Government of the Federated States of Micronesia

FSM Government Creates Program to Bridge the Kosrae State Government Revenue Gap

Palikir, Pohnpei (FSM Information Services): July 14, 2009 - In both the 2009 and 2010 Kosrae State budgets, only the first three quarters were shown as being funded by the state's General Fund budget. In both cases, this was due to an insufficient revenue base. Because of the high cost of government operations relative to the total unrestricted revenues available to the State, a structural shortfall of funds to cover core operations exists in the in final quarter of FY 2009 and FY 2010. In order to respond to these budget issues, the Office of SBOC has worked with the Kosrae State Government to identify additional revenue options that would assure balanced budgets in both 2009 and 2010.

Beginning with FY 2007, Kosrae State successfully implemented a number of expenditure-cutting and revenue-generating measures through its State Government Adjustment (Reform) Program. Despite these efforts, it still faces a general fund annual shortfall of approximately $400,000 for the remainder of FY 2009 and approximately $500,000 for FY 2010. Because of its obligation to ensure that essential public services are provided to the citizens of Kosrae, as well as support to sector grant programs and projects, Kosrae State is committed to a number of substantive initiatives to immediately address the revenue shortfall.

For FY 2009, the State's proposed plan identifies two sources of funding to balance the deficit of approximately $400,000. The first is a savings of approximately $60,000 realized from the first nine months of FY 2009. The second source is to collect on funds owed by FSM Petroleum Corporation to the former Micronesian Petroleum Company, and therefore the Kosrae State Government, for the purchase of its then existing fuel inventory. This is approximately $340,000. To ensure that these two revenue sources will be enough for the remainder of the year, a General Fund spending freeze was initiated on June 15, 2009 by all State government branches.

For FY 2010, the plan identifies five sources of funding to balance a deficit of approximately $500,000. This begins with implementing an expenditure limitation of 90% in 2010, which should realize an estimated $150,000. There is also a newly negotiated lease arrangement with FSM Petroleum Corporation that will generate an additional $100,000 to the State government in FY 2010, in addition to $30,000 from the Corporation's fuel inventory payment referenced above.

There will also be new revenues generated from accelerated infrastructure projects in 2010. There are four projects in the pipeline for Kosrae State: Tafunsak School (estimated cost of $2.5 million), the Kosrae Hospital ($8.0 million), the new jailhouse ($1.2 million), and the Lelu Water System Improvement Project ($6.7 million). The anticipated revenue contributions for FY 2010 is about $48,000.

Kosrae State will also seek to raise taxes on alcohol, tobacco products, fuel, and hotel accommodations. All of these areas have relatively low taxes compared to similar locations in the region. It is estimated that the State's share of the revenue generated by these minor tax increases could total $44,500.

Finally, there is a proposal for Kosrae State to have an exchange mechanism of exchanging Compact funds for unrestricted local revenue funds from the FSM National Government. Under this proposal, the state will exchange approximately $109,000 of its Compact Sector Grants for the same amount of unrestricted local revenues from the National Government, allowing the use of the exchanged unrestricted funds to go towards funding general government operations.

The total amount of additional revenue collections through these measures would find about $481,500. Along with some other proposed measures that depend upon Executive and Legislative action of the FSM National Government that have yet to occur, these proposed measures are expected to cover the shortfall of FY 2010.