OPA Issues Audit of General Fund

by Sabrina Salas Matanane

Guam - For the 5th consecutive year,GovGuam received a clean opinion for its financial statements. According to a report issued today, for Fiscal Year 2011 the General Fund had an operational deficit of $46.9 million, due primarily to an overestimation of budget to actual revenues of $17.3M, $35.8M unbudgeted expenditures, and $11.1M in other expenditures. However, the cumulative deficit decreased by $18.2M, going from $321.3M in FY 2010 to $303.1M in 2011, primarily due to the Guam Department of Education's (GDOE) operational surplus of $58.9M from unexpended American Recovery and Reinvestment Act (ARRA) funds, and a $6.2M surplus in Other Miscellaneous funds. The GDOE operating surplus will reverse next year when ARRA/local funds are expended for school capital projects.

Here's a brief summary of some of the findings: 

Record High Revenues, Yet Deficit Increases
GovGuam's General Fund collected $552.4M in revenues, a $56.2M increase from $496.1M in FY 2010 and the highest recorded revenue in 14 years. Despite the $56.2M increase in revenues,
the General Fund ended the fiscal year with a $46.9M deficit.

Increased Tax Collections
Income taxes increased by $43.1M from $239.2M in 2010 to $282.3M in 2011. Gross receipts taxes also increased by $11.4M from $188.6M in 2010 to $200M in 2011. According to the
Department of Revenue and Taxation, the increases in income taxes and gross receipts taxes may be attributed to numerous ARRA-funded projects, increased military activities, and a decrease in the unemployment rate. Additionally, public sector autonomous agencies as well as the mandated
law enforcement 20% salary increase have substantially contributed to higher income taxes.

Federal Contributions
Federal contributions include Section 30 Federal income tax collections, immigration fees, and indirect cost reimbursement. Federal contributions increased by $10.5M from $44.2M in FY
2010 to $54.7M in FY 2011.

Expenditures
General Fund expenditures were $487.3M plus net transfers of $102.1M, resulting in total expenditures of $589.4M. Total expenditures exceeded operational revenues of $542.6M,
resulting in the deficit of $46.9M. The increases in operational expenditures were primarily due to increases in debt service of $13.6M, $35.8M in unbudgeted items, and the recognition of
capital lease acquisition of the new John F. Kennedy (JFK) High School.

Debt Service and Lease Payments
Debt service increased by $13.6M from $43.0M in FY 2010 to $56.6M in FY 2011. The increase was due to the Layon Landfill General Obligation and Limited Obligation (Section 30) Bonds,
2009 Series A. Proceeds from the bonds were used for the construction of a new landfill. In September 2010, GovGuam issued $65.7M in Series 2010 Certificates of Participation to
finance the new JFK High School. Annual lease payments of $6.7M started in December 2010. Another $4.5M was paid in the form of tax credits for the Tiyan facility used to house JFK
students in 2011. The $4.5M lease payment was also unbudgeted. The Tiyan facility is currently being used by Untalan Middle School.

Unbudgeted Items
Expenditures of $35.8M not covered by appropriations consist of: (1) $6.2M for the temporary reduction of Retirement contributions and $2.5M in other retirement contributions; (2) $4.7M
interest on tax refunds; (3) $4.5M for the Tiyan JFK High School lease payment; (4) $3.5M for the Department of Mental Health and Substance Abuse Receiver; (5) $3.4M in credit card
charges and bank fees; and (6) $11.1M for others. Of these, interest on tax refunds, interest-only payments to the Retirement Fund, and credit card charges have been recurring for the past seven
fiscal years, and total $8.9M in FY 2011.

Planned Budget Deficit and Operational Deficit
Best practices call on governments to enact a balanced budget. The vast majority of States have balanced budget legislation, unlike Guam, which does not require it. The FY 2011 budget called
for estimated revenues of $559.9M, authorized expenditures of $504.3M plus net transfer payments of $103.9M, for total authorized expenditures of $608.2M, resulting in a planned
deficit of $48.4M. The actual deficit was $46.9M.

Increased Retiree Benefits
Retiree benefits increased 20% or $7.8M from $38.3M in the prior year to $46M. These benefits consist of healthcare premiums at $27.3M, Cost of Living Allowance at $5.9M, supplemental
annuity benefits at $12.1M, and Medicare reimbursement of $690K. The main increase in benefits was due to healthcare premiums, which increased significantly by 43% or $8.2M, going
from $19.1M to $27.3M. Retiree health insurance now exceeds COLA and supplemental annuity benefits combined by 52% or $9.3M. For the 7,117 retirees and survivors as of
September 30, 2011, GovGuam paid an average of $6,462 per retiree during the year, separate from their retirement annuities. The 2011 average of $6,462 is 19% higher or $1,048 more than
the $5,415 paid per retiree in 2010.

Subsequent Bond Issuances
For years, GovGuam has been operating in a deficit and has sustained this deficit by delaying tax refunds. As of September 30, 2011, the income tax refund liability was $326M. In December
2011, GovGuam issued a $235M bond, of which $198M was used to pay additional tax refunds. In June 2012, GovGuam issued a $108M bond, of which $60M was used to pay income tax
refunds. Approximately $33.3M previously set aside for the 2012 tax refunds were also used to pay 2011 tax refunds. However, GovGuam will need to find additional funds to cover the
remaining balance owed for 2011 of $30M plus the estimated $105M for 2012 income tax refunds. As of June 30, 2012, minimal funds have been set aside to pay 2012 tax refunds.

Bottomline according to the OPA report,  GovGuam continues to live beyond its means.