Commonwealth of the Northern Mariana Islands: Serious Economic,  
Fiscal, and Accountability Challenges (19-APR-07, GAO-07-746T).  
                                                                 
The Commonwelth of the Northern Mariana Islands (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. This testimony highlights 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 on U.S.	 
insular areas and our February 2007 testimony on CNMI before the 
Senate Committee on Energy and Natural Resources, 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.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-746T					        
    ACCNO:   A68527						        
  TITLE:     Commonwealth of the Northern Mariana Islands: Serious    
Economic, Fiscal, and Accountability Challenges 		 
     DATE:   04/19/2007 
  SUBJECT:   Accountability					 
	     Audit reports					 
	     Clothing industry					 
	     Financial records					 
	     Financial statement audits 			 
	     Funds management					 
	     Internal controls					 
	     International trade				 
	     Tourism						 
	     Northern Mariana Islands				 

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GAO-07-746T

   

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                 United States Government Accountability Office

Testimony

GAO

Before the Subcommittee on Insular Affairs, Committee on Natural Resources, U.S.
                            House of Representatives

For Release on Delivery       COMMONWEALTH OF THE NORTHERN                 
Expected at 10:00 a.m. EDT                                                 
Thursday, April 19, 2007                                                   
                                 MARIANA ISLANDS                              
                                 Serious Economic, Fiscal, and Accountability 
                                 Challenges                                   
                                 Statement of Jeanette Franzel, Director      
                                 Financial Management and Assurance           

GAO-07-746T

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.

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.

^1GAO, U.S. Insular Areas: Economic, Fiscal, and Financial Accountability
Challenges, GAO-07-119 (Washington, D.C.: Dec. 12, 2006). ^2GAO,
Commonwealth of the Northern Mariana Islands: Serious Economic, Fiscal,
and Accountability Challenges, GAO-07-436T (Washington, D.C.: Feb. 8,
2007).

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.

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.

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 dutyfree 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.

^4The 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.

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.

^5GAO, U.S.-China Trade: Textile Safeguard Procedures Should Be Improved,
GAO-05-296 (Washington, D.C.: Apr. 4, 2005).

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.)

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.

^6The 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.

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.

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.

Table 1: Reported Weaknesses Identified in the Auditors' Reports for
Fiscal Years 2001 through 2005

      Internal control over financial reporting in accordance with government
                          auditing standards (report on financial statements)

Compliance with requirements applicable to each major program and internal
       control over compliance with OMB Circular No. A-133 (report on federal
                                                                      awards)

Fiscal       Material  Reportable   Total      Material Reportable   Total 
year     weaknesses    conditions          weaknesses   conditions         
       2001           10            0      10            4          13     17 
       2002            9            1      10            2          14     16 
       2003           10            2      12            1          15     16 
       2004            8            5      13            2          31     33 
       2005            9            4      13            2          36     38 

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.

^8GAO-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.

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.

^9GA0-07-119.

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.

                           Attachment I

                    Reported CNMI Population by Citizenship

aU.S. citizenship was not conferred to residents of CNMI until 1986.
However, the CNMI Central Statistics Division has classified persons born
in CNMI together with persons born in the United States or other
territories as "U.S. citizens" for 1980.

bThe 2000 decennial population census is the most recent population census
information available.

                          Attachment II 

Reported U.S. Apparel Imports from CNMI

                         Attachment III 

Reported Revenues, Expenditures,  and Fund Balance  for CNMI's  Government
Activities

Attachment IV                                                                 
                    CNMI's Fiscal Condition
                                       Fiscal years ending September 30,
                      2001         2002             2003            2004           2005     
Data                                                                                        
Own source revenues 227,709,651    215,650,986     225,412,808    235,754,891   244,183,778 
Federal                                                           63,006,595     64,346,950 
contributions         49,348,134      71,964,627      57,560,034                            
Total revenues      $277,057,785 $287,615,613    $282,972,842    $298,761,486   308,530,728 
Total expenditures  258,177,431    314,985,333     303,986,379    352,488,419   343,370,293 
Revenues less                                                                               
expenditures                                                                                
[Surplus/(deficit)]    18,880,354     (27,369,720)   (21,013,537) (53,726,933) (34,839,565) 
Total net other                                                    39,493,350         7,625 
financinga                 6,511,003       3,510,667            0                           
Governmental funds                                                                          
beginning year                                                                              
balance b                  3,540,878   19,609,305c   (4,249,748)  (35,011,807) (49,245,390) 
                                                                       c                    
Governmental funds                                                (49,245,390) (84,077,330) 
end of year balance    17,219,852      (4,249,748)   (25,263,285)                           
Net Assets, end of                                                (18,656,437) (38,131,589) 
year d                 40,575,181      30,760,955e    15,596,170                            
Change in net                                                     (34,252,607) (19,475,152) 
assets                                 (9,814,226)   (15,164,785)                           
Calculations                                                                                
Federal                                                                                     
contributions as a                                                                          
percent of                                                                                  
revenues                    17.8              25.0           20.3       21.1           20.9 
Government revenue                                                                          
as percent of GDPf                             .30                                          
Government                                                                                  
expenditures as                                                                             
percent of                                                                                  
GDPf                                              .33                                       

Source: GAO analysis of single audit reports covering fiscal years 2001,
2002, 2003, 2004, and 2005. The estimate of GDP, in the amount of
$946,854,877, came from Final Trip Report on Benchmark Estimates of 2002
Gross Domestic Product in the Commonwealth of the Northern Mariana
Islands, U.S. Census Bureau, Feb. 11, 2005.

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.

ather financing includes transfers in and out of other funds.

bGovernmental funds finance most of the basic services provided by the
government.

The 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.

(194695)

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