Guam – A warning shot from the island’s chief auditor.
In the wake of recent pay raises for GovGuam employees, and in the midst of the current debate over raising the minimum wage, and offsetting that by cutting business taxes, the Office of Public Accountability [OPA] has issued a report on the island’s growing debt service payments.
The audit found that GovGuam debt grew 54% from $1.02 billion in FY 2008, to $1.75 billion in FY 2013. During that time the OPA reports that GovGuam’s debt service payments have almost doubled.
And the audit warns that annual payments to service that billion dollar debt will rise by another $26-million in the next 4 years, from roughly $80-million now, to about $107 million dollars annually by 2018.
No Formal Debt Management Strategy:
The audit objective was to determine the growth and magnitude of GovGuam’s indebtedness, and whether GovGuam has a formal debt management strategy and they found that GovGuam does not have a formal debt management strategy.
The audit compared Guam’s debt to the other territories and to the 50 states and found that GovGuam’s 2012 debt-to-GDP ratio of 26.4% was below the IMF’s 60% benchmark.
But other debt indicators were unfavorable, as follows:
* Guam’s 2011 debt-to-GDP of 20.4% ranked 13th amongst the United States state governments, where New York was the highest at 28.6%
* Guam’s 2012 debt-per-capita of $8,810 was the highest amongst the insular governments. In 2010, Connecticut was the highest among the states at $5,236 and Puerto Rico was the highest at $10,474
* Guam’s 2012 debt-to-asset ratio remains unfavorable as it owed creditors and vendors $1.46 for every $1 of assets it owned
Deferral of Principal Payments and Capitalized Interest “Indicative of Cash Flow Problems”:
The audit points out that GovGuam has deferred principal payments and capitalized interest on several debts in an effort to restructure that debt and relieve cash flow problems by allowing for smaller payments in the early years.
However the audit warns “these methods add to the long-term cost of the issuance and are, to a limited degree, indicative of cash flow problems”.
Conclusion and Recommendations:
Given the magnitude of GovGuam’s total public indebtedness of $1.57 billion, the auditors recommend that the GEDA Administrator develop and adopt a formal debt management strategy that is updated at least on an annual basis, using guidelines and best practices established by organizations such as the IMF and World Bank.
GEDA Administrator’s and the Director of the Bureau of Budget and Management Research [BBMR] both concurred with that audit recommendation.
However they disagreed with the audits findings on the *changes in public indebtedness; *debt-per-capita; *debt-to-GDP comparisons; and *deferral of principal and capitalized interest.