Solid fiscal management, government downsizing, federal assistance, and increased investment are keys to the resurgence of the Virgin Islands economy, says a "confidential" draft of the Five Year Fiscal and Financial Recovery Plan obtained by St. Thomas Source.
The report was prepared under the supervision of the White House Office of Management and Budget and the V.I. government by CORE International Inc., with input from other consultants.
It was delivered to the V.I. government March 31, 1999, and Gov. Charles Turnbull's administration has already begun implementing several of its cost-cutting and revenue-generating recommendations.
The report warns that "business as usual" will destroy the territory's economy, and that only sweeping reforms can avert financial ruin.
"The new administration in the U.S. Virgin Islands has inherited a fiscal state of affairs of enormous and alarming proportions," the report says. "This serious fiscal crisis is primarily a result of an ever-expanding public sector payroll and a series of three hurricanes which caused massive destruction to the territory's economy."
The government's failure to attract private investors has compounded the problem, according to the report.
"A fundamental change is necessary in (government) policies to make the current economic climate more friendly to outside and domestic investors," the document said.
The report suggested, and the administration is now planning, an investor conference to take place in fall 1999; its goal is to "solicit investor and other stakeholder input in the design of an investors incentive package."
Before recommending reforms, however, the report recognized the stifling impact the territory's divisive political interests will have on instituting economic recovery policies.
"It should be noted, however, that no matter how well-intentioned the (government) commitment to implement reform actions to reduce the government's budget deficit is, the reality is that many actions will require VI Legislature's approval and/or difficult labor negotiations, which may slow the process down and even make certain actions infeasible."
The Turnbull administration has instituted a few of the report's cost-cutting recommendations, including a hiring freeze for all employees except those hired under federal grants, layoffs through attrition, and reducing overtime pay.
The administration has also announced it is developing some of the report's other suggestions, such as a government reorganization plan, which is expected to be presented to the Legislature in late August during the Senate's Committee on Finance budget hearings.
Reorganization proposals already released include combining the V.I. Housing Authority, the V.I. Housing Finance Authority and the Department of Housing, Parks and Recreation, and merging the Division of Personnel and the Office of Collective Bargaining into a Human Resources division.
Government House officials have also said that almost every government department will undergo some degree of internal restructuring.
The report, however, made several cost-cutting recommendations the administration has yet to address.
The plan suggests leasing out VITRAN and landfill management to private operators, and privatizing airport, port and landfill operations, the V.I. Lottery and the retirement system. The government could then collect gross receipts taxes from these privatized entities, the report says.
The report also recommends reducing printing costs, letting private sponsors fund Carnival, and reducing the government's contributions to the Department of Planning and Natural Resources by $400,000 while letting DPNR raise certain fees to compensate.
Converting the territory's hospitals into non-profit institutions, phasing employees of semi-autonomous agencies out of the Government Employees Retirement System, and increasing government leases to reflect market rates also are recommended.
By revamping its leases, the government could earn another $500,000 a year, and by moving out of some rental spaces it could save $2 million.
To generate revenue, the report recommends something senators and other government officials have discussed, promised and urged for years—improving tax collections at the Bureau of Internal Revenue.
According to the report, the Turnbull administration has already beefed up the IRB and has estimated $6 million in additional revenues.
Two ways the federal government could boost the territory's revenues are to eliminate $183 million in FEMA loans and return 100 percent of the excise taxes collected on rum, which could generate an additional $12 million.
The federal government currently returns $43 million to $46 million in rum taxes annually.
The report also suggests the federal government consider developing a debt-relief program for the territory. Under such a program, the territory would have to adhere to performance standards "which would assure the elimination of the… structural deficit within a reasonable period of time."
The report also suggests increasing the annual fee for business licenses to $400 from $300 and instituting a $100 fee for new applicants. This could raise $6.3 million, the report projects.
The report also urges the government to assess replacing the gross receipts tax and to implement a road-use tax for commercial truck traffic.
The report expressed some concerns about the V.I. government's Y2K compliance program, for which it recently received a $16 million grant from the federal government. The report, however, was more concerned with the progress of the project than the funds available.
"Some efforts have been made, but the late start at Y2K remediation and lack of detailed impact assessments make identifying, remediating and thoroughly testing all systems and systems interactions very difficult," the report says. "The new administration has been analyzing the proposed use of funds and notes the general lack of detailed impact assessments which should support the requests."
The report projected that by implementing the above-mentioned self-help measures, the government could balance its budget by 2004, achieving a $2.7 million budget surplus and a $13 million general fund surplus.
Business as usual, however, will double the government's debt, the report says. Between 1999 and 2010, it projects, revenues will rise from $436 million to $588 million, but won't compensate for ballooning expenditures, which will rise from $493 million to $672 million.
"In the absence of any government actions to control costs and enhance revenues, the… operating budget deficit grows from $58 million in FY 1999 to $84 million in FY 2010 alone," the report says. "The new cumulative deficit during the period FY 1999-2010 is projected to reach $954.5 million above and beyond the current total cumulative deficit of $1.008 billion, putting the territory in close to $2 billion debt at the end of the first decade of the new century."
If the government manages its finances better, however, the report makes some bright projections.
"As long as the U.S. economy continues to grow at its current rate of 2-3 percent annually, it is reasonable to expect that the performance of the VI economy, driven largely by tourism, will proceed in a like manner," the report says.
