In The Red

Financial Crisis

What happens when a new administration takes office and is faced with an empty treasury?

By David North

THE FRAYED string finally broke, and 1000 employees of the American Samoan government (ASG) have lost their jobs.

The new Governor, AP Lutali, was faced with an empty treasury and a bloated payroll when he took office in January.

He immediately took drastic action to remedy the situation, and laid off 20 per cent of the ASG’s employees.

The protests were vociferous; the head of the territory’s Republican Party, Te’o Fuavai, organised a rally for the laid-off workers, and a law suit was filed against the (Democratic) Governor’s action in the High Court of American Samoa.

Many of the laid-off workers said it was an outrage, and that dismissals were not handled according to regulations;

other observers praised the Governor for his courage, and were relieved that something finally had been done to solve American Samoa’s long-simmering financial crisis.

American Samoa’s finances, never sturdy, have been going from bad to worse in recent years but the incumbent Governor, Peter Tali Coleman appar ently did not want to take dramatic remedial action until after the November election. He was seeking another four year term, and he was running against his life-long foe, former (and now) Governor Lutali.

So Coleman ran through just about every financial manoeuvre in the book to avoid taking the unpopular steps needed to solve the crisis. He did not want either a massive layoff or a cutback in the hours

of all workers (though he used tha technique briefly a year or so ago). Noi did he want to raise taxes enough to keep meeting the payroll.

As 1992 progressed it became eviden that Coleman could not run out th( string forever. Often there were headline; in the Samoa News saying this week th( banks were accepting ASG payrol checks, as they had not the week before or vice versa. (Sometimes one ban! accepted ASG checks and others die not). Suppliers and contractors were noi paid for months on end; sometime: shipments of medicine to the hospita were suspended as a result.

Moneys from specific federal grant: were shuffled into other funds to help meet the payroll and the Federa Highway Administration stopped repaii work on a major highway until the funding situation could be rectified.

Other techniques were also used. The pension (social security) taxes for the ASG workers were not paid by the

Coleman Administration, to keep the payroll checks flowing; in another case, a US Labor Department pot of money, designed to train the unemployed for a full year, was used up in the first three months of the current fiscal year (Octo ber 1 December 31), again to avoid layoffs. The Lutali Administration will see none of these Labor Department funds for nine months, unless Lutali can persuade the Clinton Administration to help him out.

Making things worse, the outgoing Coleman administration gave favoured employees post-election raises (which Lutali will have to cancel) and expedited salary, leave and expense account checks

for ranking political appointees.

Lutali had few options. Coleman had scrounged as much money as anyone could from various special funds, from the banks, and (in effect) from suppliers.

Lutali had promised to curb fraud and abuse, but that is a slow way to save money. Similarly, though probably needed in the long run, raising taxes takes time before money starts flowing into the treasury. Finally, Lutali did not know as much about the territory’s finances as he would have liked outgoing Treasurer Ace Tago, a Coleman ally, had refused to release the annual audits on ASG finances, and was off-island for much of the period between the election and the inauguration.

Given the situation, the only sure way to bring some financial balance was to lay off the workers. First it appeared that 429 would go, than the total moved up to 1000. Generally those laid off were either Coleman political appointees (who did not have civil service status) or the far more numerous temporary or con tract employees. In many of the latter cases, people were hired despite the fact there was no money in the budget for their salaries.

Most of the talk in Samoa has been about the hurt to the workers, not about the reduction in services; a smaller staff probably can get most of the job done.

But losing a government job in Samoa is a real blow to the individual. Samoa is a two-industry place with the exception of some retail and private sector services activity, involving perhaps 2000 workers everyone works for either the government or the tuna canneries. And since the better jobs are in government, these go exclusively to voters, while a majority of the 4700 people in the two canneries (where the work is considerably rougher) are from other islands, notably Western Samoa.

So if you lose your government job, there isn’t much else to do, unless you want to disembowel tuna all day.

The flip side of the situation was that none of the alien workers on the island were hurt by the layoffs given the situation everyone Lutali laid off was a voter, and politicians do not like to hurt voters.

One should hasten to add the Coleman’s apparent slowness to raise taxes or cut costs was not the only factor at work. As his supporters point out, when Coleman took over from Lutali four years ago the treasury was not overflowing. Further, the Fono (the territorial legislature) has not been very supportive of some of Coleman’s tax initiatives; also, Samoa never has had a tradition of frugal government. Finally, there are underlying structural factors that have quietly contributed to the current situation.

Many governments, from small island states to the mighty government in Washington, over-spend and under-tax as American Samoa has done for years but they seem to do so without the level of disorder and panic recently seen in Pago Pago. How do they manage? There are two reasons: the territorial govern ment plays a disproportionately large role in the economy, and has (compared to most other island governments) more limited powers.

Because of the territorial government’s larger role in the economy, when it screws up the consequences are much more significant than when Washington, for example, makes comparable errors, as it did in the savings and loan fiasco.

One set of numbers tells the story: on the Mainland 15 per cent of the work force is employed (either in military or civilian jobs) by federal, state or local governments In American Samoa fully 41 per cent are employed by the territorial government.

Not only has the ASG payroll been

padded with needless workers, but ASG also manages the telephone, power and water systems. Bloated governmental staffs are not unique to American Samoa; governments play major roles in the economies of all the island states. But here the second structural distinction comes into play ASG is a colonial government with severely limited fiscal powers. It simply does not have the room for manoeuvre of the independent gov ernments.

Traditionally independent nations spending more money than they raises in taxes can look for (at least temporary) relief from five sources: (1) private sector bank loans; (2) donor nations; (3) international agencies, like the World Bank; (4) the printing of additional currency, or (5) “creative” use of one’s sovereign powers, like Tonga’s sales of its passports. Since ASG is not a nation, it has no access to the last three sources, and only limited use of the first two.

As noted, the private banks treat ASG as a major, but not terribly reliable customer, and both local and federal law limit thd extent that banks can make loans to ASG. Further, the US is a jealous donor nation to its flag territories; it hands out limited subsidies and does not allow its islands (or other units of local government) to seek funds else where.

So once Coleman’s string of temporary fixes ran out, Lutali had few choices, and he took the drastic step of a large layoff.

He decided to inflict the inevitable pain early, and then later he would seek more money from the Mainland, try to get his books balanced, and hope to be in the position of re-hiring some people well before the election of 1996 rolls around.

It was a gutsy move, and maybe he can make it work. □