The CNMI uses funds and account groups to report its financial position and the results of its operations. This method, called fund accounting, is designed to demonstrate legal compliance and assist financial management by segregating or grouping related transactions together. These transactions are accounted for in various funds which are generally categorized into governmental, proprietary, and fiduciary funds. The General Fund, a major governmental fund, is used to account for the basic CNMI Government operations (executive, legislative, and judiciary).

A summary of the CNMI's Combined Balance Sheet as of September 30, 2000, based on the fund accounting method (in millions), is presented below:

The various funds, account groups, and component units, taken together, compose the CNMI Government as a reporting entity. For a simplified presentation, all funds other than the General Fund, as well as account groups, are combined in this report as "Other Funds & Account Groups." These other funds consist of such as funds as Special Revenue Fund (e.g., Federal and Private Grants), Internal Service Fund (e.g., Serv-Mart), and Pension Trust Fund (e.g., Northern Mariana Islands Retirement Fund).

At September 30, 2000, the CNMI Government had total assets of approximately $1.0 billion, total liabilities of about $324 million, and total fund equity of $696 million. These do not include those of the Commonwealth Utilities Corporation, the Northern Marianas College, the Public School System, and the Government Employees Credit Union. The fiscal year (FY) 2000 audited financial statements of these entities were not available at the time of consolidation. Of the $696 million fund equity, the "Other Funds & Account Groups" accounted for 80 percent or $563 million, $453.5 million of which was in the NMI Retirement Fund. "Component units," namely the various autonomous government agencies, accounted for about $166 million. As for the General Fund, it had an accumulated deficit of $69.5 million as of September 30, 2000, and a net fund deficit of $33 million.

Results of Operations

A comparative summary of the General Fund's Statement of Revenues, Expenditures and Changes in Deficit (in millions) for the years ended September 30, 1999 and 2000 follows:

Between FYs 1999 and 2000, CNMI revenues decreased by $5.3 million, or by about 2.4 percent, due mainly to a decline in tax and Public Land lease revenue collections. General Fund operating expenditures changed little between FY 1999 and FY 2000 thereby causing net operating revenue to decrease by $5.5 million over the same periods.

During any year, the General Fund may receive funds (transfers in) from other agencies which are used to augment revenues, or transfers out funds in the form of appropriations or subsidies. The net of these transfers in and out in FY 2000 amounted to $45 million, or $9.5 million less than in FY 1999.

This $9.5 million decrease is due primarily to the following factors. In FY 2000, the General Fund recovered about $7.7 million (advanced in prior years) from the DOI Capital Projects Fund and its collections from the Nonresident Fee Fund increased by half a million. At the same time, General Fund transfers to PSS decreased by about $1.3 million.

In government accounting, encumbered funds and items received, such as supplies inventory, are considered uses of the current year's revenues and therefore matched against such revenues. However, under generally accepted accounting principles, such items are not considered expenditures until encumbrances are actually paid and supplies actually used. To consider the effect of encumbrances and other items, such as inventories, in computing the operating fund surplus or deficit, these items are presented in government financial statements as a reservation of available funds and cannot be available for future appropriations. In FY 2000, an increase in these reserve funds served to increase the operating deficit by about $6.5 million.

The Effect of P.L. 12-33 on the General Fund Operating Deficit

Overall, the CNMI general fund's accumulated deficit increased by 1.167 million in FY 2000. However, because the CNMI Legislature reestablished the Division of Public Lands (DPL) as an independent autonomous agency via Public Law 12-33 on December 5, 2000, DPL's $11,712,383 in unobligated funds, at September 30, 2000, had to be segregated from the CNMI's General Fund (Executive Branch). This amount was therefore shown both as a reserve and a reduction from the General Fund balance, and therefore contributed to the increase in the General Fund's operating deficit.

Had DPL not been separated by law and instead retained within the Executive Branch's general fund, the unreserved general fund balance would have increased by $5.149 million and the general fund operating deficit would have been $57.742 million. Also, if DPL had not been reestablished as an autonomous agency, the CNMI's Statement of Revenues, Expenditures and Changes in Deficit for the General Fund for FY 1999 and FY 2000 would have been as follows:

Accumulated Deficit

The table and graph below provide a history of the General Fund's accumulated deficit between FY 1986 and FY 2000 (in millions):

As can be seen in the table above, the largest increase in the deficit occurred in FY 1994 when it increased by $25.7 million or a 135% increase from the previous year. There were also significant increases in FY 1997 and FY 1998 when the deficit increased by $22.5 million and $18.9 million, respectively. In FY 1999, the CNMI was able to partially reduce the deficit by $8.0 million, but in FY 2000, it again increased by $1.167 million.

Opinion Given in Single Audit Report

The independent auditor's report on the audit of financial statements has two basic objectives: to describe what the auditor has done and to communicate what the auditor has found. An unqualified audit opinion is rendered when the auditor finds no significant limitations that affect the performance of the audit and when no material deficiencies or unusual uncertainties affect the reliability of the financial statements. If there are problems, the auditor either issues a qualified opinion or disclaims from rendering an opinion depending on the circumstances.

As in the previous year, the auditor's report on the CNMI Government for FY 2000 was qualified because of a number of deficiencies including the following:

• An inability to determine the effects of the CNMI's failure to update the General Fixed Assets Account Group.
• An inability to determine the propriety of receivables from federal agencies, advances, bank overdrafts, deposits payable, other liabilities and accruals, reserve for encumbrances, and reserve for continuing appropriations for all Governmental Fund Types, and receivables from federal agencies for the Fiduciary Fund Type - Agency Fund, and their effect on the determination of revenues and expenditures because of inadequacies of accounting records.
• Omission of the Commonwealth Utilities Corporation, Northern Marianas College, the Public School System, and the Commonwealth Government Employees' Credit Union because audits of these entities were not completed for FY 1999.

Reportable Conditions

The independent auditor's report on compliance and internal control disclosed several findings that were considered to be instances of noncompliance and several findings involving internal control weaknesses that were considered to be reportable conditions, some of which were considered material weaknesses. Reportable conditions involve matters relating to significant deficiencies in the design or implementation of the internal controls over financial reporting that could adversely affect the CNMI's ability to record, process, summarize and report financial data. On the other hand, a material control weakness is a condition in which the design or implementation of one or more of the internal control components does not reduce, to a relatively low level, the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.

For FY 2000, the audit disclosed 9 instances of noncompliance and 12 reportable conditions, all of which were considered as material control weaknesses. These findings, described as Finding Nos. 2000-1 through 2000-21, are presented in the Schedule of Findings and Questioned Costs accompanying the Report on Compliance and Internal Control.

Conclusion and Recommendations

The CNMI needs to implement measures to address these findings. For Findings No. 2000-3, No. 2000-4, and No. 2000-5, it should review all outstanding accounts for propriety and collectibility, and attempt to collect all valid receivables. Moreover, it should improve record keeping of revenue and receivables to avoid significant losses in the future. For Finding No. 2000-13, it should authorize expenditures only within the budget allotments. Also, the Department of Finance and all authorized expending authorities should allow spending only within available funding. In addition to monitoring appropriation levels, spending authorities should always consult with the DOF and the Office of Management and Budget to determine actual resources available.