Representatives of three credit rating agencies heard Gov. John deJongh Jr. outline the measures taken by the Virgin Islands government in anticipation of a $120 million bond offering to be secured by rum production revenues, Government House announced Tuesday.
The discussion with the bond agencies came during a conference call Monday.
DeJongh shared the territory's current and long-term financial picture, recounted efforts to bring down the costs of government and balance revenues with expenditures, and discussed the strength of rum proceeds from two of the world's largest spirit manufacturers.
The revenue stream from the rum distilleries “is strong,” deJongh told representatives of Fitch, Moody's, and Standard and Poor's, three credit rating agencies that oversee the bond market. “It is growing and it is secure,” he said.
“No one wants to borrow for working capital purposes but the simple fact is that, in the absence of revenue growth and the need to provide government services, we cannot reduce costs quickly enough,” deJongh said. For that reason, it is important to take action as soon as possible, he said, preferably by the end of August, on the $120 million bond offering authorized by the 29th Legislature.
“The funds from the bond offering are critical to our payment of income tax refunds and obligations due to WAPA,” deJongh said.
Also in on the conference calls were members of the governor's financial team – Commissioner of Finance and Public Finance Authority Director Angel Dawson, Office of Management and Budget Director Debra Gottlieb, Deputy Chief of Staff Nathan Simmonds, the territory's bond counsel Patricia Goins, financial advisors David Paul, Pamela Laucks, Jim Diffley, and Troy Clark and Tom Dooney, the territory's underwriters.
The $120 million would provide the working capital to weather the worst financial downturn in the modern history of the Virgin Islands, the governor said. In 2010, at the nadir of the recession, the territory grappled with a 28 percent reduction in tax and fee revenues. An economic rebound was hobbled by the closure of the territory's largest private business, the Hovensa oil refinery, aggravating the government's fiscal woes.
From 2008 to 2013 the government's revenue declined a cumulative $200 million – losses due to decreases in personal income taxes, gross receipts taxes and a 71 percent drop in corporate income taxes.
The bond will be backed by matching funds obtained from the federal program that allows the Virgin Islands government to benefit from rum excise taxes. Those matching funds tell a “good story,” deJongh said, thanks to the territory's support of the Cruzan and Captain Morgan distilleries.
The partnerships with parent companies Beam and Diageo respectively have “translated into the growth and strength” in the matching-fund revenues, which are collected by the federal government and wired directly to the bond trustee, he said.
“The success of our rum initiative has been critical to offsetting this series of financial blows,” the governor told the credit rating agencies.
To each rating agency, deJongh described actions he has taken to compensate for lost revenues. The V.I. government aggressively cut spending, rolled back public salaries, dismissed some 500 employees and encouraged another 500 to take early retirements, he said, a 13 percent reduction in the government's workforce representing a 19 percent reduction in personnel costs.
The administration also raised some taxes and aggressively pursued outstanding property and gross receipts taxes owed by delinquent taxpayers, he said.
“We have made reductions that a few years ago would have seemed impossible to accomplish,” deJongh told the rating agencies.