CNMI’s economy depends on two industries, garment manufacturing and  tourism, for its employment, production, and exports. 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. 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 an estimated 25  percent compared to 2005, with exports declining to an estimated $497  million. In December 2006, the largest and oldest  garment factory closed. For example, tourism in CNMI experienced a sharp decline in  the late 1990s with the Asian financial crisis and due to the cancellation of  Korean Air service to CNMI following an airplane crash on Guam in  August 1997. CNMI’s Reported Fiscal Condition Continues to Weaken

The fiscal condition of CNMI’s government has steadily weakened from  fiscal year 2001 through fiscal year 2005, the most recent year for which  audited financial statements for CNMI were available. In addition, several  indicators point to a severe financial crisis in fiscal year 2006. As shown in  figure 4, 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. 15-24 to implement “austerity holidays”  consisting of bi-weekly furloughs, during which government employees  are not paid and many government operations are closed. 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. 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. It is important to note however, that many  of the auditors’ findings, particularly those categorized as material  weaknesses, are longstanding findings going back in some cases to 1987. In our December 2006 report, we recommended that OIA  develop a standardized framework for its site visits to improve the  effectiveness of its monitoring. 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. 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. 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. 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. This is a work of the U.S. government and is not subject to copyright protection in the  United States.
Why GAO Did This Study

The U.S. insular area of the Commonwealth of the Northern Mariana Islands (CNMI) is a self-governing commonwealth of the United States that comprises 14 islands in the North Pacific. In a December 2006 report--U.S. Insular Areas: Economic, Fiscal, and Financial Accountability Challenges (GAO-07-119)--regarding four insular areas including CNMI, GAO identified and reported the following: (1) economic challenges, including the effect of changing tax and trade laws on their economies; (2) fiscal condition; and (3) financial accountability, including compliance with the Single Audit Act. The Chairman of the Senate Committee on Energy and Natural Resources, which requested the December 2006 report, asked GAO to present and discuss the results as they pertain to CNMI. Our summary and conclusions are based on our work performed for our December 2006 report on U.S. insular areas. For this testimony we also had available CNMI's fiscal year 2005 audited financial statements, which we have included in our review, along with some recent developments in fiscal year 2006.

What GAO Found

The Commonwealth of the Northern Mariana Islands (CNMI) faces serious economic, fiscal, and financial accountability challenges. CNMI's economy depends heavily on two industries, garment manufacturing and tourism. However, recent changes in U.S. trade law have increased foreign competition for CNMI's garment industry, while other external events have negatively affected its tourism sector. CNMI's garment industry has declined in recent years with factory closings and reduced production. The value of garment shipments to the United States dropped by more than 16 percent between 2004 and 2005 and by an estimated 25 percent in 2006. Tourism in CNMI declined sharply in the late 1990s as a result of a series of external events, including the Asian financial crisis; cancellation of Korean Air service; and fears of international crises such as the SARS epidemic, terrorism, and the Iraq war. In 2005, Japan Airlines withdrew direct flights to the capital. The fiscal condition of CNMI's government has steadily weakened from fiscal year 2001 through fiscal year 2005, as government spending has exceeded revenues each year since 2002. CNMI ended fiscal year 2005 with a deficit of $84.1 million in its governmental fund balance. CNMI's liabilities also exceed its assets for its primary government. Indicators point to a severe financial crisis in fiscal year 2006. In response, the CNMI government has implemented 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. CNMI's long-standing financial accountability problems include the late submission of financial audit reports, inability to achieve "clean" opinions in its financial statements by the independent financial auditors, and reports showing serious internal control weaknesses over financial reporting. Many of the auditors' findings are longstanding, going back in some cases to 1987. Federal agencies and CNMI have sponsored and participated in conferences, training sessions, technical assistance, and other programs to improve CNMI's economy, fiscal condition, and accountability. During 2006, the CNMI government took steps to reverse its prior patterns of deficit spending. It will need to continue to work toward long-term sustainable solutions, with concentrated attention on the challenges facing the islands and feedback mechanisms for continuing improvement. Leadership on the part of the CNMI government and the Department of the Interior's Office of Insular Affairs is critical to providing long-term stability and prosperity for this U.S. insular area.