Nov. 18, 2008 — The U.S. economic recession has finally hit the Virgin Islands, causing a projected $43.5 million drop in government revenues — from $881 million to $837.5 million — for fiscal year 2009, members of the governor's financial team told senators Tuesday.
This means the $843.3 million FY 2009 budget, signed into law a few months ago by Gov. John deJongh Jr., must be realigned to meet the government's priorities and cover a few key items, according to Nathan Simmonds, the governor's senior policy advisor. Those items include millions of dollars in salary increases implemented during FY 2008, a 3-percent increase in the government's contribution to the retirement system and increased government health-insurance costs left out of the budget when it passed through the Senate in September, he said.
The new projections are based on gross General Fund operating revenues of $905.1 million, contributions of $92.9 million from other government funds and about $700,000 from other revenue sources, for a total $998.7 million. From that amount, $90 million is paid out for income-tax refunds, $49.8 million for debt service on outstanding government bonds and about $21.4 million in transfers-out from other funds, Simmonds explained.
The revised revenue projections factor in a $5 million drop in individual income-tax collections, a $40 million drop in corporate-tax collections and an $18.3 million drop in real-property-tax collections, which should hit about $105 million once both FY 2006 and FY 2007 tax bills are issued, government officials said. The FY 2006 bills — for which $6 million has already been collected — have already been issued, while FY 2007 bills are expected to come out next year, Simmonds said.
The timely collection of real-property taxes depends in large part on the outcome of a longstanding court battle between the government and group of commercial property owners. Most recently, Presiding District Court Judge Curtis Gomez found the government in contempt of the 2003 settlement agreement that prohibited the bills from being issued at anything other than the 1998 property-tax levels. The government subsequently challenged Gomez's decision, prompting the U.S. Third Circuit Court of Appeals to stay the contempt order until the government's appeal is settled. (See "V.I Government Re-Issuing 2006 Property Tax Bills.")
Gross-receipts tax projections have now dropped to $147 million, Simmonds said during Tuesday's Finance Committee meeting. The reduction is due to a large drop in consumer spending, along with a recently approved increase in the monthly gross-receipts tax exemption for businesses earning less than $225,000.
Other projected losses include a $2.8 million drop in projected stamp-tax revenues. However, contributions from other government funds have increased, sending an extra $28.1 million into the General Fund in an effort to stabilize the budget.
"The revenue shortfall is not unique to the Virgin Islands," Simmonds assured senators. "At least 29 other states and territories are facing budget shortfalls in FY 2009. Many states are closing their budget gaps through spending cuts, use of rainy-day funds and tax increases."
Looking back to FY 2008, financial team members reported $941.4 million in gross-revenue collections — approximately $2.7 million less that what was collected the year before. After making its transfers out to other funds, along with debt service and customs-duties payments, the government had about $796.6 million available for General Fund appropriations, Simmonds said. Since appropriations totaled $873.3 million, the government suffered a shortfall of $76.7 million during FY 2008, he said.
To meet its budgetary expenses, the Office of Management and Budget doled out about $802 million — $6.2 million more than what was actually available, Simmonds said. The government's total expenditures, however, hit $955.7 million during FY 2008.
The Big Economic Picture
The territory's financial strain deepened in FY 2008 as the fall out from the weak U.S. economy and high energy prices" began to take its toll on the local consumers and businesses, Simmonds said Tuesday.
"Consumer spending is being squeezed, as evidenced from the drop in gross receipts, he said. "The impact of the federal economic stimulus, which was expected to boost consumer spending, has been muted by the increase in the cost of utilities, gasoline, food and other basic necessities."
FY 2008 also ushered in a slowdown in construction activity and private capital-investment spending, Simmonds said. The last quarter of FY 2008 linked the continuous decline in the economy to a loss of jobs, particularly in the private sector, he said.
"Marginal job gains were centered in the service industries and the government, but job losses in construction, information and financial and other services constrained overall growth," he said.
A cutback in transportation expenses — coupled with an overall reduction in flights to the territory — also limited the number of visitors flying in and out of the Virgin Islands, Simmonds said.
"Expectations for business expansion in the next 12 months are negative, given the flagging state of the economy," he said. "If the U.S. economic and financial conditions worsen, the risks increase for further contraction in business activity and employment dislocation. We have already seen that some businesses are reducing hours and laying off employees."
The resulting impact on the local economy is expected to spill over into FY 2009, forcing the need for "well-timed" economic policies and initiatives, including public- and private-sector development projects, strong tourism marketing campaigns and the continuous exporting of rum and petroleum products from the islands. If approved by the Legislature, a $400 million gross-receipts tax bond issue recently submitted by the governor would subsidize a variety of road, transportation, school and housing projects.
Though many senators questioned why the Legislature should back bonds secured by a dwindling supply of projected gross-receipts tax collections, financial team members explained that the bond issue would give the government millions in cash up front with a minimal debt-service requirement that could be stretched out over 30 years.
"It's about capitalizing on cash flow," said Public Finance Authority head Julito Francis. "You're paying $9 million over 30 years for the $125 million you get today. And with these proceeds, we can stem the tide on economic downturn and address major capital improvements for the community as a whole."
The government plans to float about $125 million in bonds right off the bat for a list of capital improvements that are expected to get off the ground in the next few months, Simmonds said later. Other projects — such as the construction of a new Captain Morgan rum distillery, along with numerous territory-wide housing developments and a shopping center project on St. Croix — are also expected to mitigate the impact of the U.S. financial crisis, he added.
As deJongh joins forces with other governors across the nation to support another economic-stimulus bill that will more focus on infrastructure and benefit programs within the states and territories, the Department of Tourism has begun to target overseas markets with an aggressive promotional campaign.
"The department recently announced the implementation of a 10-point plan to address the impact of a slow U.S. economy on the territory's tourism industry and stimulate additional demand for the winter season and beyond," Simmonds said. "This stimulus plan is designed to generate widespread awareness and interest in winter travel to the territory by extending incentives while offering the traveler additional value to encourage on-island s
pending."
Tourism's promotional efforts are also meant to offset the reduction in flights to the territory. Meanwhile, the islands should see an increase in cruise-ship arrivals during 2009, with nearly 2.2 million passengers and about 700 cruise ship calls expected in the St. Thomas-St. John district. The return of ships to St. Croix starting this month will bring in another 121,700 visitors, Simmonds said.
Present during Tuesday's meeting were Sens. Carlton "Ital" Dowe, Juan Figueroa-Serville, Neville James, Terrence "Positive" Nelson and Ronald E. Russell.
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