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Thursday, March 28, 2024
HomeNewsArchivesFinancial Rating Service Warns of Further Strain on V.I. Economy

Financial Rating Service Warns of Further Strain on V.I. Economy

The financial ratings service Fitch Ratings warned of a negative financial outlook for the U.S. Virgin Islands, which will narrow the territory’s budgeting options for the next few years.

The warning was reported by the service on the Business Wire website. While the agency confirmed the BBB rating for bonds sold last month by the Public Finance Authority, it warned of further strains on the local economy.

The bond issue included a restructuring of existing debts to provide budget relief in the 2014 fiscal year, as well as the refunding for savings of a portion of the PFA’s outstanding Series 2004 Bonds. The financial restructuring and refunding combined to create $22.7 million of overall debt service savings for the upcoming fiscal year.

Bond ratings are issued by analysts who assess the credit worthiness of a government or corporation debt issues, similar to the way credit agencies issue credit ratings for individuals. Fitch’s ratings run from AAA to D. The BBB+ rating the territory received is considered a high medium grade.

But the rating service warned that, while debt-service coverage remains satisfactory even through stress scenarios, there are challenges.

"Longstanding fiscal challenges worsened in the recent downturn with sharp revenue declines, prolonged, unresolved property tax litigation, high fixed-cost burdens and difficulty in reducing expenditures," Fitch’s report says. "These fiscal challenges were compounded by the closure of Hovensa. The territory has relied on borrowing to close both its operating gaps and maintain liquidity, and financial operations are expected to remain structurally imbalanced for the next several fiscal years."

The company also said the territory’s net tax-supported debt is extremely high, and dedication of revenues to debt service reduces fiscal flexibility. Other liabilities noted in the report include pensions and unpaid retroactive salaries, both of which further weigh on the territory’s limited resources. It particularly noted uncertainty over the government pension system.

These factors add up to further difficulties in the coming years, it said.

"The USVI will continue to have difficulty achieving ongoing structural budget balance in the context of revenue losses due to the loss of its largest taxpayer and employer, longstanding fiscal constraints, high fixed costs and very high liabilities,” the report said. “The USVI has had limited flexibility in responding first to the economic downturn and now to an economy that is hampered by employment losses from the Hovensa closure. Despite making deep spending cuts, including staffing reductions and an 8 percent across the board salary cut, as well as increasing the (gross receipts tax) rate to address its structural budget gap, the operating budget is significantly unbalanced."

It’s not all bad news though, the report said.

"Although the USVI enjoys less flexibility in fiscal matters than U.S. states, the U.S. legal and regulatory environment provides stability through some oversight of financial operations as well as the allocation of grant and operating revenue," according to Fitch’s report.

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