Reports Validate Palacios’ Claim of Fiscal Stabilization

Arnold Palacios has done what has not been accomplished since the late Eloy Inos was the governor of the CNMI: He recorded a true budget surplus during austerity, according to a December 31 report from his office to the Commonwealth Legislature.

The preliminary (unaudited) report shows that in Fiscal Year 2024, the government projected revenues of $163,415,312 and actually collected $168,281,901, a budget surplus of $4,866,589, or a 3 percent positive variance.

The feat was accomplished despite the floundering economy and – according to the report – because of the Palacios administration’s conservative revenue projections coupled with savings from cutbacks and increased inflows of federal and military spending. While the government anticipates recording a Fiscal Year 2024 surplus, it still must contend with the massive deficit accumulated throughout former Governor Ralph Torres’ administration and the severe underfunding of critical agencies, programs, and even the judicial branch.

Sources have explained that Mr. Torres in Fiscal Year 2021 caused a $66 million deficit that will be reflected in the audited financials for that year. The following fiscal year reportedly will show a $33 million deficit. Fiscal Year 2023, which began on October 1, 2022 and ended September 30, 2023, was shared between Mr. Torres and Mr. Palacios’ governorships. Torres was the governor for the first quarter of that fiscal year, then in January 2023, Mr. Palacios took over the remaining nine months of that budget year.

When Mr. Palacios assumed office, his finance chief reported a major cash shortfall, discovery of an $80 million over obligation of federal pandemic funds, and the former governor’s usage of almost the entirety of the governor’s office’s annual budget within the first quarter of the fiscal year. According to a well-placed source, the financials for Fiscal Year 2023 will show a slight deficit, all of the over expenditures caused by Mr. Torres in his final three months in office.

These three budget deficits in a row continue to hog tie the government’s ability to operate, detrimentally restricting cash flow. It should be noted that the former governor incurred these deficits during the same fiscal years he had unilateral control over a billion dollars in federal pandemic and recovery funds. None of the pandemic funds were leftover unobligated by the time Mr. Palacios took office as the governor.

 

Economic Growth and Decline By Sector, and Positive Outlook Due to Federal Spending

The revenue categories and their showing of projection surplus and shortfalls provide indications as to where the local economy is improving, and where it is failing.

In spite of repeated complaints by members of the Saipan Chamber of Commerce, the Hotel Association of the Northern Mariana Islands (HANMI), and at least one newspaper editor about sluggish economic growth, the retail, construction, and banking sectors of the economy collectively paid $11.9 million more in business gross receipts taxes (BGRT) than the Palacios administration projected for FY 2024. At a BGRT tax rate of anywhere from 1 to 5 percent on sourced revenue, this means businesses within the retail, construction, and financial services industries grossed decamillions in economic activity above what the government anticipated for FY 2024.

The Northern Marianas Territorial Income Tax collections for FY 2024 also show growth in the employment sector (though a break down was not provided) over what was expected. “Corporate and Individual NMTIT exceeded budgetary projections by $1.8 million and $1.8 million respectively,” the report to the legislature states. Excise tax (tax on imports of first use) collections, however, were extraordinarily short except for Tinian Customs Collections. The exponential increase there was attributed to the significant economic activity from the military buildup there.

Military and federal source spending are expected to pull the CNMI out of the economic malaise as $800 million in buildup activity coupled with half a billion dollars in other federal grants money are let out in the near future. Mr. Palacios’ economic strategy, since the inception of his administration, has been to offset tourism losses and the pandemic-inspired recession by seeking these federal sources.

“We must continue to work closely with the US Department of Defense and all our federal partners to ensure that projects are supported for swift completion and planned investments materialize and benefit the CNMI as soon as possible,” the governor wrote in his report to legislators. “We are also pleased to inform the Legislature that the total remaining balance for the infrastructure investments stands at over $500 million, inclusive of FEMA, CDBGDR, and other major federal grants. Together, these commitments represent a remarkable funding total of over One Billion Dollars that have been successfully secured.”

“These significant investments,” he continued in the outlook portion of his report, “not only highlight our dedication to enhancing military capabilities but also underscore the importance of collaboration in achieving our goals.”

 

Tourism’s Continued Struggle

The report also repeats previous data about the CNMI’s dismal effort to attract Asian travelers to Saipan, Tinian, and Rota. As of FY 2024, the CNMI has only recovered 44 percent of tourist arrival numbers compared to Fiscal Year 2019, which ended only months prior to the start of the pandemic. While arrivals did increase by 22 percent over FY 2023, the CNMI welcomed only 237,498 visitors in FY 2024, 75 percent of whom came from Korea.

Marianas Visitors Authority, HANMI, the chamber, and at least one editorial board have continuously pushed for increased tourism from China. However, data shows a global retraction of $133 billion in Chinese overseas travel in 2024 because of the growing economic concerns within the country.

Despite the lackluster performance of MVA, the legislature has continued to fund the agency with the governor’s consent without any demand for change in its marketing strategy and spending plans. The report places hope in anticipated increase in flights from source markets, however, it does not mention how or if any new plan exists to market Saipan, Rota, and Tinian to travelers from Korea, Japan, Taiwan, and other markets.