Technical Assistance: A Way To Promote Better Management of Guam's Resources and To Increase Its Self-Reliance

Published by the Government Accountability Office on 1977-09-13.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                         DCCUMENT RESUME
03506 -   A2573711]
Technical Assistance: A Way to Promote Better Management of
Guam's Resources and to Increase Its Self-Reliance. GGD-77-80;
B-146742. September 13, 1977. 36 p. + appendix (5 pp.).

Report to the Congress; by Elmer B. Staats, Comptroller General.
Ccntact: General Government Div.
Budget unction: General Government:   xecutive Direction and
    Management (802).
Organization Concerned: Department of the Interior.
Congressional Relevance: House Committee on Interior and Insular
    Affairs; Senate Committee cn Energy and Natural Resources;
Authority: Crganic Act of Guam (48 U.S.C. 1421). Guam Elective
    Governor Act (48 U.S.C.  422).
          The Department of the Interior has not prepared the
Government cf Guam adequately for increased self-reliance--a
necessary step in achieving the basic U.S. policy of Guam's
self-determination. Findings/Cunclusicns: Guam's current fiscal
crisis underscores the need for Interior's assistance in
developing a strorg financial management capability. Guamm
inadequate udgeting process, inaccurate and untimely accounting
system, inability to collect accounts receivable, over-expansion
of Gcvernment operations, shortages of qualified iddle
managers, and ineffective Federal oversight have hindered Guam's
progress toward self-reliance. Recommendations: The Secretary
of the Interior should increase and broaden technical assistance
to the Government of Guam. Specifically, the Secretary should
use the capabilities of the S£i,2 of Territorial Affairs or
other necessar? resources to help the Government of Guam:
estal  sh a financial management system that includes improved
budgeting and accounting methodology and controls; develop a
master plan for capital improvement and economic development
projects; expand vocational educational programs to produce a
local labor force for construction projects; slow the trend
toward increased reliance on the Government of Guam to provide
employment; and provide training for Government of Guam
employees in managerial positions. The Secretary should also
assess the status of, nd degree to nich, recommendations in
previous reForts of the Government Comptroller have been put
into operation and subLit to the Congress his analysis :xnd
comments to assist in congressional consideration of proposed
financial assistance. (Author/SC)


Technical Assistance: A Way
To Promote Better Management
Of Guam's Resources And To
Increase Its Self-Reliance
Department of the Interior

The Department of the Interior has not pre-
pared the' Government of Guam adequately
for increased self-reiiance--a necessary step in
achieving the basic U.S. policy of Guam's self-

Guam's current fiscal crisis underscores the
need for Interior's assistance in developing a
strong financial management capability.
Guam's inadequate budgeting orocess, inac-
curate and untimely accounting system, in-
ability to collect accounts receivable, over-
expansion of Government operations, short
ages of qualified middle managers, and inef-
fective Federal oversight have hindered
Guam's progress toward self-rel;ance.

GGD-77-80                                          SEPTEMBER 13, 1977
                           WAIW  lto. 0D0. M


To the President of the Senate and the
Speaker of the House of Representatives
     This report describes financial problems on the island
of Guam. It discusses the need for improved budgeing, ac-
counting, and reporting by the Government f Quam and recom-
mends that the Secretary of the nterior provide necessary
technical assistance to help Guam establish an adequate
financial management system.

      We made our review pursuant to the Budget and Accounting
Act, 1921 (31 U.S.C. 53); the Accounting and Auditing Act of
1950 (31 U.S.C. 6); and the Organic Act of Guam (48 U.S.C.
     We are sending copies of this report to the Secretary
of the Interior and the Director, Office of Management and

                                Comptroller General
                                of the United States
                                           OF GUAM'S RESOURCES AND TO
                                           INCREASE ITS SELF-RELIANCE
                                           Department of the Interior

             Inadequate financial management within the
             Government of Guam has slowed the trritory's
             progress toward self-determina' 4i---the basic
             U.S. policy for Guam. Continued deterioration
             of Guam's financial position has adversely af-
             fected its services to the public, has led to
             increased need for Federal assistance, and has
             limited the effectiveness of Federal expendi-
             Inadequate funding and financial management
             deficiencies have had a detrimental impact
             on the quality of public services, such 'as
             education, health, telephone, and Federal
             grant programs. For example, lack of funds
             for education fostered serious consideration
             to establishing a separate school system for
             U.S. military dependents. Additional Federal
             assistance became necessary to ease the mili-
             tary's concerns.

             Lack of local funds and improper use of
             Federal grant moneys have also disrupted
             grant services. Several grant-edministra-
             tors could not fully implement Federal grant
             programs and experienced unnecessary delays
             in making grant expenditures due to Guam's
             cash flow problems. (See ch. 4.)
             During fiscal years 1970-76, Guam's General
             Fund operations accumulated a deficit of
             $44.5 million. The entire bank account
             reached precariously low levels and was
             overdrawn twice in July 1976. Cumulative
             operating losses in a number of Government-
             owned public enterprise agencies totaled
             $47.1 million at the end of fiscal year
             1975. (See cho 2.)
             The recent economic recessioni and Guam's
             weak economic base contributed to its

  awh..5t.  Upon removal. the report   i                   GGD- 77-80
cover ate should be noted hereon.
Government's financial woes. Additional major
factors in Guam's financial situation include
--an inadequate budgeting process,
-- an inaccurate and untimely accounting sys-
-- an inability to collect moneys due,
-- an overexpansion of Government operations,

-- shortages of qualified middle managers.
The U.S. Government Comptroller for Crlam has
called attention tc these deficiencies, but
they remain uncorrected. These deficiencies
and other problems demonstrate the need for
more effective Federal oversight and techni-
cal assistance. (See ch. 3.)
Guam's financial difficulties have led o
requests for additional Federal funds. The
Guam Power and Telephone Authorities re-
ceived authorizations for $63 million in
Vlderal loans and guarantees in fiscal year
1976. The Department of the Interior is
considering Guam's requests for special ap-
propriations up to $171 million to supple-
ment Guam's tax revenues and to fund capital
improvement projects.
Capital improvement projects could provide
needed facilities and promote economic
development of Guam's limited economic base.
However, uncorrected management deficiencies
relating to previously federally funded con-
struction projects and inadequate study and
technical assistance in developing the cur-
rent proposal could limit the effectiveness
of future Federal funding. (See ch. 5.)
To carry out the U.S. policy of self-
determination for Guam, the Secretary of
the Interior should increase and broaden
technical assistance to the Government of
Guam. Specifically, the Secretary should
             use the capabilities of the Office of
             Territorial Afairs or other necessary re-
             sources to help the Government of Guam

             -- establish a financial management system
                that includes improved budgeting and
                accounting methodology and controls,
             -- develop a master plan for capital im-
                provement and economic c elopment
             -- expand vocational education programs
                to produce a Local labor force for con-
                struction proiects,
             -- slow the trend toward increased reliance
                on the Government of Guam to provide
                employment, and
             -- provide training for Government of Guam
                employees in managerial positions.

             The Secretary should also:

             -- Assess the status of, and degree to which,
                recommendations in previous reports of
                the Government Comptroller have been put
                into operation.

             -- Submit to the Congress his analysis and
                comments to assist in congressional con-
                sideration of proposed financial assist-
                ance and in oversight of the progress
                Guam is making toward self-determination.
                (See ch. 6.)

             The Department of the Interior agreed with
             many of GAO's findings and recommendations.
             Interior said the report presented an ac-
             curate overview of the problems facing Guam
             and reflected its inability to cope effec-
             tively with or resolve successfully major
             financial and management issues reported by
             the Government Comptroller year after year.
             Interior stressed that it has no authority
             to implement Government Comptroller recom-

                       Co n t * n t

DIGEST                                                i

   1      INTRODUCTION                                1
              Guam---its people and Government        1
              How GOVGUAM programs are funded         2
              General Fund deficits                   4
              Public enterprise agencies losi::n
                money                                 6
            CRISIS                                    9
              External factors                        9
              Budgeting controls inoperative         10
              Accounting records unreliable          12
              Moneys owed not collected              12
              Overexpansion of GOVGUAM operations    14
              Ineffective Federal oversight          15
              Insufficient Federal technical
                assistance                           16
            PUBLIC SERVICES                          18
              Public education                       18
              Health sezvice                         20
              Federal grant services                 20
              Telephone service                      22

            INCREASING                               24
              Guam Power Authority                   24
              Guam Telephone Authority               27
              Special appropriations                 29
              Conclusions                            32
              Recommendations                        32
              Agency comments and our evaluation     33

   7      SCOPE                                      36
APPENDIX                                                  Page
      I    Letter dated May 18, 1977, from the Office
             of the Secretary of the Interior               37
DOI        Department of the Interior

GAO        General Accounting Office
GOVGUAM    Government of Guam
GPA        Guam Power Authority
HEW        Department of Health, Education, and Welfare

REA        Rural Electrification Administration
                         CHAPTER 1

     Self-determination is the basic U.S. policy toward the
territory of Guam. We believe this policy encompasses the
concepts of both l.ocal self-government and increased self-
reliance. Guam's success in achieving the latter depends on
the Government of Guam's (GOVGUAM's) ability to effectively
manage its financial reso ces, thereby lessening, or at
least stabilizing, the level of U.S. financial support. How-
ever, due to a recent fiscal crisis, GOVGUAM has requested
various fomns of additional Federal financial assistance.

     Our review was made to evaluate the extent and causes
of GOVGUAM's fiscal problems and to identify their impact on
local public services and te Federal Government. This
report discusses the need i.r major improvements in financial
management, the effectivene. crf Federal oversight, and the
level of technical assistance provided to GOVGUAM.


     Guam is a U.S. territory in the Pacific Ocean about
3,500 miles southwest of Hawai'.. Federal employees, military
personnel, and their dependents account for over one-fourth
of the island's population of about 105;000.
     Guam was ceded to the United States by Spain pursuant
to the 1898 Treaty of Peace following the Spanish American
War. Except for the period of Japanese occupation during
World Wa- II, Guam remained under the administration of the
Department of the Navy until passage o the Organic Act of
Guam (48 U.S.C. 1421) in 1950. This act was the first step
toward local self-government and self-determination for Guam
by granting U.S. citizenship to Guamanian citizens and pro-
viding for a popularly elected legislature.
     Until 1968 the Governor of Guam was appointed by the
President. The Guam Elective Governor Act (48 U.S.C. 1422)
provided for a popularly elected Governor and established the
Office of the Government Comptroller for Guam within the
Department of the Interior (DOI). The Government Comptroller,
under the Office of Territorial Affairs, is charged with
overseeing the substantial Federal funds ging to GOVGUAM and
promoting economy and efficiency of governmental operations.


     The Organic Act of Guam made all Federal income tax laws
applicable in the territory and provided that revenues from
such taxes be deposited in the Treasury of Guam. Local resi-
dents and business concerns pay their income.taxes directly
to GOVGUAM, whereas Federal income taxes paid by U.S. Govern-
ment employees, including te military, are collected by the
Federal Government and return;ed to the Treasure, of Guam.
Guam also receives immigration, passport, and other Federal
fees collected on the island, as well as various Federal

     The following chart shows that about 75 percent of
GOVGUAM's fiscal year 1976 General Fmd revenues of $114
million were attributed directly, or indirectly, to the
Federal Government.

                                             Revenues from
                                             Local Taxes,
                                             Government Services,
                                             Licenses, Permits, etc.
             Income Taxes Colltbted
             in Guam in Lieu of              26%
             Federal Income Taxes;
             Miscellaneous Federal

                                                      Federal Grants

                                      by the U.S.

                        GOVGUAM REVENUE SOURCES
                        (Preliminary Fiscal Year 1976 Data)

     Since 1963 GOVGUAM has also received Federal authori-
zations for $75 million in rehabilitation grants and loans,
a $5 million Economic Development Fund, a $20 million emer-
gency appropriation following a May 1976 typhoon, and $63
million in Federal loans and guarantees for the Government-
owned Power and Telephone Authorities. At the time of our
review, DOI was reviewing a GOVGUAM request for special
appropriations of $171 million, primarily to supplement tax
revenues and to fund capital improvement projects.

                                   CHAPTER 2


     During the 1970s GOVGUAM's financial position has rap-
idly deteriorated. General governmental operations, reflec-
ted in the General Fund accounts, have sustained substantial
deficits. Losses by GOVGUAM's public enterprise ag(encies,
such as public utilities, have been a further drain on finan-
cial resources. The ensuing negative cash flow condition vir-
tually depleted all cash reserves by the end of fiscal year
1976. Without increases in revenues, cash shortfalls are pro-
jected to increase substantially.

     During fiscal years 1970-76, the General Fund balance
declined from. a $5.3 million surplus to an accumulated deficit
of $44.5 million, as shown below.

              5                               2.7

      °                         (3.3)

       E   (15)_                                      \(17.0)
      "    (20) -
           (256) -
           (30) -

           (45) _                                                                (44.5)'


             1970          1    172'                  1974      197            176
                                        FISCAL YEAR
            *Prnliminary date

     Some GOVGUAM officials onside    the above to be "paper
deficits" on the basis that certain  continuing  authorizations
can be deappropriated by the local  legislature.   To a certain
extent, this is true.  However, although  about  $12 million in
continuing authorizations were eliminated in fiscal year 1976
to reduce the deficit, it still increased by $6.2 million.
     The General Fund's cash position is perhaps a better in-
dicator of the fiscal crisis facing GOVGUAM. The General
Fund's ca.h account was overdrawn by over $10.6 million (pre-
liminary data) at June 30, 1976. Most cash from the General
Fund, Federal grants, and various special funds, such as high-
way construction funds, are commingled in a single bank ac-
count. The following table shows the General Fund cverdrafts
and the residual commingled bank balance at June 30 for fis-
cal years 1971-76.
           General Fund         Other fund   Commingled account
             overdraft           balances          balance

                     ---   -.   (millions)
1371         $ 0.6                $ 1.9            $1.3
1972           4.1                  %.3             3.2
1973           2.7                  7.5             4.8
1974           4.6                  9.0             4.4
1975           8.6                 12.5             3.9
1976 (note a) 10.6                 10.9              .3
     As shown above, the General Fund used moneys from other
special OVGUAM funds to meet its cash requirements. This
resulted in a precariously low cash balance of only $314,000
in the commingled bank account on June 30, 1976. During July
1976 the entire commingled account was overdrawn twice by
about $200,000 and $100,000. The General Fund biweekly pay-
roll of $2.6 million emphasizes the critical nature of this
declining cash position.

     GOVGUAM has estimated its cash flow position will de-
teriorate further without increased Federal funds. GOVGUAM
records show a cumulative General Fund cash shortage pro-
jection of $47.6 million by the end of fiscal year 1981.

                                  June 30 cumulative
            Fiscal                   General Fund
             year                   cash shortfall
             1975                         $ 8.6
             1976                     a/15.3
             1977                         19.1
             1978                         25.4
             1979                         30.4
             1980                         38.3
             1981                         47.6
           a/Actual cash shortfall was $10.6
             millJin, according to preliminary
             finr.ncial statements.
However, sinc. most cash in the commingled account had been
depleted -- the end of fiscal year 1976, this projection
could not be covered by other funds. This situation led to
 ,bstantial curtailments of Government services.
     The above projections were prepared before a major ty-
phoon hit Guam in May 1976; it resulted in a Federal emer-
gency appropriation to GOVGUAM of $20 million. Further, rev-
enues from Federal Disaster Assistance Administration
assistance of over $30 million (as of November 1976) and
expenditures of about $153 million for damaged military
facilities will undoubtedly ease the cash flow situation
in the short run. However, all other factors equal, we
believe the long-term downward trend shown above will
probably resume.

     Net losses incurred by the Government-owned public
enterprise agencies and the Guam Memorial Hospital have
substantially drained GOVGUAM's financial resources. As
shown on the following page, cumulative losses have in-
creased from $5.4 million to 47.1 million during fiscal
years 1970-75 (1976 data was not available at the time of
our review).


       (5      (5.4)
    3( 10                  11.9)

.        1                         (19.3)

      (25)                                     (25.7)

      (30)                                               (33.0)

      (40) -

      (45) -                                                      (47.1)
            1970       1       -i1972       1975
                                            9           974
                                   FISCAL YEAR

     Since most public enterprise agencies and the Guam
Memorial Hospital have not been self-sustaining, GOVGUAM
subsidies have been neces ..!y. As shown below, $71.1 mil-
lion in cumulative subsidies had been made by the end of
fiscal year 1975.

                              Cumulative          Cumulative
                               gain or             GOVGUAM
   Agency or fund              loss J1             subsidy
Commercial Port               -$12,664             $ 7,085
Guam Economic Development
  Authority                        -395                 1,094
Guam Housing Corporation          1,631                 5,296
Guam Housing and Urban
  Renewal Authority                -998                 4,697
Guam International Air
  Terminal                        3,589                 1,038
Guam Rental Corporation             -80                  None
Guam Telephone Authority           -814                 4,773
Public Utility Agency of
  Guam                         -15,719              15,803
Univers'ty Auxiliary
  Services Fund                     -16                    24
University Dormitory
  Revenue Fund                   -174                     720
Guam Power Authority            2,264                   2,045
Guam Memorial Hospital        -23,714               28,563
   Total                    a/-$47,090          a/$71,137
a/Does not add due to rounding.
                         CHAPTER 3


     External factors, such as the recent recession, have
adversely affected GOVGUAM's financial position and have
acted as a catalyst in surfacing the many underlying internal
problems of GOVGUAM operations. Inadequate budgeting and
accounting systems, failure to collect funds due, over-
expansion of GOVGUAM, failure to implement Government Comp-
troller ecommendations, and insufficient technical assistance
have prevented GOVGUAM from minimizing the effects of declin-
ing revenues.

     Guam has an extremely limited economic base. During
1974 exports of $20 million represented less than 10 percent
of its $259 million in imports. GOVGUAM's revenues are
derived primarily from Federal expenditures and grants, the
construction industry, tourism, minor light industries, and
the trade and service industries.

     Following a major typhoon in 1962, the Federal Govern-
ment appropriated $75 million in grants and loans for
rehabilitating Guam. Most of the resulting capital improve-
ment projects were constructed during the late 1960s and
early 1970s. During this same period, the tourist industry
expanded rapidly with the establishment of air routes between
Guam and Tokyo. The construction industry further expanded
to meet the needs of hotels, stores, and amusement facilities.
     The concentrated infusion of capital into the territory
resulted in a dramatic increase in GOVGUAM's annual revenues.
But the combined effect of dwindling rehabilitation construc-
tion funds, the worldwide economic recession, and decreases in
tourism and military activities led to a decline in local tax
revenues. Changes in Federal income tax laws, such as tax
rebates, have also reduced GOVGUAM's operating funds. The
following graph shows General Fund revenues increasing from
$17 million to $117 million in fiscal years 1964-75 with a
subsequent decline to $114 million in fiscal year 1976.

                                                   GENERAL FUND REVENUES

         120 -                                                                                              117.2
          110                                                                                        12.5


                                 I2~~~~                                        }~~~~~~                 ~5.0
                70*                                                      / 68.6
    ' 60
    4 60,                                                         59.9

          2C          17.3 18.3

           O            A    i                A            A        at    A      I    ·          ·    a
                       64          66         67   68      69       70    71    72   73      74           75    76
                                                                FISCAL YEAR
           sPrdnlnmif d           _-

     During the period of increasing revenues, GOVGUAM's
financial management was seriously deficient.  However, the
aura f plenty obscured these weaknesses. The recent decrease
in revenues highlights the critical need for corrective action.


     GOVGUAM's financial deficit has resulted from its failure
to operate within available financial resources. Overappro-
priations by the legislature and failure of the financial
management system to recognize forthcoming revenue shortfdlls
and to adjust budgeted expenditures created the problem.

     The following table presents the estimated revenue,
appropriations, and changes in the General Fund balance for
fiscal year 1975 (fiscal year 1976 data was not available at
the time of our review).

Estimated revenue                                   $129,090,000
Appropriations                                      $183,139,000
Actual receipts                      ,'17,222,000
Expenditures and encumbrances         134,642,030
Deficiency (-) of revenues over
  expenditures and encumbrances       -17,420,000
Net transfer entries and increase
  in continuing authorizations         -3,830,000
Previous year fund balance            -17,044,000
June 30, 1975, fund balance          $-38,294,000

     GOVGUAM has not followed sound budgeting practices. As
shown above, the legislature appropriated over $183 million
(including prior year authorizations), although revenue esti-
mates were about $129 million. Further, expenditures and
encumbrances exceeded estimated revenues by about $6 million
and actual receipts by over $17 million.
     Budget officials informed us the budget allotments to
the various departments are not adjusted throughout the year
to reflect unrealized estimated revenues. They attribute
this to the lack of timely financial information from the
accounting system and the aversion to laying off Government
     Beginning in fiscal year 1975, the Governor of Guam
implemented austerity measures in an attempt to minimize
operating deficits. These measures included freezes on fill-
ing most vacancies and on all salary increases. Although
operating expenditures decreased, the austerity programs did
not prevent substantial fund deficits for fiscal years 1975
and 1976. Further, the salary freeze was lifted at the begin-
ning of fiscal year 1977, and a bill was introduced by the
Governor (still pending at the time of our review) to grant
retroactive salary increases to April 1975.

      Deficiencies in the budgeting procedures are compounded
 by GOVGUAM's accounting system, which provides inaccurate
 and untimely information. Certified public accounting
 have issued adverse opinions on the combined balance   firms
 and the General Fund balance sheets of GOVGUAM for fiqcal
 years 1971-75, and indications are that adverse opinions
 also be issued tor 19/b.

      Except for autonomous agencies, such as the Guam Power
 Authority (GPA), the Department of Administration maintains
 tna official records of GOVGUAM within its central accounting
 system. All departments within GOVGUAM hve their own
 counting sections, which in turn report iY. he Department
 Administration. There is a serious lack                    of
                                             coordination and
 standardized accounting procedures between department
 ing sections and the central accounting system.

      As a result, certified public accounting firms
 concluded that most departmental accounting records have
                                                     did not
 agree with the central accounting system. The firm used
 fiscal year 1975 found it impossible to reconcile departmental
 Federal grant expenditure reports to the central accounting
 system. At the close of fiscal year 1976, various depart-
 mental accountants were called in to work in the Department
 of Administration to reconcile their grant expenditure
 with central accounting records.
      The present accounting system does not provide timely
information. Monthly financial statements are supposed
be issued by the Department of Administration the         to
of the following month. However, financial statements    day
July and Agust 1976 were not expected until the          for
                                                  end of
October 1976. GOVGUAM officials advised us it would
                                                      be at
least December 25 before fiscal year 1977 monthly financial
statements would be issued on schedule.

     Accurate and timely accounting information
ment for sound financial management. Unless the is  a require-
accounting problems are corrected, GOVGUAM will
producing untimely and inaccurate financial data.continue


     GOVGUAM s failure to collect moneys owed further
mines its financial position. Several GOVGUAM agenciesunder-
funds have unacceptably high allowances for doubtful      and
as reflected in the following table for fiscal year   accounts
(fiscal year 1976 figures were not available at the time
our review).

                                                               Allowance for
                                              Allowance       doubtful accounts
                           Accouhts          for doubtful       as percent of
                           receivable         accounts        accounts receivable
        fund or auenny      6/30/75            6/30/75          6/30/75 (note a)
General     unds
    Taxes                   $23.3                 $ 6.4               27
    Hospital                  12.3                 11.2               91
    Loans to other
      funds and agencies      31.1               /28      7           92
    Other receivables           .5                     .2             40
        Total                 67.2                 46.5               69
Commercisl Port               1.5                      .9             60
aconomic Development
  Authority                     .7                     .2             36
Guam Telephone Authority       2.2                     .9             40
Public Utility Agency
  of Guam                      1.3                     .4             35
Trust and agency funds        4.3                  .2.2               52
          Total               10.0                  4.6
Total                         77.2                 51.1               66
_/Percentages based on unrounded figures.
b/During FY 1976, $20.3 million was written off as a loss by the
  General fund.

     The fiscal year 1975 allowance for doubtful accounts
for the General Fund exceeds its account deficits for both
fiscal years 1975 and 1976.   n some cases, especially the
hospital, GOVGUAM agencies have exerted little effort to col-
lect moneys owed. The fiscal year 1975 certified public
accounting firm in several cases attributed the excessive
doubtful accounts to the following factors:

        -- Insufficient collection efforts.

        -- Inadequate records and billing procedures.

        -- Inability of GOVGUAM agencies to repay loans from
           the General Fund.
     The firm found that no attem-t had been made for the
period July 1, 1971, to June 30, 1974, to determine the total
of the hospital's individual accounts receivable from patients
or the age of such accounts. It also concluded that complete
records of the Public Utility Agency of Guam's service con-
nections and charges had not been maintained; numerous
billings for water and sewerage were based on estimates be-
cause meters had not been read or could not be located.

     Unless GOVGUAM develops adequate procedures and records
regarding collections, we believe it will continue to have
excessive uncollectibles; this situation will continue to
adversely affect its financial operations.


     The decline in revenue during 1976 raises the question
of GOVGUAM's ability to financially support its large labor
force. Despite an effort to reduce employment with an early
retirement program and a freeze on most hiring, GOVGUAM's
deficit increased in fiscal year 1976.

     The following table shows that during the period of
increasing revenues, GOVGUAM employment increased from 5,500
in 1971 to 9,200 in 1975:

                    Year             GOVGUAM
                 (September)        employment
                   1970               5,500
                   1971               6,600
                   1972               7,300
                   1973               8,000
                   1974               8,700
                   1975               9,200
                   1976             a/8,500
a/Government Comptroller estimate based on payroll and
  budget data.

     GOVGUAM accounted for about one-third of non-Federal
employment on Guam in fiscal year 1976. GOVGUAM's estimated
employment level in October 1974 (the latest data available
for comparative purposes) was almost twice the national
average for State and local government employees--about
827 compared to 466 full-time equivalent employees per
10,000 population.

     Government Comptroller officials said various func-
tions, such as procurement, accounting, data processing, and
maintenance, could be consolidated. Further, much of
GOVGUAM's employment is related to services normally pro-
vided by the private sector. Hospital, telephone, power,
and other utility services are all owned by GOVGUAM. Since
many of these agencies are a financial drain on GOVGUAM, DOI
has questioned the desirability of continued GOVGUAM owner-
ship. Recent Government Comptroller reports have concluded
that some of these agencies, such as the Telephone Authority
and the Commercial Port, have excessive personnel contribut-
ing to operating losses.

     GOVGUAM is arse to layoffs since there are few job
opportunities in he private sector to absorb new employees
and Guam has no unemployment insurance. However, alien labor
has been used primarily in the construction industry to fill
the void of skilled local employees. Alien labor accounted
 or 88 percent of total 1974 construction employment.

     GOVGUAM has provided little incentive to motivate its
employees to work in the private sector.  GOVGUAM is viewed
as the most attractive employer on the island.  Further, ex-
tensive vocational education programs are lacking.

     With the influx of expected Federal funds for capital
improvement and economic development pojects, increases in
employment in the private sector are likely.  This offers
the potential for substantial Government cost savings through
reductions in staffing levels.  Reductions are possible
through vocational education programs and, perhaps, by
turning certain GOVGUAM-owned services over to the private


     Most of the deficiencies outlined above have. been pre-
viously identified in Government Comptroller reports.    The
problems have gone unresolved due to inadequate implementa-
tion of recommendations by GOVGUJAM and DOI's failure to
give the Congress comments and recommendaticns regarding
the Government Comptroller's findings.

     The Organic Act of Guam, as amended, established the
U.S. Government Comptroller for Guam under DOI.  The act
prescribed that the Government Conptroller's audits be
directed to evaluating GOVGUAM programs, to recommending
improvements which will result in greater economy and effi-
ciency, and to insuring that Federal revenues deposited
into the Treasury of Guam are accounted for properly.

     We analyzed 22 Government Comptroller reports, dating
back to fiscal year 1970, to evaluate the extent previous
recommendations had been implemented. According to follow-
up reports, only 184, or 37 percent, of the 491 recommenda-
tions had been fully implemented.  Preliminary Government
Comptroller statistics showed that unrealized recurring
annual savings and revenue associated with unimplemented
recommendations were over $42 million for fiscal years 1970-
76; potential one-time savings were about $22 million.

     DOI iformed us that during fiscal years 1970 and 1971,
a much higher percentage (almost 90 percent) of Government
Comptroller recommendations had been fully or partially

implemented. At the inception of the Comptroller's Office
in fiscal year 1970, it was believed that adverse reports
would cause difficulty in congressional appropriations. DOI
also stated that as time went on GOVGUAM management realized
that there was no relationship between funding and the Comp-
troller's reports. Consequently, the interest of top man-
agement declined and the lack of interest generally perme-
ated the entire Government; this situation resulted in a
loss of incentives and of motivation to insure fiscal
     Government Comptroller and DOI officials informed us
they have no authority to insure implementation of the above
recommendations. Since GOVGUAM does not receive direct
appropriations of the routine Federal moneys it receives,
DOI believes its influence over GOVGUAM's fiscal operations
is minimal. DOI and Government Comptroller officials be-
lieve that compliance with their recommendations can occur
only if they are specifically evaluated in special congres-
sional appropriation considerations.

      Also DOI has not adequately transmitted the informa-
tion in the Government Comptroller reports to the Congress.
Section 1422(d)(g) of title 48, U.S.C. of the Organic Act
 (as amended) requires the Secretary of the Interior to sub-
mit to the Congress his comments and recommendations regard-
ing the Government Comptroller's annual report of Guam's fis-
cal condition. However, DOI officials informed us that for
the past several years, the voluminous reports have been
transmitted without comments or recommendations. Needed
improvements in Federal oversight and GOVGUAM's noncom-
pliance with Government Comptroller recommendations could
have been highlighted through annual assessments by the

     DOI's principal mission as it relates to Guam is to
assist in political, economic, and social development ulti-
mately leading to self-determination and self-reliance. We
believe DOI has not exerted sufficient efforts to help
GOVGUAM achieve greater self-reliance. Many of the defi-
ciencies outlined in this report could have been avoided or
corrected had DOI provided sufficient technical assistance

      Insufficient management expertise is a major stumbling
block\to efficient GOVGUAM operations. In 1975 the certi-
fied public accounting firm reported that a shortage of com-
petent middle managers had adversely affected GOVGUAM opera-
tions and had contributed to inadequate financial management
controls, poor planning, and low morale. Better training

and use of managers and increased use of long-term technical
assistance are needed.

     GOVGUAM officials have acknowledged the management
weaknesses and have received sporadic technical assistance
from the Federal Government. However, they said that prior
Federal technical assistance had not been effective due to
its short duration. They believe that greater long-term
technical assistance is needed to properly train GOVGUAM
managers to effectively and efficiently operate GOVGUAM
agencies and programs.
     The fiscal problems facing Guam necessitate timely cor-
rective action. DOI is planning to help GOVGUAM implement a
mechanized financial management system. A basic understand-
ing of the concepts of financial management is needed before
a computerized system can be effectively used. A similar
system was initiated in 1969 for the Trust Territory of the
Pacific Islands but still has not been implemented. Unless
DOI devotes sufficient resources to train GOVGUAM employees
to implement a basic financial management system, Guam's
fiscal problems will not be solved soon.
     We believe DOI could use U.S. Government Comptroller
audit reports to identify other areas where technical as-
sistance is needed, such as GPA and the Guam Memorial Hos-
pital. DOI should coordinate with other Federal agencies'
efforts to provide meaningful long-term technical assistance
to Guam. Wthout proper training and management expertise,
Guam's financial situation will deteriorate further. This
situation will adversely affect GOVGUAM's ability to be
self-sustaining, and additional Federal funds will be needed.

                                       CHAPTER 4

     Inadequate funding and numerous financial management de-
ficiencies have contributed to GOVGUAM's inability tc provide
adequate education, health, telephone, and Federal grant serv-
ices. The deterioration of these services was apparent dur-
ing fiscal year 1976 when GOVGUAM experienced severe cash
flow problems and operating deficits. Until sound financial
management practices are implemented, public service delivery
will be jeopardized. This situation will adversely affect
the quality of life and Guam's relationship with the Federal


     The public education system epitomized the adverse im-
pact of GOVGUAM's financial position on public service deliv-
ery. Reductions in the fiscal year 1976 appropriation for ed-
ucation impaired school system operations.  GOVGUAM cash flow
problems compounded the Department of Education's inability
to maintain operations, recruit qualified teachers, and im-
prove educational standards. The following chart shows the
trend in resources devoted to education.



            336                                               356      .0

        Z   2a8
        2 -                             25.7
            16    14.8


                  1970   1971   1972    1973    1974   1975   1976   1977
                                        FISCAL YEAR

    As shown above, the fiscal year 1976 appropriation was re-
duced over $8 million, or about 20 percent, from the previous
year's appropriation. This was about $13 million less than
originally requested.
    The following conditions prevailed during fiscal year

    -- Shortages of qualified teachers: Over 100 positions
       were unfilled by professional teachers for the entire
       school year. These positions were filled by unquali-
       fied personnel. In some cases, janitors, telephone
       linemen, and water meter readers monitored classrooms.

    -- Shortages of equipment and supplies: Many schools had
       insufficient textbooks, library books, and other basic
       teaching supplies. In addition, some schools experi-
       enced shortages of toilet paper, paper towels, soap,
       and other necessary sanitary supplies.

    -- Inadequate maintenance and sanitation: Virtually all
       schools were without adequate maintenance. Sanitation
       problems, such as broken toilets and sewage problems,
       caused the Director of Public Health to threaten clos-
       ing some school restrooms.

    The education situation on Guam was of such great concern
to the U.S. Iailitary community that the Department of Defense
seriously considered establishing a 3parate school ;ystem
for military dependents.
    In an August 7, 1976, letter to the Secretary of Health,
Education, and Welfare, the Secretary of Defense stated the
school situation on Guam was having a negative effect on mis-
sion accomplishment. Air Force and Navy commands notified
prospective new arrivals of the school situation and at-
tempted to accommodate their desires to opt for reassignment
elsewhere. In addition, some on-island servicemen sent their
dependents home before their assignments on Guam expired.
From July 1, 1975, through September 17, 1976, 425 dependents
left Guam primarily due to the education problems.
    Dissatisfaction by the military led to factfindingSvisits
by Department of Health, Education, and Welfare (HEW) offi-
cials to assess the situation and to seek remedies, including
possible establishement of a separate school system. In' re-
turn for a stronger commitment to education by GOVGUAM, HEW
agreed to grant additional financial and technical assistance.
For example, $600,000 in Teacher Corps grant moneys were made
available to train noncertified teachers currently mployed
by the Department of Education.

     Greater Federal involvement has allayed some of the mili-
tary concerns about the educational services on Guam.  The com-
mands are cautiously optimistic that sufficient resources
will be devoted to public education.

     Although at the time of our review requested funds had
not been appropriated for the entire 1976-77 school year,
Guam education officials were confident that adequate funds
would be provided.  However, the quality of education on Guam
could deteriorate further if GOVGUAM does not better manage
its financial resources in the future.


      The overnment-owned Guam Memorial Hospital has continu-
ally incurred substantial operating losses.   Due to a lack of
funds to correct facility deficiencies, the hospital does not
meet the 1973 Life Safety Codes prescribed by HEW or vaious
standards of the Joint Commission on Accreditation of Hospi-
tals.   As early as 1968, the commission warned that the loss
of accreditation would adversely affect the quality of pa-
tient care.   Many physical facility deficiencies were not
corrected.   This situation eventually resulted in a loss of
accreditation in December 1974.

     Conditional accreditation was granted for 2 years begin-
ning March 1976, based on hospital plans to renovate its facil-
ities to meet minimum standards.  Due to a lack of funding,
renovation has not occurred. Therefore the hospital continues
to operate without meeting minimum commission standards.

     Current proposals include a plan to build a new feder-
ally funded public hospital and a plan to renovate the exist-
ing structure with typhoon relief funds. However, continued
operating losses may contribute to future facility deteriora-
tion and a decline in the quality of health services.


     Cash flow problems have also adversely affected services
funded by Federal grant programs in Guam. Cash shortages
have led to the inability of GOVGUAM to provide local funds
for matching and reimbursable expenditures and to improper
use of Federal funds.

     In   fiscal year 1976, Guam received over $29 million in
Federal   grants-in-aid.  Grant funds are received in cash
(either   in advance or as a reimbursement) or by drawdowns
against   a single letter of credit at a local bank.

Limited benefits realized

     GOVGUAM's financial problems have resulted in a failure
to fully implement Federal grant programs. In many instances,
adequate or timely grant services have not been provided to
the people of Guam.
     Due to a lack or local funds for reimbursable and match-
ing grants (for example, 50 percent Federal and 50 percent
local funds), GOVGUAM has not used substantial portions of
awarded grants. At the end of fiscal years 1975 and 1976,
unused Federal grants in the General Fund accounts were $4.9
million and $5.2 million, respectively. A GOVGUAM official
said several desired grants are not even pplied for due to
the cash flow situation. These large yearend grant balances
indicate that services to be provided with gant funds are
not being realized.
     An HEW fiscal year 1976 study noted that GOVGUAM was de-
ferring or redirecting expenditures for some grants, even
though funds had been received. While some GOVGUAM officials
believe that improvements have been made in the timely re-
lease of grant funds, other grant administrators encountered
delays in hiring personnel, making purchases, or receiving
approval for authorized travel. Our review identified sev-
eral instances of delayed and partial implementation of grant
programs. For example:
     --A mental health grant program, funded with 90 percent
       Federal moneys and 10 percent local moneys, was estab-
       lished to work with emotionally disturbed children.
       We were informed that none of the program objectives
       had been met due to a lack of local funding. Since
       the grant's inception in December 1974, a maximum of
       4 of the 12 authorized positions have been filled at
       one time; during our review, there was a staff of only

     -- As a result of cash shortages, an education grant pro-
        gram for educationally deprived children has not been
        fully implemented due to a lack of teachers. Six of
        31 teaching positions were vacant in October 1976.

     -- GOVGUAM delays in releasing funds caused untimely re-
        ceipt of supplies and equipment and delayed repairs of
        broken equipment. Thus a special education grant pro-
        gram to provide public education for all handicapped
        children was adversely affected.

 Improper use of Federal funds

      While delays and diversion of Federal grant
 precluded their use for intended services, a more funds have
 concern is GOVGUAM's improper use of Federal grant
      During fiscal year 1976, HEW found that GOVGUAM was
 misusing its Federal grant funds.  Guam was criticized for
 its flat monthly drawdowns of $1.5 million against
                                                     the sin-
 gle letter of credit without supporting expenditure
 HEW estimated monthly cash needs were only $1.1
                                                 million or
 $1.2 million.

      Our review indicated that Guam's procedures under
 single letter of credit have been corrected.  However,
 Guam's commingling of advanced grant funds with general
 erating funds has led to further improper use of Federal op-

      Advanced grant funds are deposited in the General
bank account and are thus subject to use for general
ment operations.                                       Govern-
                   Due to the decentralized grant accounting
system, it is extremely difficult to determine the
advanced grant funds were improperly used throughout extent
year.   However, our review showed that GOVGUAM had over
$250,000 in advanced Federal grant funds on July
                                                  30, 1976.
On that day, the entire commingled bank account
                                                 was  over-
drawn; thus GOVGUAT had used Federal funds i.nproperly.
separate bank accc nt for advanced Federal grant
                                                  moneys is


     The Guam Telephone Authority's lack of financial
ity (see p. 27) has resulted in inadequate telephone viabil-
on Guam. This situation adversely affects the public
business activities.

      In an April 1976 audit report, the Government Comptrol-
ler for Guam concluded the Telephone Authority had
                                                    not ful-
filled its primary mission to provide reliable
service at reasonable cost while operating the telephone
system on a self-sustaining basis.   From June 1974 through
March 1975, a monthly average of 2,593 telephone
                                                  trouble re-
ports were received, representing about 20 percent
subscribers.                                        of all
               The report found that unmet demand was exces-
sively high and that some applicants had been waiting
years for telephone service.

     The Government Comptroller also concluded the
Authority had not been able to provide the type of

desired. Of 13,300 residential subscribers, less than one-
fourth had private lines, due to insufficient line capacity.
     Telephone rates about doubled in April 1974, but sig-
nificant annual losses were incurred through fiscal year
1976. Consequently, funds were not generated for capital
projects to improve and expand line facilities.
     Authority officials believe that with receipt of Fed-
eral loan assistance for capitalization projects (discussed
in ch. 5), the authority will be able to provide reliable
service for the entire island by 1980. However, at the time
of our review, there was uncertainty whether such loan as-
sistance would be provided.

                        CHAPTER 5

     In addi.    to adversely affecting public services,
Guam's financial difficulties have led to requests for addi-
tional Federal assistance. In calendar year 1976, the Guam
Power and Telephone Authorities received approvals for $63
million in Federal loans and guarantees. DOI is also con-
sidering GOVGUAM special appropriation requests of up to
$171 million primarily to supplement Guam's tax revenues
and to fund capital improvement and economic development
projects which the local government cannot provide.


      The recent decline of GPA's financial position is shown
by its inability to repay any of $36 million in short-term
notes and other contractual obligations due on or before
June 1, 1976. The Federal Government was subsequently re-
quested to guarantee a short-term loan for that amount.
Timely removal of local ceilings on interest rates and cor-
rection of financial management deficiencies may have pre-
vented the necessity for Federal assistance. Further, vari-
ous existing and near-term problems facing GPA could seri-
ously affect its ability to repay the federally guaranteed
Inability to secure long-term financing

     To meet increaE    I     demands, GPA embarked upon a
plant expansion program in    3. Part of the expansion was
financed with short-term obligations in anticipation of se-
curing long-term financing. By June 1, 1976, GPA defaulted
on these and other obligations amounting to $36 million and
couldn't sell its long-term bond issue.

     For fiscal years 1971-74, GPA realized a net income from
its operations. However, a net loss was incurred in fiscal
year 1975. Due to this loss and the fact that current lia-
bilities exceeded current assets by $30.5 million a June
30, 1975, the certified public accounting firm wou'.d not
express an opinion on GPA's financial viability. "hese
factors resulted in a reduction of its bond rating from AA
to BB--a speculative rating.

     Since GPA's bonds were unmarketable, in June 1976 DOI
requested a congressional authorization for a federally guar-
An-eed short-term $36 million loan from the Federal Financing

Bank. The $36 million loan guarantee was enacted into law
in September 1976. The terms of the guarantee provide that
in the event of default (after Dec. 31, 1980) GOVGUAM would
become liable for the debt nd would receive an equivalent
reduction in tax revenues from the Federal Government--a
substantial financial drain which GOVGUAM may be unable to
absorb without adversely affecting its operations.

Federal assistance could have been avoided

     Interest ceilings imposed by Guam law precluded GPA's
ability to sell revenue bonds. In 1974 and early 1975 GPA
was authorized to sell bonds at an interest rate no higher
than 7 percent. However, the bond market required a higher
rate. After a lengthy delay, the legislature raised the
interest ceiling twice to 9 and 11 percent. By that time
the bond market would not accept GPA's bonds due to its
deteriorated financial position. GPA officials informed us
the bonds could have been sold in 1974 if no interest ceil-
ing had been imposed by Guam law.

     Uncorrected financial management deficiencies also con-
tributed to the need for Federal assistance. In August 1973
the Government Comptroller issued a report on GPA outlining
numerous deficiencies. An April 1976 followup report showed
that only 18 of 49 previous recommendations had been fully
implemented. Unimplemented recommendations involved inade-
quate collection efforts, excessive overtime costs, and
numerous internal management and operational deficiencies.
The report also concluded that GPA was not properly assess-
ing, billing, and collecting needed revenues. For example,
GPA records showed that fiscal year 1975 billings exceeded
collections by over $2.9 million.

Prospects for the future

     As a condition to the $36 million loan guarantee, DOI
placed certain stipulations on GPA, including hiring a quali-
fied financial officer, reconstituting the Board of Direc-
tors, and meeting certain basic financial reporting require-
ments. Compared to the requirements placed on the Federal
loan to the Guam Telephone Authority (see p. 27), the stipu-
lations placed on GPA are not stringent considering the loan
amount, the term of the loan, and GPA's financial instabil-
ity. Although GOVGUAM signed the loan agreement after ini-
tially objecting on the basis that DOI was exceeding its
management prerogatives, a disagreement later arose on the
interpretation of the stipulation that CGOVGUAM reconstitute
the Board of Directors. As of the end of December 1976,
GOVGUAM had replaced all but two of the directors and DOI was
insisting that these two directors also be replaced.

       After our review, we discussed GPA's
                                            financial problems
  with DOI officials.  Based on these discussions, the loan
  guarantee stipulations were revised along
                                            the lines of the
  Federal loan to the Guam Telephone Authority.
  officials were sent to Guam to reevaluate      Further, DOI
                                            GPA's financial
  viability. We were informed that the
                                        loan agreement had
  been signed in April 1977.

      Despite the $36 million loan guarantee,
 solve a number of critical problems before   GPA must re-
                                            financial via-
 bility can be attained. The key determinant
 ability to secure long-term financing        will be its
                                       to repay the short-
 term Federal obligation and to meet
                                     upcoming additional
 capital needs.

       To satisfy bond market requirements,
                                              GPA must improve
  its bond rating by operating as a profitable
  liminary fiscal year 1976 financial statementsconcern.     Pre-
 operating surplus of $1.2 million; however,        indicate an
                                                $955,000 of that
 amount was a GOVGUAM subsidy.   Except for fuel surcharges,
 GPA has not completed a rate study to
                                         determine the revenue
 necessary to meet operational and debt
                                          service requirements.
 GPA officials believe that a rate increase
                                               of at least 7
 percent will be necessary. However,
 the newly created Public Utility Commission are  concerned that
                                                on Guam will
 obstruct GPA's ability to charge necessary
                                               rates.   Guamani-
 ans already are paying a percentage
 electricity more than three times theof  their  income  for
                                        national average.
      The latest Government Comptroller report
                                                 concluded that
collection problems were a major factor
to meet its financial obligations.        in  GPA's inability
                                     GPA records showed that
collections were about 11 percent less
fiscal year 1975.                        than billings for
                    In a December 1975 response to the report,
GPA officials stated that collection efforts
                                                had been im-
proved. However, we found that GPA's
                                       shortfalls in collec-
tions had increased to about 12 percent
                                          during fiscal year
1976 and to about 21 percent for the
                                      first 8 months of calen-
dar year 1976. Although the May 1976
                                       typhoon decreased reve-
nues, we found it had no apparent impact
1976 or calendar year 1976 percentages     on the fiscal year
                                        of collections.

     Two other major factors affecting GPA's
                                               ability to
obtain long-term financing are future
and a court consent order on Environmental    capacity needs
                                             Protection Agency
pollution standards.  GPA and Navy officials project an
annual increase of power demand between
                                         5 and 7 percent. At
these growth rates, Guam will not have
                                        enough generating
capacity beyond 1981.  GPA will have to decide by 1978
whether to build and finance a new powerplant
estimated to cost $30 million).                 (currently

     In June 1976 GPA and the Environmental Protection
Agency signed a consent order giving GPA until no later than
mid-1981 to meet Federal pollution standards.  GPA must
either buy expensive low sulphur fuel at an annual estimated
cost increase of $8.5 million or install pollution equipment
estimated to cost between $8 million and $15 million. GPA
is opting for the latter alternative and will have tc begin
installation no later than 1979 to meet the consent order.
Again, GPA will have to obtain additional financing to meet
these requirements.
     GPA must maintain profitable operations to (1) repay
the $36 million Federal obligation and (2) obtain substantial
financing to pay for new plant construction needs and to
attain Environmental Protection Agency pollution standards.
Unless GPA initiates actions in the near future to improve
its financial condition, additional Federal assistance may
have to be requested to maintain the power system on Guam.


     As a result of continuing operating losses, mounting
debt, and inability to secure financing through private
channels, the Guam Telephone Authority secured a $27 million
loan approval from the Rural Electrification Administration
(REA). Due to the restrictions placed on the loan (see p.
28), telephone officials are confident that the authority
will become self-sustaining in the near future.

     Despite GOVGUAM subsidies amounting to $6 million from
fiscal years 1974-76, the Telephone Authority has not oper-
ated as a financially viable agency. Although telephone
rates about doubled in 1974, cumulative operating losses of
about $740,000 existed at the end of fiscal year 1976.
Losses were caused by poor management practices and ineffi-
cient operations. An April 1976 Government Comptroller's
report cited these examples.

     -- An inefficient and cumbersome labor force.

     --Excessive maintenance costs.

     -- Excessive uncollectible receivable rates.

     -- Inadequate billing and service procedures.

     -- Inadequate accounting procedures.

     In addition, independent certified public accounting
firms could not render opinions on the Telephone Authority's
fiscal years 1974 and 1975 financial statements.

Federal assistance
     The Telephone Authority was authorized to sell $15 mil-
lion in revenue bonds. Because of GPA's poor credit rating,
which would have required unacceptably high interest rates,
the authority did not attempt to sell the bonds.
     In an effort to (1) become self-sustaining and free
from GOVGUAM subsidies, (2) pay off accumulated debts amount-
ing to $5.3 million, and (3) provide service on demand, the
Telephone Authority recently secured from the REA authoriza-
tion for a low interest (5 percent), long-term (35 years),
$27 million loan. The loan proceeds will be used primarily
for capital projects which will expand service capabilities.

     REA has placed stringent requirements on the loan.
     -- Management must be approved by REA, and if default of
        a loan payment occurs, REA can replace management.

     -- Adequate telephone rates must be established to meet
        operational and debt expenses.

     -- Delinquent accounts must be collected promptly.

     -- The telephone system must be kept in good repair and
        provide continuous service.
     -- Adequate insurance must be obtained.

     -- Management cannot enter into any contract for operat-
        ing or maintaining the system without prior approval.

     -- Adequate financial management must be maintained,
        including proper accounting procedures prescribed by
        the Federal Communications Commission.

     After our review, REA officials said loan funds had not
been disbursed due to a recent change in the Telephone Author-
ity's management. Based on this development, REA is reevalu-
ating the prospects for the authority's future financial

      REA officials believe the REA loan and its restrictions
will allow the Telephone Authority to rectify past deficien-
cies and to implement sound financial management practices.
They project it will become self-sustaining by December 31,


     DOI has been developing a special authorization package
designed primarily to increase tax revenues and provice cap-
ital and economic development projects. The ultimate bjec-
tives of the proposal are to increase local revenues and
thereby reduce the level of required Federal financial
     We believe the attainment of such goals is highly de-
sirable for both GOVGUAM and the Federal Government. How-
ever, uncorrected deficier.cies relating to previous rehabil-
itation projects and the lack of adequate study and Federal
technical assistance in developing the current proposal cast
doubt on the effectiveness of future Federal unding.

Rehabilitation program deficiencies
     Following a major typhoon in the early 1960s, a series
of Federal rehabilitation appropriations were made, which
totaled $75 million in grants and loans. A fiscal year 1972
Government Comptroller report cited numerous deficiencies in
GOVGUAM's administration of the rehabilitation program. A
fiscal year 1976 followup report showed that 14 of the 18
major recommendations of the prior report had not been ade-
quately implemented. Examples of uncorrected deficiencies
at various GOVGUAM agencies were:
     -- Inadequate implementation of a long-range economic
       development plan.

     -- Need for improved procurement procedures and prac-
     -- Inadequate project cost controls.

     -- Ineffective administration of funds.

     -- Deficient contract administration.
     -- Inadequate accounting procedures.

     Our review also identified several examples of ineffi-
cient uses of both rehabilitation and local project funds
caused by inadequate planning and coordination. In 1973 a
federally funded sewer line and pumping station were com-
pleted in an area which depended on the construction of a
connecting link to the main sewer system. Since this link
had not been completed, a small sewage treatment plant was
constructed for about $200,000 to open a new school and an
urban renewal project. In addition to being an unnecessary

expenditure, the treatment plant has caused considerable pol-
lution in a nearby river. The link was still under construc-
tion at the time of our review in late 1976.

     Other sewerage coordination problems have resulted in
cessation of ongoing urban renewal projects, ripping up
recently paved streets, and sewage disposal problems for
various schools. Two schools required the construction of
temporary holding tanks and truck transport of raw sewage to
the main treatment plant.

     Also, since 1975, about $500,000 in Federal funds has
been spent on designs and access roads for a high school.
In August 1976 it was proposed that the project be canceled
and remaining funds be reprogramed to expand existing
schools due to changes in population and school enrollment

Current authorization proposal
     Another severe typhoon that hit Guam in May 1976
prompted a $20 million emergency appropriation to help GOVGUAM
provide governmental services and repair damaged public
facilities- At the time of our review, DOI was reviewing a
GOVGUAM request of $171 million for:

     --$13 million to offset 1975 and 1976 income tax losses
       resulting from the Tax Reduction Act of 1975 (and its
     --$1 million for implementing a financial management
       system and a study of the local tax burden.

     -- $41 million to upgrade typhoon-damaged educational,
        medical, and public utility structures.

     --A $116 million (based on Navy estimates) GOVGUA1M re-
       quest for such capital improvement projects as water,
       sewerage, and economic development.
     At the time of our review, DOI had forwarded the first
three items above to the Office of Management and Budget.
Guam's $116 million capital improvement project request had
not been fully evaluated; neither the amount nor the project
listing to be placed in the authorization bill had been de-
cided upon.

Need for planning and study

     Although the capital improvement project requests have
been discussed and modified since 1974, we believe there has

been inadequate technical assistance, planning, and study.
GOVGUAM's request, including economic development projects,
was prepared without DOI technical assistance and without a
current master plan. Such a plan is being developed, but a
draft version is not expected until 1978.
     Inadequate study is evidenced by the inclusion of the
replacement hospital project in the draft authorization
bill, which we were told had been sent to the Office of
Management and Budget. Reports by the Government Comptrol-
ler and two consulting firms had concluded that acute care
services by the Government-owned hospital are not needed due
to a newly constructed private hospital. A DOI official
informed us that in vievw of this information,, the hospital
may be deleted from the authorization bill. However, it s
highly undesirable to submit a bill to the Office of Man-
agement and Budget, and potentially to the Congress, with
projects that may prove to be unnecessary.
     Failure to provide for the training of a local skills.
labor force to work on the construction projects exempli-
fies insufficient program planning. A benefit of capital
improvement projects is new jobs for the local labor force.
However, alien labor was used primarily on the previous
rehabilitation grant and loan projects. GOVGUAM officials
informed us that, since training programs had not been es-
tablished to provide a substantial number of skilled em-
ployees, alien labor again would be used primarily on upcom-
ing construction projects.

                         CHAPTER 6



     Achievement of the Federal Government's objective of
self-determination for Guam has been hindered by an inade-
quate economic base and ineffective fiscal management.
Although insufficient economic development and the recent
worldwide recession have intensified Guam's financial prob-
lems, inadequate financial management has contributed sub-
stantially to GOVGUAM's fiscal crisis, adversely affected
the quality of public services, and increased GOVGUAM's
dependence on Federal support.

     GOVGUAM's recent austerity measures have not curbed its
deteriorating financial position. Dramatic increases in
general fund deficits and operating losses by public enter-
prise agencies have resulted in severe cash flow problems.

     Many of GOVGUAM's problems resulted from its failure to
implement Government Comptroller recommendations and the
lack of technical assistance from DOI.  Inadequate budgeting
and accounting system,  failure to collect moneys owed
GOVGUAM, lack of trained managers, and overexpansion of
GOVGUAM employment have contributed significantly to its
fiscal deterioration.  Insufficient funding and ineffective
financial management and control have led to a decline in
the quality of public services.

     The degree of implementation of Government Comptroller
recommendations and GOVGUAM's acceptance of technical assist-
ance should be closely evaluated before future Federal appro-
priations.  Guam has limited resources and is experiencing
increasing demands for improved services.

     Technical assistance from DOI to improve GOVGUAM's mana-
gerial capabilities and budgeting and accounting systems
could help GCVGUAM use its resources more efficiently,
achieve more effective results in delivering services, and
decrease its needs for special Federal funds.   Such technical
assistance is necessary for GOVGtJAM to achieve the self-
reliance and self-determination that are the objectives of
both the Federal Government and GOVGUAM.


     We recommend that, to carry out the U.S. policy of self-
determination for Guam, the Secretary of the Interior in-
crease and broaden technical assistance to GOVGUAM. A

specific plan to correct the deficiencies outlined in this
report should be developed immediately, in conjunction with
GOVGUAM. This plan should include substantive technical
assistance which emphasizes training of GOVGUAM managers to
assume full responsibility for implementing improved finan-
cial management techniques. Specifically, we recommend that
the Secretary use the capabilities of the Office of Terri-
torial Affairs or other necessary resources to help GOVGUAM
 (1) establish a financial management system that includes
improved budgeting and accounting methodology and controls
over collections of accounts receivable, (2) develop a mas-
ter plan for capital improvement projects, (3) expand voca-
tional education programs to produce a local labor force for
construction projects, and (4) slow the trend toward in-
creased reliance on GOVGUAM to provide employment.
     We also recommend that the Secretary:

     -- Assess the status and degree of GOVGUAM's implementa-
        tion of the recommendations in previous reports of
        the Government Comptroller.

     -- Submit to the Congress his analysis and comments to
        assist in congressional consideration of proposed
        financial assistance and in oversight of the progress
        GOVGUAM is making toward self-determination.


     DOI generally agreed with our findings. In a letter
dated May 18, 1977 (see app. I), DOI supported many of our
recommendations. We have incorporated DOI's specific com-
ments in the report where appropriate. General issues and
clarifications of our positions follow.
     DOI stated it did not have the authority to insure
GOVGUAM's implementation of Government Comptroller recom-
mendations or acceptance of Federal technical assistance.
DOI noted the report presents an accurate overview of the
problems facing Guam and reflects DOI's inability to effec-
tively cope with, or successfully resolve, the major finan-
cial and management issues which continue to be reported
year after year.

     We recognize that the ultimate solutions to GOVGUAM's
financial management deficiencies lie with GOVGUAM. How-
ever, DOI should more aggressively volunteer its services
and encourage change by helping GOVGUAM correct deficien-
cies reported by the Government Comptroller and establish
sound financial management procedures and practices.

     DOI stated the report does not provide the means to
reach the desired ends and that past DOI attempts to provide
technical assistance to Guam have been seen locally as
attempts to meddle in Guam's local affairs. As stated in
the report, we believe GOVGUAM's implementation of Govern-
ment Comptroller's recommendations and acceptance of Federal
technical assistance could be promoted if DOI highlighted
the continuing problems in periodic analyses and rep rts to
the Congress. This information could be used in considering
the advisability of appropriating additional funds to
GOVGUAM and the stipulations that should be placed on their

     According to DOI, a much higher percentage of Govern-
ment omptroller recommendations was implemented shortly
after he Comptroller's office was established, because it
was believed that adverse reports would cause difficulty in
congressional appropriations.  DOI stated that as time went
on, GOVGUAM management realized there was no relationship
between funding and the Comptroller's reports and the inter-
est in correcting reported deficiencies declined.

     DOI believed GOVGUAM lost incentives and motivation to
insure fiscal responsibility.  If so, the Federal Government
can shoulder some of the responsibility for GOVGUAM's lack
of interest. As DOI noted, GOVGUAM's interest in the Comp-
troller's reports began to wane when it perceived a lack of
Federal Government interest. GOVGUAM's special appropria-
tion requests to DOI of $171 million (of which DOI supported
$26.2 million as of May 1977) provide an excellent oppor-
tunity for DOI to volunteer to help GOVGUAM correct defi-
ciencies and establish fiscal responsibility and control.

     DOI agreed with our recommendation that technical
assistance for Guam is needed but emphasized that such
assistance must be provided in a receptive GOVGUAM environ-
ment. Specifically, DOI believed a financial management
system should be established and implemented. Although it
supported the need for developing a master plan, DOI did
not believe Puam leaders are committed to the master plan
concept. DOI acknowledged that without the motivation to
practice fiscal responsibility, there has not been the ne-
cessity of establishing long- and short-term goals, priori-
ties, and effective uses of resources required by master

     Concerning our recommendations on expanding vocational
education programs and slowing the trend toward increased
reliance on GOVGUAM to provide employment, DOI agreed that
these are important pieces of the solution to Guam's eco-
nomic problems. We agree with DOI that technical assistance

alone will not solve these problems and that they are an
appropriate orientation for an economic master plan.

      DOI agreed with our recommendation that the Secretary
of the Interior assess GOVGUAM's implementation of Govern-
ment Comptroller's recommendations and submit to the Con-
gress his analysis and comments to assist in congressional
consideration of proposed financial assistance. However,
DOI did not believe this assessment would provide over-
sight of the progress GOVGUAM is making toward self-deter-
mination, since Guam already enjoys full self-determination.
As noted in the report, we believe this concept encompasses
both local self-government and increased self-reliance and
the continued deterioration of GOVGUAM's financial position
has led to increased reliance on Federal financial assist-
     It was prepared, DOI said, subject to resource avail-
ability, to help develop improved management on Guam through
a financial management system, effective budget implementa-
tion and program execution control, and an economic devel-
opment plan with stated objectives and milestones. However,
DOI cautioned that its past attempts to provide technical
assistance to Guam have often been seen locally as attempts
by the Federal Government to meddle in Guam's local affairs.
Thus, future attempts by the Federal Government to correct
GOVGUAM's financial problems will succeed only if there is
a firm local initiative to seek and effect solutions in co-
operation with the Federal Government.

                        CHAPTER 7

     Our review included analyses of GOVGUAM records, Gov-
ernment Comptroller reports, and certified public account-
ants' reports. We analyzed certain fiscal years 1970-76
trends. Since certified public accountant reports for
fiscal year 1976 were not available at the time of our
review, we relied on preliminary GOVGUAM financial records
for data o that year.
     We talked with officials from DOI, HEW, and the U.S.
Government Comptroller for Guam. We also contacted the
Governor of Guam, representatives of the Guam Legislature's
Committee on Finance and Taxation, and various GOVGUAM
department and agency administrators. The U.S. Navy and
Air Force commands on Guam were contacted regarding the
education issue.

                                                                 APPENDIX I

             United States Department of the Interior
                           OFFICE OF THE SECRETARY
                            WASHINGTON, D.C. 20240

                                                             MAY Ij 1977

       Mr. Henry Eschwege
       Director, Cowmunity and Economic
         Development Division
        .S. General Accounting Office
       hhington, D.C. 20548

       Dear Mr. Echwege:

       Comments of the Department of the Interior on your
                                                          draft report
       to the Congress entitled "Technical Assitiance:
                                                        A Way to Promote
       Better Management of Gum's Resources and to Increase
       are enclosed. We appreciate the opportunity to review
                                                              the report.

                                          Deputy Assistant Secretary -
                                            Policy, Budget and Administration


APPENDIX I                                                         APPENDIX I

        ·            Oh wAD DAFT ueORT TO TE CONGRESS

The Interior Department is in general agreement with the facts brought
out in this report and with many of the recomendations which it presents.
In fact, most of the deficiencies have been identified in previous Govern-
ment Comptroller reports which have been transmitted to the Congress. We
believe, however, that the report reveals a basic failure to comprehend
the relationship between Guam and the Federal Government and the role of
the Interior Department in that relationship. This is crucial because
the solution to identified problems and the implementation of recom-
mendations are much more important than their identification. The report
unfortunately does not provide the means to reach the desired ends.

On page 2 it is stated that the Comptroller under OTA "is charged with
providing oversight of the substantial Federal Funds going to GOVGUAM and
promoting economy and efficiency of governmental operations." This
slightly overstates the Comptroller's authority and the distinction
is important. The Guam Organic Act charges the Comptroller specifically
with auditing GOVGUAM accounts and bringing irregularities to the attention
of the Secretary of the Interior and the Governor of Guam. These activities
are to be "directed so as to" improve efficiency and discharge the respon-
sibility of Congress. But the Comptroller is nowhere given authority to
implement recommendations or to take any direct action to accomplish the
above ends.

On page 21 it is stated that one reason for lack of problem solving is
"Department of Interior's failure to provide the Congress with comments
and recommendations regarding the Government Comptroller's findings."
On page 23, it is stated that non-compliance with recommendations "have
not come to the attention of the Congress due to poor presentation of
available information."

The Department of the Interior has transmitted to the President of the
Senate and to the Speaker of the House copies of all of the Comptroller's
annual reports as required by law. In addition, all other reports by
the Comptroller are transmitted to the comittees. Every report has a
summary of findings and recommendations which can be read rapidly and
which clearly identifies the problems. It is true that Interior has not
usually made additional comments or recommendations, although we have
supported the reports and continue to support the findings of the
Comptroller; findings which have now been confirmed by the GAO report

The report correctly notes that GOVCUAM's financial problems have
accelerated during 1970-1976 for a variety of reasons. It also notes
that only 37 percent f the Comptroller's recommendations during the
same period have been implemented. It is interesting to note that
during FY 1970 and FY 1971, a much higher percentage of recommendations
was implemented as shown in the following table.

APPENDIX '                                                         APPENDIX I

               Percent            Percent Partially      Total Implmeted or
tFrnleomnted                          mp·lemented                  Irtlemented
70               70Z                    192                      19X
71               13X                     5X                       SX
72               55Z                    202                      75Z
At the inception of the Comptrollers Office in FY 70 it was believed that
adverse reports would cause difficulty in Congressional appropriations.
As time ent on GovGuam management realized that there was no relationship
between funding and the Comptroller's reports. Consequently the interest
of top managemeet declined and the lack of interest generally permeated
the entire government resulting in a oss of incentives and of motivation
to ensure fiscal responsibility.

A reader of this report would take from it the clear impression that
Gua'se access to and expenditure of Federal funds are both under the firm
control of the Interior Department with the Government Comptroller as the
Department's watchdog. For example, page 44 states, The Department of tha
Interior is currently developing an authorization bill of up to $171 million...."
and on page 49 and other pages, there is a reference to "the progress
COVGUAM is making toward achieving the Federal Government'. goal of local
self-determination." In fact, local self-determination has been an accom-
plished fact since 1970. GOVGUAM requests for authorizations do not
necessarily originate in the Department of the Interior. The referenced
$171 million was a GOVGUAM request of which Interior supported an amount of
$26.2 million.

We do not doubt the need for additional ctcht   al assistance for the Terri-
tory of Guam. However, we emphasize that tech.lcal assistance provided
without a receptive environment is of no benefit whatever. This is proven
by the record of the office of the Government Comptroller itself. Technical
 assistance will be of benefit only when its need is fully understood and
accepted by the recipient and a commitment for implementation is implicit
in the request. With that caveat, we support ie following specific

     (1) eatablishing a financial management system:     There must be
an ability and willingness to make use of the information which the system
generates. Management and operators must be prepared to exercise discipline
and controls in preparing and executing the system. The ystem must be tied
in with effective budget formulation and program execution control.

     (2) developing a master plan: Here we also give qualified support.
The Department is presently working on the formulaton of a needs asseassment
study for Guam. This will include capital improvementas development projects

APPENDIX I                                                      APPENDIX I

and other planning needs. However, this needs assessment will not be
& master plan. Such    plan ust be desired by Guam laders, prepared
by Guam leaders, periodically reviewed by Guam leaders, and implemented
by Guam leaders. To date Gau leaders have not been committed to the
master plan concept. Without the motivation to practice fiscal
reaponaibility, there has not been the necessity of establishing long
and short term goals, priorities, and effective uses of resources which
are required by master planning. It is unlikely that Guam will
effectively prepare or use a plan until the need for fiscal responsibility
convinces the leaders of the necessity of a plan. A master plan imposed
on Guam by DOI has no more assurance of success then the multitude of
other plans and studies previously prepared.
     (3) Expanding vocational education programs to produce a local
labor force for construction projects and

      (4) Slowing the trend toward increased reliance on GOVGUA to
provide employment: These two recommendations are closely related.
The report has correctly noted that 88% of construction work is performed
by alien laborers while Guamanians look to the government to provide
employment. The above two recomendations are certainly important
pieces of the solution to Guam's economic problems. To look at them in
isolation, however, or to suppose that they can be accomplished simply
through technical assistance from the Office of Territorial Affairs or
other sources would be a dangerous oversimplification. A shift in
employment away from government white collar jobs toward private sector
blue collar jobs can only be accomplished gradually through a complex
of economic incentives. This is an appropriate orientation for an
economic master plan. Vocational education can have no effect unless
there are students willing to enroll and jobs for them when they get
out. Reduced reliance on government jobs implies !.ncreased availability
of private sector jobs.
     A final unnumbered recommendation is that the Secretary assess
GOVGUAM's implementation of recommendations in precious Comptroller's
reports and "submit to the Congress his analysis and comments to assist
in congressional consideration of proposed financial assistance a. In
oversight of the progress GOVGUAM is making toward achieving the Federal
Government's goal of local self-determination." Aside from our
clarification to the effect that Guam already enjoys full local self-
determination, we wholeheartedly endorse this recommendation. The
Congress has already received a wealth of previous submissions by the
Department with analysis and comment on GOVGUAM's implementation of
prior recommendations of the Comptroller. In the future, such sub-
missions will refer specifically to the GAO report and recommendations.

In summary, we believe this report presents an accurate overview of the
problems facing Guam. It also reflects our inability to effectively cope
with or successfully resolve the major financial and management issues
which continue to be reported year after year. The Department of the
Interior is prepared, subject to resource availability, to assist in the
development of improved management on Guam through a financial management
system, effective budget implemetation and program execution control, and
an economic development plan with stated objectives and milestones.

APPENDIX I                                                    APPENDIX I

Is order to assure that thee efforts met with mtore ueess t       have
oe·ilar program in th past, it i necessary to begin with the ruealistion
that GOm presently has local political control over *ependitures of its
oa sgovernmeat to the sm extent as any stato of the United States and in
fact to greater extont in that federal income taes paid by residents of
OUae are turned over directly to the Government of Cns. It must also be
recognosed that past ttempts by the Department of the Interior to provide
technical assistance to Cuam have often boeen see locally as attempts by
the Federal Goverment to meddle in Gum's local affairs. Thus, future
attempts by the Federal Government to correct financial problem of the
Oovermnnt of Guam will succeed only if there is · firm local initiative
to seek and effect solutions in cooperation vith the 'ederal Coverment.