAR AFFAIRS

                                 of the

                     COMMITTEE ON NATURAL RESOURCES
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                        Thursday, April 19, 2007

                               __________

                           Serial No. 110-17

                               __________

       Printed for the use of the Committee on Natural Resources



  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                                   or
         Committee address: http://resourcescommittee.house.gov

                              -------



                     U.S. GOVERNMENT PRINTING OFFICE

34-824 PDF                 WASHINGTON DC:  2007
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office  Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
DC area (202)512-1800  Fax: (202) 512-2250 Mail Stop SSOP, 
Washington, DC 20402-0001



                     COMMITTEE ON NATURAL RESOURCES

               NICK J. RAHALL II, West Virginia, Chairman
              DON YOUNG, Alaska, Ranking Republican Member

Dale E. Kildee, Michigan             Jim Saxton, New Jersey
Eni F.H. Faleomavaega, American      Elton Gallegly, California
    Samoa                            John J. Duncan, Jr., Tennessee
Neil Abercrombie, Hawaii             Wayne T. Gilchrest, Maryland
Solomon P. Ortiz, Texas              Ken Calvert, California
Frank Pallone, Jr., New Jersey       Chris Cannon, Utah
Donna M. Christensen, Virgin         Thomas G. Tancredo, Colorado
    Islands                          Jeff Flake, Arizona
Grace F. Napolitano, California      Rick Renzi, Arizona
Rush D. Holt, New Jersey             Stevan Pearce, New Mexico
Raul M. Grijalva, Arizona            Henry E. Brown, Jr., South 
Madeleine Z. Bordallo, Guam              Carolina
Jim Costa, California                Luis G. Fortuno, Puerto Rico
Dan Boren, Oklahoma                  Cathy McMorris Rodgers, Washington
John P. Sarbanes, Maryland           Bobby Jindal, Louisiana
George Miller, California            Louie Gohmert, Texas
Edward J. Markey, Massachusetts      Tom Cole, Oklahoma
Peter A. DeFazio, Oregon             Rob Bishop, Utah
Maurice D. Hinchey, New York         Bill Shuster, Pennsylvania
Patrick J. Kennedy, Rhode Island     Dean Heller, Nevada
Ron Kind, Wisconsin                  Bill Sali, Idaho
Lois Capps, California               Doug Lamborn, Colorado
Jay Inslee, Washington
Mark Udall, Colorado
Joe Baca, California
Hilda L. Solis, California
Stephanie Herseth Sandlin, South 
    Dakota
Heath Shuler, North Carolina

                     James H. Zoia, Chief of Staff
                   Jeffrey P. Petrich, Chief Counsel
                 Lloyd Jones, Republican Staff Director
                 Lisa Pittman, Republican Chief Counsel
                                 ------                                

                    SUBCOMMITTEE ON INSULAR AFFAIRS

            DONNA M. CHRISTENSEN, Virgin Islands, Chairwoman
        LUIS G. FORTUNO, Puerto Rico, Ranking Republican Member

Eni F.H. Faleomavaega, American      Elton Gallegly, California
    Samoa                            Jeff Flake, Arizona
Raul M. Grijalva, Arizona            Don Young, Alaska, ex officio
Madeleine Z. Bordallo, Guam
Nick J. Rahall II, West Virginia, 
    ex officio
                                 ------                                
                                CONTENTS

                              ----------                              
                                                                   Page

Hearing held on Thursday, April 19, 2007.........................     1

Statement of Members:
    Christensen, Hon. Donna M., a Delegate in Congress from the 
      Virgin Islands.............................................     1
    Fortuno, Luis G., the Resident Commissioner in Congress from 
      Puerto Rico................................................     3

Statement of Witnesses:
    Cohen, David B., Deputy Assistant Secretary for Insular 
      Affairs, U.S. Department of the Interior...................    26
        Prepared statement of....................................    29
    Franzel, Jeanette M., Director, Financial Management and 
      Assurance, U.S. Government Accountability Office...........    35
        Prepared statement of....................................    37
    Tenorio, Hon. Pedro A., Resident Representative to the United 
      States, Commonwealth of the Northern Mariana Islands.......     6
        Prepared statement of....................................     8

Additional materials supplied:
    Williams, Ambassador F. Haydn, Statement submitted for the 
      record.....................................................     4


   OVERSIGHT HEARING ON THE ``CURRENT ECONOMIC, SOCIAL, AND SECURITY 
    CONDITIONS OF THE COMMONWEALTH OF THE NORTHERN MARIANA ISLANDS''

                              ----------                              


                        Thursday, April 19, 2007

                     U.S. House of Representatives

                    Subcommittee on Insular Affairs

                     Committee on Natural Resources

                            Washington, D.C.

                              ----------                              

    The Subcommittee met, pursuant to call, at 10:00 a.m. in 
Room 1324, Longworth House Office Building, Hon. Donna 
Christensen [Chairwoman of the Subcommittee] presiding.
    Present: Representatives Christensen, Fortuno, Bordallo, 
and Flake.
    Mrs. Christensen. The oversight hearing by the Subcommittee 
on Insular Affairs will now come to order.
    The Subcommittee is meeting today to conduct the oversight 
hearing on the current economic, social, and security 
conditions in the Commonwealth of the Northern Mariana Islands 
(CNMI).
    Under Committee Rule 4[g], the Chairman and Ranking 
Minority Member can make opening statements. If any other 
Members would have statements, they can be included in the 
hearing record under unanimous consent.
    I now recognize myself for my opening statement.

STATEMENT OF THE HON. DONNA CHRISTENSEN, A DELEGATE IN CONGRESS 
                    FROM THE VIRGIN ISLANDS

    Mrs. Christensen. As I said, this morning we are holding 
the hearing on the current economic, social, and security 
conditions of the Commonwealth of the Northern Mariana Islands. 
This hearing is the first in a series of two hearings that the 
Subcommittee will hold on this issue, and the Subcommittee has 
invited the CNMI Resident Representative to Washington, The 
Hon. Pete Tenorio. Welcome, Mr. Tenorio.
    As we are all aware, the CNMI is the only U.S. jurisdiction 
without any formal representation in the House of 
Representatives. Absent that formal seat, however, the 
Subcommittee views his elected position as the important voice 
for CNMI here in Washington, D.C., and in Congress. And we 
recognize that when the CNMI is given representation, it will 
be their Resident Representative who will join us on this dais.
    In the first hearing we will also hear from the Department 
of the Interior and the Government Accountability Office. We 
welcome also those officials, and note that this Administration 
is fully aware of concerns raised by Congress over the past two 
decades with regard to the CNMI's control of its immigration 
and economic policy, which led to great growth during the 
1990s.
    Such growth, however, was not only limited to revenue and 
lifting the standard of living for CNMI residents, as has been 
pointed out in a previous GAO study, the other effect was a 
population explosion of non-residents that filled the labor-
intensive requirements of the developing garment industry.
    Within a span of 20 years, the CNMI went from a population 
of about 15,000 to 70,000, more than half of whom were non-
resident guest workers recruited from mainly China and the 
Philippines to work in the CNMI.
    I realize that this period of growth, although argued an 
economic success by some, is also, on the other hand, a source 
of criticism, as well. It would also be negligent for us not to 
acknowledge that non-resident guest workers in the CNMI were, 
and when I was there in 1997/1998, subjected to labor and human 
rights abuses. And it was for these very reasons that in 1995, 
Congress passed an initiative creating a Federal Ombudsman's 
Office, and increasing the presence of other Federal agencies, 
such as OSHA, EEOC, and the Department of Labor's Wage and Hour 
Division to inform and assist non-resident guest workers of 
their labor rights, and with complaints against their 
employers.
    To a measurable degree, this initiative and the increased 
Federal presence has helped curtail the incidences of abuse and 
exploitation, along with the commitment of the Government of 
CNMI.
    There remains, however, a very difficult challenge that the 
CNMI continues to face. Of course, the lifting of World Trade 
Organization quotas on exports from China to the U.S. has 
negated any competitive advantage the CNMI garment industry 
once held. And as a result, the garment industry is all but 
shut down.
    In addition, tourism, the other pillar of CNMI's economy, 
is suffering from discontinuation of direct flights, and that 
reduced capacity has closed hotels and businesses.
    The Subcommittee is concerned that along with the negative 
economic growth, there doesn't seem to be a corresponding 
decline in the number of non-resident guest workers, or a 
reliable plan in place for repatriation. And the Subcommittee 
is also greatly concerned for the security of the Marianas 
region. The global war on terrorism and growing threat concerns 
in Asia have caused the U.S. to realign and increase its 
military presence in the Pacific. We are all aware that plans 
are in place to increase military infrastructure in Guam, as 
well as training in the region. The additional military 
presence makes it even more important that the whole Mariana 
Islands chain comprising Guam and the CNMI be secure. This 
seems an impossible task, if CNMI continues to have local 
control over its borders.
    It is clear that the CNMI will have to undergo a 
transformation to address the problems it now faces. In order 
to move the CNMI forward, there will be the need to resolve 
concerns that have been raised in the past, as well as those 
that continue today.
    The Subcommittee looks forward to the testimony from 
today's witnesses, and we should all understand that, despite 
all of the problems, there has been progress made in the CNMI, 
although there seems to have been some steps backward. We need 
to get the CNMI on the right path, and we look forward in this 
Subcommittee to working with your leadership, the 
Administration, and the CNMI community to do just that.
    With that, I would now recognize Mr. Fortuno for any 
statement he may have.

            STATEMENT OF THE HON. LUIS G. FORTUNO, 
           THE RESIDENT COMMISSIONER FROM PUERTO RICO

    Mr. Fortuno. Madame Chairwoman, thank you for holding 
another important hearing concerning one of our Federal 
territories, the Commonwealth of the Northern Mariana Islands.
    There are many difficult issues facing the CNMI, and I look 
forward to exploring them with you. I understand that some of 
our Committee staff had the opportunity to visit Guam and the 
CNMI during the recess to examine these many issues firsthand, 
and that they were very well received by everyone.
    It is so important for the residents of our territories to 
see that the policymakers in Washington, D.C., care about our 
local issues enough to come out and see for themselves the 
unique culture of the places they govern.
    It is often frustrating for our constituents to be 
legislated upon without ever seeing where we live and how we 
live, so I am glad that the Committee staff had this chance to 
meet with the local leaders and citizens of the CNMI and Guam 
in preparation for this hearing today.
    While I welcome all of our witnesses today, I want to 
especially welcome The Hon. Pedro Tenorio, the current 
representative of the CNMI. As you well know, Madame 
Chairwoman, we both cosponsored, along with Chairman Rahall and 
Ranking Member Young, H.R. 873 in the 109th Congress, a bill to 
grant the CNMI a permanent delegate in the House of 
Representatives. I look forward to the day a delegate from the 
CNMI joins us up here.
    For the many economic, social, and security concerns of the 
CNMI, I just want to say that while we certainly will not solve 
them all here today, we begin the process of creating a fresh 
Congressional record on those issues, and that we will be 
making our legislative determinations based on the existing 
facts and conditions as they stand today in the CNMI, and not 
based on circumstances 10, 20, or 30 years ago.
    Again, thank you very much, Madame Chairwoman, for holding 
this hearing today.
    Mrs. Christensen. Thank you, Mr. Fortuno. And now, if there 
are no objections, I would like to take this opportunity to 
enter into the record the statement of Ambassador Haydn 
Williams. Hearing no objection, so ordered.
    [The statement submitted for the record follows:]

                 Statement submitted for the record by 
                      Ambassador F. Haydn Williams

    Madame Chair, I thank you for the invitation to testify before your 
Subcommittee today. I regret that I cannot be here in person but I 
request that my written statement be made a part of the record of this 
hearing.
    I have had a long association with the Mariana Islands going back 
to my Navy days in World War II. Later in the 1950's and 60's, as 
Deputy Assistant Secretary of Defense for International Security 
Affairs under Presidents Eisenhower and Kennedy, my office had 
responsibility for DoD interests in the Pacific Trust Territories 
including the Northern Marianas. In the 1970's I was the President's 
Personal Representative for the Micronesian and the Marianas Status 
Negotiations and on the signing of the CNMI Covenant I was asked by 
President Ford to see the Covenant through the House and Senate 
approval process. Frequent visits to Saipan in the 80's and 90's kept 
alive my interest in the NMI along with my efforts to win Congressional 
support and funding for building the Memorial to our war dead in the 
battles of Saipan, Tinian and the Philippine Sea in the American 
Memorial Park on Saipan.
    My message, my hope is a simple one. It is time for the Congress to 
act, to take a hard critical look at the current situation in the CNMI 
in the best interests of the ordinary citizens in the Commonwealth and 
the broader interests of the United States. The Committee is well aware 
that the CNMI today is in dire economic straits and has turned to 
Washington for help. With the changes in the House this hearing is very 
timely. It is my hope that among other things, particular attention 
will be given to immigration matters and the need to control America's 
western most borders in the far Pacific.
    In addressing current conditions in the NMI, a brief look back at 
the Covenant negotiations may be useful--to remember the times, the 
context, the spirit in which the talks were conducted. The goal, the 
long held desire of the people of the NMI was to become a permanent 
part of America. Two issues were preeminent: U.S. sovereignty and the 
rights of internal self-government. Once these critical questions were 
agreed to in principle, the negotiations turned to what Federal laws 
would apply to the new commonwealth.
    Members of the Marianas negotiating team were especially concerned 
about the possible impact of U.S. immigration laws on their island 
culture. They were worried that their Chamorro and Carolinian heritage 
might be overwhelmed by a heavy influx of peoples from Asia. They 
wanted protection, assurance that this wouldn't happen. The threat of 
war refugees streaming into the NMI from Southeast Asia was also on 
their minds. They thus asked that the control of immigration be in 
their hands to enable them to restrict the numbers of aliens entering 
their islands.
    While understanding their concerns, the U.S. could not accept this 
proposal. It agreed however, that in a transition period, awaiting the 
end of the UN trusteeship and before the coming into force of U.S. 
sovereignty, the new Commonwealth government would be given 
transitional responsibility for immigration. Under Section 503 of the 
Covenant, it was clearly stated and agreed that the U.S. Congress 
retained the ultimate authority to make U.S. immigration laws 
applicable to the CNMI.
    It was anticipated at the time of the negotiations that such action 
would be taken quickly by the Congress upon termination of the 
trusteeship--given the known attitude of leading Members of Congress 
regarding territories and immigration. But instead of a couple of years 
of transition, with the CNMI in control of immigration, ten years 
elapsed between the approval of the Covenant by the United States in 
1976 and the UN termination of the Marianas Trusteeship in 1986.
    This far, far longer than expected interim period, enabled largely 
foreign and other non-indigenous investors and entrepreneurs to 
capitalize on the Covenant's liberal export privileges and wage and 
immigration exemptions to establish their presence and influence in the 
CNMI and to begin importing increasingly large numbers of low-paid 
alien workers for their garment factories.
    It was during this transition period that local CNMI political and 
business opposition to any Federal implementation of Section 503 became 
institutionalized. This opposition led and largely funded by the 
garment industry was committed to blocking, with the help of hired 
Washington K Street lobbyists, any action by the Congress on labor 
matters, minimum wages, and immigration.
    The opposition's success in Washington, especially in the House in 
recent years is well documented. The results in the CNMI is another 
story. CNMI immigration policies far from protecting the islands social 
and cultural heritage has seen a population explosion of over 500% over 
the past 30 years turning the indigenous people into a small minority. 
The impact on the environment, the infrastructure and island life has 
been equally deleterious.
    Three Administrations beginning with President Reagan have each 
voiced deep concern over these developments. The Senate and some 
members of the House too, have long recognized the need for 
Congressional remedial action. In 2001, the CNMI Covenant 
Implementation Act, authored by Senators Murkowski and Akaka and 
endorsed by the Clinton Administration called for the extension of U.S. 
immigration laws to the CNMI with reasonable and orderly transitional 
measures and exemptions. The Act was passed unanimously by the Senate 
in 2001 strongly supported by the new Bush Administration. Regretfully 
this Senate initiative died in the House without even a hearing for 
reasons that are now well known.
    The House, under new leadership, now has an opportunity to act. It 
is my understanding that legislation regarding the Marianas is moving 
forward in the Senate. It is my hope that this time the House will 
consider what comes out of the Senate favorably or similar legislation 
of their own making which addresses the current situation in the CNMI.
    In your Subcommittee Hearing I also hope that the Chair and the 
members will pay special attention to border security. Today we are no 
longer living in a soft security environment and it has been reported 
by the Justice Department that critical security vulnerabilities have 
existed in the CNMI for several years. Needed control over who enters 
the CNMI was one of the principal reasons cited by the Bush 
Administration in support of the Murkowski-Akaka Bill in 2001. Indeed 
in view of heightened international terrorism and the Marianas 
strategic location, the Federal government's responsibility for 
protecting the people of the CNMI and all American citizens has taken 
on a new and urgent importance.
    Lacking an international status the CNMI simply does not have the 
institutional capacity to adequately pre-screen or screen persons 
entering the Commonwealth. Border control is an inherently sovereign 
function, repeat, an inherently sovereign function and in the present 
threatening world security environment and the expanding reach of 
global crime syndicates, the responsibility for protecting the nation's 
borders in the NMI should be in the hands of the Federal government.
    U.S. control of immigration in the CNMI should not be seen as a 
threat to the Islands' economy. As far back as the Covenant 
negotiations, the U.S. was fully sensitive and sympathetic to the NMI's 
legitimate need for imported labor to help it reach its goal of 
economic self-sufficiency. This same understanding was evident in the 
Murkowski-Akaka Bill. It stated that S. 507 extending U.S. immigration 
laws to the Marianas Commonwealth would be carried out ``in an orderly 
manner with a commitment...to mitigate any adverse effects...on the 
local economy.'' The bill further delineated how the law could help 
diversify, stabilize, and strengthen the local economy.
    The growth of the CNMI economy based largely on unlimited low cost 
alien labor is like a castle built on sand, a false unsustainable 
economy. What is needed is a new, more stable, more realistic, 
sustainable economic foundation for the future. I am confident that 
with goodwill, open on-going communications, trust and cooperation 
between Saipan and Washington the current situation can be gradually 
improved. I also firmly believe that Federal legislation that will call 
for the orderly application of national immigration laws to the CNMI 
will have positive long term benefits for the people of the NMI.
    Indeed it is time for the Congress to take this long overdue 
action. Clearly the successful blockage of past legislative action in 
the House has been detrimental to the CNMI and to U.S. security 
interests. It is also time for Interior and the Administration to 
support this latest Congressional initiative to exercise its authority 
under Section 503 of the Covenant as originally extended.
    Thank you Madam Chair for giving me the opportunity of presenting 
my views on this importance subject matter that is before your 
Subcommittee.
                                 ______
                                 
    Mrs. Christensen. Now I would like to recognize the first 
panel. The Hon. Pedro A. Tenorio, Resident Representative of 
the Commonwealth of the Northern Marianas.
    Mr. Tenorio, you will be recognized for five minutes. The 
timing lights are on the table, and will indicate when your 
time has concluded. And you may begin.

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

    Mr. Tenorio. Good morning and Hafa Adai, Chairwoman 
Christensen and Ranking Member Fortuno, Members of this 
Subcommittee.
    This room, this great hearing room, represents to me a 
very, very pleasant memory, as it was in this room that I, as a 
member of the Marianas Political Status Commission, first 
testified in front of the Chairman and good friend, Philip 
Burton from California. So it is so good to be back here.
    The events that have unfolded this past Monday, April 16, 
at Virginia Tech have affected the entire nation. My people 
join me in extending our sorrow to the families of the victims, 
and to the entire community in Blacksburg. We join the rest of 
the country in prayer and in mourning.
    Thank you for inviting me to testify. The people of the 
Commonwealth appreciate your courtesy in affording me the 
opportunity to speak on their behalf. As this committee is 
fully aware, the Northern Marianas is the only territory in the 
United States without representation in the Congress, so I am 
very grateful for this opportunity to speak about issues that 
are important to all of us.
    I want to especially acknowledge that if it had been up to 
the Members of this Subcommittee, the Northern Marianas would 
have had a delegate years ago. The people of the CNMI are very 
grateful for your ongoing support and assistance.
    I also want to congratulate this Subcommittee on its plan 
to hold a field hearing in the CNMI. This will be the first 
ever held by Congress in the Commonwealth, and I applaud you, 
Madame Chairman, Members, for your desire to hear not only from 
our various government officials, but also from the people we 
represent.
    Madame Chairwoman, the current economic condition of our 
islands is very disturbing. It disheartens me to report such 
findings.
    A little more than a decade ago, the CNMI was hailed as an 
example of a successful young American democracy with an 
economy well on its way to self-sufficiency and financial 
independence. I now fear that our economy is swiftly becoming a 
disaster and a failure.
    It is indeed a shame that anyplace in America can be 
described this way. Our economy needs to be rescued before a 
total meltdown takes place. Now more than ever, Congress, if it 
can do something, should exercise its oversight, authorize 
emergency financial resources, and provide technical assistance 
to help us avoid economic and social chaos.
    The average family in the Northern Marianas is greatly 
challenged today to not only make ends meet, but to survive. 
With the highest electrical rates in the country, few can 
afford hot showers or air conditioning. Some not only unplug 
microwaves and DVD players when not in use to save a few watts, 
but also unplug the refrigerators at night. They have stopped 
cooking on their electric stoves, and now use firewood or 
propane for cooking.
    Food is getting more expensive because the cost of shipping 
is no longer defrayed by the garment industry, and many 
families are having a tough time keeping food on the table. The 
cost of gasoline is much higher than the national average. And 
even though our islands are small, a family's only car will 
drive many miles in a day taking parents to work and children 
to their schools.
    A once idyllic lifestyle--barbecues at the beach and large 
family gatherings--is now marred by signs of desperation.
    It is difficult to document these social problems. We have 
few safety nets that normally protect society from the adverse 
consequences of poverty. We do not have unemployment programs 
or temporary assistance for needy families. We have a small 
food stamp program that I worry will not be able to expand to 
meet future needs.
    The public health and public safety needs of the community 
are also in jeopardy because the health insurance and medical 
services continue to escalate, and many will not seek medical 
attention because they simply cannot afford it any more. The 
rate of diabetes and heart disease in the CNMI is among the 
worst in the world. Rising levels of crime is proof of the 
growing desperation among those trying to survive.
    Our inability to adequately fund both public health and 
public safety puts many lives at an unnecessary risk. These 
desperate social and economic conditions have been an impetus 
for hundreds of Chamorros and Carolinian families to sell or 
lease their property at extraordinarily low prices just so that 
they can purchase one-way tickets and relocate to Guam, Hawaii, 
or the mainland. If this exodus continues, I fear that we will 
lose many of our highly trained and skilled local people to 
these other areas.
    We are also expecting that our young college graduates who 
have achieved their higher education at great government 
expenses will continue the trend of not returning to the CNMI, 
as there is little opportunity in their homeland.
    This should not be happening to our people, but our 
economic troubles have brought us to this new reality. This is 
not the Commonwealth I envisioned 30 years ago when they signed 
the covenant. And as a member of the Political Status 
Commission, on behalf of our people, this is certainly not the 
Commonwealth that we should leave behind as a legacy to our 
children.
    If the goal of this committee is to transform CNMI 
immigration into a Federal framework, I urge Congress to please 
proceed carefully. Congress must ensure that the outcome is 
positive and beneficial to both sides.
    I look forward to working with you to successfully develop 
a more lasting framework for the CNMI. I maintain my position 
on that normalization of our immigration outline on February 8, 
before the Senate Energy Committee, and I have included it in 
my written testimony submitted for this hearing.
    Last, Madame Chairwoman, I request that the prior work of 
this Subcommittee and the larger Resources Committee continue. 
I am speaking of the people of the CNMI's quest for 
representation in Congress. I think that is a matter of simple 
democratic principles that the CNMI be afforded the right to 
representation before Congress proceeds to dismantle and 
hopefully review the economic framework of the Commonwealth.
    The people of the CNMI should not feel that we are at the 
mercy of our critics, or that we are being punished for 
mistakes made in the past. To quote my dear friend, that 
honorable Congresswoman from Guam, she stated, ``Representation 
in American democracy is an inalienable right for American 
citizens, and not one that is contingent upon a litmus test.''
    The well-being of my people is literally at stake. I am 
greatly concerned about the ongoing reduction of public 
services in healthcare, basic sanitation, clean and adequate 
water and public safety. We have been the plaything of 
political opponents for too many years. I desperately want 
reason to prevail in any Congressional actions that will affect 
the CNMI.
    Madame Chairwoman, let us proceed in a logical manner. I 
would prefer that prior to the introduction of any other 
legislation, that the CNMI Delegate Bill will be reintroduced 
and acted on first.
    Thank you for this opportunity to address you this morning.
    [The prepared statement of Mr. Tenorio follows:]

             Statement of The Honorable Pedro A. Tenorio, 
              Resident Representative to the United States

    Hafa Adai, Madam Chairwoman, Congressman Fortuno, and Members of 
the Committee. Thank you for holding this hearing and for this 
opportunity to share with you my thoughts on issues relating to the 
current economic, social and security conditions in the Commonwealth of 
the Northern Mariana Islands. While I understand that the focus of 
today's hearing is a federal perspective on the issues at hand, we in 
the Commonwealth appreciate your courtesy and willingness in affording 
the Resident Representative an opportunity to speak on behalf of the 
United States citizens residing there. As this committee is fully 
aware, the Northern Mariana Islands is the only place in the United 
States without representation in Congress, so I am very grateful that 
this subcommittee has lent me its ears.
An Historical Perspective:
    The Northern Marianas had known almost 400 years of colonial rule 
and subjugation prior to the 1947 United Nations Mandate which created 
the Trust Territory of the Pacific Islands. In 1975 when we had the 
opportunity to vote on our own future, America's global reputation was 
very low, its foreign relationships weak, and it was losing the respect 
of its own citizens. Yet we chose overwhelmingly by 78% to become a 
permanent part of this great nation. As a member of the Marianas 
Political Status Commission, I worked hard encouraging my people to 
choose this path as I felt it would be the best option for our future 
and our children's future. I convinced them that American is a fair and 
compassionate Nation, one that takes care of its own people; fairly, 
equally, and without question. I continue to believe in these promises 
and principles; and the goodness and generosity of America to take care 
of its diversified population of minorities, immigrants, and Native 
Americans. So in spite of our enormous and difficult challenges, I 
believe that Congress can and will help us develop solutions so that we 
can move forward along a path that will bring us to prosperous future 
consistent with the American Dream.
    While the majority of the American citizens of the CNMI strongly 
believe in our relationship with the U.S. we have those in our islands 
who want to re-invent the Covenant and renege on this long established 
agreement negotiated in good faith.
The Economic Perspective:
    Madam Chairwoman, our economy is in dire straits. It disheartens me 
to report such findings because it was a little over a decade ago, in 
front of this very committee that the CNMI stood as an example of a 
successful young American democracy with an economy that was well its 
way to self-sufficiency and financial independence. I fear now that our 
economy is swiftly becoming a basket case and a failure. It is indeed a 
shame when any place in American can be described this way. I am here 
today to appeal for assistance in getting us out of this serious 
predicament. Now, more than ever, Congress must and should exercise its 
oversight, expend its resources and provide technical assistance to 
help us avoid economic and social chaos.
    There are two primary economic engines in the CNMI: apparel 
manufacturing and tourism. Both are suffering from downturns caused by 
external factors. Trends in international trade agreements have left 
our apparel industry less competitive than those in countries such as 
China, Vietnam, and India. In 2000 we had 34 operating factories. By 
the end of this month we will have only 13, and I expect two or three 
more will close in the near future. The outcome of H.R. 2, The Fair 
Minimum Wage Act of 2007, and our request to amend General Note 3(a) 
will determine the longevity of the industry. A primary measure of the 
health of this industry has been the amount they pay in user fees to 
the CNMI Government. Chart 1 of the Attachment tracks the demise of 
this industry since 1999.
    The other primary industry in the CNMI is tourism. This has also 
been adversely affected by circumstances beyond our control such as the 
price of aviation fuel, unprofitable tour packages, and availability of 
air service. Arrivals have been on the decline since 1996 as displayed 
in Chart 2 of the attachment. Japan Air Lines has eliminated flights to 
the CNMI and Continental Airlines has been reducing flights for some 
years. We have lost one commuter airline making it more difficult to 
reach Tinian, Rota, or Guam. Just recently Northwest Airlines has 
announced a reduction in flights and a conversion to smaller aircraft. 
Northwest alone will be carrying 169,000 less passengers with these 
changes. In addition, tourists have decreased their average length of 
stay and the amount of money they spend while in the CNMI.
    Not only do these two industries support much of the other private 
sector activity, they directly provide a significant share of 
government revenue. The government reduced its revenue projections last 
year from $212 million to $193 million last year due to declining 
revenue collections. It has further reduced its revenue collection 
projections for FY 2007 to $163 million, or 25% in just two years. As 
you can see from Chart 3 of the attachment, we have been experiencing 
this downward trend since 1999.
    Governor Benigno Fitial implemented strict austerity measures last 
year including the implementation of austerity holidays where most 
government employees receive one day of unpaid leave per pay period. 
While we finished FY 2006 without adding to the deficit, those cuts are 
not sufficient to meet the new budget level of $163 million. The 
government is still trying to determine how to make the additional 
budget cuts, but will have to either cut salaries more or reduce 
positions. Either decision will hurt people, and further hamper the 
economy. We do not anticipate any reversal of this trend in the near 
future, and in fact expect government revenues to be reduced by an 
additional $15 million at least for next year.
    We are also faced with a significant government operations deficit 
of $174 million. You will ask yourselves, how a population of less than 
70,000 people with limited long term obligations could have over spent 
their annual budgets by this amount in just 30 years. Our own 
Retirement Fund is a perfect example of the government's inability to 
pay obligations.
    Our public employees' retirement system is in a mess and is in 
danger of becoming insolvent, especially if the current government 
practice of not paying the employers' share continues. With penalties 
the government debt to the Retirement Fund is close to one hundred 
twenty million dollars and no payments are predicted for the rest of 
this fiscal year and possibly not for next fiscal year. The Retirement 
Fund is forced to dip into its investment revenue and capital to make 
annuities payments. If this practice continues the Fund will bleed its 
investments to death. To make the matter worse, many current government 
employees are withdrawing their contribution to the Fund. The security 
of all current retirees, as well as those who have yet to reach 
retirement age is at stake. There is absolutely no excuse for allowing 
our retirees who have worked hard for our government and our people to 
be faced with this dilemma. They deserve better treatment and 
protection from their government.
    Madam Chairwoman, the economic situation in the CNMI continues to 
erode. It is almost impossible to bring in new investors at this time. 
The uncertainty of minimum wage and availability of workers leaves 
prospective investors with more questions than answers. How can they 
develop their business plans if they do not know if they can hire 
workers, or know what they will be paying those workers? While we have 
been suffering from this economic downturn for a number of years now, 
the current interest by Congress to address labor and immigration 
control is only adding to the problem and making everything much worse.
The Social Perspective:
    Madam Chairwoman, it is difficult to document the social problems 
that are due to our economic condition. We have few safety nets that 
normally protect society from the adverse consequences of poverty. We 
do not have unemployment programs or Temporary Assistance to Needy 
Families (TANF). We have a small food stamp program that I worry will 
not be able to expand to meet future needs. Fortunately our close knit 
extended family social structure has been able to mitigate to some 
extent. We are seeing one or two breadwinners providing for the needs 
of all those in a family housing compound. I and other elected 
officials are asked daily for money so that fathers can feed their 
children.
    As government revenues continue to decline I grow increasingly 
concerned about our ability to adequately fund public safety. Crime is 
on the increase. Purse snatching and other crimes against tourists are 
on the rise. There have been several incidences where people have 
resorted to stealing copper from telephone lines, power lines, and drop 
lines which provide power to water wells in order to sell them to 
recycling centers. We have been successful in prosecuting these crimes 
but the damages result in over a $100 thousand in replacement and 
repairs not to mention serious disruptions in basic services.
    Declining revenues also have frightening prospects for our public 
health. You may be already aware that the CNMI has one of the worst 
rates of diabetes and heart disease in the world. The decline in 
revenue has forced the government to cut the number of medical 
referrals thus endangering the lives of patients in need of specialized 
care. The increase in unemployment has led to an increase in Medicaid 
eligibility. This committee is all too aware of the problems we face 
with existing Medicaid caps, and even though Congress has recently 
increased that cap, we will be playing a game of catch up.
    These dire social and economic conditions have been an impetus for 
hundreds of Chamorro and Carolinian families to sell or lease their 
homes and lots at extraordinarily low prices just so that they can 
purchase one-way tickets and relocate to Guam, Hawaii, or the mainland. 
If this exodus continues, I fear that we will lose many of our highly 
trained and skilled local people to other areas. We are also expecting 
that our young college graduates, who have achieved their higher 
education at great government expense, will continue the trend of not 
returning to the CNMI as there is little opportunity in their homeland. 
This should not be happening to our people, but our economic troubles 
have all brought us to this new reality. This is not the Commonwealth I 
envisioned thirty two years ago when I signed the Covenant on behalf of 
our people. This is certainly not the Commonwealth that we should leave 
behind as a legacy to our children. ]
    The cost of utilities, food items, fuel, education, shipping, 
medical services, and other essential amenities increase almost daily. 
The price of utilities has skyrocketed uncontrollably, so much so that 
during this last Christmas the normally joyous and festive spirit of 
the islands displayed by beautiful Christmas lights on businesses, 
hotels, homes and even the public sidewalks was absent, replaced by 
empty darkness. Usually a season of love and hope Christmas had become 
a sobering reminder of just how much our people are suffering.
    Madam Chairwoman, I could go on and on with the depressing 
scenarios people in the CNMI face. We must admit, however, that these 
challenges are so daunting and tough for us alone to tackle. I feel 
that we simply cannot survive on our own. I am here to request for your 
intervention and assistance.
Immigration Initiatives:
    Legislation that is developed without due consideration of existing 
socio-economic conditions in the CNMI will have a profound and negative 
effect on our economy. A 1997 U.S. Commission on Immigration Reform 
report stated that ``immediate imposition of all parts of the 
Immigration and Nationality Act would harm the CNMI's economic 
development. Moving a society that has become so dependent on foreign 
contract labor towards a more sustainable economy cannot occur 
overnight.''
    Those words were true in 1997 and they are even more true today. If 
the goal of this committee is to normalize CNMI immigration into a 
federal framework, we urge Congress to proceed carefully as this is a 
very complicated endeavor. It must be guaranteed that comprehensive 
economic and social statistics reflecting current conditions and 
realities are carefully collected and evaluated so as to ensure that 
the outcome of normalization is positive and beneficial to both the 
CNMI and the federal government.
    At the time of our negotiations, tens of thousands of Southeast 
Asian refugees were arriving in Guam under U.S. immigration policy, and 
we were fearful that full implementation of the INA would allow those 
and other U.S. immigrants to migrate to the CNMI. We felt that the 
early years of our status as a U.S. Commonwealth should be focused on 
building a stable economy.
    On the other hand, we recognized that we needed a larger labor 
force than we had to build our infrastructure, hotels, and other 
business establishments. It was our intent that the need for these 
workers would be temporary. Though some are critical of how we built 
our economy through local control of immigration, that criticism does 
not negate the need for skilled workers that are not readily available 
from elsewhere in the U.S. or its freely associated partners.
    When the Covenant was being negotiated, all sides assumed there 
would be a significant United States presence in our islands from a 
buildup by the Department of Defense. One of the more difficult issues 
to resolve, but one we were willing to accommodate the United States 
on, was the land requirements that the United States wanted for defense 
purposes, including use of our main harbor area and the most productive 
agriculture lands on Tinian. We all anticipated that the buildup would 
not only jump start our economy as the infrastructure was constructed, 
but would provide a long term stable base for private sector growth in 
small businesses as well as local employment. The model we all 
considered was Guam.
    That did not happen and as we continued to develop from the mixed 
subsistence/cash economy under the Trusteeship, the principal source of 
employment became the public sector as we struggled to provide services 
to our residents at mainland standards. Tourism gradually developed, 
but also took a toll on our resources and demanded workers and skills 
not available within the local population. Garment manufacturing began 
in Guam, but found a home in Saipan. In retrospect we probably should 
have paid closer attention to the demands that industry placed on our 
services and also on our resources, but nonetheless, the textile and 
tourism sectors form the backbone of our private sector and the source 
of the revenues our government requires to provide services to our 
residents. Hindsight is a wonderful gift, but we need to deal with 
where we are now rather than with the economy that we anticipated 
thirty years ago when this Committee considered and approved the 
Covenant.
    We are here to participate in a serious process with the 
Subcommittee and the Congress to ensure additional mistakes are not 
made, but more importantly, what can we do to rebuild our local economy 
and alleviate the burdens of my people. When the Covenant was 
originally negotiated, as this Committee will recall, a provision was 
included that provided an annual grant for operations for our local 
government. The grant was slowly transformed to eliminate any payments 
for operations and to dedicate the funds exclusively to infrastructure 
development and for replacement of the aging works installed during 
Japanese Mandate and Trust Territory of the Pacific Island government 
times.
    I mention this because sometimes in looking at the current problems 
we forget how much progress has been made since the Covenant first went 
fully into effect only about twenty years ago. This Committee has been 
particularly sensitive over the years to how the territories differ 
from the mainland and in some cases from each other and how mainland 
standards don't always work in non-contiguous areas. We have been 
fortunate over the years that this Committee is well represented from 
these non-contiguous areas and there fore has a greater understanding 
of our promises and problems. For that reason, if Congress chooses to 
extend U.S. immigration laws to the CNMI, we will need to look to you 
to craft the provisions that ensure a smooth transition and strengthen 
the local economy.
    I will be proposing a series of CNMI specific amendments to U.S. 
immigration policy which will accomplish this. By no means is this list 
exhaustive or complete, but rather a starting point for further 
discussion, and is basically the same list that I provided the Senate 
Energy Committee at their hearing on February 8th.
    First, I request that Congress provide us with our own Visa Waiver 
Program similar yet distinct from Guam's Visa Waiver Program. Much of 
our tourism planning focuses on new markets in China and Russia. 
Several years ago with the assistance of the U.S. State Department, we 
were granted Approved Destination Status by the People's Republic of 
China. That designation and market as well as the Russian market would 
be cut off to us without a visa waiver program.
    Second, as you know we have a very small indigenous labor pool, and 
have turned to guest workers to build our economy. Whether it be for 
doctors, nurses, engineers, cooks, or hotel maids, applying existing H1 
and H2 caps to the CNMI would disrupt our health care system, our 
government and our economy. Therefore I request that special provisions 
be made outside of standard H1 and H2 caps and rules for the CNMI.
    Third, since many of our businesses are owned and operated by 
foreign corporations and were begun under our own immigration rules, I 
am concerned that normalizing immigration might disrupt these 
businesses if they are not grandfathered in to the new system. 
Likewise, as we are trying to attract new investors into the CNMI, I 
fear that the existing cumbersome, slow and overly bureaucratic 
processing system for standard H1 visas would be a deterrent to our 
economic recovery. Therefore, I request that special provisions for 
current and future foreign investors be included in any legislation.
    Fourth, we have been criticized for building our economy on two 
labor intensive industries, i.e. apparel and tourism. To change this we 
will need federal financial assistance and guidance to diversify our 
economic base beyond these two. However, the CNMI's indigenous 
population is still not large enough to provide for an adequately sized 
labor force to support a sustainable economy and will thus greatly 
limit our options to widen our economic base. Therefore, immigration 
policies must be sensitive to the workforce and training needs that 
will arise from a shift in available jobs required by new industries. A 
specifically and carefully designed guest worker program to meet the 
CNMI's workforce requirements must be an integral part of a new 
immigration framework.
    Fifth, our proximity to Asia makes the CNMI an excellent location 
to provide specialized training such as English for Asian businessmen 
and students and nursing NCLEX prep classes. We currently provide NCLEX 
prep classes to Asian nurses, who upon passage come to the U.S. to fill 
a void created by a severe nursing shortage. I understand that U.S. 
student visas are now very difficult to acquire. Within a visa waiver 
program, I request that special consideration be granted to the CNMI 
for foreign student visas.
    Sixth, several years ago the CNMI negotiated an MOU with various 
federal agencies to provide for the enforcement of U.S. treaty 
obligations relating to refugees and asylum. Full implementation of the 
INA in regards to refugees and asylum seekers may have adverse 
consequences for both the CNMI and the U.S. Careful study of the 
situation is required and possibly delayed implementation would be 
best.
    Seventh, it was the intent of the Covenant to preserve the Northern 
Marianas for its indigenous people. Too many times in the history of 
the U.S. we have seen indigenous peoples displaced and outnumbered 
leaving them a political and economic minority in their own homeland. I 
caution the Committee to be careful in the construction of a new 
immigration framework so as to avoid the political and social 
alienation of the Chamorro and Carolinian peoples.
    Eighth, create an immigration board comprised of both local and 
federal government for the purpose of periodically reviewing the 
effectiveness of regulations promulgated under this new law, to make 
suggestions and amendments.
    Ninth, I respectfully recommend that extensive study, deliberation 
and consultation be included in developing this new framework. I 
recommend that a joint congressional, administrative, and CNMI study 
group be formed to thoroughly study all aspects of the CNMI's economy, 
current immigration laws, and long term economic prospects as a crucial 
step in developing a new immigration policy for the CNMI. It has taken 
the CNMI three decades to reach this point in our development. Only 
through careful consideration can we move the CNMI toward economic 
recovery and into a new era of prosperity while returning us to a state 
of self sufficiency and stability that we once enjoyed.
    In essence, Madam Chairwoman, this Committee is embarking on a long 
and difficult voyage. We acknowledge without question that Section 503 
of the Covenant specifically allows Congress to extend the immigration 
and naturalization laws to the CNMI. Furthermore, I respectfully 
emphasize that Section 701, requires the U.S. to ``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 community and to develop its economic 
resources...'' I am looking forward to working with your 
Subcommittee to successfully merge these two important fundamental 
principles of our political agreement into a new reality for the 
Commonwealth.
Call for a Delegate:
    The CNMI is currently blessed, though some may say it is cursed, 
with a great deal of attention by the U.S. Congress. Since the 
beginning of the year we have been visited by two staff delegations, 
one from the Senate and more recently one from this subcommittee. This 
is the second hearing that has been convened to examine our current 
situation.
    This attention has been met with a variety of responses from the 
CNMI. There are some who welcome Congressional intervention as they 
believe that we have strayed from our original goals, and that we need 
help to get back on track. There are others that feel that this 
attention is unwarranted and unnecessary and that we are doing ``just 
fine, thank you.'' I however, believe that for the most part, 
Congresses intentions are honorable and that there is no real desire by 
any member to destroy us. I honestly believe that Congress would like 
to see us succeed, but sees a need to alter the rules under which we 
operate.
    Madam Chairwoman, it is my intention to work with this committee 
and any congressional committee that desires to re-visit the Covenant 
under which the CNMI was created. I feel that it is much better to be 
involved and participate in any discussions or legislation that may 
affect the CNMI.
    However, I feel that the manner in which Congress is proceeding is 
unfair. Not only was it anticipated that the CNMI's control over 
immigration be terminated at some point by Congress and that the 
Immigration and Nationality Act would apply, it was also anticipated 
that the CNMI would be represented in this esteemed body as all other 
non-state entities are. Since Congress did not extend the INA to the 
CNMI in 1986 when the Trusteeship Agreement was terminated, and since 
local control of immigration has become an essential tool in our 
economic development, it is easy to interpret Congress' desire to 
normalize or federalize our immigration now as political, vengeful, or 
retaliatory.
    Even though you have extended to me as the Resident Representative 
some honorary privileges as if I were a Delegate, it is simply not the 
same. I cannot sit with you in subcommittee meetings; I am not privy to 
classified documents that detail how CNMI control of immigration is an 
alleged threat to national security; I cannot speak for the CNMI on the 
floor of the House of Representatives; nor can I defend my people 
except as an invited witness at hearings such as this one.
    I think that it is a matter of simple democratic principles that 
the CNMI be afforded the right of representation before Congress 
proceeds to dismantle and hopefully rebuild the economic framework of 
the Commonwealth. The people of the CNMI should not feel that we are at 
the mercy of our critics or that we are being punished for mistakes 
made in our past. Neither behavior nor performance should not be used 
as a litmus test in the granting of a delegate for the CNMI.
    The well-being of my people is literally at stake. I am gravely 
concerned about the ongoing availability of health care, basic 
sanitation, clean water and public safety. We have been the plaything 
of political opponents for too many years. I desperately want reason to 
prevail in any congressional actions that will affect the CNMI. Madam 
Chairwoman, let us proceed in a logical manner. I respectfully request 
that prior to the introduction of any other legislation that the CNMI 
Delegate bill be re-introduced and acted on first.
    Thank you.
    [GRAPHIC] [TIFF OMITTED] 34824.001
    
    [GRAPHIC] [TIFF OMITTED] 34824.002
    
    [GRAPHIC] [TIFF OMITTED] 34824.003
    
                                 
                                 
    Mrs. Christensen. Thank you, Mr. Tenorio.
    Reminding the Members that the Committee Rule 3[c] imposes 
a five-minute limit on questions, the Chairman will now 
recognize herself for questions, then recognize Members in the 
order in which they arrived.
    I have to tell you that even reading the testimony 
preparing for this hearing and listening to you this morning, 
it is very troubling to hear the enormity of the crisis that 
exists in the CNMI. Having traveled there, I had a very nice 
trip; it was really in some of the better times for CNMI, even 
though there were many problems that existed back then, many of 
which were addressed. And I have just read that school will 
also be closing two months later, so that is an additional--or 
will open two months later. That is an additional issue that 
tells us just how serious the situation is.
    I appreciated your testimony. It contemplates the extending 
of U.S. immigration policy to the CNMI, and your willingness to 
work with us to work out a compromise. And your suggestions are 
very helpful.
    Apart from that, with respect to anything immediate that 
Congress should consider to assist the CNMI, do you have some 
maybe three specific areas that we should be considering?
    Mr. Tenorio. Thank you, Madame Chairwoman. I certainly 
welcome that question. And I know that you asked for three, but 
if I may be permitted to add on, to about five priorities.
    Mrs. Christensen. Sure.
    Mr. Tenorio. Just so that the Committee can have some 
options.
    Mrs. Christensen. Yes.
    Mr. Tenorio. I would say first of all that we can be helped 
by this committee by revisiting the authorization of the 
covenant section 702, and that is the financial provision of 
the covenant. I am sure they are familiar with the history of 
the covenant itself, and how the funds that was intended 
originally for capital improvement for government operations 
and for economic development were reoriented toward just the 
capital improvement program.
    What I am suggesting is for the Committee to revisit that 
provision, and see whether or not it will be possible to 
increase the authorization so that the funds that will be made 
available under that provision of the covenant could possibly 
be redirected for operations, at least for some timeframe, to 
help out the immediate need of the government's limited 
resources.
    Second, I would also recommend that the Committee revisit 
the covenant, I mean the compact funds that this committee, the 
Members were successful in providing for a larger amount of 
funds through the reauthorization of the compacts of 
Micronesia.
    We are grateful that the compact funds have been increased 
from averaging about $800,000 a year since about 10 years ago, 
1996 or 1997, to now, the new level of $5.2 million a year, 
with, of course, a corresponding increase for Guam and Samoa 
and Hawaii.
    I feel that there is an institutionalized mechanism already 
established where it is possible to increase this compact 
impact. And the reason that I say this, Madame Chairwoman, is 
because of the fact that we are, even though the amount that we 
receive is substantial and has increased substantially over the 
last 10 years, nevertheless, CNMI, just like Guam, continues to 
spend more than what has been provided under the compact impact 
provision.
    We are averaging somewhere in the neighborhood of about $9 
million a year of public expenditure to take care of the freely 
associated states' guests that are in our islands. And again, 
since these funds are being appropriated for operations of 
government, it would have a direct impact on the current 
financial shortage that we are experiencing.
    Third, I would like to request the Committee to help us 
accelerate the cover-over of tax revenue that is identified 
under the covenant section 703[b], mandating that the U.S. 
Treasury reimburse the CNMI Government for all taxes that has 
been collected over the years, inclusive of the estate tax that 
was, I assume was covered under the 703[b] provision of tax 
rebating.
    We have been successful, and our government has been 
working closely with Treasury to continue transfer of funds. 
But there are still substantial amount of funds that have not 
been covered over yet. So if the Committee can revisit this 
provision and help us, it would really help our island 
governments immediately.
    I also want to recommend that, through the Federal funds 
grants under the Work Force Investment Act, that funds be 
increased for the CNMI, so that that agency that we have, the 
Work Force Investment Agency, can use these funds to hire those 
that have lost their jobs because of austerity and other 
revenue shortfall, but at the same time also the funds could be 
used to train our local people toward some profession where 
they can have, eventually in the future, a more permanent job.
    The program is working very well in the Commonwealth. I met 
with a number of the previous and current administrators about 
the program. But they need more assistance in order to hire 
more people, and hopefully through that program the 
implementation of the Federal minimum wage could then be used 
and experimented on for that agency.
    Last, I want to request the Committee to help us pass the 
amendment to Headnote 3(a). As you know, I acknowledge that you 
folks, you people have helped us in the past, and we continue 
to ask for your assistance in having Congress pass the 
amendment to Headnote 3(a) Act, so that the CNMI, the garment 
factories can then depend on this assistance to stay in 
business, and to be more competitive against products that are 
being imported to the U.S. from other countries.
    And again, I want to emphasize that the trade agreements 
that have been established between the United States and some 
of these foreign countries actually are much more favorable and 
advantageous agreements than what the Commonwealth has been 
subject to under the current situation.
    So in order for some of the factories that are there to 
continue to remain at least for several years during the time 
that we can try to recover our economy, it would be of great 
help if the amendment is passed, so that, you know, these 
factories can take advantage of the new competitive situation 
that they will be in with the Headnote 3(a) amendment.
    Short of that amendment, I fear that, you know, most of the 
factories, if not all of them, would close down as quickly as 
possible. And you can see it happening every day.
    Thank you, Madame Chairwoman.
    Mrs. Christensen. Thank you. I now recognize Mr. Fortuno 
for such questions as he might have for five minutes.
    Mr. Fortuno. Thank you again. I echo our Chairwoman's 
concerns, and actually our heart goes out to all the residents, 
fellow residents of CNMI.
    I know in the past there have been different discussions, 
and certainly the fact that the garment and the tourism 
industries actually pretty much collapsed for different reasons 
in the last decade or so, have, to a great degree, created this 
situation.
    There have been discussions regarding minimum wage, 
immigration policies that have been discussed in the past. You 
touched upon them in your presentation.
    Let me start with immigration. And the question will be, 
how would the Federalization of immigration policies in the 
CNMI address these concerns and assist in this situation?
    Mr. Tenorio. Well, for one thing, Congressman Fortuno, for 
one thing, if there is normalization of the immigration policy 
for the Commonwealth, it will provide for a very stable policy, 
for one. People, investors that are coming in would then have 
something to rely on--on a permanent basis.
    Right now, with the different strategies and different ways 
that the immigration provisions are being handled, it does not 
provide for a stability in terms of the investors that are 
coming in.
    And the same thing goes with minimum wage. Many businesses 
are closing down because they are worried that they cannot have 
any reliance on whether or not the minimum wage would increase 
or decrease, or stay as it is. And especially those that fear 
that, you know, increasing the minimum wage would impact their 
business readily. They would rather close their business and 
uproot and go someplace else, rather than stay on and continue 
to lose their resources.
    So having a permanent policy established, such as 
immigration and minimum wage, would provide the kind of 
security that these businesses would need in order to feel 
comfortable, and to invest on our islands on a long-term basis.
    Mr. Fortuno. In addition to garment and tourism industries, 
is there a way, is it realistic to believe that there could be 
a way to diversify the economy and move into other areas, as 
well? And what would it take to do that?
    Mr. Tenorio. First of all, let me say that, you know, 
because of our limited resources, and we have gone through this 
since the establishment of the new government, we have tried, 
the government has tried to explore all possibilities of 
diversifying the economy. So that, you know, we wouldn't feel 
that if one sector of the economy goes down, that we will all 
be in trouble, just like what is happening right now.
    Unfortunately, there are few investors that would want to 
come to the CNMI for other than tourism and garment, apparel 
manufacturing. There are some that come there to explore 
possibilities of a fishing industry, for example. We do have a 
very large area of ocean, 240,000 square miles of it, that 
continues to be idle, unexploited, and it is available for 
people to come in. But for some reason, we just don't get the 
kind of interest that other places have gotten. So I look at 
the ocean resources as a major potential for purposes of 
diversification of the economy.
    I don't see resources in the Commonwealth, natural mineral 
resources that we have, that we can exploit. Most of what we 
are doing there are on subsistence type of, you know, local 
economic initiative. For example, subsistence fishing, 
subsistence farming.
    But we don't just sit back and not look at other options. 
But our options are quite limited, because of land size, and 
because of the absence of natural resources that other larger 
countries and states, for example, have. You know, ore deposits 
and mineral resources that are abundant in other places.
    And we do have a lot of deposits of coral limestone. And 
you know, it is a useful product, because we use it for 
construction, but we can't export it. There is a current 
interest to exploit the value of pozzolan, which is a volcanic 
product from volcanic eruptions, and it continues to be 
extruded out of the volcanic vents. But it is a long-term type 
of economic diversification, because it takes a lot of 
investment to do it. And not too many interests really is 
there. There are some that want to try to mine pozzolan for, 
you know, for profits, but it is not much.
    We do have, I believe, fairly rich soil properties in the 
islands. And to raise some crops that possibly could be 
exported to Guam, the nearer islands of Guam. We also have the 
soil is very conducive to production of or planting of 
coconuts, which at one time was one of the major industries 
that actually we had in the CNMI. The northern islands, 
volcanic islands, was, you know, covered with coconuts at one 
time. And I think that industry can still be revived for 
purposes of food items, as well as for energy.
    There is ongoing interest in some places to use biodiesel 
and using coconut and other farm product oil as an addition to 
gasoline. So there is that possibility.
    But we continue to look for--and I want to acknowledge also 
the very great effort that the Department of Interior, through 
Mr. Cohen's office, the Office of Insular Affairs, in 
sponsoring business opportunities conferences out in the 
islands several years ago. It was in the West Coast, in Los 
Angeles, and here also. And then just last, I believe it was 
last year, when it was conducted in Honolulu. And there was a 
lot of people that showed up there with a lot of interests and 
ideas.
    And we understand that it takes time for people to make up 
their mind as to, you know, investment. But that is another 
effort that through that Administration, we are getting some 
positive interest.
    Mr. Fortuno. Thank you very much.
    Mrs. Christensen. And thank you. I now recognize Ms. 
Bordallo for five minutes.
    Ms. Bordallo. Thank you very much, Madame Chairman, and 
thank you for holding this very important hearing.
    I would like to welcome Resident Representative Pete A. 
Tenorio. And I want to share with not only the people in the 
audience today, but with the Committee here, that I share an 
excellent working relationship with Representative Tenorio and 
the CNMI leaders.
    And I want to take this opportunity to again call attention 
to the fact that the CNMI is the one member of the American 
family without a voice in this House. And I strongly believe 
that a Member of Congress to represent the CNMI would help this 
situation in its review of the many interests, of interests and 
concern with respect to the application of Federal law in the 
CNMI. It is simply the right thing to do.
    I look forward this morning to the testimony and am 
interested in learning of the efforts of the Office of Insular 
Affairs in helping the CNMI Government improve its financial 
standing, and in fostering greater economic diversification and 
growth. And I am also interested in learning of the GAO's 
assessment of the work underway within the Federal and the CNMI 
Governments to make needed improvements in the areas of labor, 
immigration, economic and financial accountability policy.
    And finally, I am interested in learning from the witnesses 
on specific ways the Congress, the Administration, and the CNMI 
Government can work together to make improvements within the 
spirit of the covenant relationship.
    I do have one question for you, Representative Tenorio. 
Could you comment for us on the current position or the views 
of the CNMI's leaders on the question of the application of 
Federal minimum wage in the CNMI? Given the legislation pending 
in Congress, what are the views of your government?
    Mr. Tenorio. Thank you, Congresswoman Bordallo, and good 
morning again to you.
    I appreciate that question very much, because that is one 
of the issues that many of our leaders have very different 
positions on.
    But there comes a time when--and I keep informing them that 
if you don't have a unified position to present to Congress, 
then you might as well not come to Congress and present 
something, because you won't be listened to. It is embarrassing 
for the government to be coming up with so many different 
ideas, when Congress wants just one. And that has been my 
advice to our leaders back home.
    Finally, after the passage of H.R. 2 in the House, there 
was a very concerted effort to come up with something so that 
we can present to Congress. I thought it was too late, but 
fortunately the bill was still in Congress, and it gives us an 
opportunity to reaffirm a united position.
    So we came up with a position that because the Northern 
Marianas is a relatively developing territory, and as we 
understand all the territories have gone through the process of 
using the Fair Labor Standard Act industry wage base system, we 
agreed that we would ask Congress to help us to be under that 
system for a while, so that, you know, we can then learn how 
best we can manage our local wage system.
    So that is the position that the Administration, together 
with the elected officials, have, is to be subject under the 
Federal Fair Labor Standards Act provisions, but at the same 
time be provided the opportunity to use the industry wage 
system as a base. This way, decisions having to do with the 
increase of minimum wage on the islands would be based on the 
information and knowledge and recommendations of those that are 
mostly affected, and that is the local people.
    So we appreciate any more initiative that Congress can do 
to get us into that system.
    Ms. Bordallo. Thank you. Have you given that position to 
the U.S. Congress? Have you officially?
    Mr. Tenorio. Yes, Congresswoman, we did. We have 
communicated with the Senate committee. Members of the Senate, 
through Chairman Bingaman, have been approached by many of our 
leaders and dismiss people to help us get that system through, 
yes.
    Ms. Bordallo. Very good. Very good. Madame Chairman, I know 
my time is up, but I have one quick question.
    Inasmuch as this economic situation exists today, how is 
tourism? Is it up or down?
    Mr. Tenorio. Well, the latest information on this is 
probably not a fair comparison, but the month of April is going 
to experience something like a 40 percent occupancy in the 
hotel. And you can translate that into, you know, numbers 
coming in, tours coming in from Japan basically has been 
drastically reduced because of the departure of Japan Airlines 
completely out of the Commonwealth after more than 20 years of 
operation.
    And you know, it was a business decision made by their 
company, and there is nothing much that the CNMI can do about 
it, although we appealed many times to try and bring them back.
    The overall situation of the garment industry is very 
disturbing. It continues to decline. And while we try to open 
up new markets to supplement the losses that we are 
experiencing through Japan through just the reduction of the 
flights, as well as reduction of tourist numbers based on 
economy, we will continue to see this downward trend for a 
while.
    This is what the Marianas Visitors Authority have been 
projecting. And it doesn't look like there is any light----
    Ms. Bordallo. At the end of the tunnel?
    Mr. Tenorio.--at the end of the tunnel for the time being.
    Ms. Bordallo. Thank you. Thank you very much, Madame 
Chairman.
    Mrs. Christensen. Mr. Tenorio, we might have another round 
if you have another question. So I am going to start mine.
    Mr. Tenorio, do you have any estimate of how much the 
cover-over in taxes would be? Is there any kind of----
    Mr. Tenorio. Well, we have some rough estimates, Madame 
Chairwoman Christensen. As of a year ago, for example, where we 
got figures from our former Governor, they estimated through 
their own assessment somewhere in the neighborhood of about $50 
to $60 million of total tax collected by IRS. That is all the 
CNMI. A lot of it, a substantial amount of it, has to do with 
the estate tax.
    But you know, that is the estimate that we got. I would be 
happy to provide you with a more recent estimate, if you give 
us time to contact the office back home.
    Mrs. Christensen. Well, it was important to at least get a 
ballpark figure.
    As you were talking about the different possibilities for 
diversifying the economy, is there any kind of thinking or 
planning in CNMI, given the military buildup that is starting 
on Guam, as to how you see that CNMI could perhaps take 
advantage of that situation to improve your economy?
    Mr. Tenorio. Yes. Thank you for that question, and I am 
glad Congresswoman Bordallo is here, because I intend to come 
and visit you, Congresswoman, to kind of brainstorm on this 
subject.
    I do have some ideas. They may sound wild to you folks 
right now, but let me just share them with you.
    Many years ago, I guess it was in the fifties, when Saipan 
was built up by an agency of the Federal government. The CIA 
was at one time present in Saipan to train Taiwan Chinese to 
invade China. This was a big operation. I was very young at 
that time, but I was of the age of understanding, so I was able 
to accumulate quite a bit of memory about that presence.
    Capitol Hill, for your information, where the government 
center is located, and where there are a lot of homes over 
there, if you look closely at those homes, they were actually 
constructed out of prefabricated concrete slabs that were 
manufactured in Guam and shipped over to Saipan, because there 
was no construction company in Saipan.
    So there was this very intensive construction in Guam. Guam 
was greatly helped by that construction, because that agency 
made use of the slabs and other kind of forms that were 
manufactured to construct not only the headquarters, where the 
Governor's office is located, but also the homes of the 
staffers and the trainers.
    And I feel that, you know, if the military would look into 
this thing, like using now Saipan as a manufacturing point, as 
a prefabrication point for housing construction and other kind 
of structures, where Guam at one time did, that would invite 
quite a bit of activities. It would, you know, regenerate 
interest in construction and employment. And we do have the 
manpower there, and perhaps it is very more accessible.
    Under the current immigration authority that the Northern 
Marianas has, it can bring in steel workers in accordance with 
the military planning specifications of the kind of workers and 
skills that is needed. Have them temporarily located on Saipan 
or wherever, or maybe even Rota. And then have them do the 
construction, and then ship over this prefabbed constructed 
parts of housing and other facilities to Guam.
    Mrs. Christensen. May I just interrupt you? I think that is 
a great idea, and I just want to try to get in some other 
questions.
    Mr. Tenorio. OK.
    Mrs. Christensen. Do you want to wrap that answer up?
    Mr. Tenorio. Yes, I will wrap it up. And also, I think 
CNMI, everybody says it is a great, nice, beautiful island, 
group of islands. And again, if the military could consider the 
island as R&R for the families and even the soldiers that will 
be located in Guam, Guam is getting overcrowded, perhaps 
Congresswoman Bordallo, just, you know, Rota is very close to 
Guam. And that would be one area where perhaps a nice R&R could 
be developed for, you know, for the families.
    Mrs. Christensen. OK. Let me see, because we do have 
another panel and our time is somewhat limited. Because I 
wanted to ask this very important question.
    Clearly, CNMI's current situation is a very serious one, 
and you know, we look forward to working with you as we move 
forward.
    Given the seriousness of declining government revenue, 
though, I want to know whether or not you feel your presence--
we see what happened with the schools, what is proposed to 
happen to the schools. But given the declining government 
revenue, I want to know whether you feel your presence and the 
representation that you provide as CNMI's elected official here 
in Washington, D.C., is also threatened by the government's 
declining revenue.
    Mr. Tenorio. Well, I hate to speculate, but you know, 
looking at things the way it is now, I even have a much more 
pessimistic projection of the revenue, simply because there are 
other businesses that are not counted in the flow of revenue 
for this year that will be closing down. Many garment 
industries will close down, and that translates into loss of 
revenue.
    My office here, yes, would be threatened if the government 
goes only with its plan to reduce additional 40 percent of the 
current available budget that the agencies of government are 
now operating under. It would mean a reduction in my staff, and 
that means a reduction in the people, the provision of people 
that I utilize to convey the problems and to do things for, you 
know, on behalf of the Congress requests. So there will be that 
problem.
    Also, imagine then our operations here in terms of the 
properties we own. We own a house outright fee simple that we 
use as an office space, essentially just for office space and 
receptions. And we have obligations toward that house in terms 
of insurance and other kind of upkeep and maintenance.
    I don't think it will come to that, but the prospect for, 
you know, the overall government not providing vital services 
to the community is one that really disturbs me. And I think 
that it would happen sooner than later.
    Mrs. Christensen. Thank you. It disturbs all of us, as I 
think everyone has said.
    Mr. Fortuno, do you have further questions?
    Mr. Fortuno. Yes. Yes, I do. First of all, I want to 
apologize, Mr. Tenorio, for having to walk back and forth.
    You mentioned in your opening statement the tragedy that 
the country has gone through at Virginia Tech. I lost one of my 
constituents, and I was talking to the widow, so I apologize, 
for she needed to talk with me, and I hope you understand.
    Mr. Tenorio. Yes, sir.
    Mr. Fortuno. So having said that, I feel it is important 
that we continue to bring into the record more information on 
the current situation. Could you give us some data, if the 
government has data, for example, on employment rates, and 
whether it has changed dramatically in the last 10 years? What 
is the rate today, and what it was several years back? The rate 
of growth of the economy, as well? Do you have any data on 
that?
    Mr. Tenorio. We can provide you, Congressman, with that 
information. Give us some time to look at our information, and 
also to convey these requests to our government back home, and 
we will give you the information.
    Mr. Fortuno. Thank you. I feel it could be useful for the 
Committee to understand. Actually, I would say it will be 
interesting to see what has happened since the compact was 
entered into until today, what has happened with basic economic 
statistics and indicators. That will be very useful, if you 
may, I feel.
    Having said that, I also understand, and this is normal, 
when you have these economic situations, then there are other 
social and economic conditions that spring up. And actually, as 
I understand it, the crime rate has been going up. There may be 
a greater drug trafficking problem than there was before, as 
well as human trafficking. Could you expand on that, please?
    Mr. Tenorio. Yes, Congressman. Yes, definitely. I was there 
personally for almost a month and a half just last month, in 
February and March. And I personally went around, looked around 
and observed and opened my eyes and talked to so many people 
about, you know, what the problems they are faced with.
    They are faced with the problem of lack of jobs, for 
example. Some of them lost their jobs. Some of them continue to 
look for jobs, but couldn't find any meaningful jobs.
    There is also the problem with the, because of the lack of 
government resources, the government employees are being 
furloughed every other Friday. Meaning that their income has 
been reduced by 10 percent.
    We do have many different crimes there that have been 
committed that could be directly or indirectly a result of the 
current economic problems that we face. And I would not 
hesitate to mention that we do have burglaries throughout many 
of the homes, including homicide incidents where, you know, 
poker parlors are being targeted by criminals for robbing 
workers there, and even hurting workers, at times, you know, 
fatally, and wounding them.
    Mr. Fortuno. In terms of human trafficking, perhaps 
regional human trafficking, are you seeing that kind of 
activity, as well?
    Mr. Tenorio. It comes periodically. I don't know the 
frequency to that, but I think the representative from OIA, 
probably through Mr. Benedetto, can provide you with that more 
detailed information about the frequency of interception, for 
example. And you know, from our area into Guam, they would be 
in a better position to provide you with that.
    But I just want to emphasize, too, and this is not a joke. 
But you know that there is a common thing now being spread 
around the islands that we do have what we call the brass 
thieves, because these people will go out and daring, daringly, 
would go out in the open, in the middle of day, and will cut 
down live electrical wire that is copper wire, that is 
servicing a deep well. They will climb up the transformers, and 
from there they will cut off this wire, and then steal the 
wires for to sell.
    This happens not only in the government facilities, but 
even in private homes. People, you know, before they could open 
up the house, they hook up the electricity, and they will find 
the next morning that they have lost the dropped line.
    Telephone lines have been vandalized for brass. You know, 
you can see how--I mean, this, to me, is such great desperation 
already, too.
    Mr. Fortuno. Yes.
    Mr. Tenorio. So we do have a lot of these crimes I believe 
are probably associated with, you know, this bad economic 
situation that we have.
    And the social impact of the lack of jobs and revenue, too, 
is really growing at a disturbing rate. We have broken 
families, families that don't have jobs and divorce cases are 
coming up. People are losing or selling their lands, selling 
their homes to travel someplace else, because they couldn't 
survive over there in the islands. So it is a real mess.
    Mr. Fortuno. Unbelievable. Let me tell you, Mr. Tenorio, I 
am so sorry to hear this, you know, how things have gone down. 
And I believe that data would be very useful for the 
understanding of everyone in the Committee.
    So I thank you for being here, and I would thank you for 
providing us with the data, you know, unemployment rate, rate 
of growth, and so on and so forth. Thank you again.
    Mr. Tenorio. Thank you.
    Mrs. Christensen. I now recognize Ms. Bordallo for five 
minutes.
    Ms. Bordallo. Thank you, Madame Chairman. I wish to 
continue questioning the Resident Representative to further 
what Congressman Fortuno has talked about.
    Your testimony outlined some of the austerity measures that 
have been put in place, and I think you just answered him as to 
what has been happening in the government.
    For government employees whose position may be reduced, 
what other opportunities are there for employment in the 
private sector? And also, I know that the CNMI Government has 
hired non-resident guest workers to fill skilled or 
professional positions. Are there laws in place which protect 
their employment, given that they were hired for a specific 
CNMI Government need that couldn't be filled locally?
    Mr. Tenorio. I believe there are laws to protect them, 
Congresswoman. I do know for a fact that doctors and nurses and 
health professionals that are hired from the outside, of 
course, are protected on their own contract. And since they are 
the most demanded positions for the Commonwealth, they will be 
there for as long as they want to. And we really have a problem 
trying to keep them on board, because they all want to leave 
after a couple of years.
    There are also employees in the government sector in the 
technical areas, in the Commonwealth Utilities Corporation, 
Public Works, engineers and architects that are there. And they 
are there as government employees for a certain period of time; 
I don't know for how long. But those are the workers, the 
professionals that are subject to being replaced by local 
people once these local professionals come back for the jobs. 
But I can tell you now that not too many of them are coming 
back to work in the CNMI.
    But as far as any specific law that protects their 
presence, I am not really sure, but I could find out for you.
    Ms. Bordallo. In addition to that question, what about the 
private sector? I mean, someone whose government salary has 
been reduced. Could he maybe get a part-time job in the private 
sector stepping up----
    Mr. Tenorio. I am sure that the private sector is doing its 
best. They have had some conference and meeting with the 
Northern Marianas College, for example, to try and pin down 
just exactly what can be done by the private sector to begin to 
mobilize local people into their businesses.
    There has been some progress made in that. At the same 
time, there are existing local workers that are hired by the 
private businesses there, but mostly for higher-supervisory 
position than anything else. Those that local people for some 
reason do not want to work in that lower kind of unskilled 
categories, like hotel rooms, workers and maintenance.
    So we do have a problem, too, because of the fact that the 
current minimum wage for all industries there, it is not 
attractive. In fact, it is discouraging to so many of the local 
people that wanted to get a job, but not at the rate that is 
being, you know, that they are being paid, or the salary that 
is existing right now: $3.05 an hour. That is a discouragement. 
And that is why I believe that the CNMI should support an 
increase in the minimum wage, something that is gradual. And 
especially for those businesses that can afford a little bit 
more because of their higher profit margin.
    And there are, in fact, some businesses that would do that. 
But in general, throughout the private sector, the local folks 
are discouraged from seeking private employment because of 
that.
    I mean, especially when they see that the government has 
such high salaries, three or four times what the private sector 
pays. So there is that competition there.
    Ms. Bordallo. Thank you very much. Madame Chairman, I just 
want to go on record as saying, too, that I sympathize with 
this situation. There have been a number of CNMI leaders, 
businesspeople, government leaders that have come to my office, 
so I am quite aware of the situation. And I just want to go on 
record with Mr. Fortuno to say that we sympathize with you; we 
certainly hope that we can find some kind of a solution to this 
problem.
    Again, I do have questions, but my questions are for the 
Administration. So thank you, thank you very much.
    Mrs. Christensen. We have been joined by Mr. Flake. Mr. 
Flake, would you like to take five minutes of questions?
    Mr. Flake. Thank you. I appreciate it. I apologize for 
getting here late. And I know you covered it in your testimony, 
but could you elaborate a little--and I apologize if it is 
ground that has already been plowed--with regard to visa waiver 
then, and how CNMI needs something quite separate from what we 
have here? Can you elaborate a little on that? For example, for 
you to have an agreement with China or other close markets 
there.
    Mr. Tenorio. Yes. Thank you, Congressman Flake, and good 
morning to you.
    Yes, the CNMI is quite unique, as we all know, because it 
has its own immigration system. And it has two reasons, 
probably the mainstay, the main economic generator for the 
islands, we do concentrate in trying to bring as many tourists 
to the islands as possible.
    It is very difficult for us to try to bring, to entice 
people from the mainland, for example, to come because of 
distance and expense. But we are located in very, very high-
populated areas in Asia. And Japan, that has been our main 
market. But because Japan now has, you know, has reduced its 
expresses on the islands, as a matter of fact, the panel has 
cut off its operation for the CNMI, we have been looking at 
other markets. And these are the markets that are open for us 
because of the fact that we administer our own immigration. So 
we can issue--we don't require a visa from them. Markets, such 
as China, for example, in which our government has entered into 
an agreement called approved destination status, where the 
Government of China permits its people to visit the islands 
under a memorandum of agreement. And that opens up a new 
opportunity to resume an industry to really flourish.
    Now we are looking into Russia as well. Some of the 
outlying provinces in the western and southern part of Russia, 
close, you know, north of Japan area. Sakhalin Island and those 
places are now being visited by our visitors' authority to open 
up a new market, bring in Russian tourists.
    And we, as a matter of fact, when I went there last month 
there was a first charter flight out of Russia that came to 
Saipan bringing tourists with them. That vantage that we have, 
as you know, is we do have this ability to use our immigration 
authority to make it easier for tourists from these countries 
that cannot go into the U.S., we found visitors' visa through 
the U.S., you know, applied through the U.S. Embassy or 
Consulate. But they can some to the Northern Marianas with 
their passport and their return tickets.
    And what you would call an approved, what is it? I am 
sorry. It is a kind of approval that our government provides to 
the airlines to board, authorization to board. And that is the 
system that we use. And we use some standard criteria to make 
them eligible to come. And that is working out OK, as we see 
it.
    If the new immigration framework is enacted that denies us 
the ability to continue that operation of visa waiver, then our 
tourism industry will not flourish as well or as quickly. So 
that is one of the areas that I requested the Senate, when I 
testified in the Senate, to include in any framework on 
immigration that the Congress would enact for the CNMI.
    Mr. Flake. Thank you.
    Mrs. Christensen. Thank you, Mr. Flake. I want to thank 
you, Mr. Tenorio, for your valuable testimony, and thank the 
Members for their questions. Members of the Subcommittee will 
have some additional questions for you, I am sure, and we will 
ask you respond in writing. Some of them have already been 
raised.
    At this point you are excused.
    Mr. Tenorio. Thank you. Thank you, Madame Chairwoman and 
Members.
    Mrs. Christensen. Thank you again. I would now like to 
recognize the second panel: Mr. David B. Cohen, Deputy 
Assistant Secretary of Insular Affairs for the U.S. Department 
of Interior; and Ms. Jeanette Franzel, Director of Financial 
Management and Assurance of the Government Accountability 
Office.
    And the Chair now recognizes Mr. Cohen to testify for five 
minutes.

  STATEMENT OF DAVID B. COHEN, DEPUTY ASSISTANT SECRETARY FOR 
        INSULAR AFFAIRS, U.S. DEPARTMENT OF THE INTERIOR

    Mr. Cohen. Thank you, Madame Chairwoman and Members of the 
Committee. Thank you for the opportunity to testify on the 
CNMI. With me today is the Federal Ombudsman Respondent in 
Saipan, Jim Benedetto, to answer any questions you might have 
in his area.
    The CNMI's greatest challenge today is how to deal with the 
deepening economic crisis that has triggered a growing fiscal 
crisis. Both of the CNMI's major industries, as the Resident 
Representative has eloquently described, garment manufacturing 
and tourism, continue to decline rapidly and simultaneously. 
This has caused government revenues to drop approximately 25 
percent since 2004.
    Continued declines of this magnitude would cast doubt on 
the local government's ability to remain solvent and to provide 
even the most basic critical services.
    On labor conditions, we give the CNMI Government a great 
deal of credit for the progress that has been made in the last 
several years. However, we continue to have a number of 
concerns.
    For example, many incidents have been reported of young 
women recruited for non-existent jobs, and then coerced into 
prostitution. A recent verified account of the number of 
trafficking victims receiving services in the CNMI puts the 
number at over 30, a figure that far exceeds the incidence of 
trafficking victims in the United States per capita.
    On the other hand, I commend the CNMI Attorney General's 
Office for aggressively investigating and winning convictions 
in the Red Heart Massage case, where club owners pressured 
foreign workers into prostitution.
    The labor situation in the CNMI is inexorably linked to the 
fiscal and economic situation. The most significant threat to 
the human rights of foreign workers in the CNMI today is the 
deteriorating economy. We also remain troubled by the serious 
structural imbalances in the CNMI economy and in CNMI society, 
as discussed in my written statement.
    I call your attention to the unique situation of the long-
term foreign workers that have become an integral part of CNMI 
society. A number of foreign workers have been working in the 
CNMI for five, 10, 15 or more years. Many are raising children 
in the CNMI, and their children are U.S. citizens. These 
workers were invited to come to the CNMI because they were 
needed; they came, and have stayed legally, and they have 
contributed much to the economy. They were essential in 
building the CNMI economy from the ground up. Long-term foreign 
workers are integrated into all levels of the CNMI's work force 
and society.
    I hope that the Committee and the CNMI Government will keep 
the situation of these long-term members of the CNMI community 
in mind as they consider reforms to the CNMI's immigration 
system.
    The Administration is committed to working with Congress 
and with the CNMI's representatives to establish a framework 
that will allow the people of the CNMI to build a strong, 
prosperous, and just society. We are currently working within 
the Administration, with Congress, and with the CNMI Government 
to develop a concept of flexible Federalization through which 
the Federal government would exert control over the CNMI's 
immigration system in a manner that would not cause needless 
economic or fiscal harm.
    We believe that any effort to Federalize the CNMI 
immigration system must be flexible, because of the CNMI's 
unique history, culture, status, demographic situation, 
location, and, perhaps most importantly, fragile economic and 
fiscal condition.
    Such an effort should be based upon the following 
principles. First, national security and homeland security 
issues must be properly addressed.
    Second, we should minimize damage to the CNMI economy, and 
maximize the potential for economic growth.
    Third, the new CNMI economy must not be as conducive to 
worker exploitation and abuse as was the old CNMI economy.
    Fourth, we should carefully analyze the likely impact of 
major proposals before we implement them. Labeling our efforts 
as reform does not relieve us of the responsibility to 
carefully consider the potential consequences of our actions. 
If we leap before we look, we could needlessly hurt people that 
we are trying to help.
    We should, however, be expeditious in our analysis, and not 
use the need to study as an excuse to delay. The people of the 
CNMI are eager to get on with their future.
    Finally, we must ensure that the people of the CNMI 
participate fully in decisions that will affect their future. A 
better future for the people of the CNMI cannot be imposed 
unilaterally from Washington, D.C., ignoring the insights, 
wisdom, and aspirations of those to whom this future belongs.
    I was in Saipan last month as the President's special 
representative for consultations with CNMI Governor Fitial 
under Section 902 of the U.S.-CNMI Covenant. I heard the 
Governor's concerns about the effect that Federalization might 
have under CNMI's precarious economic and fiscal condition. The 
Governor and I endorsed the five principles that are outlined 
in my testimony today, although we are still in dialogue about 
how those principles should be implemented.
    While in Saipan I spoke with as many community groups and 
ordinary people as I possibly could. There is a great diversity 
of opinion in the CNMI, but a shared sense of anxiety about 
what the Federal government may or may not do, and a shared 
desire for their voices to be heard here in Washington.
    The anxiety stems from the fact that Congress is developing 
policy that will profoundly affect a small corner of America 
that many of your colleagues in Congress know little about.
    The Members of this Subcommittee, on the other hand, 
possess a great deal of knowledge about the CNMI. I commend you 
all for your commitment to learn as much as you can about what 
is really happening in the CNMI today. So look beneath the 
negative, sensationalistic press reports to find the more 
complicated truth, and to listen to the diverse voices of the 
people of the CNMI.
    One last point. Three years ago I testified on behalf of 
the Bush Administration in favor of granting the CNMI a non-
voting delegate to this body. I spoke of the many men and women 
from the CNMI who were fighting in Iraq and Afghanistan so that 
the people of each of those countries could be represented in 
their national legislatures.
    Please allow me to pay tribute to the following sons of 
Saipan who have been killed in action in Iraq since then.
    Army Sergeant Eddie Chen; Army Sergeant Wilgene Lieto; Army 
Specialist Derrence Jack; Army Sergeant Jesse Castro; Marine 
Lance Corporal Adam Quitugua Emul; and Army Specialist Leeroy 
Camacho.
    Forgive me for pointing out that these men died so that the 
people of Iraq could enjoy rights that are still not enjoyed by 
the loved ones that these men have left behind.
    Before considering legislation that would drastically 
change the lives of the people of the CNMI, we hope that 
Congress will consider granting them a seat at the table at 
which their fate will be decided.
    Thank you.
    [The prepared statement of Mr. Cohen follows:]

Statement of David B. Cohen, Deputy Assistant Secretary of the Interior 

          for Insular Affairs, U.S. Department of the Interior

    Madam Chairwoman and members of the Committee, thank you for the 
opportunity to testify on the important issues facing the Commonwealth 
of the Northern Mariana Islands (CNMI). I come before you today wearing 
at least two hats: As Deputy Assistant Secretary of the Interior for 
Insular Affairs, I am the Federal official that is responsible for 
generally administering, on behalf of the Secretary of the Interior, 
the Federal Government's relationship with the CNMI. I also serve as 
the President's Special Representative for consultations with the CNMI 
on any matter of mutual concern, pursuant to Section 902 of the U.S.-
CNMI Covenant. In fact, I was in Saipan last month for Section 902 
consultations with CNMI Governor Fitial and his team.
    I testified before the Senate Committee on Energy and Natural 
Resources in March 2006 about the very difficult economic and fiscal 
challenges that the CNMI was facing as its only two major private 
sector industries, garment manufacturing and tourism, were facing 
significant declines at the same time. The situation has changed since 
then. It has gotten worse.
    The most compelling challenge that the CNMI faces today is how to 
deal with a deepening economic crisis that has triggered a growing 
fiscal crisis. Both of the CNMI's major industries continue to decline 
rapidly and simultaneously. Between 2000 and 2006, garment sales 
declined 49.5 percent, from $1 billion to $527 million. According to 
the CNMI Department of Finance, garment makers contributed, directly 
and indirectly, 37.9 percent of general fund revenues in Fiscal Year 
2000. In Fiscal Year 2006, that share was down to 25.1 percent, and it 
is headed down still further since garment factory closings continue. 
In 2000, there were 34 holders of garment making and shipping licenses 
in CNMI. The closure of Saipan's largest garment factory in December 
2006 caused the loss of approximately 1400 jobs, and brought the number 
of garment factories remaining on Saipan down to 19. Two more garment 
factories, with a total of approximately 400 employees, closed at the 
end of last month. We expect two additional factories, with a total of 
over 550 employees, to close in June or July.
    The CNMI's other major industry, tourism, is also experiencing 
troubling declines. Just as the industry, dependent more heavily on 
Japan than it is on any other market, was recovering, Japan Airlines 
(JAL) discontinued flights to the CNMI in October 2005. This was a 
major setback to the CNMI's tourism industry because JAL carried 40 
percent of all Japanese tourists to the CNMI and 29 percent of all 
tourists to the CNMI. Although Northwest Airlines initially replaced 
some of the Japan Airlines flights cut in 2005, it recently cut several 
flights and is planning to downsize the aircraft used for its daily 
flight from Narita, Japan, by September this year. Tourist traffic was 
down 16 percent during 2006, and tourist levels will not recover if 
arrival capacity continues to decline. The tax contribution of tourism 
to the CNMI treasury cannot be measured as directly as that of garment 
manufacturers. However, it is reasonable to say that tourism is the 
only other major source of income and taxes in the CNMI.
    The simultaneous decline of the CNMI's only two major industries 
has caused government revenues to decline sharply, dropping 
approximately 25 percent from $221.2 million in 2004 to a projected 
$165.8 million for the current fiscal year. Continued declines of this 
magnitude would cast doubt on the CNMI government's ability to remain 
solvent and to provide even the most basic critical services to CNMI 
residents.
    I would like to also address the labor situation in the CNMI. Much 
has transpired since Congress began to take a hard look at CNMI labor 
conditions in the 1990s. The following are examples of the significant 
progress that the CNMI government has achieved in recent years:
      The independent Garment Oversight Board has been in place 
since 2003 as a result of a class-action lawsuit. The Board monitors 
compliance by CNMI garment factories with 59 standards relating to 
working and living conditions. The Board, which is made up of three 
former judges (including former California Supreme Court Justice Cruz 
Reynoso and former Washington Supreme Court Chief Justice Richard Guy), 
engaged, through December 2006, the nonprofit organizations Verite and 
Global Social Compliance to conduct comprehensive inspections of each 
factory twice a year (with additional inspections as necessary). A 
factory placed on probation as a result of a failed inspection loses 
its eligibility to sell to 26 major retailers.
      The Federal Ombudsman's Office reports that the number of 
complaints filed annually had been reduced by over 60% since the 
inception of the office in 1999: from 1221 complaints per year to 473. 
In recent years, the complaints generally have concerned matters less 
grievous in nature than those identified in the early years.
      In 2003, the CNMI government signed a Memorandum of 
Agreement with the Department of the Interior's Office of Insular 
Affairs to establish a refugee protection system. Under the guidance of 
the Department of Homeland Security's (DHS) U.S. Citizenship and 
Immigration Services, the CNMI amended its immigration statute, 
promulgated implementing regulations, and established a refugee 
protection program with financial assistance from the Office of Insular 
Affairs.
      Under the Memorandum of Agreement with the Office of 
Insular Affairs, the CNMI also agreed to cooperate with the United 
States to combat human trafficking. In furtherance of that goal, the 
CNMI enacted the Anti-Trafficking Act of 2005. That same year, the 
Federal Ombudsman established the Victims of Trafficking Coalition to 
identify persons in the community who may come into contact with 
trafficking victims, share information, identify resources in the 
community available to assist victims, and assess unmet needs. 
Additionally, the Catholic non-profit group, Karidat, through its 
shelter, the Guma Esperansa, applied for and received a $450,000 grant 
from the U.S. Department of Justice to provide services to trafficking 
victims. A similar grant was received by the CNMI Department of Public 
Safety. Last year, my office provided a $45,000 grant to support the 
Guma Esperansa shelter, and we plan to provide more support in the 
future. Recently, the U.S. Attorney's Office established the Human 
Trafficking Intervention Coalition.
      I would like to commend the CNMI Attorney General's 
Office for aggressively investigating and winning convictions in the 
Red Heart massage case, where club owners pressured foreign employees 
into prostitution. I would also like to commend the U.S. Attorney's 
Office for its successful prosecution of U.S. v. Zheng, a forced 
prostitution case.
      In 1999, 23 garment factories entered into a strategic 
partnership with the U.S. Department of Labor's Occupational Safety and 
Health Administration (OSHA) that requires each participant to maintain 
a formal, written safety and health management system for each worksite 
and associated staff housing, and to establish a joint employer/
employee safety and health team. OSHA credits this program with 
reducing the lost workday injury rate in these factories to well below 
the average for the industry nationwide. OSHA reports that over 44 full 
time health and safety managers have been hired by the garment 
factories pursuant to this partnership.
      The U.S. Department of Labor's Wage and Hour Division 
(WHD) continues to have a strong enforcement program for all applicable 
provisions of the Fair Labor Standards Act. For the past several years, 
WHD has conducted annual enforcement strike forces, stepped up 
litigation, and worked with the Saipan Garment Manufacturers 
Association to provide training on the monitoring of garment shops to 
increase compliance in the CNMI. In the last six fiscal years (2001-
2006), WHD concluded 274 investigations of employers in the CNMI. The 
agency collected over $14.6 million in back wages for approximately 
10,500 employees. In addition to investigations in the garment 
manufacturing industry, WHD has had enforcement cases in the 
construction, hotel/motel and security guard industries.
      The CNMI government has negotiated agreements with the 
Chinese Economic Development Association to pre-screen Chinese 
nationals coming to work in the CNMI, limit the fees the workers can be 
charged by approved recruiters, and intercede on the workers' behalf 
when a dispute arises; implemented secondary preference for jobless 
alien workers already present in the CNMI; and completed a 
comprehensive revision of the alien labor rules and regulations to 
guarantee due process rights to alien worker complainants. While the 
pre-screening noted above is not intended to, and does not, substitute 
for a visa screening process administered as a foreign affairs and 
national security function of the United States, it does assist in 
regulating the numbers of nonresident workers who come to work in the 
CNMI, ensuring that some minimum standards are met with respect to the 
qualifications of those workers, and in protecting their legal rights.
      We congratulate the CNMI Department of Labor for recently 
eliminating a backlog of over 3,000 labor cases that had begun to 
accumulate during prior administrations. This accomplishment could not 
have occurred without the Governor's strong commitment and a great deal 
of hard work by local public servants. We are proud that the staff of 
OIA's Office of the Federal Ombudsman was able to provide important 
assistance to this effort, including by translating the testimony of 
hundreds of workers.
      On November 30, 2006, the CNMI held a Workforce 
Development Summit cosponsored by the Northern Marianas College Small 
Business Development Center and the CNMI Workforce Investment Agency. 
The goals of the Summit were twofold: (1) offer an in-depth discussion 
of employment issues facing local residents and the public and private 
sectors, and (2) gather business and government leaders to discuss the 
CNMI employment needs with a goal of developing the local workforce to 
fill positions that are currently occupied by foreign employees. The 
Summit brought together business and government leaders to discuss the 
CNMI's critical employment needs so that government counseling, 
training, education, financial assistance, internship and placement 
programs could unify their efforts and maximize resources to develop 
the necessary resident labor talent. As a result, the CNMI is creating 
a demand-driven talent development action plan that will result in a 
higher percentage of resident workers employed in the private sector. 
The U.S. Department of Labor's Employment and Training Administration 
is assisting the CNMI with mapping their public and private resources 
and assets to begin development of their talent development action 
plan.
    We give the CNMI government a great deal of credit for the progress 
that has been made in the last several years. A number of others 
deserve a great deal of credit as well, including Members of Congress 
who have pushed for reforms, the garment workers and their attorneys 
who brought the class action suit against the garment industry, 
international non-profit organizations such as Verite which conduct 
rigorous inspections of the garment factories, and longtime workers 
rights advocates such as former California Supreme Court Justice Cruz 
Reynoso who have worked to oversee the inspection regime. We recognize, 
however, that the situation remains far from perfect, and we continue 
to have a number of concerns. For example:
      The CNMI Department of Labor still has too few 
experienced investigators and hearing officers to deal with the labor 
complaints that have been generated.
      We believe that enforcement in labor cases is hampered by 
an insufficient commitment by the CNMI law enforcement authorities to 
prosecuting or sanctioning repeat offenders.
      We are concerned about foreign attempts to influence the 
adjudication of particular cases in the CNMI's fledgling refugee 
protection program.
      We continue to be concerned about foreign nationals in 
the CNMI engaging in prostitution. Many incidents have been reported of 
young women recruited for non-existent jobs, and then coerced into 
prostitution. A recent, verified count of the number of trafficking 
victims receiving services in the CNMI puts the number at over 30, a 
figure that far exceeds the incidence of trafficking victims in the 
United States on a per capita basis.
      The CNMI's current fiscal crisis casts doubt on its 
ability to ensure the timely repatriation of thousands of garment 
workers employed by factories who may not have the resources to pay 
their wages in full and provide them a plane ticket to their point of 
hire. In addition, of the bonding companies who have a secondary 
obligation to pay back wages and provide tickets, a majority do not 
have sufficient assets to meet their obligations.
    The labor situation in the CNMI is inextricably linked to the 
fiscal and economic situation. The most significant threat to the human 
rights of foreign employees in the CNMI today is the deteriorating 
economy. This manifests itself in a number of ways, including by 
depriving the government of the resources that it needs to effectively 
prevent, investigate and prosecute labor abuse. The closure of large 
garment factories places significant demands upon the local government, 
and simultaneously causes the government to lose revenues that it 
desperately needs to meet those demands and all of its other 
obligations. This mutually reinforcing negative cycle illustrates that 
while the departure of the garment industry may be in the long-term 
best interests of the CNMI, an immediate, abrupt departure is not. 
Change is necessary, but we should be wary of exacerbating a situation 
that is already fraught with peril.
    In addition to these concerns, we remain troubled by the serious 
structural imbalances in the CNMI economy and in CNMI society. The CNMI 
remains a two-tier economy where the private sector is overly reliant 
on foreign employees, and where the indigenous population is overly 
reliant on the public sector for employment. Because of the unique 
economic structure of the CNMI and the fact that approximately 50% of 
the residents are foreign employees, the ability to import labor is a 
factor that tends to depress wages in the private sector, which in turn 
tends to reinforce the reluctance of U.S. citizens to work outside of 
the public sector. There have been attempts to address this unique 
structural problem through local legislation, but the problem persists.
    Additionally, having a large alien work force with little economic 
power and relatively limited legal rights has created a great risk of 
exploitation and abuse in the CNMI. As noted above, the CNMI has made 
commendable progress over the last several years in curbing labor 
abuse. Our experience tells us, however, that excessive reliance within 
the CNMI on a foreign, low-wage work force creates a risk of abuse. 
That risk could be overcome with a high level of effort, vigilance and 
resources, but it would probably be difficult to sustain such efforts 
under the CNMI's current fiscal and economic conditions. Perhaps we 
would not all have to work so hard to prevent abuse if the structure of 
the CNMI's economy did not give rise to such risks. And eliminating the 
most overt forms of abuse will not necessarily eliminate subtler forms 
of exploitation that arise when foreign employees have little power and 
a great deal to lose if they assert even the limited rights they have.
    I call to your attention the unique situation of the long-term 
foreign employees that have become an integral part of CNMI society. A 
number of foreign employees have been working in the CNMI for five, 
ten, fifteen or more years. Many are raising children in the CNMI, and 
their children are U.S. citizens. These employees were invited to come 
to the CNMI because they were needed, they came and have stayed 
legally, and they have contributed much to the community. They were 
essential in building the CNMI economy from the ground up from what it 
was at the inception of the Commonwealth: a rural economy with little 
industry, tourism or other commercial activity. Long-term foreign 
employees are integrated into all levels of the CNMI's workforce and 
society, serving as doctors, nurses, journalists, business managers, 
engineers, architects, service industry employees, housekeepers, 
farmers, construction workers, and in countless other occupations. I 
hope that the Committee and the CNMI Government will keep the situation 
of these long-term members of the CNMI community in mind as they 
consider reforms to the CNMI's immigration system.
    We stress, Madame Chairwoman, that the CNMI's situation in general 
is unique, and our discussion of the CNMI should not be extrapolated to 
draw observations about other economies, including that of the U.S. as 
a whole. The CNMI's proportional reliance on foreign labor is 
overwhelming when compared to that of many other economies, including 
the U.S. economy as a whole; foreign employees constitute approximately 
half of the CNMI's population. The CNMI also has the ability to admit 
foreign employees from low-wage economies in the region without being 
subject to Federal laws designed to protect opportunities for the U.S. 
workforce. The sheer scope and scale of the foreign labor situation in 
the CNMI make the CNMI a special case.
    The question is not whether the CNMI's current economic structure 
is a good one. It is not. The question is how to help the people of the 
CNMI build a strong, prosperous and just society without causing 
needless pain and suffering to innocent people--including the foreign 
employees--in the transition. The Administration is committed to 
working with Congress and with the CNMI's representatives to establish 
a framework that will allow the people of the CNMI to build such a 
society. We are currently working within the Administration, with 
Congress and with the CNMI government to develop a concept of flexible 
federalization through which the Federal Government would assert 
control over the CNMI's immigration system in a manner that would not 
cause needless economic or fiscal harm. We believe that any effort to 
federalize the CNMI immigration system must be flexible because of the 
CNMI's unique history, culture, status, demographic situation, 
location, and, perhaps most importantly, fragile economic and fiscal 
condition. Since federalization would constitute a paradigm shift from 
the current system, we believe that various options for federalization 
should be considered carefully in order to avoid unintended 
consequences. We believe that such an effort should be based upon the 
following principles:
    First, we must ensure that national security and homeland security 
issues are properly addressed. In a post-9/11 world, this principle 
must take priority over all others. Any proposal should be fully vetted 
by the experts at the Departments of Homeland Security, State, and 
Justice to ensure that it provides adequate protections for the CNMI 
and for the rest of the U.S.
    The second principle is that, subject to the need to address 
compelling national security and homeland security concerns, we should 
minimize damage to the CNMI economy and maximize the potential for 
future economic growth. We must recognize that the CNMI is in a very 
fragile economic and fiscal condition. The Federal Government must make 
every effort to avoid imposing measures that could plunge the CNMI even 
deeper into crisis. The cash-strapped local government, which is 
struggling to absorb sharp decreases in revenues, is already unable to 
provide critical services such as water and power in a reliable 
fashion. If the current crisis is exacerbated, it could endanger the 
health, safety and welfare of innocent people, threaten the public 
order, and leave large numbers of foreign workers jobless and stranded.
    Once the CNMI gets through the current crisis, it will have to 
build a sustainable economic future. This is probably an opportune 
moment in the CNMI's history for the people of the CNMI to engage in a 
facilitated process to develop a homegrown strategic plan for its 
economic future. The process should involve all segments of society, 
and the ultimate product should be one that the large majority of the 
community is willing to buy in to. If the CNMI were to embark on such a 
process, there would not necessarily be a need for Congress to delay 
its effort to establish a framework for a new immigration system. We 
would suggest that Congress build sufficient flexibility into that 
framework, however, so that the CNMI's vision for its future could be 
duly considered and, to the extent possible, accommodated when it is 
ready.
    Regardless of whether such a strategic planning process occurs or 
what it produces, we should recognize that the CNMI's unique 
circumstances should be taken into account. By controlling its own 
immigration system, the CNMI enjoys a competitive access advantage--in 
other words, it has the ability to make it easier for certain classes 
of visitors to enter the CNMI than to enter the rest of the U.S. This 
competitive access advantage enabled the CNMI to reach out to other 
tourist markets after it lost a significant share of its Japanese 
market. It has also allowed the CNMI to consider legitimate economic 
opportunities that might arise from admitting students, retirees, 
investors and others who might not have easy access to the rest of the 
U.S. If the CNMI were to lose its competitive access advantage with 
respect to legitimate foreign visitors, it would significantly restrict 
the already limited range of options that the CNMI has to build a 
viable economy.
    As part of the bargain through which the CNMI currently retains the 
flexibility to control its own immigration system, the U.S. seeks to 
insulate itself from the impact of CNMI immigration decisions by 
maintaining a ``second firewall'' between the CNMI and the rest of the 
U.S. Aliens seeking admission to the CNMI must be processed and 
inspected through CNMI immigration procedures, which could be thought 
of as the ``first firewall.'' Admission to the CNMI confers no right of 
admission to the rest of the U.S. Aliens seeking to travel from the 
CNMI to the rest of the U.S. must apply separately for admission to the 
U.S., and all persons traveling from the CNMI to the rest of the U.S. 
are inspected as if they were arriving from a foreign country (the 
``second firewall''). While DHS has statutory authority to inspect and 
determine the admissibility of aliens proceeding from all insular 
territories to the remainder of the United States, including those 
territories governed by U.S. immigration law, the ``second firewall'' 
authority is broader and more significant in the case of a territory 
like the CNMI which operates its own immigration system.
    Even under an immigration system administered by the Federal 
Government, the law could provide greater flexibility to admit foreign 
visitors to the CNMI than is currently allowed under the Immigration 
and Nationality Act. This greater flexibility could be justified by the 
fact that the CNMI's economic viability is arguably dependent upon 
having it. As with the current system, the U.S. could seek to insulate 
itself from any impact to the rest of the U.S. from granting greater 
flexibility to the CNMI by maintaining the ``second firewall'' between 
the CNMI and the rest of the U.S. Under such a scenario, aliens 
entering the CNMI after qualifying for special visas or visa waivers 
would have to qualify separately for admission to the rest of the U.S., 
and all persons traveling from the CNMI to the rest of the U.S. would 
continue to be inspected as if they were arriving from a foreign 
country.
    We raise these ideas not as concrete proposals, but as discussion 
items that Congress, the Administration and the CNMI government could 
explore together. The underlying point here is that for the CNMI to 
build a viable new economy, it will likely need to remain readily 
accessible not only to a reasonable number of workers, but, more 
importantly, to customers such as tourists and students. Achieving this 
objective may require some degree of flexibility and creativity.
    The third principle is that we must ensure that the new CNMI 
economy is not as conducive to worker exploitation and abuse as was the 
old CNMI economy. Since the CNMI has a very limited indigenous labor 
pool, it is reasonable for its economy to rely to some degree on 
foreign workers. But the mistakes of the past must not be repeated, 
with a large class of politically powerless foreign employees 
populating the lower tier of a two-tier CNMI economy, regulated by a 
government without adequate resources to prevent exploitative 
practices.
    The fourth principle is that we should carefully analyze the likely 
impact of major proposals before we implement them. Just as we would 
not perform major surgery on a patient without first performing a 
detailed diagnosis and medical analysis, and just as we do not build 
even schools or hospitals without conducting an environmental analysis 
or impact study, neither should be attempt to perform major surgery on 
the CNMI's economy and society without first analyzing the likely 
impact. Labeling our efforts as ``reform'' does not relieve us of the 
responsibility to carefully consider the potential consequences of our 
actions before we take them. This is especially true when we are 
dealing with an economy and society that is as fragile and potentially 
volatile as that of the CNMI. If we leap before we look, we could 
inadvertently and needlessly hurt people that we are trying to help. We 
should, however, be expeditious in our analysis, and not use the need 
to study as an excuse to delay. The people of the CNMI are eager to get 
on with their future.
    The fifth and final principle is that we must ensure that the 
people of the CNMI participate fully in decisions that will affect 
their future. A better future for the people of the CNMI cannot be 
imposed unilaterally from Washington, D.C., ignoring the insights, 
wisdom and aspirations of those to whom this future belongs.
    I was in Saipan last month as the President's Special 
Representative for consultations with CNMI Governor Fitial under 
Section 902 of the U.S.-CNMI Covenant, and heard the Governor's 
concerns about the effect that federalization might have on the CNMI's 
precarious economic and fiscal condition. The Governor and I endorsed 
the five principles that are outlined in my testimony today, although 
we are still in dialogue about how those principles should be 
implemented. While in Saipan, I also took the opportunity to speak with 
as many community groups and ordinary people as I possibly could. There 
is a great diversity of opinion in the CNMI, but a shared sense of 
anxiety about what the Federal Government may or may not do and a 
shared desire for their voices to be heard here in Washington. The 
anxiety stems from the fact that Congress is developing policy that 
will profoundly affect a small corner of America that many of your 
colleagues in Congress know little about. The members of this 
Subcommittee, on the other hand, possess a great deal of knowledge 
about the CNMI. I commend you all for your commitment to learn as much 
as you can about what's really happening in the CNMI today, to look 
beneath the negative, sensationalistic press reports to find the more 
complicated truth, and to listen to the diverse voices of the people of 
the CNMI.
    I commend this Subcommittee for its plan to hold a hearing in the 
CNMI, and hope that some of your colleagues less familiar with the CNMI 
will be able to attend. Once your colleagues get to know the people of 
these islands, it will be difficult for them not to care about the 
future facing the CNMI.
    I would like to make one more important point about the need for 
the CNMI to participate fully in decisions that will determine its 
future. Three years ago, I testified on behalf of the Bush 
Administration before the full Committee in favor of granting the CNMI 
a non-voting delegate to the U.S. House of Representatives. I testified 
about the many men and women from the Northern Mariana Islands who were 
fighting in Iraq and Afghanistan so that the people of each of those 
countries could have a democracy.
    Please allow me to pay tribute to the following sons of Saipan who 
have been killed in action in Iraq:
      Army Sergeant Eddie Chen
      Army Sergeant Wilgene Lieto
      Army Specialist Derrence Jack
      Army Sergeant Jesse Castro
      Marine Lance Corporal Adam Quitugua Emul
      Army Specialist Leeroy Camacho
    Please consider their sacrifices while we embrace the need to 
support the CNMI during a difficult time. The CNMI is prepared to be an 
active participant in our efforts to assist them in seeking a brighter 
future. Before considering legislation that would drastically change 
the lives of the people of the CNMI, we hope that Congress will 
consider granting them a seat at the table at which their fate will be 
decided.
    Thank you.
                                 ______
                                 
    Mrs. Christensen. Thank you, Mr. Cohen. The Committee now 
recognizes Ms. Franzel to testify for five minutes.

 STATEMENT OF JEANETTE FRANZEL, DIRECTOR, FINANCIAL MANAGEMENT 
      AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Ms. Franzel. Thank you. Good morning, Madame Chairwoman and 
Members of the Subcommittee.
    I am pleased to be here today to discuss our recent work on 
issues impacting CNMI. My comments today will specifically 
focus on CNMI's economic challenges, its weakened fiscal 
condition, and its financial accountability issues.
    We have updated information from our December 2006 report 
to include information for Fiscal Years 2005 and 2006, and I 
will also discuss some current trends being reported by the 
CNMI Government.
    Overall, as we have heard, CNMI is facing serious economic, 
fiscal, and accountability challenges, and the CNMI economy is 
going through a drastic transition.
    First I will discuss CNMI's economic challenges. As we have 
heard, CNMI's economy has been dependent on a narrow economic 
base, including garment manufacturing and tourism, and both of 
those industries have been in decline. Those economic factors 
have had a significant impact on the CNMI Government's fiscal 
condition, which has steadily weakened since 2001.
    CNMI's fund balance, which is basically the net worth of 
the government, went into a deficit or negative balance in 
2002, and has steadily declined to a negative balance of $84 
million in 2005. In order to finance its activities during that 
period where revenues were less than expenditures, CNMI has had 
to increase its debt and stop making required payments to its 
pension plan. And that is only through 2005. 2006 audited 
financial statements are not yet available; however, there are 
many indications that there has been a severe fiscal crisis in 
2006, which continues today.
    In 2006, for instance, the CNMI implemented drastic cost-
cutting and restructuring measures, including the austerity 
holidays that we have heard about in this hearing, as well as a 
suspension of payments to the pension plan which provides 
temporary cash relief. But in the long run, the hole just gets 
bigger.
    Based on unaudited data recently provided to us by CNMI's 
Secretary of Finance, Mr. Inos, it appears that both revenues 
and expenditures for Fiscal Year 2006 drastically decreased 
from 2005 levels, reflecting the decreased government 
activities and the austerity holidays.
    For the current fiscal year, even at that reduced level the 
government is currently becoming aware of and projecting 
additional shortfalls for 2007, and they are looking at some 
more across-the-board budget cuts for 2007.
    At this point I would like to issue a cautionary note. It 
is admirable that the government has been taking such drastic 
actions to try to balance its budget, but care is really 
needed. This is not a long-term solution. Care is needed to 
ensure that these types of emergency austerity measures and 
across-the-board cuts do not have long-term negative impacts, 
such as a weakened government infrastructure and an overall 
negative impact on citizens and the business climate. And so I 
do congratulate you for having this hearing today, because 
these are very important issues, and we seem to be reaching 
that point.
    Mr. Tenorio has recently requested some analysis from the 
CNMI Government on the effect of the austerity holidays on the 
Federal grant programs. For instance, if the Federal grant 
programs have been reduced, there may be some unintended 
reduction in Federal reimbursements simply because the Federal 
programs have also been reduced. And so that analysis is 
ongoing. At a time when local revenues are shrinking, the 
government really cannot afford to have the Federal 
reimbursements shrinking.
    Finally, I would like to briefly discuss CNMI's 
accountability challenges. The Government of CNMI, even before 
this crisis, has had longstanding financial accountability 
problems, including the inability to achieve clean audit 
opinions on financial statements due to numerous issues with 
reporting, financial reporting and compliance.
    CNMI has made some progress, but really needs to get to a 
point where it can pass an audit where reliable financial 
information is readily available, especially for making 
decisions in difficult times like this.
    According to CNMI's Secretary of Finance, the Fiscal Year 
2006 audit is proceeding well, and is anticipated to be 
submitted on time this year, by June 30 of 2007, which would 
represent a significant improvement over past history. And I 
will mention that for Fiscal Year 2005, they had made 
significant progress in that area, as well. So I am hoping that 
on the financial side, soon reliable, timely figures will be 
readily available. But we will have to wait and see when that 
comes in, and whether there is a clean financial audit opinion 
on those figures.
    Before concluding, I would like to just mention our 
recommendations from our December 2006 report. Our 
recommendations were addressed to Department of Interior's 
Office of Insular Affairs, dealing with the role they play in 
helping CNMI and the other insular areas to attract potential 
investors and businesses. And those recommendations mainly 
focused around measuring the impact and monitoring the impact 
of those efforts. OIA did agree with our recommendations, and 
in fact has been taking steps already to address those 
recommendations.
    In summary, strong leadership and commitment will be needed 
to address CNMI's serious economic, fiscal, and accountability 
challenges, and to achieve long-term stability and prosperity. 
The CNMI Government needs to continue to work toward 
sustainable solutions, and OIA, in response to our recent 
report, has expressed its commitment to working with CNMI 
toward that goal.
    In addition, I highly encourage the ongoing dialogue 
between Congress and CNMI officials to arrive at constructive 
and appropriate solutions for CNMI during this current economic 
and fiscal transition, and for the long term.
    Madame Chairwoman, this concludes my statement. I will be 
pleased to respond to any questions you or the Subcommittee 
Members have.
    [The prepared statement of Ms. Franzel follows:]

 Statement of Jeanette M. Franzel, Director, Financial Management and 
            Assurance, U.S. Government Accountability Office

    Madam Chairwoman and Members of the Subcommittee:
    I am pleased to be here today to discuss the Commonwealth of the 
Northern Mariana Islands' (CNMI) serious challenges in strengthening 
its economy, fiscal condition, and financial accountability. CNMI is a 
self-governing commonwealth of the United States that administers its 
own local government functions under its own constitution. CNMI 
consists of 14 islands in the North Pacific with a total land area 
about 2.5 times the size of Washington, D.C. In recent years, CNMI has 
experienced serious economic and fiscal challenges, and several 
indicators point to a fiscal crisis in Fiscal Year 2006.
    Today, I will highlight the recent economic trends in the CNMI 
economy, its weakening fiscal condition, and its financial 
accountability challenges. Our conclusions are based on work performed 
for our December 2006 report 1 on U.S. insular areas and our 
February 2007 testimony on CNMI before the Senate Committee on Energy 
and Natural Resources, 2 which was updated to include 
audited financial information through Fiscal Year 2005 and some recent 
developments in Fiscal Year 2006 based on information available as of 
February 2007. Today, we are also including additional information on 
CNMI's Fiscal Year 2006 status recently provided to us by CNMI's 
Secretary of Finance. We conducted our work in accordance with 
generally accepted government auditing standards.
---------------------------------------------------------------------------
    \1\ GAO, U.S. Insular Areas: Economic, Fiscal, and Financial 
Accountability Challenges, GAO-07-119 (Washington, D.C.: Dec. 12, 
2006).
    \2\ GAO, Commonwealth of the Northern Mariana Islands: Serious 
Economic, Fiscal, and Accountability Challenges, GAO-07-436T 
(Washington, D.C.: Feb. 8, 2007).
---------------------------------------------------------------------------
Summary
    The government of CNMI faces serious economic, fiscal, and 
financial accountability challenges. The government's ability to 
strengthen CNMI's economy has been constrained by CNMI's lack of 
diversification in industries. CNMI's economy is highly dependent on 
two industries: garment manufacturing and tourism. The garment 
manufacturing industry is facing the challenge of remaining 
internationally competitive against low-wage nations given recent 
changes in trade agreements. CNMI's tourism sector experienced a sharp 
decline in the late 1990s, and a series of external events, such as 
unfavorable economic trends of nearby countries and changes in airline 
practices, have further hampered the sector. Both the garment and 
tourism industries employ noncitizen workers who are paid wages lower 
than the U.S. minimum wage.
    The fiscal condition of CNMI's government steadily weakened from 
Fiscal Year 2001 through Fiscal Year 2005, the most recent year for 
which audited financial statements for CNMI are available. CNMI's fund 
balance, which generally reflects the amount of resources available for 
current government operations, went into a deficit balance during 
Fiscal Year 2002 and continued to decline through the end of Fiscal 
Year 2005. CNMI has also shown significant declines and negative 
balances in its reported net assets, which is another measure of fiscal 
health. In order to finance its government activities in an environment 
where expenditures have exceeded revenues, CNMI has increased its debt. 
In addition, several indicators point to a severe fiscal crisis during 
Fiscal Year 2006. The CNMI government implemented several drastic cost-
cutting and restructuring measures, including ``austerity holidays'' 
consisting of biweekly furloughs, during which government workers are 
not paid and many government operations are closed to reduce personnel 
and operating costs during Fiscal Years 2006 and 2007. Based on 
unaudited data recently provided to us by CNMI's Secretary of Finance, 
it appears that both revenues and expenditures for Fiscal Year 2006 
have significantly decreased from Fiscal Year 2005 levels.
    The government of CNMI has long-standing financial accountability 
problems, including the inability to achieve unqualified (``clean'') 
audit opinions on its financial statements, and numerous, long-standing 
material weaknesses in internal control over financial reporting and 
compliance with laws and regulations governing federal grant awards. 
CNMI received $65.6 million in federal grants in Fiscal Year 2005, and 
its audited financial statements are used by federal agencies for 
overseeing and monitoring the use of federal grants. With CNMI's 
continued inability to achieve clean opinions on its financial 
statements and the continuing material internal control weaknesses over 
financial reporting, there is limited accountability over its federal 
grants. Furthermore, the lack of timely and reliable financial 
information hampers CNMI's ability to monitor programs and the 
reliability of financial information, such as revenues and 
expenditures, in order to make informed decisions.
    The U.S. Department of the Interior ``s Office of Insular Affairs 
3 (OIA) has ongoing efforts to support economic development 
in CNMI and assist CNMI in addressing its accountability issues. A 
focused effort is called for where direct and targeted attention is 
concentrated on the challenges facing CNMI to help CNMI achieve 
economic and fiscal stability. OIA plays a key role in this effort by 
helping CNMI and the other insular areas improve their business 
climates, identify areas of potential for private sector investment, 
and market insular areas to potential investors. In response to our 
recent report, OIA expressed its commitments to continuing its 
comprehensive approach and to implementing other innovative ideas to 
assist CNMI and the other insular areas to continue to improve 
financial management and accountability and to support economic 
development.
---------------------------------------------------------------------------
    \3\ OIA's mission is to promote sound financial management 
processes, boost economic development, and increase the federal 
government's responsiveness to the unique needs of the insular areas.
---------------------------------------------------------------------------
Narrow Economic Base and Intrinsic and External Factors Limit Economic 
        Progress in CNMI
    Several factors constrain CNMI's economic potential, including the 
lack of diversification, scarce natural resources, small domestic 
markets, limited infrastructure, and shortages of skilled labor. The 
United States exercises sovereignty over CNMI, and in general, federal 
laws apply to CNMI. However, federal minimum wage provisions and 
federal immigration laws do not apply. 4 CNMI immigration 
policies and the demands for labor by the garment manufacturing 
industry and tourism sector have resulted in rapid population growth 
since 1980 such that the majority of the population are non-U.S. 
citizens. (See attachment I.) According to U.S. Census Bureau data for 
2000, the most recent census data available, about 56 percent of the 
CNMI population of 69,221 were not U.S. citizens.
---------------------------------------------------------------------------
    \4\ The U.S. House of Representatives and the Senate recently 
passed H.R. 2, ``Fair Minimum Wage Act of 2007'' as well as H.R. 1591, 
``U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq 
Accountability Appropriations Act, 2007'' either of which, if enacted, 
would make the federal minimum wage provisions applicable to the CNMI 
with a phased-in implementation.
---------------------------------------------------------------------------
    According to U.S. Census Bureau data for 2000, the median household 
income in CNMI was $22,898, a little more than half of the U.S. median 
household income of almost $42,000 for 2000. The percentage of 
individuals in poverty in 2000 was 46 percent, nearly four times the 
continental U.S. rate of 12 percent in that same year.
    CNMI's economy depends on two industries, garment manufacturing and 
tourism, for its employment, production, and exports. These two 
industries rely heavily on a noncitizen workforce. This workforce 
represents more than three quarters of the labor pool that are subject 
to the CNMI minimum wage, which is lower than the U.S. minimum wage. 
However, recent changes in trade laws have increased foreign 
competition for CNMI's garment industry, while other external events 
have negatively impacted its tourism sector.
Decline in Garment Industry Tied to Trade Law Changes
    Recent developments in international trade laws have reduced CNMI's 
trade advantages, and the garment industry has declined in recent 
years. Historically, while garment exporters from other countries faced 
quotas and duties in shipping to the U.S. market, CNMI's garment 
industry benefited from quota-free and duty-free access to U.S. markets 
for shipments of certain goods in which 50 percent of the value was 
added in CNMI. In recent years, however, U.S. agreements with other 
textile-producing countries have liberalized the textile and apparel 
trade. For example, in January 2005, in accordance with one of the 1994 
World Trade Organization (WTO) Uruguay Round agreements, the United 
States eliminated quotas on textile and apparel imports from other 
textile-producing countries, leaving CNMI's apparel industry to operate 
under stiffer competition, especially from low-wage countries such as 
China. 5 According to a DOI official, more than 3,800 
garment jobs were lost between April 2004 and the end of July 2006, 
with 10 out of 27 garment factories closing. U.S. Department of 
Commerce data show that the value of CNMI shipments of garments to the 
United States dropped by more than 16 percent between 2004 and 2005, 
from about $807 million to $677 million, and down from a peak of $1 
billion in 1998-2000. In 2006, reported garment exports to the United 
States fell further, by 27 percent compared to 2005, with exports 
declining to $495 million. The reported level of shipments to the 
United States in 2006 was comparable to levels of sales in 1995-1996, 
prior to the significant build-up of the industry. (See attachment II.) 
In December 2006, the largest and oldest garment factory closed. Given 
that the garment industry is significant to CNMI's economy, these 
developments will likely have a negative financial effect on government 
revenue. For example, reported fees collected by the government on 
garment exports fell 37 percent from $38.6 million in 2000 to $24.4 
million in 2005.
---------------------------------------------------------------------------
    \5\ GAO, U.S.-China Trade: Textile Safeguard Procedures Should Be 
Improved, GAO-05-296 (Washington, D.C.: Apr. 4, 2005).
---------------------------------------------------------------------------
External Events Affect Tourism
    CNMI's tourism sector experienced a sharp decline in the late 
1990s, and a series of external events have further hampered the 
sector. Tourism became a significant sector of economic activity in 
CNMI by the mid-1980s and continued to grow into the 1990s. According 
to the Marianas Visitors Authority, the number of visitors reached 
about 736,000 visitors in 1996 then sharply declined in 1998 and has 
not recovered since then. The Marianas Visitors Authority reported 
435,500 visitors in 2006. The reported visitor arrivals in 2006 were 59 
percent of the peak level in 1996.
    Due to its proximity to Asia, Asian economic trends and other 
events have a direct effect on CNMI's economy. For example, the Asian 
financial crisis and the cancellation of Korean Air service to CNMI 
following an airplane crash on Guam in August 1997 contributed to the 
decline. Visitors from Korea, the second largest source of tourists, 
decreased by 85 percent from 1996 to 1998. After a modest recovery in 
2000, tourism faltered again with the September 11, 2001, terrorist 
attacks on the United States. In 2003, according to CNMI officials, 
tourism slowed--with a double-digit decline in arrivals for several 
months--in reaction to the SARS epidemic and to the war in Iraq.
    Tourism in CNMI is also subject to changes in airline practices. 
For example, Japan Airlines (JAL) withdrew its direct flights between 
Tokyo and Saipan in October 2005, raising concerns because roughly 30 
percent of all tourists and 40 percent of Japanese tourists arrive in 
CNMI on JAL flights, according to CNMI and DOI officials. The Marianas 
Visitors Authority's June 2006 data show that the downward trend in 
Japanese arrivals is not being offset by the growth in arrivals from 
other markets such as China and South Korea. At the same time, CNMI has 
experienced an increase in Chinese tourists in recent years, which 
offers the potential to rebuild the industry.
CNMI's Reported Fiscal Condition Continues to Weaken
    The fiscal condition of CNMI's government steadily weakened from 
Fiscal Year 2001 through Fiscal Year 2005, the most recent year for 
which audited financial statements for CNMI are available. In addition, 
several indicators point to a severe financial crisis in Fiscal Year 
2006. CNMI's reported governmental fund balance declined from a 
positive $3.5 million at the beginning of Fiscal Year 2001 to a deficit 
of $84.1 million by the end of Fiscal Year 2005, as CNMI's expenditures 
for its governmental activities consistently exceeded revenues in each 
year since Fiscal Year 2002. (See attachment III.) Most of CNMI's 
governmental activities, which include basic services such as public 
safety, health care, general administration, streets and parks, and 
security and safety, are reported in its governmental activities, or 
government funds. The fund balance (or deficit) for these activities 
reflects the amount of funds available at the end of the year for 
spending. A significant contributing factor to the gap between 
expenditures and revenues is that actual expenditures exceeded budgeted 
expenditures for each fiscal year during the period 2001 through 2005.
    Another measure of fiscal health is the measure of net assets for 
governmental activities, which represents total assets minus total 
liabilities. The primary difference between the fund balance measure 
and net assets is that the net assets include capital assets and long-
term liabilities, whereas the fund balance figure focuses on assets 
available for current period expenditures and liabilities that are due 
and payable in the current period. CNMI has experienced a negative 
trend in its balance of net assets for governmental activities, going 
from a reported positive $40.6 million balance at the end of Fiscal 
Year 2001 to a negative $38 million balance 6 at the end of 
Fiscal Year 2005. (See attachment IV.)
---------------------------------------------------------------------------
    \6\ The net asset amount at September 30, 2005, when compared to 
the fund balance amount as of the same date, includes an additional 
positive balance of $46 million resulting from capital and deferred 
assets of approximately $180.8 million less long-term liabilities of 
$134.8 million.
---------------------------------------------------------------------------
    In order to finance its government activities in an environment 
where expenditures have exceeded revenues, CNMI has increased its debt 
and has not made the required contributions to its retirement fund. 
CNMI's reported balance of notes and bonds payable increased from $83 
million in Fiscal Year 2002 to $113 million in Fiscal Year 2005, 
representing an increase of 36 percent. CNMI's balance owed to its 
pension fund increased from $72 million in 2002 to $120 million in 
2005, representing an increase of 67 percent. CNMI has also been 
incurring penalties on the unpaid liabilities to the pension fund. The 
total amount of assessed penalties was $24 million as of September 30, 
2005.
    Although CNMI's audited Fiscal Year 2006 financial statements are 
not yet available, indicators point to a severe fiscal crisis during 
Fiscal Year 2006. In a May 5, 2006, letter to CNMI legislative leaders, 
Governor Benigno R. Fitial stated that ``the Commonwealth is facing an 
unsustainable economic emergency...I regret to say that the nature and 
extent of these financial problems are such that there is no simple or 
painless solution.'' CNMI implemented several significant cost-cutting 
and restructuring measures during Fiscal Year 2006. For instance, in 
August 2006, CNMI enacted its Public Law No. 15-24 to implement 
``austerity holidays'' consisting of biweekly furloughs, during which 
government employees are not paid and many government operations are 
closed. This measure was taken to help alleviate the financial crisis 
by saving millions of dollars in both personnel and operational costs. 
The measure declared one unpaid holiday per pay period for the 
remainder of Fiscal Years 2006 and 2007, reducing the government's 
normal pay period to 72 hours every 2 weeks. In June of 2006, CNMI 
enacted Public Law No. 15-15 to authorize the CNMI government to 
suspend the government's employer contributions to the retirement fund 
for the remainder of Fiscal Years 2006 and 2007. In addition, CNMI has 
passed laws to restructure loans among its component units, reform the 
rate of compensation for members of boards and commissions, increase 
the governor's authority to reprogram funds, and extend the date for 
full funding of the retirement fund's defined benefit plan--the 
unfunded pension liability was estimated at $552,042,142 as of October 
1, 2004. CNMI has also created a defined contribution retirement plan 
for government employees hired on or after January 1, 2007. These 
measures are immediate and dramatic, and are indicative of severe 
financial problems that will likely call for long-term solutions.
    Based on unaudited data recently provided to us by CNMI's Secretary 
of Finance, it appears that both revenues and expenditures for Fiscal 
Year 2006 have significantly decreased from Fiscal Year 2005 levels. 
The significant decline in revenues is likely due to declines in the 
garment manufacturing and tourism industries. Although these unaudited 
data are showing a balanced budget for the year with no significant 
changes to the cumulative deficit balance, these data are unaudited and 
could change due to adjustments identified in the audit process.
CNMI's Financial Accountability Remains Weak
    CNMI has had long-standing financial accountability problems, 
including the late issuance of its single audit reports, the inability 
to achieve unqualified (``clean'') audit opinions on its financial 
statements, and numerous material weaknesses in internal controls over 
financial operations and compliance with laws and regulations governing 
federal grant awards.
CNMI's Compliance with Single Audit Requirements
    As a nonfederal entity expending more than $500,000 a year in 
federal awards, CNMI is required to submit a single audit report each 
year to comply with the Single Audit Act, as amended. 7 
Single audits are audits of the recipient organization--the government 
in the case of CNMI--that focus on the recipient's financial 
statements, internal controls, and compliance with laws and regulations 
governing federal grants. Single audits provide key information about 
the federal grantee's financial management and reporting and are an 
important control used by federal agencies for overseeing and 
monitoring the use of federal grants.
---------------------------------------------------------------------------
    \7\ 31 U.S.C. Chp. 75.
---------------------------------------------------------------------------
    For fiscal years 1997 through 2005, CNMI did not submit its single 
audit reports by the due date, which is generally no later than 9 
months after the fiscal year end. CNMI's single audit submissions were 
significantly late for fiscal years 1997 through 2004, ranging from 22 
months late for Fiscal Year 2004 to 2 months late for Fiscal Year 1998. 
CNMI's late submission of single audit reports means that the federal 
agencies overseeing federal grants to CNMI did not have current audited 
information about CNMI's use of federal grant funds. CNMI made 
significant progress in 2005 by submitting its Fiscal Year 2005 single 
audit report less than 1 month late. According to CNMI's Secretary of 
Finance, the Fiscal Year 2006 single audit is progressing well and it 
is anticipated that the single audit report will be submitted to the 
Federal Audit Clearinghouse on time, by June 30, 2007.
CNMI Unable to Achieve ``Clean'' Audit Opinions Due to Persistent, 
        Significant Weaknesses
    The CNMI government has been unable to achieve unqualified 
(``clean'') audit opinions on its financial statements, receiving 
qualified opinions on the financial statements issued for fiscal years 
1997 through 2005. Auditors render a qualified opinion when they 
identify one or more specific matters that affect the fair presentation 
of the financial statements. The effect of the auditors' qualified 
opinion can be significant enough to reduce the usefulness and 
reliability of CNMI's financial statements.
    CNMI has made some progress in addressing the matters that resulted 
in the qualified opinions on its financial statements for Fiscal Years 
2001 through 2003. However, some of the issues continued to exist in 
2004 and 2005. The auditors identified the following issues in Fiscal 
Year 2005 that resulted in the most recent qualified audit opinion: (1) 
inadequacies in the accounting records regarding taxes receivable, 
advances, accounts payable, tax rebates payable, other liabilities and 
accruals, and the reserve for continuing appropriations; (2) 
inadequacies in accounting records and internal controls regarding the 
capital assets of the Northern Marianas College; and (3) the lack of 
audited financial statements for the Commonwealth Utilities 
Corporation, which represents a significant component unit of CNMI.
    Auditors for CNMI rendered qualified opinions on CNMI's compliance 
with the requirements for major federal award programs from 1997 
through 2005. In Fiscal Year 2005, the auditors cited noncompliance in 
the areas of allowable costs, cash management, eligibility, property 
management, procurement, and other requirements.
    CNMI's Secretary of Finance told us that he expects that the single 
audit report for Fiscal Year 2006 will show improvement from the 2005 
reporting in the area of qualifications to the audit opinion.
Weaknesses over Financial Reporting and Compliance with Requirements 
        for Major Federal Programs
    CNMI has long-standing and significant internal control weaknesses 
over financial reporting and compliance with requirements for federal 
grants. Table 1 shows the number of material weaknesses and reportable 
conditions for CNMI for Fiscal Years 2001 through 2005. The large 
number and the significance of reported internal control weaknesses 
raise serious questions about the integrity and reliability of CNMI's 
financial statements and its compliance with requirements of major 
federal programs. Furthermore, the lack of reliable financial 
information hampers CNMI's ability to monitor programs and financial 
information such as revenues and expenses and to make timely, informed 
decisions.
[GRAPHIC] [TIFF OMITTED] 34824.004


    CNMI's 13 internal control reportable conditions for Fiscal 
Year 2005, 9 of which were material weaknesses, indicate a lack of 
sound internal control over financial reporting needed to provide 
adequate assurance that transactions are properly recorded, assets are 
properly safeguarded, and controls are adequate to prevent or detect 
fraud, waste, abuse, and mismanagement. For example, one of the 
material internal control weaknesses that the auditors reported for 
CNMI's government for Fiscal Year 2005 was the lack of audited Fiscal 
Year 2005 financial statements of the Commonwealth Utilities 
Corporation (Corporation), a significant component unit of CNMI. 
Because the Corporation's financial statements were unaudited, the 
auditors could not determine the propriety of account balances 
presented in the financial statements that would affect CNMI's basic 
financial statements. CNMI's auditors also reported other significant 
material internal control weaknesses that have continued from previous 
years, such as improper tracking and lack of support for advances to 
vendors, travel advances to employees, liabilities recorded in the 
General Fund, and tax rebates payable. Due to the lack of detailed 
subsidiary ledgers and other supporting evidence, the auditors could 
not determine the propriety of these account balances. According to the 
auditors, the effect of these weaknesses is a possible misstatement of 
expenditures and related advances and liabilities, which also resulted 
in a qualification of the opinion on the Fiscal Year 2005 CNMI 
financial statements. Consequently, CNMI's financial statements may not 
be reliable.
    As shown in table 1, auditors also reported 38 reportable 
conditions in CNMI's compliance with requirements for major federal 
programs and the internal controls intended to ensure compliance with 
these requirements for Fiscal Year 2005, 2 of which were material 
weaknesses. One of the material internal control weaknesses affecting 
compliance with federal programs related to the failure to record 
expenditures for the Medical Assistance Program when they were 
incurred. Specifically, the auditors identified expenditures in Fiscal 
Year 2005 for billings from service providers for services rendered in 
previous years. The effect of this weakness is that expenditures 
reported to the grantor agency, the U.S. Department of Health and Human 
Services, are based on the paid date and not, as required, the service 
date. In addition, actual expenditures incurred during the year are not 
properly recorded and, therefore, current year expenditures and 
unrecorded liabilities are understated. The other material weakness 
affecting compliance related to the lack of adherence to established 
policies and procedures for managing and tracking property and 
equipment purchased with federal grant funds. As a result, CNMI's 
government was not in compliance with federal property standards and 
its own property management policies and procedures. The other 36 
reportable conditions concerned compliance with requirements regarding 
allowable costs; cash management; eligibility; equipment and property 
management; matching, level of effort, and earmarking; procurement and 
suspensions and debarment; reporting; subrecipient monitoring; and 
special tests and provisions that are applicable to CNMI's major 
federal programs.
Efforts to Assist CNMI in Its Economic and Accountability Challenges
    OIA has ongoing efforts to support economic development in CNMI and 
assist CNMI in addressing its accountability issues. OIA has in the 
last 3 years sponsored conferences in the United States and business-
opportunity missions in the insular areas to attract American 
businesses to the insular areas.
    OIA's efforts in helping to create links between the business 
communities in the United States and CNMI are key to helping meet some 
of the economic challenges. In our December 2006 report, 8 
we concluded that the insular areas would benefit from formal periodic 
OIA evaluation of its conferences and business-opportunity missions, 
including assessments of the cost and benefit of its activities and the 
extent to which these efforts are creating partnerships with businesses 
in other nations. We recommended that OIA conduct such formal and 
periodic evaluations to assess the effect of these activities on 
creating private sector jobs and increasing insular area income. OIA 
agreed with our recommendation.
---------------------------------------------------------------------------
    \8\ GAO-07-119.
---------------------------------------------------------------------------
    To promote sound financial management processes in the insular area 
government, OIA has increased its focus on bringing the CNMI government 
into compliance with the Single Audit Act. For example, OIA created an 
incentive for CNMI to comply with the act by stating that an insular 
area cannot receive capital funding unless its government is in 
compliance with the act or has presented a plan, approved by OIA, that 
is designed to bring the government into compliance by a certain date. 
In addition, OIA provides general technical assistance funds for 
training and other direct assistance, such as grants, to help the 
insular area governments comply with the act and to improve their 
financial management systems and environments.
    DOI's OIA and IG, other federal inspectors general, and local 
auditing authorities assist or oversee CNMI's efforts to improve its 
financial accountability. OIA monitors the progress of completion and 
issuance of the single audit reports as well as providing general 
technical assistance funds to provide training for insular area 
employees and funds to enhance financial management systems and 
processes. DOI's IG has audit oversight responsibilities for federal 
funds in the insular area.
    OIA staff members make site visits to CNMI as part of OIA's 
oversight activities. In our December 2006 report, 9 we 
recommended that OIA develop a standardized framework for its site 
visits to improve the effectiveness of its monitoring. We also 
recommended that OIA develop and implement procedures for formal 
evaluation of progress made by the insular areas to resolve 
accountability findings and set a time frame for achieving clean audit 
opinions. OIA agreed with our recommendations and noted that it had 
already made some progress during Fiscal Year 2006.
---------------------------------------------------------------------------
    \9\ GA0-07-119.
---------------------------------------------------------------------------
Conclusions
    CNMI faces daunting economic, fiscal, and financial accountability 
challenges. CNMI's economic and fiscal conditions are affected by its 
economy's general dependence on two key industries, which have 
experienced significant declines in recent years. In addition, although 
progress has been made in improving financial accountability, CNMI 
continues to have serious internal control and accountability problems 
that increase its risk of fraud, waste, abuse, and mismanagement.
    Efforts to meet formidable fiscal challenges in CNMI are 
exacerbated by delayed and incomplete financial reporting that does not 
provide officials with the timely and complete information they need 
for effective decision making. Timely and reliable financial 
information is especially important as CNMI continues to take actions 
to deal with its fiscal crisis.
    OIA has ongoing efforts to assist CNMI in addressing its 
accountability issues and to support economic development in CNMI. OIA 
officials monitor CNMI's progress in submitting single audit reports, 
and OIA provides funding to improve financial management. Yet, progress 
has been slow and inconsistent. The benefit to CNMI of past and current 
assistance is unclear. Federal agencies and CNMI have sponsored and 
participated in conferences, training sessions, and other programs to 
improve accountability, but knowing what has and has not been effective 
and drawing the right lessons from this experience is hampered by a 
lack of formal evaluation and data collection.
    Strong leadership is needed for CNMI to weather its current crisis 
and establish a sustainable and prosperous path for the future. During 
2006, the CNMI government took dramatic steps to reverse prior patterns 
of deficit spending. The CNMI government will need to continue to work 
toward long-term sustainable solutions. A focused effort is called for 
in which direct and targeted attention is concentrated on the 
challenges facing CNMI, with feedback mechanisms for continuing 
improvement to help CNMI achieve economic, fiscal, and financial 
stability. OIA plays a key role in this effort. In its comments on our 
December 2006 report, OIA pointed out that it provides ``a crucial 
leadership role and can provide important technical assistance'' to 
help CNMI and the other insular areas improve their business climates, 
identify areas of potential for private sector investment, and market 
insular areas to potential investors. It also noted that improving 
accountability for federal financial assistance for CNMI and other 
insular areas is a major priority. OIA has stated its commitment to 
continuing its comprehensive approach and to implementing other 
innovative ideas to assist CNMI and the other insular areas in 
continuing to improve financial management and accountability. 
Leadership on the part of the CNMI government and OIA is critical to 
addressing the challenges CNMI faces and to providing long-term 
stability and prosperity for this insular area.
    Madam Chairwoman and Members of the Subcommittee, this concludes my 
statement. I would be pleased to answer any questions that you and 
other Members of the Subcommittee may have at this time.
[GRAPHIC] [TIFF OMITTED] 34824.005

[GRAPHIC] [TIFF OMITTED] 34824.006

[GRAPHIC] [TIFF OMITTED] 34824.007

[GRAPHIC] [TIFF OMITTED] 34824.008


    Note 1: Financial data reflect CNMI's financial statements for 
its governmental activities, which include most of CNMI's basic 
services. These financial data do not include CNMI's component units, 
which are legally separate but related to CNMI. These financial data 
also do not include CNMI's fiduciary funds, because those funds cannot 
be used to finance CNMI operations.
    Note 2: CNMI's audited financial statements received qualified 
opinions from its external auditors and, therefore, these amounts are 
subject to the limitations cited by the auditors in their opinions and 
to the material internal control weaknesses identified.
    aOther financing includes transfers in and out of other 
funds.
    bGovernmental funds finance most of the basic services 
provided by the government.
    cThe end-of-year fund balance for the prior fiscal year 
may not agree with the beginning-of-year fund balance for the 
succeeding fiscal year due to amounts being restated in subsequent 
financial statements. We could not readily identify explanations for 
these restatements because comparative information was not always 
available or disclosures were not made in subsequent financial 
statements.
    dNet assets are capital assets and other assets, such as 
cash and receivables, less liabilities.
    eThe amount reported is the restated amount from the 
2003 single audit report, corrected because of excluded and misstated 
amounts.
    fGDP estimates are not available for 2001, 2003, 2004, 
and 2005.

                              Attachment V

GAO Contacts
    For further information about this testimony, please contact 
Jeanette Franzel, Director, Financial Management and Assurance at (202) 
512-9471 or [email protected], or David Gootnick, Director, 
International Affairs and Trade at (202) 512-4128 or [email protected]. 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this testimony. The following 
individuals made important contributions to this report: Norma Samuel, 
Emil Friberg, Jr., James Wozny, Sandra Silzer, Nicole McGuire, Meg 
Mills, and Seyda Wentworth.
Congressional Relations
    Gloria Jarmon, Managing Director, [email protected] (202) 512-4400, 
U.S. Government Accountability Office, 441 G Street NW, Room 7125, 
Washington, D.C. 20548.
Public Affairs
    Paul Anderson, Managing Director, [email protected] (202) 512-
4800, U.S. Government Accountability Office, 441 G Street NW, Room 
7149, Washington, D.C. 20548.
                                 ______
                                 
    [NOTE: The GAO report ``U.S. Insular Areas: Economic, 
Fiscal, and Financial Accountability Challenges,'' GAO-07-119 
(Washington, D.C.: Dec. 12, 2006), submitted for the record has 
been retained in the Committee's official files.]
    Mrs. Christensen. Thank you, Ms. Franzel. I guess I will 
begin with you, since you just finished your testimony.
    I, too, was impressed with the fact that the CNMI really 
took some strong measures to bring their budget into balance, 
as painful as it was and it continues to be. But it shows their 
commitment to try to do the best they can.
    But they have grown, the population has grown to now 
70,000, of which 56 percent is the foreign workers. Do you 
think that they can get out of this crisis without repatriating 
a large number of those workers?
    Ms. Franzel. Certainly, if you look at the population 
figures--and we do have a chart in the written statement that 
shows the drastic growth in those figures--many of those 
residents came to work in the apparel industry. And so now that 
that industry is shrinking, of course the question becomes what 
happens to those folks.
    I think what is really called for here is a comprehensive 
type of package. And so this would be one very important 
factor. But really a comprehensive multi-faceted plan. And I am 
assuming that in the framework that Mr. Cohen talked about, 
maybe he can elaborate, you know, that many of these factors 
would be taken into account.
    But you do have the population question. You have got the 
economic industry question, how can certain areas be grown. The 
government services question, the solvency question. Multi-
faceted issues here that need to be addressed.
    Mrs. Christensen. Thank you. Mr. Cohen, let me follow up, 
because you did suggest a strategic plan or something--I may 
not be using the exact term. And I know that under your 
leadership, you had hired Dr. Waliosman, the economist formerly 
with the Bank of Hawaii. You have had the Summer Fellows 
Program offered to graduate students from schools of business 
the opportunity to study and to do some research, and to report 
back to us.
    With all of these resources, have they been able to report 
back to you on some of the better prospects for economic 
development in this new environment, or identified the areas 
where tourism might focus to bring back that industry into the 
CNMI, or any other outcomes from that research?
    Mr. Cohen. Madame Chairwoman, we have identified a number 
of areas that hopefully show some promise. There are no big 
surprises; we didn't come up with any revelatory magic bullets. 
But a lot of the areas that people have talked about are areas 
that are worth looking at.
    Certainly tourism, you know, they have traditionally relied 
primarily on tourism from Japan. And there are a lot of 
constraints that are beyond their control that have affected 
tourism from Japan in a negative way, including just the 
reduction in service from Japan for reasons that go beyond the 
desirability of the CNMI as a destination. It continues to be a 
very desirable destination.
    But they have looked at diversified tourism to South Korea. 
They are getting charters now from Taiwan. They are getting 
charters now from Russia. And as the Resident Representative 
pointed out, the tourists from Russia tend to stay longer and 
spend more money, according to the visitor authority's 
statistics.
    And as the Resident Representative pointed out, they are 
the only jurisdiction in the United States that has approved 
destination status from the Peoples Republic of China. Now, 
being able to fully capitalize on that might present a number 
of challenges that we can discuss in greater detail. But there 
are opportunities, and there is indeed an imperative to 
diversify the tourism sector.
    People have looked at whether there is a potential for 
education as a business to offer, you know, revenues for the 
CNMI. And that continues to be a possibility. There currently 
isn't the infrastructure in the CNMI in the educational 
infrastructure to support that fully, and that really depends 
on the CNMI's continuing to have a competitive advantage over 
the rest of the U.S. in terms of access. Because if it is just 
as hard for a student with an F-1 visa, for example, to get 
into the CNMI as it is for such a student to get into anywhere 
else in the United States, it would be very difficult for the 
CNMI to compete in that industry.
    But nonetheless, there is a high demand for certifications, 
you know, of various types. Nursing exams have been given in 
the CNMI, but now they are being given in Manila, as well, so 
the promise--there continues to be promise there, but there are 
also challenges.
    There are opportunities, I think the Resident 
Representative mentioned, in the northern islands. There are 
deposits of a very valuable mineral called pozzolan, which some 
investors have expressed interest in trying to harvest. There 
are some opportunities we have identified in aquaculture, in 
specialty agriculture, undersea resources, as the Resident 
Representative has mentioned. There are a number of things that 
we have identified, but a lot of them will require a good deal 
of planning and effort, and also supporting infrastructure, to 
properly realize, and a stable legal environment, so that 
potential investors know what they are getting into.
    Mrs. Christensen. Thank you. Mr. Fortuno, I recognize you 
for your questions.
    Mr. Fortuno. Thank you again, Madame Chairwoman. And thank 
you to the members of the panel for being here this morning 
with us.
    You probably were here when I was asking Mr. Tenorio for 
any economic data that he may have, and actually I pass that 
along to both of you, as well. If you think there is any 
economic data, starting from the date of the compact until 
today, that may be useful for the Committee to understand the 
whole situation, we will appreciate getting it from both of 
you, as well.
    I have a question to begin with for Mr. Cohen. We are 
talking about the Federalization of the immigration policies. 
We have been discussing here today minimum wage legislation.
    I am starting to get a sense that perhaps the pendulum in 
terms of this relationship, that moved away from territorial 
status to a free association, may be going back. Could you 
expand on that?
    Mr. Cohen. Sure. Thank you, Mr. Fortuno. I guess 
historically, when the CNMI, before it was the CNMI, when the 
Northern Mariana Islands was part of the trust territory of the 
Pacific Islands, you know, the different island communities in 
the trust territory, had different views of how they wanted, 
how they envisioned their future.
    So three parts of that old trust territory opted for free 
association, and now we have the Republic of the Marshall 
Islands, the Federated States of Micronesia, and the Republic 
of Palau. And the Northern Mariana Islands is the only island 
chain in the old trust territory that opted to join the United 
States through the covenant as a commonwealth.
    So I am not sure if it is accurate to say the pendulum is 
swinging, although you could certainly----
    Mr. Fortuno. If I may, there is no spillover to the other 
territories that compose the whole number of islands of this 
economic situation at all? There has been none?
    Mr. Cohen. Well, that is a very good question. I mean, 
there is an impact, because the economies of the different 
islands, especially in Micronesia, are linked. They are 
certainly linked when there are negative impacts in, you know, 
the Federated States of Micronesia, for example. It results in 
migration to places like Guam and the Northern Mariana Islands.
    And then also migration from Saipan to Guam and elsewhere 
in the United States when, as now, the economy is doing poorly.
    But the CNMI situation is fairly unique, because it is part 
of the United States of America. Under the covenant it was 
given the opportunity to control its own immigration and set 
minimum wage. Congress reserved the right to reimpose that at 
such time and in such manner as it chose.
    I don't agree with the observations of those who said that 
this was inevitable, and it was merely postponed because the 
trust territory was still in effect. I think a reading of the 
history shows that that observation is actually not correct.
    But what is correct is that Congress has the authority at 
any time it wants to impose immigration control and apply 
Federal minimum wage law to the CNMI. And I think the pendulum 
is swinging in that direction. And indeed, now that that issue 
has been raised, now that we have had both Houses of Congress 
pass minimum wage Federalization legislation, and now that 
there is active discussion of Federalizing immigration, I would 
suggest that it is very important that these issues be handled 
with great care and thought, and also expeditiously.
    Because, as the Resident Representative pointed out, as 
long as we have this cloud of uncertainty hanging over the 
CNMI, and potential investors don't know what the rules are 
going to be, and hence, they don't know whether they want to 
commit resources to the CNMI, it has a chilling effect on the 
economy at precisely the wrong time.
    When I was in the CNMI last month, I was told that as a 
result of our most recent conference in Honolulu, the 
Secretary's Conference on Business Opportunities in the 
Islands, that there were at least 12 potential investors--this 
is according to the knowledge of only one person that was 
dealing with these companies--that were interested in investing 
in the CNMI, but wanted to know what the rules of the game were 
going to be.
    So I would urge us all to work together to resolve these 
issues as expeditiously and as thoughtfully as we can.
    Mr. Fortuno. Thank you. My time is up, so I yield back.
    Mrs. Christensen. We should have another round I think, 
though. Ms. Bordallo, you are recognized.
    Ms. Bordallo. Thank you. Thank you very much, Madame 
Chairman. I have one question for Mr. Cohen.
    What is the Administration's current position on the 
application of the Immigration and Nationality Act to the CNMI? 
And can you enlighten us on any evolution in the 
Administration's position on the Federalization of immigration 
in the CNMI since 2001, when the Senate considered in past 
legislation sponsored by Senators Murkowski and Akaka?
    Please clarify for us what the Administration's position 
was at that time on the legislation, and what it is today on 
the same principles and objectives put forward in that 
legislation, given the events that have transpired since the 
Senate passed that bill.
    Mr. Cohen. Thank you, Congresswoman Bordallo. In 2001, the 
Administration expressed its strong support for the Murkowski-
Akaka Bill that passed the Senate. That was through the Justice 
Department, but it was cleared through the Administration, so 
that was an Administration position strongly in support of that 
legislation to Federalize immigration in the CNMI, and, as you 
have said, apply the Immigration and Nationality Act to the 
CNMI.
    We were asked last year whether that was still our 
position, and our interim response was that a lot has changed 
since then. So we would like to consider this carefully in 
light of all the developments that have occurred since then, 
including the changing state of the economy, including progress 
that has been made in terms of protecting the rights of 
workers, and challenges that have arisen since then in terms of 
protecting the rights of workers, and all of the other factors 
that go into this mix.
    The current position of the Administration is that we are 
willing to work with Congress on this concept called flexible 
Federalization. We were given a drafting service by the Senate 
Committee on Energy and Natural Resources, and we are working 
very closely with our colleagues on the Senate side to draft 
legislation.
    When we present our product to the Senate, it will not 
carry with it at that time the endorsement of the 
Administration. But then we will work within the Administration 
to formulate a position.
    So the Administration will take a position on specific 
legislation when that legislation is ready, and we are working 
with the Congress to develop that legislation. But we are going 
to wait until the legislation is in place.
    Ms. Bordallo. Thank you. Thank you, Secretary Cohen. A 
report originating within DOJ written after 9/11 spoke of 
security and border concerns that stem from the CNMI's local 
control of immigration. And also, the Subcommittee staff 
recently had briefings in Guam with the Naval and the Air Force 
bases, where both commanders confirmed that CNMI's local 
control over immigration caused a security concern, especially 
considering the plans for increased military presence and 
relocation of assets in the region.
    Given this track record of concern, would you agree that, 
absent a Federal presence at CNMI's ports of entry, the 
security risk that has been expressed will continue to be a 
concern in the Marianas region?
    Mr. Cohen. We would agree that a Federal presence at the 
CNMI's ports of entry could be very beneficial in helping to 
address these security concerns, and it would give the Federal 
government a much greater degree of confidence that these 
concerns are being addressed.
    Ms. Bordallo. One followup, if I could, Madame Chairman. I 
just want you to know that with the enhancement of the 
military, the big movement to Guam, the CNMI, especially 
Saipan, will be considered as a training area. So I want to 
allay the fears of Representative Tenorio. I know he has been 
questioning me on that. But that for sure I know, that they are 
considering CNMI as a training area.
    I have one other question for you, Mr. Cohen. It is on a 
different topic. Does the government, the CNMI Government, 
enter into an MOU or something like that with the garment 
factories as to how they treat their workers upon closing? Such 
as severance pay or return airline tickets.
    I know that right now you currently have 13 factories still 
in existence, and two are supposed to close. Recently one of 
the largest factories closed, with 900 factory workers. What 
has happened to them? Are they leaving the island? Are they 
going elsewhere illegally?
    Mr. Cohen. Thank you, Congresswoman. I am going to start to 
answer the question, but also, since you have mentioned the 
arrangements that the government has had, you know, to address 
garment factory closures, I am going to also get the insights 
from someone who was directly involved in the discussions that 
helped formulate that policy, Mr. Benedetto.
    But actually, the number of garment factories is always a 
moving target because when larger garment factories close down, 
often others spring up that are smaller, perhaps operating much 
closer to the margin and much closer to the edge of what we 
would like to think of as best practice.
    So that is always a moving target. So there may be more 
than 13 at this point, but still, employment in the garment 
industry is rapidly declining.
    The CNMI has devoted a great deal of thought to how it will 
deal with major closures. And since Jim Benedetto was very 
actively involved in working up an agreement with the 
government and other interested parties in how to address this, 
if I could call on him to give you some more insights on that.
    Mrs. Christensen. No objection.
    Mr. Benedetto. Thank you. There is a memorandum of 
agreement in place between the Attorney General's Office, the 
Department of Labor, the Ombudsman's Office, the Chinese 
Economic Development Association and other stakeholders in the 
CNMI with regard to garment factory closures.
    Upon receiving notice that there is going to be a garment 
factory that is going to close its doors, each of the parties 
that are involved have respective duties which they are 
supposed to discharge within a certain number of days.
    The Attorney General's Office checks to see whether there 
are wages that might be owed to the workers, or whether there 
are taxes that might be owed to the CNMI Government, and takes 
steps to prevent the principals in some cases in those garment 
factories from leaving the jurisdiction without addressing 
those issues.
    The Department of Labor has the largest role. And what it 
does is it agrees to open up a compliance agency case, which 
does a speedy investigation into the causes for the closure, 
and then holds a transfer hearing for all the garment workers 
that are displaced. So that if the finding is made that the 
factory closed due to no fault of the workers, then they are 
all granted transfer relief within a certain amount of time.
    The Ombudsman's Office provides translator assistance so 
that they can conduct their investigations, and tries to 
ascertain whether there are going to be any problems with the 
travel documents of any of the workers that may choose to 
leave.
    And the Chinese Economic Development Association will 
assist in the speedy reapplication for travel documents that 
have expired or are close to expiration.
    Ms. Bordallo. Would you say these rules and regs are being 
followed?
    Mr. Benedetto. In my observation, yes, they are.
    Ms. Bordallo. So you don't have many workers roaming around 
on the island without any work, is that correct?
    Mr. Benedetto. Well, we do have a fair number of workers 
that are unemployed. And nobody knows how many of those have 
pending labor cases, or how many are simply overstaying.
    But the trend in the past year or so anyway has been, with 
respect to garment workers, that they are departing in large 
numbers once they realize that there are no jobs there for them 
to transfer to.
    And I don't have any figures available to give you, but I 
am told from the Department of Labor that something like 90 
percent of those workers that are displaced due to garment 
factory closures are choosing to go home, and have departed.
    Ms. Bordallo. Thank you. Thank you, Madame Chairman.
    Mrs. Christensen. Thank you. Mr. Flake, you are recognized 
for five minutes.
    Mr. Flake. Thank you. Mr. Cohen, with regard to this 
flexible Federalization, do you envision really any changes to 
the current immigration policy that CNMI has in terms of 
desired destination, with the memorandum of understanding they 
have with China or the others? Would those things be possible 
under this flexible Federalization? Is there anything that they 
are doing now, CNMI, or wish to do that you know of, that would 
be prohibited by the kind of flexible Federalization you 
envision?
    Mr. Cohen. Congressman, we are actively working now to 
develop the specific contours of the policy. But we are making 
every effort to include in that whatever the CNMI is doing now, 
other than things that, you know, I guess people would largely 
disapprove of.
    But all of the legitimate, you know, tourist markets and 
other types of visitor markets that they are currently engaging 
in, and others that have been mentioned to show promise, we are 
doing our best to see if those can be accommodated. So we are 
looking at the approved destination status agreement with 
China. We are looking at Russia, South Korea, Taiwan, the other 
tourist markets that show promise.
    And we are looking at ways to try to provide greater 
flexibility, in terms of access to the CNMI, than exists for 
the rest of the United States, and justifying that by 
maintaining what I call in my written statement the second 
firewall between the CNMI and the rest of the United States.
    In other words, continuing to treat travelers from the CNMI 
as if they are coming from a foreign country. Say, when they go 
to Guam or Honolulu. And requiring separate independent travel 
authorization to get into the rest of the United States.
    We are still discussing these. I had a very good meeting 
with a number of officials from various agencies of the 
Department of Homeland Security. We are discussing this with 
our colleagues in the Senate. But the hope is to find a way to 
offer as much flexibility as possible, including accommodating 
all of the activities that are currently ongoing and 
envisioned.
    Mr. Flake. Are there any countries that are excluded 
totally under CNMI immigration policy, that are not excluded by 
Guam or the mainland?
    Mr. Cohen. Yes, there are. In fact, there is a provision in 
CNMI immigration law that excludes certain countries, and I 
think at least one province in China from supplying visitors to 
the CNMI.
    Mr. Flake. What are the reasons for that?
    Mr. Cohen. I think the reasons are that there are concerns 
about these countries, and perhaps a policy decision by the 
CNMI that the resources that would be necessary to satisfy all 
the concerns about visitors from these places, it is not worth 
committing the resources for the benefit that you would receive 
by allowing these visitors in.
    And at least one or perhaps two--and I will defer to Jim on 
this--countries that are on the Guam visa waiver list are 
excluded under CNMI law.
    Do you have anything to add to that?
    Mr. Benedetto. I believe that Malaysia is one.
    Mr. Cohen. Malaysia. Indonesia?
    Mr. Benedetto. And I think Indonesia is another.
    Mr. Cohen. And Fujian Province in China.
    Mr. Flake. With regard to, it was mentioned that there was 
a point at which it was decided--and I understand on the 
minimum wage it has been an issue that has percolated and been 
discussed here quite a bit--when and what prompted the decision 
to Federalize or have some form of Federalization of 
immigration policy? What were the concerns? Were there certain 
incidents that prompted this type of analysis or conclusion 
that we needed to Federalize it? Can you go into that?
    Mr. Cohen. Sure. The concerns were, I guess in this round--
--
    Mr. Flake. Or were they just general concerns? You know, 
after 9/11 we need to be more careful.
    Mr. Cohen. Certainly. Well, there was the risk assessment 
that Congresswoman Bordallo mentioned. That risk assessment was 
very valuable. It was very rough. I mean, it was more in the 
spirit of, well, here are horrible scenarios that could 
possibly happen, and it didn't really get to the level of 
evaluating the probability that any of those scenarios might 
happen. But that would be, you know, a logical next step. So it 
was pretty much painting worst-case scenarios, but it was very 
valuable, you know, to help us focus on things that could 
conceivably happen in the CNMI.
    From the Senate side, both the Chairman and Ranking Member 
of the Senate Committee on Energy and Natural Resources have 
expressed these concerns, and asked us to take a look at it. 
And we have made every effort to be responsive to those 
requests.
    And the declining economy has prompted us all, in the CNMI, 
has prompted us all to ask the question, does the CNMI still 
have the ability to control its borders, even in the manner 
that it had in the past. And what types of pressures are going 
to be put on the CNMI in light of the rapid job loss in the 
garment industry, and the need to repatriate workers. Is it 
still going to be able to handle all of these concerns.
    We also have concerns about human trafficking. Because 
there is such a high percentage of aliens in the CNMI, there is 
a concern that there will be a disproportionate amount of that 
type of activity in the CNMI. So all of these things have 
contributed to a renewed interest in the immigration system in 
the CNMI.
    Mr. Flake. Thank you.
    Mrs. Christensen. Thank you, Mr. Flake. Mr. Benedetto 
maybe, I would like to follow up on the question about China, 
Indonesia, the other countries. Because one of the examples 
that the CNMI usually uses to show that they are, their 
immigration policy is a strong one, is their ability to refuse 
immigration from localities such as those in China and other 
places.
    What can you tell us about the enforcement, about that 
policy and how it is being enforced?
    Mr. Benedetto. Thank you for the question. The Division of 
Immigration has its own regulations. And under Section 804 they 
have a list of excluded locations, and these are locations that 
they have concern about for two reasons.
    Number one is the authenticity of travel documents. If they 
don't have confidence in the authenticity of those documents, 
then you don't know who you are letting in.
    And the second is the return of individuals who have been 
identified as over-stayers or people who should not be there. 
And if the country of origin does not want to take back its 
nationals, then that is also of great concern.
    There are about a dozen and a half, I guess, countries on 
that list. And one of them is the Fujian Province of China. And 
I believe this is a sound policy that the CNMI Government has 
adopted.
    However, there are some exceptions to it. You can get an 
Attorney General waiver or a Governor's exemption. And I have 
in the past written a number of letters to the CNMI Government 
to complain about the typical scam that we see, where people 
pay large amounts of money from Fujian Province to a recruiter, 
and then they are given contract documents and brought to the 
CNMI for a non-existent job, and then maybe coerced into 
prostitution or just left there with nothing to do, and a large 
debt at home.
    It is a matter of record that some of these human 
trafficking victims and these people who have been victimized 
by these scams have come in from Fujian Province under 
Governor's exemptions. And so there are obviously some things 
that need to occur in the followup there.
    I have recommended in the letters that I have sent to the 
government that they do prompt investigations of these cases; 
that they prosecute or take other enforcement action; and that 
they undertake a reexamination of their policies and 
regulations to try and stop those incidents from occurring.
    Mrs. Christensen. Thank you. Mr. Cohen, I am asking this 
question because it has been an issue before. So the question 
is, do you think the question of whether CNMI should have a 
delegate ought to be tied in any way to fixing these problems 
that we are discussing this morning?
    Mr. Cohen. Thank you, Madame Chairwoman. The answer is no, 
I don't. And the reason I say that there should be no 
conditionality on granting the CNMI representation in this body 
is every single other state and territory has representation in 
this body, is that we don't apply those standards to any other 
state and territory.
    Mrs. Christensen. Right.
    Mr. Cohen. We have problems in every single state and every 
single territory in this great nation. I remember, you know, 
before I moved out here from southern California, we had a 
great sweatshop scandal in southern California, where a bunch 
of people from Thailand were basically held prisoner in 
barracks in essentially an illegal garment factory. And we all, 
the authorities took appropriate measures to address that, but 
no one questioned whether the people of southern California had 
therefore sacrificed their right to representation in Congress, 
and were somehow no longer worth of representation in Congress.
    In fact, we don't have any sort of fitness test, other than 
you not be a convicted felon, that we apply to any other 
community for representation in Congress. And you all on this 
panel have spoken very eloquently about this subject in the 
past.
    So one would ask why would we apply some sort of fitness 
test to the CNMI? If certain people disagree with electoral 
decisions that they have made, or if certain people disagree 
with policy decisions that they have made, or even disapprove 
of policy decisions that they have made, that is well and good 
in the democratic process. We can work those things out.
    But for one group of Americans to sit in judgment about the 
democratic decisions that have been made by another group of 
Americans, and say therefore, you guys do not deserve to be 
represented in Congress the way that everybody else in America 
is represented, to me is not consistent with the principles 
that those soldiers from Saipan, Tinian, and Rota are fighting 
and dying for in Iraq and Afghanistan.
    Mrs. Christensen. Thank you. My last question is to you, 
Ms. Franzel, because I understand that you have done a lot of 
work with the D.C. Government, or some work, and so you may be 
familiar with their establishment of their Chief Fiscal Officer 
and the effects that that office has had on projecting revenue, 
keeping within spending limits, accounting for such 
expenditures, and so forth.
    Given the longstanding audit problems associated with the 
CNMI, would such a position be a positive, a step that you 
would recommend? Or would a CFO be an essential part of their 
recovery strategies?
    Ms. Franzel. The establishment of a CFO with certain 
responsibilities and reporting requirements was a very 
important element of the D.C. recovery.
    What you refer to as the D.C. situation in the early 
nineties, where the District of Columbia was literally 
bankrupt, not paying its bills, and many agencies were in 
dysfunction, there was a comprehensive reform package put in 
place which involved a combination of oversight, financial 
reform, some programmatic reforms where certain agencies were 
put into receivership; some assistance also from the Federal 
government, and some very stringent reporting and monitoring-
type requirements.
    So the CFO was part of all of that. And the establishment 
of the CFO with those reporting requirements was a very 
important element.
    One of the conditions for coming out of the control period 
for the District of Columbia did deal with balanced budgets, 
clean audit opinions, et cetera. And so the District did 
achieve that, as well as many other factors to come out of the 
control period. So it was a very important factor, as part of a 
comprehensive set of reform and assistance.
    Mrs. Christensen. Thank you. Do you have any further 
questions?
    Mr. Fortuno. Just a couple, perhaps. Ms. Franzel, you had 
mentioned unfunded pension liabilities of the CNMI. Could you 
expand a little bit about what were you referring to? And could 
you compare that situation with CNMI with perhaps a couple of 
the other territories, if you may?
    Ms. Franzel. The unfunded pension liability situation 
refers to accumulated promises that workers have earned under 
the current system. So for instance, they are part of the 
government retirement system; they have put in certain amounts 
of years of service. And under the current system, they have 
earned certain benefits. And funding means that the CNMI 
Government would be putting away a portion of that for future 
use.
    So for instance, really saving up for the time when those 
workers retire, and then using those funds to pay the retirees, 
so that you are really matching the earning of those benefits 
with the paying of that expense.
    There has been a long-term mismatch, OK, in the CNMI 
between the time period when the workers are earning the 
benefits, and there is just not enough in the savings account 
for future pensions. The numbers are very alarming. At 
September 30, 2005, it was reported as a $552 million shortfall 
if benefits were to be paid out at the promised amount, based 
on what people earned.
    Now, it could also be that the benefits need to be looked 
at, also. So you have really got both sides of the equation. 
Are the benefits being promised too generous? But you have also 
got the situation where the CNMI Government hasn't been paying 
into that fund. This is a long-term issue that will need to be 
dealt with.
    Mr. Fortuno. Do you have an idea what--you gave the total 
amount--what is the ratio, cover ratio, in terms of those 
benefits versus what is available? Is it 50 percent? Is it 40 
percent?
    Ms. Franzel. I do not know the details of their pension 
plan, but that is certainly something that needs to be looked 
at in light of this situation.
    I will mention that many other local jurisdictions in the 
mainland are having problems with their unfunded pensions right 
now. There have been new accounting rules put in place 
requiring local and state jurisdictions to do these 
calculations to figure out to what extent our pension plans are 
underfunded, and many local jurisdictions are starting to look 
at how generous are those benefits in relation to other 
benchmarks.
    So yes, it should be looked at for CNMI. And I just want to 
mention that other jurisdictions are going through this same 
type of analysis.
    Mr. Fortuno. OK. Well, thank you very much. I yield back 
the balance of my time.
    Mrs. Christensen. Thank you. Mr. Bordallo, do you have 
further questions?
    Ms. Bordallo. Yes, thank you. First I want to clear the 
record a bit on the movement of the Marines to Guam. I said 
earlier that they are looking at Saipan, I think, and what I 
should have said was that they are seriously considering 
training in Tinian.
    And second, Saipan will see some economic results, 
especially through the port. And that is that they are moving 
in there for supplies, and there will be embarkation and 
disembarkation activities going on. So Saipan will see activity 
with this enhancement of the Marines to Guam, and it is Tinian 
that is being seriously considered for training. So I just 
wanted to correct the record.
    I have a question here for Secretary Cohen. Is it possible, 
Secretary, to make a distinction between Federal control and a 
separate guest worker visa waiver program? Is this something 
that we can think about?
    Mr. Cohen. Thank you, Congresswoman Bordallo. We can 
certainly think about all sorts of ways to offer the CNMI the 
flexibility that it needs, first of all to continue to have a 
proper labor supply. Because when all is said and done, the 
indigenous work force in the CNMI is still very small. Almost 
anyone that has looked at this concludes that they are going to 
continue to need a significant amount of supplementation to 
their work force from outside; that they probably will not be 
able to attract from other jurisdictions in the U.S. or the 
federated states or the freely associated states.
    So we are definitely looking at how to continue to provide 
some degree of flexibility in that regard, as well as 
flexibility to let visitors in--in ways that visitors cannot 
access the rest of the U.S.
    Ms. Bordallo. And then I have another question for Ms. 
Franzel. Your testimony focused a lot around the inability for 
the CNMI to achieve unqualified audits. And sadly, today it was 
reported in the Saipan Tribune that due to the expected 15.6 
percent budget cut that will be implemented across government 
agencies, the cash-strapped public school system may have no 
choice but to start the next school year in October instead of 
the usual August.
    Does this inability on the part of the CNMI Government give 
any indication as to the overall management of the government 
and its ability to provide essential services to the community?
    Ms. Franzel. I will say that financial reporting and 
accounting is just a basic management function, and it is 
something that CNMI has struggled with for years.
    And so you can say, if CNMI is having troubles with this 
basic function, perhaps there are problems in other management 
functions for similar reasons. For instance, CNMI has had 
difficulty attracting people to the islands who have the 
financial expertise needed to really help fix the problems. And 
so it could be that other areas would be suffering from the 
same issues.
    And so these have been longstanding problems. I will say, 
however, that in times like this, it is extremely important to 
have a very good management and finance team on board for 
regular reporting, for decisions like these. You know, did they 
have timely, accurate financial information and other 
information available when making this decision? That is really 
the key question. And is the management and finance team 
suffering from the inability to attract and keep qualified 
people.
    Ms. Bordallo. You said in your statement earlier that 
things seem to be improving, but you are waiting for the latest 
audit, is that correct?
    Ms. Franzel. Things are improving in terms of timeliness. 
Now, I will tell you that that is for the audit report, and 
they do have nine months after the fiscal year to complete the 
audit report.
    We have been told by the Secretary of Finance that it will 
be on time. But those numbers are as of September 30, 2006. So 
in terms of management decisions, that is still way too late; 
however, in terms of complying with Federal law for grant 
recipients, which CNMI is, this might be the first year that 
CNMI has complied with that deadline.
    Ms. Bordallo. Thank you. Madame Chairman, in closing, this 
is probably going to be the last round, I just want to again 
say that I will continue to work very closely with the Resident 
Commissioner or the Resident Representative from the CNMI, Mr. 
Tenorio, until such time that U.S. Congress gives them what 
they deserve; and that is a voting representative to be a 
Member of the U.S. Congress.
    I always keep in mind that the citizens of CNMI are our 
brothers and sisters. And so until such time we decide to give 
them a voting representative in the U.S. Congress, I will 
continue to work with the CNMI Government.
    Thank you very much.
    Mrs. Christensen. Thank you. I wanted to also thank all of 
the witnesses for their testimony and their thoughtful, 
insightful answers to our questions.
    I think the first step that we need to take in that regard, 
Ms. Bordallo, maybe both of us need to reintroduce the bill. 
Because, I was inquiring, it has not yet been reintroduced, so 
we will move swiftly to do that.
    And we have a complex set of issues ahead of us, and the 
solutions are going to be just as complex. And so I look 
forward also to working with Mr. Tenorio, the Government of the 
Northern Mariana Islands, the Department of Interior Office of 
Insular Affairs, utilizing the expertise of the Government 
Accountability Office, and working with my colleagues to come 
up with some solutions to help our brothers and sisters in the 
CNMI.
    So thank you again for taking the time to be here with us 
this morning, and for your testimony.
    Let me just also add that the hearing record will be open 
for 10 days for responses that we would ask in writing. And if 
there is no further business before this Subcommittee, the 
Chairman again thanks the Members. And additional questions 
will be submitted in writing. We have 10 days for that.
    And therefore, if there is no further statement or 
business, the Subcommittee stands adjourned.
    [Whereupon, at 12:02 p.m., the Subcommittee was adjourned.]

                                 
