United States Government Accountability Office

GAO Testimony

Before the Subcommittee on Insular 

Affairs, Committee on Natural 

Resources, U.S. House of 

Representatives

COMMONWEALTH OF 

THE NORTHERN 

MARIANA ISLANDS 

For Release on Delivery 

Expected at 10:00 a.m. EDT 

Thursday, April 19, 2007

Serious Economic, Fiscal, 

and Accountability 

Challenges 

Statement of Jeanette Franzel, Director 

Financial Management and Assurance 

GAO-07-746T 
Page 2 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 report1

 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 

 

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). 

 
Page 3 GAO-07-746T 

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 Affairs3

 (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. 
Page 4 GAO-07-746T 

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 

 

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. 
Page 5 GAO-07-746T 

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. 

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 

 

5

GAO, U.S.-China Trade: Textile Safeguard Procedures Should Be Improved, GAO-05-296 (Washington, 

D.C.: Apr. 4, 2005). 
Page 6 GAO-07-746T 

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 balance6

 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 

 

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.
Page 7 GAO-07-746T 

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 

 

7

31 U.S.C. Chp. 75. 
Page 8 GAO-07-746T 

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. 

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. 
Page 9 GAO-07-746T 

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 

year 

Material 

weaknesses 

Reportable

conditions

Total Material 

weaknesses

Reportable 

conditions

Total

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 
Page 10 GAO-07-746T 

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 

 

8

GAO-07-119. 
Page 11 GAO-07-746T 

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. 

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. 

 

9

GA0-07-119. 
Page 12 GAO-07-746T 

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. 
Page 13 GAO-07-746T 

 Attachment I Attachment I 

Reported CNMI Population by Citizenship 

a

U.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. 

b The 2000 decennial population census is the most recent population census information available. 
Page 14 GAO-07-746T 

Attachment II Attachment II 

Reported U.S. Apparel Imports from CNMI 
Page 15 GAO-07-746T 

Attachment III Attachment III 

Reported Revenues, Expenditures, and Fund Balance 

for CNMI’s Government Activities 
Page 16 GAO-07-746T 

Attachment IV 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 contributions 49,348,134 71,964,627 57,560,034 63,006,595 64,346,950 

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 financinga 6,511,003 3,510,667 0 39,493,350 7,625 

Governmental funds beginning year 

balanceb

 3,540,878 19,609,305c (4,249,748) (35,011,807) c (49,245,390) 

Governmental funds end of year balance 17,219,852 (4,249,748) (25,263,285) (49,245,390) (84,077,330) 

Net Assets, end of yeard

40,575,181 30,760,955e 15,596,170 (18,656,437) (38,131,589) 

 Change in net assets -- (9,814,226) (15,164,785) (34,252,607) (19,475,152) 

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. 

 aOther financing includes transfers in and out of other funds. 

b

Governmental funds finance most of the basic services provided by the government. c

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. d

Net assets are capital assets and other assets, such as cash and receivables, less liabilities. e The amount reported is the restated amount from the 2003 single audit report, corrected because of 

excluded and misstated amounts. 

f

GDP estimates are not available for 2001, 2003, 2004, and 2005. 
Page 17 GAO-07-746T 

Attachment V Attachment V 

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