Territorial governments issue debt securities and receive loans for a variety of purposes, including to finance long-term investments, such as infrastructure projects, and to fund government operating costs. For the purposes of this report, total public debt outstanding refers to the sum of bonds and other debt held by and payable to the public, as reported in the territories’ single audit reports. Bonds payable are marketable bonded debt securities issued by the territories’ primary governments or their component units and held by investors outside those governments. The primary government is generally comprised of governmental activities (generally financed with taxes and intergovernmental aid) and business- type activities (generally financed with charges for goods and services). Component units are legally separate entities for which a government is financially accountable. For the purposes of this report, any reference to total government activity and balances includes both the primary government and component units. Other debt payable may include shorter term marketable notes and bills issued by territorial governments and held by investors outside those governments, non-marketable intragovernmental notes, notes held by local banks, federal loans, intragovernmental loans, and loans issued by local banks. Pension liabilities and other post-employment benefits (OPEB) are not included in our definition of total public debt. Marketable debt securities, primarily bonds with long-term maturities, are the main vehicle by which the territories access capital markets. Municipal bonds issued by all five territories have traditionally been attractive to investors because they are triple tax exempt; interest from the bonds is generally not subject to federal, state, and local income taxes regardless of an investor’s state of residence. There are several different types of marketable debt securities: General obligation bonds are bonds issued by territorial governments that are payable from the general funds of the issuer, although the precise source and priority of payment for general obligation bonds may vary considerably from issuer to issuer depending on applicable law. Most general obligation bonds are said to entail the full faith and credit (and in many cases the taxing power) of the issuer, depending on applicable law. In USVI, unlike in the other four territories in which general obligations bonds are backed by the full faith and credit of the government, debt issued by the primary government is either backed by 1) both a general obligation of the government and revenue from USVI’s gross receipts tax, or 2) revenue from the federal excise tax on rum rebated to the territory. Limited obligation bonds are bonds payable from specific taxes that are limited by law in rate or amount, while revenue bonds are payable from specific sources of revenue. Marketable notes differ from bonds in that they are short-term obligations of an issuer to repay a specified principal amount on a certain date, together with interest at a stated rate, usually payable from a defined source of anticipated revenues. Notes usually mature in 1 year or less, although notes of longer maturities are also issued. Bonds and notes may be issued by both the territories’ primary governments and by their component units. Examples of the territories’ component units are USVI’s Water and Power Authority, Guam’s Airport Authority, CNMI’s Ports Authority, and Puerto Rico’s Electric Power Authority. Unlike the states, territories are prohibited from authorizing their component units to seek debt restructuring under Chapter 9 of the federal bankruptcy code, which can be used to extend the timeline for debt repayment, refinance debt, or reduce the principal or interest on existing debt. U.S. law restricts the territories’ authority to impose certain territorial taxes. Three territories—Guam, CNMI, and USVI—are required by U.S. law to have a mirror tax code. In general this means that these territories must use the U.S. Internal Revenue Code (IRC) as their territorial income tax law. In contrast, American Samoa and Puerto Rico, which are not bound by a mirror tax code, have established and promulgated their own income tax regulations. Although Guam and CNMI are mirror-code jurisdictions, they are authorized under the Tax Reform Act of 1986 to delink from the IRC if certain conditions are met. Revenues are amounts that result from governments’ exercise of their sovereign power to tax or otherwise compel payment. Revenues also include income generated by the territories’ component units. While our analysis primarily focuses on trends in general revenues, we also include total revenue—general revenues and program revenues combined—in our analysis. In addition to general revenue levels, another measure of fiscal health is the net position for primary government activities, which represents the difference between the primary government’s assets (including the deferred outflows of resources) and the primary government’s liabilities (including the deferred inflows of resources). In other words, the net position for primary government activities reflects what the primary government would have left after satisfying its liabilities. A negative net position means that the primary government has more liabilities than assets. A decline in net position may indicate a deteriorating financial position. While our analysis primarily focuses on trends in the net position for the primary government, we also include certain information on trends in the total net position—primary government net position and component unit net position combined— for the government. Fiscal risks refer to responsibilities, programs, and activities that may legally commit or create the expectation for future government spending. Fiscal risks may be explicit in that the government is legally required to fund the commitment, or implicit in that an exposure arises not from a legal commitment, but from current policy, past practices, or other factors that may create the expectation for future spending. Civilian pension benefits are typically an example of an explicit fiscal risk because the government has a legal commitment to pay pension benefits earned by current government employees who will receive benefits in the future and to pay retirees who currently receive benefits. Puerto Rico’s total public debt outstanding increased continuously between fiscal years 2005 and 2014. (See figure 2.) Total public debt grew from $39.2 billion in fiscal year 2005 to $67.8 billion at the end of fiscal year 2014 —an average rate of 6.3 percent per year. Bonded debt outstanding —including mainly general obligation and revenue bonds—represented the majority of total public debt outstanding for all years. Bonded debt outstanding averaged 86 percent of total public debt between fiscal years 2005 and 2014, increasing from a total of $35 billion in fiscal year 2005 to $58.5 billion in fiscal year 2014. Puerto Rico’s Consolidated Audited Financial Report for fiscal year 2015 was not available as of June 2017. However, in the March 13, 2017, fiscal plan released by the Government of Puerto Rico, total public debt outstanding was listed as $74.3 billion as of February 2017. As of fiscal year 2014, the primary government’s bonded debt outstanding was mainly comprised of revenue bonds. These accounted for $24.3 billion of the $37.9 billion in total bonded debt. In contrast, between fiscal years 2005 and 2008, general obligation bonds represented the majority of the primary government’s bonded debt. In fiscal year 2009, the amount of revenue bonds outstanding tripled. The risks of general obligation bonds and revenue bonds are different. A revenue bond is secured by a specific revenue stream, identified in the bond contract, whereas a general obligation bond is secured by the full taxing power of the government, but also reliant on the full faith and credit of the issuing government. Puerto Rico also issued notes between fiscal years 2005 and 2014. Puerto Rico’s primary government and the three largest component units—the Puerto Rico Electric Power Authority (PREPA), the Puerto Rico Aqueduct and Sewage Authority (PRASA), and the Puerto Rico Highways and Transportation Authority (PRHTA)—owed the majority of Puerto Rico’s public debt outstanding in fiscal year 2014. (See table 1.) These component units mostly issued debt backed by their own resources, including the revenue generated from their operations. Other component units also held public debt in fiscal year 2014, including the Government Development Bank, State Insurance Fund Corporation and the Puerto Rico Trade and Export Company, among others. The primary government’s share of total public debt outstanding grew relative to debt owed by all of the component units from 44 percent in fiscal year 2005 to 59 percent in fiscal year 2014. Puerto Rico’s total public debt outstanding as a percentage of Gross Domestic Product (GDP) grew from 47 percent in fiscal year 2005 to 66 percent in fiscal year 2014, and its ratio of total public debt outstanding to Gross National Product (GNP) grew from 71 percent of GNP in fiscal year 2005 to 99 percent in fiscal year 2014. (See figure 3.) GDP measures the value of goods and services produced inside a country, or for the purpose of this report, a territory. In contrast, GNP measures the value of goods and services produced by its residents. GNP includes production from residents abroad and excludes production by foreign companies in a country. In Puerto Rico, GDP has consistently been greater than GNP, which means that production by foreign companies in Puerto Rico is larger than production by Puerto Rican residents in the territory and abroad. For this reason, according to the U.S. Department of the Treasury, GNP is generally a more representative measure of Puerto Rico’s economic activity than GDP. A July 2014 report by the Federal Reserve Bank of New York stated that debt to GNP ratios above just 60 percent can inhibit economic growth because they generally lead to higher financing costs and limit access to other sources of financing. Puerto Rico’s share of total public debt outstanding to GNP has remained above 90 percent since 2010. Puerto Rico’s total public debt outstanding per capita has almost doubled since fiscal year 2005, rising from $10,000 per person in fiscal year 2005 to $19,000 per person in fiscal year 2014. (See figure 4.) Puerto Rico’s general revenue fluctuated between fiscal years 2005 and 2014, with lows around $11.6 billion between fiscal years 2008 and 2010 and again in 2013. Puerto Rico’s general revenue in fiscal year 2014 was $13.8 billion, of which 75 percent or $10.3 billion was tax revenue. Most of the tax revenue for the same year was reported as income taxes (52 percent of the total or $5.4 billion) and excise taxes (33 percent of the total or $3.4 billion.) Revenue in fiscal year 2014 increased by over $2 billion from the prior year. The majority of this growth was due to increases in income and excise taxes. Puerto Rico’s total revenue (i.e. general revenue and program revenue combined) also fluctuated but grew slightly by 3 percent on average, per year, from $25.5 billion in fiscal year 2005 to $32.5 billion in fiscal year 2014. (See figure 5.) Despite the growth in revenue in fiscal year 2014, Puerto Rico’s net position for the primary government as of fiscal year end 2014 was a negative $49.7 billion, declining from a negative $46.4 billion as of fiscal year end 2013. Moreover, despite the fluctuations in revenue between fiscal years 2005 and 2014, Puerto Rico’s net position for the primary government declined year over year from a negative $15.2 billion as of fiscal year end 2005 to a negative $49.7 billion as of fiscal year end 2014. Puerto Rico’s declining net position for the primary government reflects its deteriorating financial position. Further, the effect of Puerto Rico implementing Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions —An Amendment of GASB Statement No. 27, is not yet known. GASB Statement No. 68 was in effect for fiscal years beginning after June 15, 2014, and established standards for measuring and recognizing liabilities, deferred outflows of resources, and deferred inflows of resources related to pensions. For each of the other territories that implemented GASB Statement No. 68, implementing the statement resulted in the territory recognizing previously unrecognized net pension liabilities and, therefore, a decline in ending net position in the year of recognition. Puerto Rico’s total net position for the primary government and component units combined also declined year over year between fiscal years 2005 and 2014, from a positive $2.5 billion as of fiscal year end 2005 to a negative $43.6 billion as of fiscal year end 2014. Puerto Rico officials, representatives from ratings agencies that we spoke to, and publically available reports that we reviewed cited various major factors as contributors to Puerto Rico’s high debt levels. The factors cited include the following: Public debt financing government operations: Ratings agency officials told us that Puerto Rico has long used public debt as a means to finance general government operations and indicated that debt has been used for this purpose in Puerto Rico since at least 2000. According to these officials, the sustained use of debt to finance general government operations is unusual when compared to states and was considered a “red flag” in the case of Puerto Rico. As Puerto Rico’s debt grew, the government found it increasingly difficult to meet other responsibilities, including paying tax returns, settling accounts payable, and fulfilling pension obligations. Triple tax exempt status: Debt in Puerto Rico was attractive to investors for its triple tax exempt status. Over time, Puerto Rico’s primary government accumulated debt from investors without addressing its persistent deficits. According to the February 28, 2017, version of the Puerto Rico government’s fiscal plan, Puerto Rico’s capacity to issue debt at favorable rates postponed the implementation of fiscal reforms and controls necessary to balance Puerto Rico’s budget. Financial data limitations: A lack of comprehensive, timely, and accurate financial data from Puerto Rico may have limited the ability of some investors to anticipate or fully understand the economic crisis in the territory. For example, according to the Government of Puerto Rico’s February 28, 2017, version of the fiscal plan, audited financial statements for Puerto Rico were only issued on time three times from 2005 to 2014. Audited financial statements are still currently pending for fiscal years 2015 and 2016. In addition, forecasts routinely overestimated revenue. Recession and outmigration: Recession and outmigration have resulted in reduced tax revenue. A recession in Puerto Rico began in 2006 and continued through the period we reviewed. Outmigration also accelerated most years since 2005 as Puerto Ricans migrated to the U.S. mainland and elsewhere. According to U.S. Census Bureau estimates, Puerto Rico lost 14 percent of its population, more than 550,000 individuals, between July 2009 and July 2016. 936 tax credit phase out: The phase out of the section 936 tax credit is often cited by Puerto Rico officials for its negative effect on Puerto Rico’s economy. Other experts said the effect was not as significant. In addition, in 2006, we reported that the expiration of the benefit did not ultimately lead to a reduction in income and value added. A substantial share of production in Puerto Rico is carried out by U.S. multinational corporations, in part because of federal corporate income tax benefits, once available to firms located in Puerto Rico. Prior to 1994, certain U.S. corporations could claim the possessions tax credit under section 936 of the Internal Revenue Code (IRC). In general, the credit equaled the full amount of federal tax liability related to an eligible corporation’s income from its operations in a possession—including Puerto Rico—effectively making such income tax-free. In 1993, caps were placed on the amount of possessions credits that corporations could earn. In 1996, the credit was repealed, although corporations that were existing credit claimants were eligible to claim credits through 2005. Puerto Rico had missed up to $1.5 billion in debt service payments as of September 2016. Puerto Rico’s government is working with the Financial Management and Oversight Board (Board) to implement plans for long- term financial reform and to adjust debts accrued by both the primary government and public corporations. The Board has the power to approve or certify fiscal plans, budgets, voluntary agreements with bondholders, debt restructuring plans, and critical projects within Puerto Rico. As the first step in a process to adjust debts in Puerto Rico, the Board certified the current Governor’s fiscal plan in March 2017, which outlines strategies for financial reform. The fiscal plan includes estimates for how much each year can be allocated for debt payments, which average 23 percent of total debt payments due for the years 2018 through 2026. (See figure 6.) On May 3, 2017, the Board filed an initial petition for restructuring Puerto Rico’s debt and pension liabilities. Puerto Rico’s ultimate liability for its outstanding debt will be determined based on the outcome of this process in federal court. American Samoa’s total public debt outstanding grew from $27 million in fiscal year 2005 to $69.5 million in fiscal year 2015. Until fiscal year 2015, the portion of American Samoa’s total public debt outstanding that was bonded debt outstanding was limited. (See figure 7.) In fiscal year 2007, the territory paid off a general obligation bond that was issued in fiscal year 2000 to refinance prior debt. Between fiscal years 2008 and 2014, American Samoa had no outstanding bonded public debt. In fiscal year 2015, American Samoa’s primary government issued a general obligation bond for about $55 million, and in January 2016 a second bond was issued for $23 million. Most of American Samoa’s bonded debt outstanding is scheduled to mature by 2035. Between fiscal years 2005 and 2015, American Samoa’s loan balance was significantly greater than bonded debt outstanding for all years except fiscal year 2015. American Samoa’s loan balance consists of both loans from the U.S. government and intragovernmental loans, or loans between the territory’s primary government and component units. Between fiscal years 2005 and 2015, this included 1993 and 1994 Federal Emergency Management Agency community disaster loans totaling $10.2 million and a 1999 Department of the Interior loan in the amount of $18.6 million. In 2006 and 2007, the primary government also entered into two loan agreements with the government retirement fund, in the amounts of $10 million and $20 million, in part to finance infrastructure projects. American Samoa’s total public debt outstanding has remained small relative to its economy between fiscal years 2005 and 2015. During this period, American Samoa’s total public debt outstanding as a percentage of GDP was 5.3 percent in fiscal year 2005, reached a low of 4.4 percent in fiscal year 2014, and grew to 10.9 percent in fiscal year 2015. During this same period, bonded debt outstanding as a share of GDP was 1.3 percent in fiscal year 2005, declined to 0.44 percent in fiscal year 2007 and remained at 0 percent between fiscal years 2008 and 2014. The new bond issuance in fiscal year 2015 increased the share to 8.6 percent. (See figure 8.) Total public debt per capita grew from $414 per person in fiscal year 2005 to $1,212.8 in fiscal year 2015. (See figure 9.) American Samoa’s general revenue fluctuated, but trended upward between fiscal years 2005 and 2015. American Samoa’s general revenue of $116.5 million in fiscal year 2015 represented a 20 percent increase over its revenue of $97.4 million in fiscal year 2005. Approximately 55 percent of the general revenue earned by American Samoa during this period was comprised of tax revenue, and all of the tax revenue was from income and excise taxes. American Samoa’s total revenue (i.e. general revenue and program revenue combined) also fluctuated but trended upward between fiscal years 2005 and 2015. Its total revenue of $436.4 million in fiscal year 2015 represented a 55 percent increase over its total revenue of $281.8 million in fiscal year 2005. According to territory officials, growth in revenue during this period can be attributed in part to revenue generated by stimulus funding the territory received as part of the American Recovery and Reinvestment Act of 2009. (See figure 10.) Along with the growth in revenue, American Samoa’s net position for the primary government was consistently positive and generally improving between fiscal years 2005 and 2014. American Samoa’s net position for the primary government generally improved year over year from a positive $217.7 million as of fiscal year end 2005 to a positive $291.9 as of fiscal year end 2014; it then declined to a positive $245.1 million as of fiscal year end 2015. American Samoa’s net position for the primary government as of fiscal year end 2014 is shown prior to restatement. In fiscal year 2015, American Samoa implemented GASB Statement No. 68 and adjusted its beginning net position by $60.1 million, resulting in a restated net position as of fiscal year end 2014 of a positive $240.8 million. The implementation of GASB Statement No. 68 resulted in the territory recognizing previously unrecognized net pension liabilities and, therefore, a decline in ending net position in the year of recognition. American Samoa’s total net position for the primary government and component units combined was also consistently positive and generally improving between fiscal years 2005 and 2015. It increased from $317.9 million as of fiscal year end 2005 to $450.2 million as of fiscal year end 2015. The territory has previously faced financial management challenges, including failures to meet revenue projections and deficiencies in forecasting expenditures. Territory officials said, however, that they are taking a number of steps to improve forecasting. In early 2015, officials convened a task force in Hawaii to develop a plan to improve the management of American Samoa’s finances. As part of the effort to improve forecasting, the plan requires the treasury and budget departments to meet on a monthly basis to reconcile actual revenues and expenditures and brief the Governor. If revenues are below projections, the Governor may instruct all government departments to reduce spending by an additional 5-10 percent. In addition, officials told us that the territory is planning to procure a contractor in fiscal year 2017 to help further improve its revenue and spending forecasts. According to territory officials, American Samoa has never issued debt to fund government operating costs and does not intend to do so. Territory officials confirmed that the fiscal year 2015 and 2016 general obligation bonds were issued primarily to fund various infrastructure projects, including relocating airport fuel tanks, constructing an inter-island ferry, and establishing a territorial charter bank. While American Samoa’s level of public debt is relatively low compared to other territories, we found that it faces significant economic vulnerabilities that may hamper its ability to repay that debt. According to territory officials and our prior work, American Samoa’s economy relies heavily on the tuna processing and canning industry. In December 2016, we reported that canneries employed about 14 percent of American Samoa’s workforce in 2014. Moreover, we found that the canneries provided a number of indirect benefits to other industries and the economy in American Samoa. For example, other businesses exist because of the canneries, such as the company that manufactures the cans. Maintenance for the canneries and for the vessels that supply the canneries also has brought business and jobs to the island. Cannery workers spend money at local establishments, such as restaurants and retail stores. Additionally, exported cannery products and delivery of materials to the canneries reduced the shipping cost of bringing other goods to American Samoa. We also reported that the tuna canning industry faces a number of challenges; in addition territory officials expressed concerns about federal policies that may hamper American Samoa’s tuna industry, such as scheduled minimum wage increases that increase labor costs for tuna canning in American Samoa relative to other locations, decreased access to fishing grounds in the Pacific due to environmental regulations, and potential erosion of the territory’s preferential trade status. In October 2016, one of the two companies with canning operations in American Samoa announced that it would indefinitely suspend its operations in the territory, and the other temporarily suspended operations twice during the same year. Changes in American Samoa’s tuna industry have been important determinants of changes in its GDP, and additional disruptions in the industry would reduce revenue and hamper GDP growth, which, if severe enough, could impede the repayment of existing debt. In part because of such challenges, Moody’s Investor Services assigned a noninvestment grade rating to the territory’s bonds in early 2016. According to the rating agency, this downgrade reflected concerns associated with the territory’s small and volatile economy, low income levels, weak financial position, and financial management challenges. Territory officials told us that the Puerto Rico debt crisis has affected their access to favorable rates in capital markets, and said that they currently do not have plans to issue any more bonded debt. CNMI’s total public debt outstanding declined from $251.7 million in fiscal year 2005 to $144.7 million in fiscal year 2015. (See figure 11.) During this time, CNMI’s primary government issued one general obligation bond in the amount of about $100.5 million in fiscal year 2007. This general obligation bond refinanced two prior bonds that were issued in fiscal years 2000 and 2003. Most of CNMI’s bonded debt outstanding is scheduled to mature in 2030 or later. Between fiscal years 2005 and 2015, CNMI’s total public debt outstanding as a share of GDP grew from 23 percent in fiscal year 2005 to 26 percent in fiscal year 2007, and then declined to 16 percent in fiscal year 2015. Bonded debt outstanding as a share of GDP was 14 percent in both fiscal years 2005 and 2015, but reached 19 percent in fiscal year 2011. (See figure 12.) CNMI’s total public debt outstanding per capita declined from about $4,199 per person in fiscal year 2007 to about $2,776 per person in fiscal year 2015. (See figure 13.) CNMI’s general revenue fluctuated between fiscal years 2005 and 2015. General revenues declined by about 39 percent between fiscal years 2005 and 2011, largely due to the decline in the territory’s garment industry. (See figure 14.) General revenues have steadily increased since fiscal year 2011, primarily as a result of growth in the tourism sector. Data from the Marianas Visitor Authority show that the downward trend in Japanese visitors from 2013 to 2016 was offset by the growth in visitors from China and South Korea. The tourist industry has also been boosted by the introduction of a new casino. In August 2014, the CNMI government entered into a casino license agreement to construct a development project that will include a hotel with a minimum of 2,004 guest rooms and areas for gaming, food, retail, and entertainment, among other things. CNMI’s total revenue (i.e. general revenue and program revenue combined) also fluctuated between fiscal years 2005 and 2015. Total revenue reached a high of $635.7 million in fiscal year 2014 and then declined to $573.8 million in fiscal year 2015, which represented only a one percent increase over the fiscal year 2005 revenue of $567.9 million. While general revenue fluctuated, dipping then rebounding between fiscal years 2005 and 2015, CNMI’s net position for the primary government has been negative and generally trending downward. Specifically, CNMI’s net position for the primary government declined from a negative $38.1 million as of fiscal year end 2005 to a negative $215.4 million as of fiscal year end 2015. CNMI’s net position for the primary government has been negative by over $200 million for each fiscal year since 2010, but it showed a slight improvement between fiscal years 2011 and 2013 and in fiscal year 2015. CNMI’s total net position for the primary government and component units combined fluctuated but generally remained stagnant, increasing slightly from $281.6 million as of fiscal year end 2005 to $284.8 million as of fiscal year end 2015. CNMI’s Constitution prohibits public indebtedness for operating expenses of the CNMI government or its political subdivisions. In addition, the territory’s legislature must approve any bond issuances and the value of any bonds issued cannot exceed 10 percent of the assessed value of real property within CNMI. In fiscal year 2007, the primary government of CNMI issued one general obligation bond to refinance two bonds originally issued in 2000 and 2003. Both the 2000 and 2003 bonds were issued to finance various infrastructure improvement projects. The 2003 issuance was also used for a onetime payment to settle land claims for the appropriation of private lands for public use. Component units in CNMI also issue debt. In 2007, the Commonwealth Ports Authority, which is responsible for operating, maintaining, and improving all airports and seaports in CNMI, issued a bond for about $7.2 million. The proceeds of the bond were used in part to pay for improvements to seaport facilities at Saipan Harbor. While CNMI’s economic outlook has improved, with GDP increasing 3 years in a row since 2013, we found that the territory faces growing labor shortages that may affect its ability to repay public debt in the future. In May 2017, we reported that CNMI’s economy relies heavily on a foreign workforce and foreign workers comprised a majority of the territory’s workforce in 2015. The Consolidated Natural Resources Act of 2008, among other things, established federal control of CNMI immigration beginning in 2009. The act established a transition period with special provisions for foreign visitors, investors, and workers. Specifically, it required the U.S. Department of Homeland Security (DHS) to establish a temporary work permit program for foreign workers and to reduce annually the number of permits issued, reaching zero by the end of the transition period—now set to occur on December 31, 2019. We analyzed the economic effect of removing all permitted foreign workers from CNMI’s economy using the most recent GDP information available from calendar year 2015. Depending on assumptions made, with no permitted workers CNMI’s GDP in 2015 would have hypothetically declined by 26 to 62 percent. Planned reductions in permitted workers could worsen the effect on GDP going forward and hamper the territory’s ability to repay existing debt. CNMI also has significant pension liabilities, but the exact amount of the net pension liability is not included in the territory’s most recent single audit report because the government has not complied with accounting standards that require it to do so. In 2013, a U.S. district court approved a settlement agreement with the territory’s government pension plan, which applied for bankruptcy in 2012. As part of the settlement, CNMI agreed to make minimum annual payments to the fund to allow members to receive 75 percent of their full benefits. In addition to the settlement plan, CNMI appropriated $25 million of casino license fees to fund the restoration of the 25 percent reduction of the retirees’ and beneficiaries’ pensions, among other purposes. CNMI made one payment of $27 million and another payment of $19.4 million to the fund in fiscal year 2015. Territory officials told us they are planning to market a $45 million general obligation bond in 2017 to provide additional financing for the pension fund. They added, however, that they currently have no plans to issue debt for other purposes, such as infrastructure projects, because of uncertainty in the labor market. In 2012, Moody’s Investor Services confirmed CNMI’s general obligation bond ratings as non-investment grade, which was downgraded in 2009. According to the rating agency, the 2012 rating was due to losses in the territory’s garment industry, consistent operating deficits, and increasing unfunded pension liabilities. Guam’s total public debt outstanding increased from almost $1 billion in fiscal year 2005 to $2.5 billion fiscal year 2015, with the majority of the increase occurring between fiscal years 2008 and 2015 when total outstanding public debt grew 13 percent on average per year. (See figure 15.) In fiscal year 2015, 54 percent of Guam’s total public debt outstanding was issued by component units. Territory officials told us component unit debt is backed solely by the revenue component units generate and cannot be used to service debt issued by the primary government. The majority of Guam’s total public debt is in the form of bonds. Bonded debt outstanding comprised between 93 and 97 percent of total public debt outstanding from fiscal years 2005 through 2015. Most of Guam’s bonded debt outstanding will mature in 2027 or afterwards. The remainder of Guam’s public debt outstanding between fiscal years 2005 and 2015 was primarily comprised of notes and loans, including loans from the federal government. Between fiscal years 2005 and 2015, Guam’s total public debt outstanding as a share of GDP increased from 24 percent to 44 percent, with bonded debt outstanding growing similarly from 22 percent of GDP to 42 percent. (See figure 16.) Both total public debt and bonded public debt outstanding per capita more than doubled between fiscal years 2005 and 2015. Total public debt outstanding per capita rose from about $6,270 per person to $15,323 per person, while bonded public debt outstanding increased from $5,810 per person to $14,759 per person. (See figure 17.) Guam’s general revenue grew by 6 percent on average, per year, between fiscal years 2005 and 2015, from $573.2 million to $862.7 million. General revenue declined sharply in fiscal year 2006, recovered in fiscal year 2007, and then increased steadily through fiscal year 2015. According to territory officials, this increase in revenue can largely be attributed to economic development, with significant growth in tourism and new construction. A 2015 report to Guam’s bondholders noted that there was an increase in visitors to the island each month between 2014 and 2015. The report attributed this increase to several factors, such as the expanded number of airline routes to Guam, the favorable exchange rate for Asian visitors, and the relative improvement of the overall global economy. Guam’s total revenue, or general revenue and program revenue combined, also grew by 5 percent on average, per year, between fiscal years 2005 and 2015, from $1.4 billion to $2.2 billion. (See figure 18.) To project revenues, Guam officials use a model comprised of statistical weights that are calculated and assigned to each revenue source, which is derived from historical collections data from the prior fiscal years. While revenue generally grew, Guam’s net position for the primary government fluctuated significantly between fiscal years 2005 and 2015. Since fiscal year end 2006, Guam’s net position for the primary government has been negative and trending downward. Specifically, Guam’s net position for the primary government declined from a positive $79.8 million as of fiscal year end 2005 to a negative $194.2 million as of fiscal year end 2012. Net position improved significantly and was positive in fiscal years 2013 and 2014, but then declined from a positive $174.4 million as of fiscal year end 2014 to a 10-year low of a negative $670.9 million as of fiscal year end 2015. Guam’s net position for the primary government as of fiscal year end 2014 is shown prior to restatement. In fiscal year 2015, Guam implemented GASB Statement No. 68 and adjusted its beginning net position by $815.6 million, resulting in a restated net position as of fiscal year end 2014 of a negative $641.2 million. The implementation of GASB Statement No. 68 resulted in the territory recognizing previously unrecognized net pension liabilities and, therefore, a decline in ending net position in the year of recognition. Guam’s total net position for the primary government and component units combined also fluctuated significantly. Specifically, Guam’s total net position increased from a positive $788.8 million as of fiscal year end 2012 to a 10-year high of positive $1.2 billion as of fiscal year end 2014. It declined to a 10-year low of positive $47.3 million as of fiscal year end 2015 due to the implementation of GASB Statement No. 68. According to territory officials, Guam’s bonded debt outstanding has primarily been used to comply with federal requirements and court orders. Guam has issued debt in several cases when compelled to meet federal and territorial requirements. For example, since Guam adheres to the mirror tax code, the territory is required to fund the Earned Income Tax Credit (EITC) and is not reimbursed for this by the federal government. In June 2004, the territory agreed to pay $60 million over 9 years in settlement of unpaid EITC refunds from 1996, and in September 2006, the territory reached a new settlement replacing the 2004 agreement in which it agreed to pay up to $90 million. Moreover, in 2006, the Superior Court of Guam held that a territorial statutory provision required the retirement fund for government employees to pay past due annual lump sum Cost of Living (COLA) payments plus interest to eligible retirees and survivors. This resulted in an award of $123.5 million plus interest to those individuals. In response, Guam issued a general obligation bond in 2007 in the amount of $151.9 million to finance these past due tax refunds and outstanding COLA settlement payments, as well as to refinance prior debt and help fund infrastructure projects. In 2009, it issued another general obligation bond in the amount of $271 million for similar purposes. According to a Guam government report, the largest increase in the territory’s indebtedness occurred between fiscal year 2008 and fiscal year 2009, and was due in part to issuing bonds to pay for past due tax refunds and unpaid COLA expenses. In Guam’s 2017 draft debt management policy, the Governor cited the administration’s commitment to ensuring that tax refunds will be paid on time and no later than 6 months after filing. In addition, in February 2004 the U.S. Environmental Protection Agency (EPA) and the Department of Justice filed a consent decree in the U.S. District Court of Guam. The consent decree set forth the settlement terms agreed to by the federal government and Guam settling a lawsuit alleging Guam violated the Clean Water Act. The consent decree included deadlines for opening a new landfill and adopting a dump closure plan. In response to a 2009 District Court order that Guam comply with the terms of the consent order, the territory chose to issue a $202.4 million limited obligation bond to fund closing the Ordot dump and constructing a new landfill to meet the terms of the settlement agreement. Guam also issued revenue bonds between fiscal years 2005 and 2015 to finance infrastructure projects. For example, in 2011 a revenue bond backed by hotel occupancy taxes was issued in the amount of $90.6 million in part to fund the construction of a museum on the island and other projects to benefit Guam’s tourism industry. In addition, in 2013 Guam’s Airport Authority issued $247 million in bonds that were used, in part, to fund airport enhancements. As established under its Organic Act, Guam has the authority to issue bonds, but Guam’s public indebtedness is not authorized or allowed to exceed 10 percent of the aggregate tax valuation of property in the territory; tax valuation of property is currently set at 90 percent of appraised value of property. The limit applies to both general obligation and limited obligation debt. In fiscal year 2007, to increase borrowing capacity to address a $524 million deficit, the government changed the percentage of appraised value which constitutes the assessed value. The debt ceiling still limits the amount of public debt Guam can issue to 10 percent of the aggregate tax valuation of property. However, in September 2007, Guam amended its statutory definition of assessed value from 35 percent of appraised property values to 70 percent. In May 2009, the definition tax valuation of property was again amended to 90 percent of appraised property values. This second increase was imposed so Guam could issue bonds to comply with the requirement to close the Ordot dump and open a new landfill. In fiscal year 2012, the government increased borrowing capacity a third time by amending the definition of assessed value to 100 percent of appraised value in order to fund past due tax refunds. In fiscal year 2016, the statutory definition of assessed value was decreased back down to 90 percent of appraised value. Despite economic growth, we found that Guam faces large fiscal risks related to unfunded pension liabilities and other post-employment benefits (OPEB) that, if unaddressed, may hamper its ability to repay existing debt and increase its need to issue debt. A number of factors may contribute to continued economic growth in Guam. Specifically, according to a government report, visitor arrivals to Guam are projected to continue increasing and higher room rates and occupancy are leading to continued hotel development. Moreover, the Marine Corps has plans to consolidate bases in Okinawa, Japan, and relocate 4,100 Marines to Guam. The Department of Defense (DOD) expects this relocation to Guam to occur between fiscal years 2022 and 2026. Officials from Guam predict that the military buildup will result in significant additional investment in Guam’s economy. In July 2016, DOD agreed to give Guam approximately $55.6 million in grants to fund civilian water and wastewater projects linked to the military buildup; additional investments in the power infrastructure will also be funded by DOD. A 2014 study conducted by the Department of the Navy on the effect of the military buildup on Guam’s economy concluded that it would increase civilian labor force demand, increase civilian labor force income, and increase tax revenues. While it maintained Guam’s debt as investment grade as of 2017, the rating agency Standard and Poor’s expressed concern about Guam’s extremely high debt burden and vulnerability to economic changes in its tourism and military industries. In addition, Guam has large pension and OPEB liabilities that may stress current debt service payment arrangements if anticipated savings from changes to the government pension system are not realized. In fiscal year 2015, pension liabilities were $1.2 billion and OPEB liabilities were $2 billion, 22 and 37 percent of GDP, respectively. Territory officials told us that they have taken a variety of steps to address their unfunded pension and OPEB liabilities. In 1995, the government closed the defined benefit plan to new members with all new employees participating in a defined contribution plan, which resulted in a decrease in accrued liabilities. To address insufficient savings by members in the defined contribution plan, the legislature created two new retirement plans in 2016. The government estimates that the new retirement plans could add an additional $173 million to the pension fund. Territory officials said the government is meeting its actuarial contributions on an annual basis and is on track to pay off the existing unfunded pension liability in approximately 15 years. Between fiscal years 2005 and 2015, USVI’s total public debt outstanding grew by 84 percent, from $1.4 billion to $2.6 billion. (See figure 19.) The sharpest increase was between fiscal years 2008 and 2010. During this period, total public debt outstanding increased by about $800 million, and almost all of USVI’s public debt was in the form of bonds. Bonds issued by USVI’s primary government are either backed by 1) both a general obligation of the government and a gross receipts tax, or 2) an excise tax on rum produced in USVI. Bonds issued by component units are backed by their revenues. Approximately half of USVI’s bonded debt is backed by revenues generated from the excise tax placed on rum imports to the U.S. mainland. Both the primary government and component units issued notes and took out loans during this period. Most of USVI’s bonded debt outstanding is scheduled to mature in 2027 or afterward. USVI’s total public debt outstanding as a percentage of GDP doubled between fiscal years 2005 and 2015, growing from 34 percent to 72 percent. The steepest increases were between 2008 and 2010, when total public debt outstanding as a percentage of GDP increased by 19 percent, and between 2011 and 2014, when it increased by 16 percent. Total public debt outstanding as a share of GDP reached 72 percent in fiscal year 2015. Bonded debt outstanding was 63 percent of GDP in fiscal year 2015. (See figure 20.) Total public debt outstanding per capita also increased during this period. It ranged from about $13,063 per person in fiscal year 2005 to about $25,739 per person in fiscal year 2015. (See figure 21.) USVI’s general revenue showed almost no growth in the 10-year period between fiscal years 2005 and 2015. USVI’s general revenue declined from fiscal years 2008 to 2009 due to the 2008 recession and operating losses at the Hovensa oil refinery, and rebounded in fiscal year 2010 as the economy recovered. General revenue decreased again from fiscal year 2010 to 2011. Between fiscal years 2011 and 2014 revenue increased again. Despite the increase, the fiscal year 2015 general revenue of $919.4 million was only about $43 million greater than that collected 10 years prior. In contrast USVI’s total revenue (i.e. general revenue and program revenue combined) grew slightly by 2 percent on average, per year, between fiscal years 2005 and 2015, from $1.6 billion to $1.9 billion. (See figure 22.) USVI has a statutory requirement that a team, composed of senior executives and legislative officials, meet at least twice a year to establish an official economic forecast of the territorial economy, including estimates of the following year’s revenue. Territory officials acknowledged that in recent years actual revenues have been less than had been estimated, citing both adverse economic conditions and litigation that had blocked the collection of property taxes for several years. These officials said that a new estimation methodology has been devised which uses a weighted average of the prior 5 years of actual revenue. USVI’s net position for the primary government declined year over year from a negative $215.0 million as of fiscal year end 2008 to a negative $1.5 billion as of fiscal year end 2014; continuing to decline to a negative $3.7 billion as of fiscal year end 2015. USVI’s net position for the primary government as of fiscal year end 2014 is shown prior to restatement implementing GASB Statement No. 68. In fiscal year 2015, USVI implemented GASB Statement No. 68 and adjusted its beginning net position by $2.0 billion, resulting in a restated net position as of fiscal year end 2014 of a negative $3.5 billion. The implementation of GASB Statement No. 68 resulted in the territory recognizing previously unrecognized net pension liabilities and, therefore, a decline in ending net position in the year of recognition. USVI’s declining net position for its primary government reflects its deteriorating financial position. USVI’s total net position for the primary government and component units combined increased between fiscal year end 2005 and 2007; it then declined year over year from positive $490.9 million as of fiscal year end 2008 to negative $3.6 billion as of fiscal year end 2015. More than a third of USVI’s current bonded debt outstanding as of fiscal year 2015 was issued to fund government operating costs. Before that time bonded debt outstanding issued on behalf of the primary government was used either to refinance earlier bond issues; fund infrastructure projects such as improvements to schools, public safety facilities, and transportation infrastructure; or to assist privately-owned industrial enterprises, specifically construction at the Cruzan and Diageo rum distilleries and payment of a portion of the costs of sewage and solid waste disposal at the Hovensa oil refinery. In the period following the recession of 2008, revenues declined and there were continuing demands for spending. In response, USVI issued debt for the purpose of financing regular government operating expenses. Between July 2010 and December 2014, USVI issued almost $850 million in bonds for this purpose with maturities ranging between 1 and 20 years. According to territory officials, several factors contributed to USVI’s increasing reliance on debt to fund government operations, including the recession of 2008, the 2012 closure of the Hovensa oil refinery, a decline in USVI’s share of worldwide rum sales, and a decline in visits from cruise ship passengers. According to a senior government official, the closure of the Hovensa refinery was particularly detrimental to the territory’s economy and resulted in the loss of 2,000 jobs on St. Croix and a significant decrease in revenue. As of April 2017, USVI’s unemployment rate was 10.3 percent. USVI officials cited several federal requirements that contributed to USVI’s need to issue debt. Because USVI is part of the mirror tax code, officials noted that USVI is required to pay the EITC to its residents, but is not reimbursed for this by the federal government. In contrast, state governments do not pay EITC because it is a federal benefit administered through the federal tax code. EPA directives for improving landfills and water projects and federal banking regulations that treat branches of U.S. banks placed in USVI as non-U.S. banks—thereby discouraging large banks from having branches in USVI—were also cited as reasons that USVI has issued debt. USVI officials expressed confidence in the territory’s ability to repay public debt, but we found that large fiscal risks and exclusion from capital markets may hamper its ability to do so. USVI’s bonds are backed by the gross receipts tax on some individuals and entities doing business in USVI and by excise tax revenues collected by the federal government and remitted to USVI as required by statute. Officials said that revenues from the gross receipts tax and excise tax rebates—from which debt service payments are made—are monitored on a month-by-month basis. Also, officials cited as a protection against default the “lockbox” provisions that USVI has had contractually for some time and that were written into its statutes in 2016. According to these provisions, gross receipts tax and excise rebate revenue go directly to an escrow account in a New York bank, and the escrow agent makes debt service payments twice a year from the account; a year’s worth of payments is held in reserve at all times. USVI officials expressed confidence that these provisions make it difficult for USVI to default on its debt payments. However, in a recent statement, Moody’s rating service said that these security provisions have not been tested in a stress scenario where the government faces a lack of funds to provide basic services. This observation was part of a statement issued by Moody’s in late January 2017 in which it announced it had downgraded USVI’s matching fund bonds (those backed by excise tax rebates) to noninvestment grade. Other rating agencies expressed similar concerns. For example, Standard & Poor’s cited 1) the government’s fiscal distress, as evidenced by its significant structural imbalance and continued reliance on deficit financing to fund operations; 2) revenue backed bond issues that have exhibited either declining or flat growth absent tax rate increases and are levied on a limited and concentrated base; 3) adequate, but substantially reduced, debt service coverage; and 4) a limited economy, concentrated in rum production, tourism, and government. In late January 2017, USVI cancelled a new bond issuance it was attempting to market to provide additional financing for general government operations. The bond issuance was authorized by the USVI legislature in 2016, but according to a senior bank official involved in underwriting USVI bonds, delays in bringing the issuance to market, and the legislature’s delay in enacting so-called “sin taxes” on items such as beer, cigarettes, and liquor, reduced the chances of successfully marketing the bond issue to investors. By the time USVI made an effort to market the bonds in late 2016 and January 2017, the Puerto Rico debt crisis had increased investors’ concerns about USVI’s debt as well. The rating downgrades of existing USVI debt, while not the decisive factor according to the bank official, did reinforce existing skepticism on the part of potential investors. Ultimately, the early 2017 bond issuance was not adequately subscribed and the offer failed. USVI effectively lost market access to new debt even at high interest rates. In September 2016, the administration released its 5-year financial plan. The two major features of this plan were a reduction in government expenditures by limiting hiring and reducing non-personnel costs, and a proposal for increasing revenue through taxes on beer, rum, wine, brandy, sugar-laden carbonated beverages, and cigarettes, among other revenue generating measures. The legislature passed the tax increase bill, with some modification of the Governor’s proposal, in early March and the Governor signed it into law on March 22, 2017. In the 5-year financial plan, the administration said that adopting austerity and tax measures would eliminate future deficits, which otherwise would amount to more than $130 million for each fiscal year between 2017 and 2021. A senior USVI official expressed a belief that the level of consumption of cigarettes, for example, will remain at pretax levels despite the higher cost. However, due to elasticity of demand, an increase in the price of cigarettes could decrease cigarette consumption and therefore revenues. If the tax increases do not produce the anticipated level of revenue, and if USVI is not able to regain access to capital markets, it will place even more stress on the debt service arrangements currently in effect. Moreover, the recent measures do not address the fiscal risk presented by unfunded pension liabilities and OPEB for government employees. USVI reported an unfunded pension liability of over $3 billion, which was 83 percent of GDP in fiscal year 2015. According to an independent consulting firm’s August 2016 report conducted for the USVI Government Employees Retirement System, the retirement fund will become insolvent in 2023 without adding financial resources and adjusting benefit levels. Territory officials cited several reasons for the large unfunded pension and OPEB benefit liabilities. These include recent legislation that resulted in more retirees eligible for pensions and a decline in the active USVI government workforce that resulted in a narrower ratio of retirees to workers, dropping from 6-to-1 in fiscal year 1982 to almost 1-to-1 in fiscal year 2015. In addition, officials told us that the most significant cause for the current condition of the retirement system is the primary government making contributions to the system below the amounts required by law. Some measures have been taken to address the retirement fund’s impending insolvency, and other steps have been recommended. According to territory officials, USVI law changed in 2005, resulting in increased required pension contributions from all newly hired employees except for judges and legislators. In 2013, a Pension Reform Task Force (Task Force) recommended legislation that would 1) increase government and employee contributions towards pension benefits, 2) raise contribution rates for senators and judges, 3) reduce retiree current benefits by 10 percent, 4) increase the early retirement age from 50 to 55 and the regular retirement age from 60 to 65, 5) limit cost of living increases, and 6) change the formula used to calculate benefits. In October 2015, the Legislature enacted and the Governor signed legislation that raised retirement ages for some employees, changed the basis for determining pension levels to career earnings, and allowed the retirement system to invest funds in lower-rated securities. This did not, however, address most of the Task Force recommendations. Territory officials told us that the administration will put forward additional pension reform proposals in the near future, however it remains unclear what those reforms will entail and when they will take effect. Moreover, territory officials told us that since 2011 the government has paid less than half of actual post-employment benefit costs, leaving an unpaid current obligation of $357 million as of fiscal year 2015. The unfunded liability for post-employment benefits, projecting anticipated future costs, was most recently calculated in October 2013; at that time it was just over $1 billion. USVI’s pension and OPEB obligations are already contributing to the territory’s debt burden, and will likely continue to do so at an increasing rate. If unaddressed, they may place additional stress on the debt service arrangements currently in effect and hamper the territory’s ability to repay debt. We provided a draft of this report for review to the U.S. Departments of the Interior and Treasury. We also provided, to the governments of Puerto Rico, American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam, and the United States Virgin Islands (USVI), portions of the draft that were relevant to them. We received written comments from each of the five territories’ governments, which are reprinted in appendixes II, III, IV, V, and VI, respectively. We also received technical comments from American Samoa, Guam, USVI, and Treasury, which we incorporated as appropriate. We did not receive any comments from the Department of the Interior. In the letter from the Governor of Guam, the territory raised some issues, which we subsequently discussed in depth with territory officials. Following these discussions, we made modifications to the draft to provide additional context by broadening our coverage of revenue for Guam and for other territories, as applicable. We provide additional information about changes that we made or did not make at the end of Appendix V. We will provide copies of this report to the Governor of each territory and the U.S. Secretaries of the Interior and Treasury. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have questions about this report, please contact Susan J. Irving at (202) 512-6806, or David Gootnick at (202) 512-3149. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. Our objectives were, for each U.S. territory—Puerto Rico, American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam and the U.S. Virgin Islands (USVI)— to describe: (1) trends in public debt and its composition between fiscal years 2005 and 2015, (2) trends in revenue and its composition between fiscal years 2005 and 2015, (3) the major reported drivers of the territory’s public debt, and (4) what is known about the ability of the territory to repay public debt. For the purposes of this report, total debt held by the public (public debt) refers to the sum of bonds payable and other debt payable as described in the audited financial statements included within the territories’ single audit reporting packages, hereinafter referred to as the single audit reports. Bonds payable are marketable bonded debt securities issued by territorial governments or their component units and held by investors outside those governments. Other debt payable may include marketable notes issued by territorial governments and held by investors outside those governments; non-marketable intragovernmental notes; and notes held by local banks, federal loans, intragovernmental loans, and loans issued by local banks. Pension liabilities and other post-employment benefits (OPEB) are not included in the definition of total public debt but are considered and discussed in the sections of the report that describe the territories’ ability to repay their public debt. To describe trends in public debt and its composition for each territory, we reviewed the territories’ single audit reports. These single audits are conducted each year by independent accounting firms in accordance with government accounting standards. We obtained single audits for American Samoa, CNMI, Guam, and USVI for fiscal years 2005 through 2015. We also obtained and analyzed consolidated audited financial statements for Puerto Rico from the Commonwealth of Puerto Rico’s Treasury Department website for fiscal years 2005 through 2014. For each territory, we reviewed the independent auditor’s report corresponding to each single audit and noted the type of opinion that was expressed on the financial statements and accompanying note disclosures. With the exception of Puerto Rico, each of the territories received modified opinions by auditors on one or more of the single audit reports included in our analysis. We reviewed each of these opinions and determined that despite the modified opinions the data we obtained from each of the single audit reports was reliable for the purpose of describing trends in debt and revenue and their composition for the fiscal years included in our analysis. For each territory, we extracted information on public debt—specifically bonds, loans, and notes for both the primary government and component units—for each fiscal year and recorded the data on spreadsheets, which were then independently verified by other analysts. For American Samoa, CNMI, Guam, and USVI, we calculated debt per capita and debt as a percentage of nominal Gross Domestic Product (GDP) using nominal GDP and population data from the U.S. Department of Commerce’s Bureau of Economic Analysis. For Puerto Rico, we obtained data on Gross National Product (GNP) and nominal GDP from the Commonwealth of Puerto Rico Office of the Governor’s Planning Board and data on population from the U. S. Census Bureau. To identify trends in revenue and its composition for each territory, we obtained and recorded information from the single audit reports on general revenues. All tax revenues, including tax revenues that are dedicated to particular purposes, are reported in general revenues. Tax revenues represent the largest component of general revenues and include both derived tax revenues (resulting from assessments imposed on exchange transactions, such as income taxes and sales taxes) and imposed nonexchange revenues (resulting from assessments imposed on non-exchange transactions, such as property taxes and fines). General revenues also include other forms of revenue, such as unrestricted aid from other governments and investment earnings. Our analysis primarily focused on trends in general revenues because the territories’ public debt is either explicitly or implicitly backed by general revenues. We also included total revenue—general revenues and program revenues combined—in our analysis because it reflects revenue generated by the territories’ component units and could be used to service debt payments. In addition to general revenue levels, another measure of fiscal health is the net position for primary government activities, which represents the difference between the primary government’s assets (including the deferred outflows of resources) and the primary government’s liabilities (including the deferred inflows of resources). In other words, the net position for primary government activities reflects what the primary government would have left after satisfying its liabilities. A negative net position means that the primary government has more liabilities than assets. A decline in net position may be indicative of a deteriorating financial position. While our analysis primarily focuses on trends in the net position for the primary government, we also include certain information on trends in the total net position for the primary government and component units combined. To determine the major reported drivers of public debt and what is known about the territories’ ability to repay this debt, we interviewed officials from the territories’ governments, including officials from the Governors’ offices, departments of finance or treasury, and the agency responsible for issuing and marketing bonded debt. We also spoke to officials in territorial public audit offices. In addition, we interviewed representatives of the three rating agencies that provide credit ratings for the territories’ securities: Fitch, Moody’s, and Standard and Poor’s. In addition, to determine what is known about the territories’ ability to repay public debt we analyzed common factors—identified through prior work, documents, and interviews with the three rating agencies—that indicate territories’ potential vulnerability to debt crises. These factors included 1) the extent to which territories consistently issued debt to fund general government operations, 2) the extent to which territories’ economies were vulnerable to shocks due to a heavy dependence on a single or limited industry, and 3) the extent to which territories faced large fiscal risks such as pension liabilities. We also interviewed officials from the Department of the Interior’s Office of Insular Affairs, which provides grant aid and technical assistance and support to the territories, and the Pacific and Virgin Islands Training Initiatives, which provides training and technical assistance on fiscal management to the Pacific territories and USVI, and directs the preparation of an annual report on the fiscal condition of these territories. In addition, we spoke with subject matter experts on territorial debt, officials from an investment bank involved in underwriting the territories’ bonds, and officials from the three rating agencies that rate the marketability of the territories’ bonds. We obtained and reviewed information on territorial bond issuances from fiscal years 2005 through 2015 from the Electronic Municipal Market Access (EMMA) database of the Municipal Securities Rulemaking Board, the primary regulator of the municipal securities market. We reviewed information from EMMA on bonds issued by the territories from fiscal years 2005 through 2015, including memoranda of offering for individual bond issuances. We conducted this performance audit from September 2016 to October 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained for the purpose of addressing our audit objectives provides a reasonable basis for our findings and conclusions. The following are GAO’s comments on Guam’s letter that supplement the comments in the text. 1. Our responses to Guam’s technical comments are not corrections. After reviewing Guam’s comments, we expanded the information provided on revenue and net position for all 5 territories. For example, for Guam, we included on pages 41 and 42 of this report, additional information on revenue where we combine primary government revenue and component unit revenue. 2. Since our objective was to provide the most comprehensive metric of total public debt, it would have been incorrect for us to exclude public enterprise and revenue bond debt in our measure. 3. We do not compare the relative public debt burdens of the territories in this report. Further, pension liabilities are not included in our definition of public debt. Our definition of total public debt does include component unit debt, which Guam excludes from the calculations presented in its response. 4. On pages 41 and 42 of this report we include both a measure of primary government revenue, and a measure of primary government revenue and component unit revenue combined; an “apples-to- apples” comparison can be made to our total public debt figure, which includes component unit debt. 5. Our calculation of total public debt outstanding for Guam is the total of bonds payable and notes payable, both the current and noncurrent portions, and other debt as defined on page 8 of this report. Guam’s calculation of total public debt outstanding as shown in the table is all noncurrent liabilities except the net pension liability and results in a higher amount for fiscal year 2015 than our calculation. For bonds payable, our calculation includes both the current and noncurrent portions of bonds payable. Guam’s calculation of bonds payable as shown in the table only includes the noncurrent portion and results in a lower amount for fiscal year 2015 than our calculation. As a result of these differences, our calculation of bonded debt outstanding as a percentage of total public debt outstanding for fiscal year 2015 is higher than Guam’s calculation. 6. As noted on page 42 of this report, while revenue generally grew, Guam’s net position for the primary government fluctuated significantly between fiscal years 2005 and 2015. Since fiscal year end 2006, Guam’s net position for the primary government has been negative and trending downward. Guam’s total net position for the primary government and component units also combined fluctuated significantly. On page 41 and 42 of this report, we explicitly note the increase in revenue, however in the long-term significant financial risks may outweigh any given year’s revenue increase. 7. Based on our methodology, which includes component unit debt, Guam’s total public debt outstanding was $2.5 billion for fiscal year 2015. 8. We used total public debt outstanding, not solely tax-supported debt to calculate the debt-to-GDP ratio for all 5 territories. As reported on page 39 of this report, Guam’s debt to GDP ratio is 44 percent for total public debt and 42 percent for bonded debt for fiscal year 2015. We do not rank the U.S. territories in this report. 9. The per capita amounts presented in the report are based on debt amounts from Guam’s fiscal year 2015 audit as reported in the single audit report. However, the debt amounts and population figure shown in the table differ from those used in our calculations. Total public debt and bonded public debt outstanding used in our per capita calculations are calculated as discussed in comment 5 above, which differ by about $7 million from the amounts cited in the table. In addition, the population figure used in our per capita calculations is on a fiscal year basis, which results in 161,500 for fiscal year 2015. 10. Pension liabilities are not included in our definition of public debt. The debt per capita numbers that we present in this report are based on total public debt. For Guam that figure for fiscal year 2015 was $2.5 billion. 11. We disagree with Guam’s comment that the presentation in this report is negative. The final section in the discussion of Guam notes both the elements that may contribute to continued economic growth in Guam and the vulnerabilities and risks to the future: a high total debt burden and vulnerability to economic changes in its tourism and military industries. In addition, we note that Guam has large pension and other post-employment benefits liabilities that may stress current debt service payment arrangements if anticipated savings from changes to the government pension system are not realized. In addition to the contacts named above, Tara Carter, Assistant Director; Emil Friberg, Assistant Director; Divya Bali, Analyst-in-Charge; and Steven Berke, Karen Cassidy, and Eddie Uyekawa made significant contributions to this report. Dawn Simpson, Director; Nicole Burkart, Assistant Director; and J. Mark Yoder provided accounting expertise. Also contributing to this report were Pedro Almoguera, Jeffrey Arkin, Ann Czapiewski, John Hussey, Heather Krause, Donna Miller, Amy Radovich, Justin Snover, and A.J. Stephens.

Summary: The United States has five territories: Puerto Rico, American Samoa, CNMI, Guam, and USVI. The territories, like U.S. states in some cases, borrow through financial markets. Puerto Rico in particular has amassed large amounts of debt, and defaulted on billions of dollars of debt payments. In response to the fiscal crisis in Puerto Rico, Congress enacted and the President signed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in June of 2016, which established an Oversight Board with broad powers of budgetary and financial control over Puerto Rico and requires GAO to study fiscal issues in all five U.S. territories. In this report, for each territory for fiscal years 2005-2015, GAO examined (1) trends in public debt and its composition, (2) trends in revenue and its composition, (3) the major reported drivers of the territory's public debt, and (4) what is known about the ability of each territory to repay public debt. GAO analyzed the territories' single audit reports; interviewed officials from the territories' governments, ratings agencies, and subject matter experts; and reviewed documents and prior GAO work. Puerto Rico: Between fiscal years 2005 and 2014, the latest figures available, Puerto Rico's total public debt outstanding (public debt) grew from $39.2 billion to $67.8 billion, reaching 66 percent of Gross Domestic Product (GDP). Despite some revenue growth, Puerto Rico's net position was negative and declining during the period, reflecting its deteriorating financial position. Experts pointed to several factors as contributing to Puerto Rico's high debt levels, and in September 2016 Puerto Rico missed up to $1.5 billion in debt payments. The outcome of the ongoing debt restructuring process will determine future debt repayment. American Samoa: American Samoa's public debt more than doubled in fiscal year 2015 to $69.5 million, but remained small relative to its economy, with a debt to GDP ratio of 10.9 percent. American Samoa's debt was primarily used to fund infrastructure projects. Between fiscal years 2005 and 2015, revenues grew and the government's net position was positive and generally improving. GAO previously reported that American Samoa relies heavily on the tuna processing and canning industry. Disruptions in this industry could affect its ability to repay debt. Commonwealth of the Northern Mariana Islands (CNMI): CNMI's public debt declined from $251.7 million to $144.7 million between fiscal years 2005 and 2015, decreasing CNMI's debt to GDP ratio to 16 percent. Most of CNMI's debt was used to refinance prior debt and fund infrastructure projects. Despite revenue growth since fiscal year 2011, CNMI's net position was negative and generally declining during the period. GAO previously reported that labor shortages may affect GDP. This could impede CNMI's ability to repay debt in the future. Guam: Between fiscal years 2005 and 2015, Guam's public debt more than doubled from almost $1 billion to $2.5 billion, with a debt to GDP ratio of 44 percent for fiscal year 2015. Most of Guam's debt was used to comply with federal requirements and court orders. Revenue grew during this period, and net position fluctuated significantly, with a negative balance in fiscal year 2015. Despite recent and expected economic growth, GAO found that large unfunded pension and other post-employment benefit (OPEB) liabilities may present a risk. U.S. Virgin Islands (USVI): Between fiscal years 2005 and 2015, USVI's public debt nearly doubled, reaching $2.6 billion and a debt to GDP ratio of 72 percent. Since 2010, most of USVI's debt was used to fund general government operations. Revenue remained stagnant and net position was negative and declining during the period, reflecting a deteriorating financial position. While USVI holds a year's worth of debt service payments in reserve, GAO found that economic uncertainty and looming government pension fund insolvency by 2023 may hamper repayment. In early 2017, USVI was unable to access capital markets to issue new debt at favorable rates. Although the government adopted a financial plan intended to reduce expenditures and increase revenue, the plan does not address USVI's significant unfunded pension and OPEB liabilities and it is unclear whether the plan will produce the intended level of savings. GAO is not making recommendations in this report.