CNMI and Guam audits dispel claims of financial stewardship by governors

Audits out of Guam and the CNMI tell stories very different from what Gov. Lou Leon Guerrero, former Gov. Ralph Torres, and former Gov. Eddie Calvo have been saying about their respective administrations.

The single audit of CNMI federal funds for Fiscal Year 2020 reveals the Torres administration mishandled $47.8 million in questioned costs, accumulated $55.2 million in tax rebate debt to the people of the Commonwealth, violated travel laws, and absorbed $46 million in bad debt from autonomous agencies. And that’s only the beginning of a 275-page audit of federal funds through September 30, 2020. Mr. Torres never commissioned audits for Fiscal Years 2021 and 2022, which would cover all of the federal pandemic funds he expended from the American Rescue Plan Act.

On Guam, the administrations of former Gov. Eddie Calvo and current Gov. Leon Guerrero have failed to implement an astonishing 123 out of 182 recommendations for funds accountability. The total financial impact of these audit recommendations, according to Office of Public Accountability Report No. 23-01 is $ 794,001,343. The report encompasses the recommendations contained in 55 OPA reports from calendar years 2016 through 2021. These years equally spread the time period of Mr. Calvo’s final term, and Ms. Leon Guerrero’s first term.

Here is a summary (the subheadings) of the full article (which addresses components of the audits back and forth) below:

• Torres overspent federal funds, racked up $47.8M in questioned costs
• Significant questioned costs and financial impact in the Calvo administration
• $55.2M owed to the people of the Commonwealth
• Guam health insurance contract, illegal procurement of hotel by governor’s son in law remain unresolved audit matters
• Illegal first-class travel noted even after CNMI House began investigation
• Guam Cancer Trust Fund questioned costs, failure to collect gaming tax, and $40M in losses on property and other taxes
• Casino wrote checks that bounced, General Fund absorbed bad debts, and vendor paid $3M but failed to provide $1.4M worth of medical equipment

Torres overspent federal funds, racked up $47.8M in questioned costs

According to the CNMI single audit, as of September 30, 2020, the federal government gave the Torres administration $274 million in federal funds. This included the first pandemic relief package, the Coronavirus Aid Relief and Economic Security (CARES) Act. The Torres administration managed to overspend by nearly $20 million, with the audited financials showing an expenditure of $292.4 million by the end of Fiscal Year 2020.

From failures in reporting to missing documents, and from disallowed costs to eligibility of funds, the audit found the Torres administration jeopardized all future grants with $47.8 million in questioned costs and misuses of funds. The findings include questioned costs in the CNMI Nutrition Assistance Program, Unemployment Insurance, Coronavirus Relief Fund, Education Stabilization Fund, Child Care and Development Block Grant, Children’s Health Insurance Program, Medical Assistance Program, Disaster Grants, Hazard Mitigation Grant, Statistical Research and Methodology Assistance, and even capital improvement aid from the U.S. Department of the Interior.

“The CNMI is responsible for preparing a corrective action plan to address each audit finding,” independent auditors from Deloitte wrote in the single audit.

Gov. Arnold Palacios alluded to the findings of significant and egregious mishandling of finances by his predecessor in testimony to the U.S. Senate Energy and Natural Resources committee.

“We have also dedicated our limited resources towards finally completing long-delayed single audits of the Commonwealth government for fiscal years 2020 and 2021, and I have sought the assistance of the Public Auditor in reviewing the transition reports that have been prepared for each of the government’s departments and agencies,” Mr. Palacios wrote, signaling a return to commitments of annual audits that will ease anxiety among federal grant partners. “I have additionally requested federal technical assistance in conducting forensic audits of the Commonwealth’s federal and local accounts.”

Significant questioned costs and financial impact in the Calvo administration

The majority of the financial impact from GovGuam’s failure to implement 123 audit recommendations from 2016 to 2021 are under the Calvo administration, according to Guam Public Auditor Benjamin Cruz.

According to the audit, the financial impact under Mr. Calvo’s portion of the period in question is $734,213,356, while the balance of $59,787,955 is under Ms. Leon Guerrero’s first three years in office.

The largest financial impact pertains to the Guam Department of Public Works’s Unsystematic Pavement Management System for Village Streets, where potential savings of $254 million could have been realized if Mr. Cruz’s audit recommendations were followed.

Outstanding to this day, according to that audit, is $2.2 million in questioned costs related to the construction of FESTPAC festival huts at the Chamorro Village in Hagatna.

According to the audit, there is “$1.8M in unrealized revenues and in other financial impact due to lost [Department of Administration] and [Department of Revenue and Taxation] revenues and inaccurate ledgers pertaining to returned checks, $181.9M in questioned costs, $210.7M unrealized revenues, and $14.7M in other financial impacts pertaining to the DRT’s Gross Receipts Tax exemptions.”

$55.2M owed to the people of the Commonwealth

The CNMI single audit confirms what several legislators have suspected since the pandemic ripped open wounds of financial hardship among the middle and poor classes: that the former Gov. Torres was funding his lavish lifestyles and operations on the backs of taxpayers.

According to the single audit, as of September 30, 2020, the Commonwealth government had failed to pay tax rebates (as set forth in the Covenant) to the tune of $44,585,605. On top of that astounding category of payable is a debt to parents of $9,100,571 in the federal Additional Child Tax Credit (ACTC), and $1.5 million estimated 2020 liability based on Fiscal Year 2020 collections.

In a further breach of fiduciary duty, the auditors noted that out of an attempted test of 16 assessed and matched filings relating to individual and corporate tax rebate payables, eight tax returns were not provided to auditors, totaling $298,220 in payments from the Commonwealth government.

Guam health insurance contract, illegal procurement of hotel by governor’s son in law remain unresolved audit matters

Remember the controversy surrounding the procurement of the health insurance contract during the Calvo years? There remain $5 million in financial impact, according to the Guam audit, “from the lack of verification of refunds in the GovGuam health insurance contracts.”

More recently, the Leon Guerrero administration has done nothing to resolve $3 million in questioned costs from a 2021 audit of the alleged illegal sole source procurement of the Pacific Star Hotel as a quarantine facility. The procurement occurred under the direction of then-governor’s legal counsel Haig Huynh. The hotel, it was discovered following the procurement, had a multimillion dollar note with the same bank the governor’s family owns and runs. Mr. Huynh worked for that bank prior to his stint at Adelup, and went back to work for the bank after he resigned as governor’s legal counsel.

Former attorney general Leevin Camacho decided not to investigate or prosecute following the audit findings. It is rumored Attorney General Douglas Moylan is investigating the matter.

Illegal first-class travel noted even after CNMI House began investigation

According to the CNMI single audit, at least two instances of illegal premium travel occurred during Fiscal Year 2020, which was after the House of Representatives began a probe that included scrutiny of this illegal activity.

“Airline tickets for two [travel authorizations] were purchased for travel in premium class designation,” the single audit states.

Auditors also noted the Torres administration failed to furnish documents to justify the expenditure of a total $60,652 aggregated from four travel records. The employees who traveled, only are identified by employee number: 169498, 101261, 102581, and 212512.

Other comments by the auditors surrounding a test of 14 travel expenditures include:

“Travel vouchers (TVs) for two TAs were not submitted within fifteen days upon return from travel.”

“Lodging costs for three items exceeded the maximum daily lodging cost per the Per Diem Bulletin issued by PDTATAC.”

“Two supporting travel vouchers for two TAs were not provided.”

The auditors also noted the absence of travel vouchers and liquidation documents for at least five travel advances, four of which were from Business Unit 1021.

Guam Cancer Trust Fund questioned costs, failure to collect gaming tax, and $40M in losses on property and other taxes

Rounding out the audit recommendations Ms. Leon Guerrero has failed to address are more than $4 million in questioned costs under the University of Guam Cancer Trust Fund, and $2.4 million in potential savings there.

Also unresolved are “$40.1M in unrealized revenues from DRT’s forgone property tax revenues and revenue leakages,” according to the Guam audit report.

And, finally, Guam’s government still fails to collect $2.6 million in Limited Gaming Tax from the lucrative gaming activities of non profit organizations.

Casino wrote checks that bounced, General Fund absorbed bad debts, and vendor paid $3M but failed to provide $1.4M worth of medical equipment

According to the CNMI single audit of federal funds, the CNMI paid a vendor more than $3 million for 80 units of medical equipment. The documents audited reveal the Commonwealth government received only 45 of those equipments, resulting in an overpayment to the vendor of $1,368,000.

“No reconciliation or adjustment was provided by the CNMI to record a receivable from the vendor,” the auditors stated.

Also stated:

“As of September 30, 2020, the General Fund recorded returned checks receivable (account no. 1010.12800) of $5,614,652 for which no subsidiary ledger was provided. $4,676,801 of which refers to returned checks from the CNMI’s sole casino licensee. No analysis was performed by the CNMI to determine the propriety of the September 30, 2020 allowance for doubtful returned checks receivable. An allowance of $604,060 was recorded in the General Fund to provide for this account.”

“In October 2016, NMIRF transferred receivables from autonomous agencies of $46,051,656 to the CNMI. The CNMI has not obtained details of these receivables and has not assessed collectibility. In addition, no written document supported the transfer. The transfer has not been recorded as of September 30, 2020. No audit adjustment was proposed due to the uncertainty of collection.”