Debate over the proposed Continuing Budget Resolution for FY 2021 is brewing with three weeks remaining before the FY 2020 budget ends.

The Senate Committee report on the Continuing Budget resolution said that passing the budget based on FY 2020 fiscal year expenditure levels is “fiscally irresponsible” given the projected declining revenues in FY 2022 and FY 2023.

Senate’s report blames the Administration saying that the delayed submission of the proposed continuing resolution bill and the inconsistent information provided by Minister of Finance at various press conferences gave the Committee conflicting information and short amount of time to do proper study of the proposed budget and its implications.

The only choice, they say, was to either let the Administration’s proposal go through which keeps FY 2021 budget at FY 2020 level or cut budget now to allow for gradual adjustment in 2021 and 2022.

The report states that the Administration “inadvertently raised public expectations regarding the FY 2021 budget despite the backdrop of drastically declining revenues.”  It says that Ministry of Finance projected drastic revenue reductions for FY 2022 and FY 2023 but proposed maintaining FY 2021 budget at FY 2020 levels.  It added that MOF “offers no guidance about how the government would achieve this transition in just one fiscal year or what specific regular budget activities would be drastically reduced in FY 2022 and FY 2023.”

Senate passed bill SB 10-181 cutting government budget across branches and ministries anywhere from 5% to 15% cuts.

Some of the cuts include $177k from Office of the President, $1.01m from MPIIC, $542k from MOH, $159 from Judiciary, $346k from Senate, $426k from the House, $84k from Election Commission, $33k from FIC, $75k from Aimeliik State, $106k from Airai State, $80k from Ngarchelong, $82k from Peleliu, $359k from PCC and so on.  The accompanying report had these details but the body of the bill only had percentage reduction for each Ministry or Agency, meaning if passed, the next government can reduce each agency budget however it wants as long as the overall ministry or agency falls within the percentage level on the budget.

Senate also appropriated funds to maintain the $50 Social Security Benefit and also to fund Pension Plan and PPUC Lifeline Subsidy.

Funds Availability Analysis provided by Ministry of Finance identified sources of funds for FY 2021.  With projected shortfall of $30 for FY 2021, MOF identified $10M balance from the ADB COPRO loan and $20M from ADB OCR to cover local revenue shortfall. 

Finance Minister Elbuchel Sadang at last week’s press conference said that FY 2022 and FY 2023 face “financial crisis” and he said that he agreed with some expense reductions in the budget but stated that one of OEK’s job is to look for money, not just shuffle the budget.

“It requires more than just reduced expenditures. We reduce expenditures but our responsibility is also to find new money to fill the treasury,” stated Sadang. 

“Executive Branch, Legislative, State governments, Judiciary and Board and Commissions are funded by local revenue.  If you remove 15% from these, there will be a big impact,” expressed Sadang.

Sadang explained that this year’s $21 million local revenue shortfall was covered with $11 million from ADB Disaster Relief Loan and $10 million from General Reserve Fund. In FY 2021, the projected shortfall of around $30 million will be covered by the $10 million balance not used this year plus a $20 million loan.

Ng ngercheled lokeed a rokui el tekoi,” said Sadang.  It is our responsibility to prepare all that we can. 

OEK under the CROSS ACT had authorized the Administration to seek $60 million to cover potential revenue losses due to COVID-19.  Administration had secured pre-approval of $60 million from Asian Development Bank.  The first $20 million has been approved and disbursed to Palau while the remaining $40 million are policy loans, which means that they require certain changes in Palau’s policies in order to be drawn down.

The changes required in order to access the $40 million loan are Palau’s Public Financial Reforms (PFR).  To access the $20 million of the $40 million remaining loan, Palau will be required to develop a Fiscal Responsibility Framework (FRF) and publish a fiscal strategy.  To obtain the remaining $20 million, it will need to enact a Fiscal Responsibility Framework law, and “complete the FY 2022 budget process on a comprehensive basis (government wide) that complies with FRF and “update, amend and publish the fiscal strategy.”

Sadang said that the policies are aimed at strengthening Palau’s financial position.  “Like any bank, when you get a big loan, it requires you to make some changes so that you can pay the loan.”  “They should act now.  Remuul el momedechel e mesmechokl.”

Senate report said that passing a budget based on obtaining a loan with policy mandates to be implemented by the next administration is contradictory to the current administration’s policy “of not infringing on the next administration’s prerogative to enact its own agenda.”

Saying so, the Senate took the option to reduce expenditures of regular budget activities below FY 2020 levels to provide the next administration with ability to cut expenditures. “Making this reduction now might provide the incoming administration with more flexibility regarding how to balance the national budget for the next couple of fiscal years.”

Senate version of the budget has passed first reading in the House and sent to Ways & Means Committee.  The bill is expected to face opposition in the House which has traditionally supported strengthening State budgets.

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