Revenue Sharing Between the States and National Government

Posted by - francisx

The Financial Situation at Present

To provide necessary background information, Nick Andon from the FSM Budget Office presented on the current financial situation of the FSM national government. The national government, which receives 12.5% of the Compact funds each year, has a healthy balance in the form of $13 million in unspent funds from previous years. In addition to its share of the Compact funds, which is expected to amount to over $12 million this year, the national government also has a budgeted income of $25 million in taxes and revenue. Most of this latter sum of money comes from the sale of fishing licenses to foreign nations. Despite its relatively sound financial position, the FSM government has been experiencing budget cuts for the past two years. One senses that this is less due to a sense of impending crisis than as a response to the summons of the president to cut back expenses by 20% each year. Even so, its revenue has dropped from $65 million in 1995 to a projected $51 million in 1997. Its budget has also been reduced-from $33 million in 1995 to nearly $28 million in the present year.

The national government appears to be well off in contrast to the state governments, if Pohnpei is a fair indication of their present condition. According to Anna Mendiola, the Pohnpei State budget has suffered annual cutbacks-from $26 million in 1995 to $21 million this year and a projected $18 million in 1998. The main reason for the cutbacks, of course, is the stepdown in Compact funds. The state leadership would prefer to find additional sources of funding to make up the loss of funds, but this is extremely difficult to do without a solid base of revenue-generating industry. Government cutbacks are always politically hazardous, but they are hard to effect for other reasons as well; population growth, price hikes on imported goods, the rising costs of medical referrals, and so on, often undermine even the firmest resolutions to downsize government services. In any case, Pohnpei sustained a deficit of $1.2 million in 1995 and $1.8 million in 1996 for a total debt of $3 million. The state can expect a deficit of another $3 million in 1997 alone unless serious cutbacks are made.

What Can Be Done?

For a time the discussion centered on what Pohnpei and the other states could do to drag themselves out of the financial pit into which they have fallen. The first thought, as always, turned to whether additional sources of assistance might be available from outside FSM. The Japanese government provides yearly substantial aid for infrastructure and development that the FSM government apportions to the states on a rotation basis. Other foreign aid projects are handled the same way. Virtually all foreign assistance is for development programs, someone noted; the US (through the Compact funds) is the only country that provides FSM with assistance that can be used for operational costs on a year-by-year basis.

Could the US be approached to increase their federal program funds to FSM? US federal programs are ordinarily intended to fund suplementary rather than basic programs, so in theory they would not help the state governments meet its obligations for basic services. Moreover, federal programs have always had a way of increasing government costs in the long run rather than reducing them. Special Education, for instance, was introduced as a component of the basic education system here because US grant money was available for the program. The problem occurs when the money runs out, as it did for Special Education last year, and the state lacks the resources to contain the program, which people have come to regard as an educational necessity rather than a luxury.

As the discussion roamed over a wide array of topics, some participants wondered whether Pohnpei State couldn't claim reimbursement from the national government for those persons from other states who work in Pohnpei. This is a direction similar to the one many residents of Guam take in requesting the US government to compensate Guam for expenses the local government incurs in providing education, health services, and other services to the emigrants from FSM. Another participant, however, reminded us that the people from other states also pay taxes and spend their money here. In so doing they are already contributing to the local economy.

Development of a productive economy is badly needed on Pohnpei as in the other states so that the private sector can generate the revenue that the government needs to provide basic services to people. All the states must develop an export base in order to raise revenue. This explains the hunger of the state leadership for big projects capable of making big taxable profits, whether this is a giant tourist hotel, a gambling casino, or an ambitious fishing project such as was outlined in the YTK proposal. There were a few participants who tended to "think small" and give priority to small business projects that people could carry out on a normal plot of rural land, but most saw the urgency of large development projects. Many seemed to think that foreign investment was a necessity to get this sort of grand project out of the planning stage and into reality, not just because of the financial backing required but because of the management skills needed to make such projects successful. One participants mentioned that the state legislature was considering extending the maximum length of the land lease beyond 25 years to lure investors.

Cutting the Costs of Government

In Pohnpei the 20% salary decrease will be going into effect at the beginning of next month. To make the cut more palatable, the government is also planning to cut the number of hours of work by 20%; hence, the beginning of what will probably be a four-day work week on Pohnpei. But this measure by itself is insufficient to bring the state budget in line with the resources at hand. The present 1400 state government employees will have to be cut by 200 by 1998. Even now the VER program (voluntary early retirement) is being implemented in an attempt to induce some government workers to step down so that their jobs can be eliminated. Despite the title of this new program, not all retirements are voluntary; some are forced upn employees for a variety of reasons. There are positions in the government that have been judged to be unnecessary and certain individuals singled out as useless`or even even harmful to the public good.

Reforms in the state government are badly needed, most agreed. The state government has already started to implement some of the more obvious by cutting down the length of accumulated leave with pay and demanding stricter performance standards. Other abuses may be the result of long ingrained attitudes toward government work dating from the old Trust Territory days when government jobs were, for all practical purposes, the only jobs to be had. A system was adopted to protect employees "rights" and to guard against firings without due cause that now makes it difficult to get rid of persons who contribute very little to the government. Somehow this system has to be revised and govenment employees must begin seeing their work as a public service rather than simply a means of supporting their family. Is it possible to put into play in government work those same competitive attitudes that move people and families to contribute to the community through the practice of local custom?

Downsizing of the government sector and a change in work habits and attitudes is essential to the future of Pohnpei and the other states. This must be achieved independently of any reallocations of government revenue by the national government. One participant noted that the timing of the recent referendum on revenue sharing was unfortunate; it would have been better if the states had implemented their reforms and made an honest attempt to cut government costs before they tried to enlarge their share of FSM government monies.

The "80-20" Referendum

In March 1997, at the time of the general elections, a referendum was held on a proposed amendment to the FSM Constitution to reduce the national government's share of all tax revenues from 50 to 20 percent, with the states getting 80 percent of all revenues. Many participants felt that the referendum was a mistake. The process of adopting a constitutional amendment is a costly and time-consuming one. Even with a good public education program to support it (which this referendum apparently lacked), a constitutional amendment requiring passage by 75 percent of the popular vote in at least three states is nearly impossible to pass.

There were any number of side issues that affected the outcome of the March referendum, including people's judgment on the relative merits of state legislators and congressmen. In the end, however, one participant may have been correct when he suggested that the voters expected their state and national representatives to resolve the matter on their own. The people in the towns and villages of FSM know full well that the state is experiencing serious financial difficulties, for they have had their work salaries cut and their disposal income reduced to the point that many are finding it impossible to continue their loan repayments through salary deductions. Even so, they voted against the amendment in surprisingly large numbers. Are they sending a message that they are disappointed in their state leadership? Or are they, as one person speculated, biding their time and waiting for their national leaders to come to the state's rescue?

Whatever the case, the issue of revenue sharing will not vanish just because the amendment was defeated. It will resurface again and again, as it has so often in the past, until the state governments are fiscally healthy again.

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