By David J. John
The government’s tax receipts are at record highs. There are hundreds of high paying federal jobs, most government of Guam employees received a 22% pay raise, and the island can plan for billions of dollars federal and local government spending for the next decade. So why are so many Guamanians concerned about the economy and the direction of the island?
For those new readers to this annual article, Kin Cook, Maria Leon Guerrero, Maureen Maratita, and I met with many of the leaders of the top businesses written about within this issue to discuss economic trends facing their company, their industry and Guam, as well as what is on their mind.
Typically, each year a clear economic pattern forms around the fifth meeting. This year was a bit different, and we ended up talking more about schools, the hospital, infrastructure and how the federal spending is creating both opportunities and social economic issues for the island.
With that, this year I want to do something a bit different. I am going to summarize the economic picture into a few bullet points and spend more time on addressing several systematic concerns facing the islands, and as well as ideas we heard to get us back on track.
Led by federal spending on and off base, the construction industry continues to break records for construction across the island. There are currently 5,500 H-2B workers on Guam and this number is projected to grow to 12,000 within the next couple of years as federal construction projects continue to come online. The concern for construction is twofold. First, finding skilled labor is difficult and while H-2B workers are available, they are costly and only make sense for larger projects due to the structure of the system.
The other concern is input costs, especially concrete costs. The increased costs are pricing out private sector development and new housing stock. VAT, GRT and worker withholding taxes are helping make the Government of Guam flush with cash and this trend should continue for at least another decade.
Tourism numbers continue to rebound from COVID-19 lows. The industry is targeting 65% of 2019 levels – 600,000 Koreans representing 80% of 2019 Korea arrivals and 350,000 Japanese representing 50% of 2019 Japan arrivals. But these numbers will require a concerted effort by the entire industry and there are some troubling trends within the trends that need to be addressed. I will discuss this later in this article.
Wholesale/Retail: Wholesale and retail is a mixed bag. Top line revenue is up at many companies, but inflation of product costs and transportation are putting a lot of pressure on margins. Consumer spending, while stable, is shifting to be more cost conscious. Expect these trends to continue for the coming year.
Demand for labor in the federal government, construction and tourism industries continues to be strong. A mixed match of skilled labor and the government of Guam’s 22% onetime wage increase for most of its workforce is putting a lot of pressure on businesses to not only find employees with the right skills but manage the fact that wages are up double digits over the last two years. In the short term, this trend will continue. I will discuss some long-term solutions later in the article.
Between construction costs and financing, housing is becoming unaffordable for mid- to lower-income earners and first-time buyers. According to Siska S. Hutepea, president of Cornerstone Valuation Guam Inc.; the median price of a home on Guam is currently $415,000, up 54% ($269,450) from just five years ago. If the actual cost of housing isn’t bad enough, interest rates on mortgages have increased from 3.1% in 2020 to 7.5%, further making it difficult for many families to get into a home.
There is a rule used in budgeting called the Housing Income Ratio Rule. With this rule, housing costs should not make up more than 28% of an owner’s gross income. According to the 2020 Island Areas Census, median household income in Guam was $58,289. If we increase this average to $65,000 to reflect for inflation, 28% of $65,000 is $18,200 or roughly $1,500 a month that should go to housing under a healthy ratio. The problem is the monthly debt services on a 30-year fixed, 7.5% interest mortgage would be approximately $2,500 (or 46% of gross income) and this does not even take into consideration typhoon insurance and the need to put 20% down requiring a $83,000 down payment.
It is clear to me that the island faces some serious systematic issues that will require well thought out, systematic solutions to solve them. Band aid bills/laws will not cut it. It is imperative that we have a strategic vision to assure our citizenry and our offspring have the quality of life we have come to expect on our island.
I want to stress that while one can blame individuals, organizations, and leadership for our issues, I believe our issues are more systematic in nature. An example is the hospital in Guam. I don’t think anyone would argue (including those at the hospital) that in its current state, it has failed the community. However, I could not even imagine trying to run an organization so complex, without the ability to hire and fire my team due to archaic Civil Service Commission rules, and where the system to purchase goods, services and equipment falls under a procurement process that requires three bids, resulting in frequent protests.
Sen. Joe Manchin of West Virginia recently announced he will not run for reelection. In his release he said something that resonated with me. To quote Manchin, “I truly believe that all 435 people elected to Washington want to do good, but the ‘business model’ of both parties leads politicians to motivate supporters by creating or exaggerating division, rather than compromising. We can talk about the real problems. We don’t have to villainize the other side just because they might think different than I do.” If Sen. Manchin was Chamorro, I think he might be referring to inafa’maolek — a concept focused on interdependence, cooperation, and togetherness.
The bottom line is it’s easier to criticize (something I am very guilty of) and harder to build. The local government is flush with cash and future cash flows should remain solid for at least another decade due to federal spending. The time is now to make impactful strategic changes to our institutions and practices. The island does not need incremental change, what we need is a revolution — a Guam Renaissance.
Before I get into specific issues, several of the proposed solutions entail privatization.
I know for many of our readers privatization is a panacea to all that is government, while some in the government this is a dirty word. In a macro sense, I do not believe it is either. However, in the case of the government of Guam, I believe privatization should be a central solution due to our current issues. See what I wrote earlier about the government of Guam’s Civil Service rules and procurement. These two systems set any agency up for failure at the start.
And working for the government of Guam is not what it used to be. In the past, employees of the government could put in a 20-year career and retire on the average of their final few years’ wages. This is no longer the case. When the government transferred to the defined contribution retirement from the defined benefit plan, depending on who you talk to, they either forgot to enroll the employees into Social Security, or they on purposely constructed a retirement system with no guaranteed income stream. When Government of Guam employees retire, they get a lump sum and it’s up to them to figure out how to make it last the rest of their lives. With this, one of the best benefits of working for the government disappeared.
We have a successful model to follow in GTA. When GTA was the Government of Guam Telephone Authority, it had spotty service, it was late to market in cellular, and lost money for the taxpayers. Today, led by a local management team, it is a leading employer on the island and is at the forefront of cable landing and data center development. As far as I see there is really no downside to privatizing as many functions of the government as possible.
With privatization on our minds, let’s address some of the issues and solutions we discussed in our meetings.
Everyone on Guam knows we have needed a hospital for years. The current issue is we cannot agree on a location. The governor wants to build a comprehensive campus in Barrigada to include a nursing training facility, labs, a veterans clinic, and room to support the military. Most of the doctors and senators want a new hospital on Ypao Point. Both positions have pros and cons. The governor’s vision should receive funding from the military, but that facility will take time to build, due to insufficient infrastructure in the area. Ypao Point can be built quicker and less expensively but runs the chance of not receiving military support due to its size.
Two things are clear. First, we need a new hospital immediately and we need our leaders to come together to get it done. Secondly, we can’t wait to get the new facility built to turn the hospital around, we need to privatize the existing operation immediately. One person we talked to suggested that if our leaders can’t come to some sort of agreement by the end of the year, they should get together and Jan Ken Po* for the location.
There is a stark dichotomy in our education system. While our public lower, middle, and high school are coming up short, our higher education institutions GCC and UOG are two of our island’s best assets. How can this be?
The reason comes down to system and controls. GCC and UOG are run by boards who control budgets, results, strategy, and culture. While our public schools are run by an elected body with little authority or control over their budget. We need to either look to charter schools, get rid of the school board and give the control of schools back to the governor and rewrite our complex procurement laws or a combination of the two. But we need to do something quick before the federal government takes our schools under receivership.
Further, many of the jobs in our community are skilled jobs, requiring training, but not four-year degrees. We need to get back to a system that encourages trades and vocational schools starting in high school, focused on well-paying skilled jobs tied to the needs of our economy in facilities maintenance, auto repair, electrical, mechanical, cyber security, tourism, and healthcare. so that our youth are ready to meet the workforce and start a family.
At first glance tourism looks to be rebounding and somehow naturally we will reset to 2019 numbers when we saw 1.6 million visitors including 750,000 Koreans and 685,000 Japanese come to Guam. I think it is more complex than that, especially for the return of the Japanese travelers.
Absolute Japanese travel is down to pretty much every destination in the world. However, what is troubling to me is we started to lose market share of outbound Japanese travelers to Guam before COVID-19 and we have continued to lose share since. If you look at the numbers, Guam’s recovery of Japanese tourism is performing worse than every other destination in the world. The good news is we know why. Guam is seen as stale and stagnating with nothing new and sun, sea and sand are no longer enough in this competitive era. Many other destinations offer similar features for much lower cost. To turn things around, GVB and GEDA have preliminary begun reaching out to GPA, GWA, and DPW to tie planned infrastructure investments into a new round of Hotel Occupancy Tax bonds to help restore Tumon, both from a visual standpoint above ground as well as to upgrade our infrastructure to allow for new and exciting investments. Additionally, GEDA is looking into a more aggressive tourism Qualifying Certificate program specific to renovation of existing facilities as well as new and exciting tourism attractions and activities.
Infrastructure – GPA and GWA
Of all the issues, GPA and GWA are two of the most important issues facing our island. The good news is the solution is clear. Follow what almost every other jurisdiction has done around the country and privatize them immediately using the GTA model that has been a success for the community.
As I wrote earlier, a 54% increase in housing from just five years ago has priced out many in our community from owning a home. We need to change this. Affordable housing is a key metric in any successful community and our current ratios are nonfunctional. To solve this issue, we need to think outside the box and look to other building materials than cement, such as prefabricated housing. However, to obtain financing for this kind of housing we need to make them eligible for typhoon insurance.
Other ideas for housing include having the government build or help pay for infrastructure and working with the federal government to allow H-2B pools, where labor could work on multiple housing locations at a time.
We have talked about this for years and things have gotten a little better, but we need to simplify the permitting process. In addition to insisting on a client and investor friendly process, other ideas that have been discussed are contracting private companies with bonding to complete the permitting process on behalf of the government agencies.
What is clear is that we need to make sure we don’t blow this moment in time.
The local government will be flushed with cash for the next decade and the opportunities are abundant. However, this too shall end at some point in time in the future and we need to be ready. To succeed, we need to think strategically, support infrastructure with investment and investment with infrastructure. To accomplish this, we need to spend taxes strategically on investing in infrastructure, education and projects that drive our economy and improve the lives of our citizens.
Editor’s Note: Jan Ken Po is based on the children’s game of Rock, Paper, Scissors to determine a winner.