A Report on the
STATE OF THE ISLANDS

Chapter 3: COMMONWEALTH OF THE NORTHERN MARIANA ISLANDS

3.1 The Commonwealth of the Northern Mariana Islands

The Commonwealth of the Northern Mariana Islands (CNMI) is a self-governing Commonwealth of the United States. The people of the CNMI chose to join the United States in a 1975 act of self-determination and were granted U.S. citizenship in 1986. Pursuant to a locally-adopted constitution, they elect a Governor, bi-cameral legislature, and Washington Representative.

The islands' status is based on the "Covenant to Establish a Commonwealth of the Northern Mariana Islands in Political Union with the United States". The agreement was negotiated by representatives of the United States and the Northern Mariana Islands and signed on February 15, 1975. The Covenant was subsequently signed by the President on March 15, 1976, and approved by the Congress of the United States by joint resolution on March 24, 1976 (Public Law 94-241; 90 Stat. 263). The first constitutional government of the CNMI took office in January 1978.

The Covenant was fully implemented on November 3, 1986, pursuant to Presidential Proclamation No. 5564, which terminated the Trust Territory of the Pacific Islands as it applied to the CNMI. Previous to its Commonwealth status, the CNMI was a member of the Trust Territory, which was created in 1947 by the United Nations. The United States was designated the administering authority of the Trust Territory under the terms of a trusteeship agreement.

As a Commonwealth, the islands are under the sovereignty of the United States. In general, federal law applies to the CNMI. However, certain exceptions were provided in the Covenant: 1) the CNMI is not within the customs territory of the U.S.; 2) Federal minimum wage provisions do not apply; 3) Federal immigration laws do not apply; 4) the CNMI can establish its own tax laws; 5) the Jones Act, requiring goods shipped between U.S. ports to be carried on U.S.-registered ships, does not apply to the CNMI.

The CNMI main island of Saipan is located about 100 miles northeast of Guam, about 1,200 miles southeast of Tokyo, and 3,300 miles west of Honolulu. The smallest of the U.S. insular areas, the CNMI consists of 14 islands with a total land area of 183.5 square miles. The 1990 population was 43,345 persons. The 1995 mid decade census preliminary results shows a total population of 59,913 persons. Non-United States citizens make up 54 percent of the population, with local residents who are United States citizens comprising the remaining 46 percent.

3.2 Political Status Developments and Federal Relations

Local control over immigration . Under the Covenant, the Commonwealth has had local control over its own immigration since 1979. In the past year, however, there has been some discussion in Congress about taking this control back, which under the Covenant, would require an Act of Congress. At least one bill to this effect has been introduced in the House, where the Committee on Natural Resources has been expressing concern about the CNMI's labor, immigration, and taxation policies. Neither OIA nor the United States Immigration and Naturalization Service support the bill; the Commonwealth Government strongly opposes it. This issue appears likely to stay at the forefront of discussions between the two governments in the immediate future.

Delegate . The Commonwealth has an elected "Resident Representative to the United States". Unlike the Delegates from Guam, American Samoa, and the US Virgin Islands, the Representative is not a member of Congress. CNMI Governor Froilan C. Tenorio has expressed support for an amendment to the CNMI Constitution making the Resident Representative an appointed position. The status of the Resident Representative has been an issue for 902 consultations. A bill was introduced in the House of Representatives on January 4, 1996, which would create a position for a non-voting Delegate to the United States Congress.

Funding . Section 702 of the Covenant provides for financial assistance from the Federal Government to the Commonwealth. The purpose of this was to develop the economic resources of the CNMI to attain a goal of self-reliance. The first round of Covenant funding lasted seven years (1978-85) and totaled $192 million. The second round for another seven years (1985-92) totaled $228 million.

Since 1992, funding has been extended one year at a time. The Commonwealth received $27.7 million from FY 1993 through FY 1995. In all three years, the Commonwealth has been required to provide a gradually rising level of matching funds. In FY 1995, Congress specifically designated $7 million of the 702 funding to be used to address labor, immigration, and law enforcement problems in the CNMI. For FY 1996 through FY 2002, funding of $11 million will be provided for infrastructure, with an equal local match. In addition, beginning in FY 1997, $3 million will be appropriated to the Secretary of the Interior for use by Federal agencies and the CNMI government to continue to address the labor and immigrations issues in the CNMI. Also, $3 million will be appropriated to the College of the Northern Marianas in FY 1997.

Section 902 talks . Section 902 of the Covenant provides for direct discussions between the two governments on "all matters affecting the relationship between them". The Representatives to these discussions are appointed directly by the CNMI Governor and the President of the United States.

The thirteenth round of 902 talks ended in December 1992. In February 1994, CNMI Governor Froilan Tenorio designated Brenda Y. Tenorio and Vicente Salas as his Special Representative and President Clinton designated Edward B. Cohen as his Special Representatives to the 902 talks. The fourteenth round began with a meeting in December 1994 and has continued since, with the most recent session being an informal meeting in Washington in March 1996. The Special Representatives held a series of discussions on the role of the Resident Representatives and developed position papers outlining the views of both sides. These discussions were successfully completed with a clarification of the role and an identification of the types of changes that the CNMI and the United States Governments may want to consider. Topics currently under discussion include the ownership and control of the Commonwealth's submerged lands, and whether United States citizenship should continue to be granted to all persons born in the CNMI.

American Memorial Park . Interior agencies, primarily the National Park Service and OIA, worked with CNMI leaders on the American Memorial Park to fund park development. This effort was completed in time for the 50th anniversary of the World War II Mariana Islands Campaign in June 1994. On November 11, 1995, the end of the 50th Anniversary Commemoration of World War II began in Saipan with the tolling of the"Bells of Peace" from the Carillon which was constructed on Saipan for this event. The Park has won praise both as a tasteful memorial, useful, and attractive civic center. Further local planning for the Park continues.

Federal-CNMI Initiative on Labor, Immigration, and Law Enforcement . On June 4, 1996, the Administration submitted its second annual report on the Federal CNMI Labor, Immigration, and Law Enforcement Initiative to Congress. It reported that through the combined efforts of the Government of the CNMI and the Federal agencies progress is being made in addressing the labor, immigration, and law enforcement issues. The CNMI Governor has strongly endorsed the CNMI's actions and the increase of Federal law enforcement presence. The Federal agencies and the CNMI are working cooperatively, with the Office of Insular Affairs acting as an ombudsman, to address the problems of responding to the consequences of enormous growth in the CNMI. The Administration recommended that l) Congress finalize enactment of section 2 of S. 638 to establish in Federal law the annual 30-cent increase in the minimum wage contained in existing CNMI law and 2) that the Congress direct the CNMI to utilize Covenant funds for prison and detention facilities. The Initiative has brought increased Federal resources and staff to the CNMI to enforce Federal law. Full-time Federal staffing in the CNMI increased. Federal agencies are also providing training to local agency personnel. Caseloads for the Federal District Court, the United States Attorney, the U.S. Department of Labor, National Labor Relations Board, and laws enforcement agencies have all risen dramatically.

3.3 Current Economic Conditions

The CNMI's economy is largely based on tourism, and it has grown enormously since the early 1980's. Tourist entries have steadily increased in the last three years: from 488,000 in 1993 to 583,500 in 1994 to 654,400 in 1995. Total visitor expenditures were $507 million in 1993, $464 million in 1994 and $522 million in 1995. Projections to the year 2000 foresee more than 800,000 visitors to the Commonwealth that year, with spending approaching a billion dollars.

The tourism industry is largely Japanese; 70 percent of the visitors are Japanese and 64 percent of the hotel rooms are owned by Japanese firms. However, the CNMI tourism industry has sought to broaden its base and has met with some success by marketing to Hong Kong, Taiwan, South Korea, and other Asian locations.

The impact of tourism-driven economic growth is illustrated by the local revenues collected by the CNMI government in the past fifteen years. In 1980, local revenue collections were $10.2 million. By 1990, they had increased ten-fold to $52.8 million. By 1995, estimated revenues were in excess of $190 million.

The general trend of growth has not been without interruptions. The Commonwealth economy is tightly linked to that of Japan's. Thus, when Japan went into recession in 1992-93, Japanese investors and tourists became more cautious in their spending habits, and the CNMI economy suffered accordingly. During this period, although tourist numbers continued to rise, tourist spending leveled off, real estate transactions dropped, and the local construction industry went through a sharp downturn as new construction almost ceased. At the same time, the government went into its first deficit in over a decade, as income fell well short of budget projections.

Since early 1994, the economy has been in a recovery. Although the real estate market remains volatile, both business gross revenues and government collections are up. Tourism numbers have continued to climb throughout. A 36-hole golf course opened at the end of that year; an 18-hole course on the island of Rota opened in June 1995; and another 18-hole course on Saipan was finished in early 1996, giving the Commonwealth seven golf courses. Hotel occupancy in 1995 was at 83 percent. Several small hotels have been constructed in recent years and several existing hotels have been expanded, to bring the total number of hotel rooms to 3,561. The rapid rise of the yen against the dollar in late 1994 and early 1995 was a factor in the significant increase in tourist arrivals and tourist spending in the second half of 1995.

The Commonwealth's only other major industry is garment manufacturing, which thrives on a special Covenant-based exemption that allows CNMI garment factories to export into the United States without paying a customs duty. The garment industry engendered controversy in the early 1990s, when reports of labor abuses and poor working conditions brought international attention. The U.S. Department of Labor and OSHA brought several actions, including one that resulted in $9 million fine on the largest CNMI manufacturer. The worst abuses appear to have been corrected; however, progress still needs to be made in the labor camps, garment, and construction industries.

The total declared export value of CNMI-made garments was $296.7 million in 1993, $319.2 million in 1994 and $419.1 million in 1995. The industry does not pay the business gross revenue tax of up to 5 percent on revenues over $750,000, but instead pays a "user fee" of 3.5 percent of exports for the use of the customs exemption. The user fee generated $9.6 million in 1994 and 14.7 million in 1995. The industry paid $51.7 million in wages in 1994.

Employment in the garment industry is made up almost entirely of non-resident aliens. Non-resident garment workers increased by 29 percent from 1992 to 1995 to a level of 6,609, making up 87.6 percent of the garment labor force. Local employees made up 2.6 percent of garment employment, with the remaining 10 percent consisting of Micronesians and resident aliens.

The current minimum wage is $2.75 per hour which was to be increased $0.30 on January 1 by CNMI labor law but was delayed. The law provided a $0.30 annual increase until the federal minimum wage level was reached in 2000. The CNMI Legislature in December 1995 voted a six-month delay in implementing the scheduled January 1, 1996, $0.30 minimum wage increase. The Governor vetoed the bill which was over-ridden by the CNMI legislature just before the January 1 deadline. In May 1996, a legislative proposal was made to consider establishing a one time $0.15 wage increase in minimum wage for the garment and construction industries while leaving in place the previously-scheduled $0.30 increase for all other areas. This law would also repeal the annual automatic increase which has been in effect for three years in the CNMI.

The newest industry in the Commonwealth appears to be casino gaming, which was legalized on the island of Tinian in 1989, but has taken several years to get off the ground. Rapid expansion is projected, but it is still too soon to tell if the projections are valid.

Development in the CNMI has not been evenly spread throughout the major islands of Saipan, Tinian, and Rota. Yet each requires basic infrastructure, e.g., airports, medical facilities, telephone, power, water, etc. Rota and Tinian have experienced little development to date, compared to Saipan. This may now be changing with development of casinos on Tinian and the golf course on Rota. The Voice of America will be constructing a small communications facility on Tinian, the contract award is anticipated to be late 1996.

The rapid pace of development in the CNMI, particularly on Saipan, has created jobs that far outnumber the available local labor pool, making the importation of foreign workers an economic necessity, if current growth patterns are to be sustained. For the past several years, resident and non-resident aliens have outnumbered U.S. citizens. In 1995, preliminary census data indicate that 54.1 percent of the population were not United States citizens and 48.2 percent were non-resident aliens. (About 6 percent were resident aliens, including Micronesians. who entered under the terms of the Compact of Free Association.) Non-resident aliens are precluded by law from certain occupations and are clustered in the tourist, construction, garment, and domestic service industries. Approximately 50 percent of the U.S. citizen workforce is employed by the CNMI and other local governments which are the employers of first choice for native CNMI residents.

In 1994 and 1995, reports of labor abuse in the CNMI received national and international publicity. Abuses of non-resident workers were alleged on all three major islands, but most particularly on the island of Rota.

In response to labor and immigration problems, Congress appropriated $7 million from 702 funds in FY 1995 (Public Law 103-322) to address the labor, immigration, and law enforcement problems in the CNMI. Of this amount, $4 million was allocated by the Department of the Interior for Federal agency action. The Departments of Labor, Justice, and Treasury were provided funds to increase federal law enforcement presence in the CNMI and to provide training to their local government counterparts. Federal interagency working groups have been formed in Washington and Saipan to implement this initiative. The remaining $3 million was awarded to the CNMI through direct grants by the Department of the Interior including $1.5 million for local projects and $1.5 million for a computer system to track aliens in the CNMI. The Commonwealth Government has taken steps to address the problems, including increased enforcement of the labor laws and prosecution of offenders. Governor Tenorio has requested a larger federal presence in the Commonwealth, including more federal prosecutors and enforcement agents.

In response to the reports, the Philippine Government banned the export of certain types of worker to the Commonwealth for a year and lifted it in May 1996. Negative publicity about labor abuse, along with concerns about organized crime, drugs, and prostitution; the cost to the Federal and CNMI Governments of uncontrolled immigration; and the rapid rise in duty and quota free garment imports produced with alien labor, has encouraged Congress to consider suspending or removing local control over immigration.

In response to its ballooning government deficit, and reductions in Federal financing, the Commonwealth passed its first major tax increase in many years in January 1995. Taxes were increased significantly, leading to some controversy and a roll back of some excise tax increases. Taxes remain much lower than on the United States mainland.

The wage and salary tax varies from zero for annual gross wages under 1,000 to 9 percent for wages over $50,000. An earnings tax equal to the wage and salary tax is levied on earnings sources in the CNMI from other non-business income. The business gross revenue tax begins at 1.5 percent for annual revenue over $5,000 and goes to 5 percent for over $750,000 in revenue. These taxes on incomes are credited against the Northern Marianas Territorial Income Tax (NMTIT), which is based on the internal revenue code. Taxpayers also receive a rebate of 50 percent to 90 percent of any net income tax paid on CNMI sources income based on a sliding scale. These rebates have been scaled back from the original level of 95 percent on all income. There is no property tax in the CNMI. Excise taxes vary from 1 percent on food to 50 percent on tobacco products.

3.4 Government Administration

The Commonwealth government is organized along the standard lines of the United States state model, with a Governor, a bicameral legislature, and a two-tiered judiciary. The CNMI and the local governments on Saipan, Tinian, and Rota employed 4,849 persons in 1995. The CNMI Government's operational budget for FY 1996 was $190.5 million.

The present Governor, Froilan C. Tenorio, was inaugurated in January 1994. His first major action was to attempt a sweeping reorganization of the government by Executive Order. The order was hotly contested both in the Legislature and by litigation, although it was eventually put into effect.

The CNMI faces the dual challenge of responding to and addressing deficiencies resulting from its early economic successes, while at the same time, during the current period of declining foreign investment, continuing to encourage desirable private sector economic growth and investment. The rapid pace of development and the attendant increase in non-resident alien population has created enormous stress upon the CNMI's physical infrastructure and upon the social services provided by the government. Capital costs of infrastructure have been covered by Covenant funds rather than amortized by user fees.

Certain events in 1996 assisted the CNMI set its course towards expanding its economic development. The recently enacted Telecommunications Act of 1996 will provide universal telecommunications service to the CNMI and Guam. The mandate amounts to domestic rate integration for these island communities which means the residents on these islands will be paying lower long-distance rates. The Federal Communications Commission will soon be issuing a rule for domestic rate integration for the islands. In addition, CNMI and Guam will be integrated into the North American Numbering Plan next year, making long-distance dialing to and from the islands easier.

A semi-autonomous government agency, the Commonwealth Utilities Corporation (CUC), operates the electrical, water and wastewater systems. The public utility does not receive operating revenue from the government. It is mandated by CNMI Public Law 4-47 to recover all operating expenses through its rate structures. Both the water and wastewater rate structures are inadequate. Thus, the Commonwealth's water and wastewater systems are currently insufficient to meet the needs of the citizen and tourist populations.

Electrical infrastructure is adequate for the current residential/business community. The Saipan power plant has plenty of generation capacity; however, the field distribution system is constantly in the state of redevelopment. The electrical rate structure of 11 cents per kilowatt hour residential and 16 cents commercial is sufficient to cover operating expenses, but not sufficient for capital expenditures, which have been covered from Covenant funds. Based on population expectations, the utility will need to build a new power plant during the next four years.

Despite the requirements of PL 4-47, local political pressure precluded the utility from raising rates and reaching full cost recovery. The utility lacked capital, technical expertise, credibility and faced numerous operational problems. To assist the utility, the U.S. Department of Interior (DOI) offered both technical advice and monetary grants through its Operations and Maintenance Improvement Program (OMIP).

Based on the 1987 Covenant Special Representative's Agreement, the Interior Department has the authority to monitor and approve all CIP programs. Since the Commonwealth Utilities Corporation was using Capital Improvement money but failing to achieve recovery, the Interior Department determined it was necessary to take a more aggressive supervisory approach in 1994. The Department entered into a new Partnership Agreement with the CNMI Governor to strengthen the Commonwealth Utilities Corporation. Both the CUC and its primary creditor, the Commonwealth Development Authority (CDA), participated in the Partnership Agreement negotiations.

The Partnership Agreement, signed on August 11, 1994, requires the following:

1. the performance of a feasibility study for privatization of CUC's assets and/or utility operations;
2. the implementation of audit recommendations (including those of the Inspector General, Metzler Management Audit, Office of Public Auditor) as well as other management initiatives to improve the efficiency and internal control environment of the CUC and the previous OMIP recommendations;
3. a rational restructuring of CUC's debt;
4. the resolution and ultimate disposition of utility operations within a privatized or improved public utility; and
5. the resolution and ultimate disposition of utility operations in Rota and Tinian within the context of a privatized or improved public utility. The feasibility study will also provide the utility with a detailed "cost of service" report. Thus, CUC will be able to implement the suggested allocated rate structures in 1996.

Concurrently, all parties are implementing the terms of this agreement. The result should be an improved private or public utility which achieves full cost recovery and meets the needs of the islands while operating in a professional, business-like manner. Pending completion of the Partnership Agreement, the Governor appointed to CUC a new Board of Directors. A management audit was completed and implemented. and management has improved. Services are becoming more reliable as the utility struggles to obtain necessary cash and catch up with island development. CUC officers are currently negotiating with CDA officials to restructure its debt through an equity conversion.

The CNMI needs to better coordinate its planning processes and streamline its personnel-heavy government. Public utilities and health service systems continue to receive local government subsidies and should implement more market-oriented user fees. The Commonwealth must also address improvement in management of development funds. The Commonwealth Development Authority has not fully embraced the recommendations of the 1991 Interior Inspector General audit which indicated a need to better manage, account for, and control funds designated for capital projects. The first zoning law in the CNMI's history was signed into law in 1993 to set a framework for orderly development in Saipan. However. the Legislature rescinded the law in 1994.

Improvements in financial and budget management are expected from the installation of a new government computer system. The CNMI's finance and budget functions are already administered by highly qualified management personnel. The CNMI expects to soon complete audits of fiscal years since 1988 to bring the government into full compliance with the Single Audit Act.

The CNMI entered FY 94 and FY 95 without a direct operational subsidy from the U.S. Government. Covenant assistance continues to be directed to constructing the infrastructure still needed in the islands.

The Fifth Year Operations and Maintenance Program (OMIP) recommended that the CNMI plan for economic growth through the preparation of master plans and the establishment of a central planning office to update and modify those plans.