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DeJongh Proposes Budget Crisis Summit in State of the Territory

Gov. John deJongh Jr. highlighted a looming budget deficit of $70 million and proposed a late February summit meeting with the 30th Legislature to work out a consensus plan to chop it in half, during his eighth and final state of the territory address Monday. (See: 2014 State of the Territory Address in Related Links below)

To avoid catastrophic abrupt cuts and defaults later in the year, spending must be reduced now, deJongh said, toward the end of an address that focused largely on the ups and downs, goals and accomplishments of his two terms in office.

"All of us are acutely aware of what this means in terms of the operations of the government. To spend more money now is to completely run out of money sooner," deJongh said.

Borrowing "is no longer a viable long-term strategy, especially in the wake of the closing of Hovensa," he said. "We must acknowledge the structural changes in our economy. …The simple reality is that our economy today is not as big as it once was. Overall, our gross territorial product declined 13 percent from 2008 to 2012," he said.

About half of the budget hole is structural, with the economy and tax revenues simply not growing fast enough after repeated economic shocks to sustain the costs of government, according to deJongh. But the other half reflects the decision by the U.S. Department of the Interior not to advance rum excise tax funds at the full $13.25 rate, he said. DeJongh proposed the territory hope for the best and assume Congress will eventually release all the fund, as it has in the past, and focus on the remaining $35 million or so.

DeJongh said he has been told the Legislature plans to hold a hearing on the budget deficit in mid-February.

"What I would like to propose tonight, directly to the Senate president, is that he and I agree to schedule a time when the members of the 30th Legislature and I will meet at Government House, within two weeks following that hearing, and at that time hammer out an agreement as to how we will reduce our budget deficit by 50 percent," deJongh said. "This will allow our government to operate, even as we continue our efforts in Washington to secure the cover-over revenues. And if, by the time of our next budget submission, Congress has not acted, or Interior continues to decline to release the funds, we will at that time have to take further action," he said.

The balance of the deficit reflects both increased personnel costs from the expiration of an unpopular temporary 8 percent pay cut for government employees and increased health insurance costs, deJongh said.

The pay cut was legislated in 2011 as an emergency budget measure and expired in July of 2013. (See related links below)

While deJongh did not initially support the pay cuts, proposing staffing cuts instead, he opposed letting them expire until the budget stabilized.

"Perhaps it will be your choice to revisit that decision," deJongh said to the gathered senators in the Earl B. Ottley Legislative Chambers. "Perhaps there are other courses of action that have been discussed before. Or perhaps we will come up with a new and different idea. But like it or not, we know what we have to do," deJongh said.

“Looking into the longer term, we should recognize that we are also no different than any other state or municipality in the United States when it comes to the threat of unfunded pension liabilities. Our Government Employees’ Retirement System is our largest single public asset. It represents the savings of all who have worked and are now working for our government. But it is also the single largest liability of our government.”

Noting with alarm that the Government Employee Retirement System is projected to "run out of money to make its payments to retirees in less than ten years," deJongh urged the Legislature to quickly enact changes to the system proposed last May by his pension reform task force.

"Once its investments are depleted, the retirement obligations will … then have to compete for the limited dollars in our budget with our demands for health care, for public safety, for education and for the salaries of government workers," he said. "Today, we are facing a $70 million deficit without having to fund the over $200 million in retirement benefits currently paid by GERS. Just imagine the disaster that will be ours if we have to add this $200 million to the annual budget. This is the future we face if we fail to put the GERS on sound financial footing in the short time we have," he said.

Those changes include freezing cost of living adjustments, changes to retirement age, increases in employee and employer contribution rates.

"Yes, these recommended reforms are harsh, but meeting this challenge is critical to all across our community," deJongh said, adding that "(n)o one who participated in the work of the taskforce would have agreed to them if there were any other viable choices." Each member understood that some pain would be felt by all."

Looking at the fiscal crisis facing both of the territory’s hospitals, especially Gov. Juan F. Luis Hospital on St. Croix, deJongh said the territory must address "an organizational structure that results in the duplication of resources and prevents the sharing of knowledge and the gaining of efficiencies of scale that could be achieved through system consolidation."

To that end, the governor said he is "prepared to work with members of this Senate toward the goal of creating a unified organizational structure for our hospitals in time for the next budget submission."

These policies and proposals for the upcoming year came toward the end of deJongh’s address, while the governor spent much of the speech looking back over the last seven years of his administration, cataloguing the economic blows, from IRS actions temporarily reducing investment in the territory to the worldwide recession and later closure of the Hovensa refinery.

And he highlighted his administration’s goals and successes, pointing to increased government revenues due to the Diageo distillery as one move in particular that has helped prevent much worse budget cuts and government layoffs.

He pointed to a long list of capital projects that were begun or completed on his watch, from the completed Christiansted Bypass to ongoing work to complete the V.I. Next Generation Network broadband project.

While energy costs remain very high, deJongh said he was optimistic that ongoing solar power projects and conversion to using natural gas instead of fuel oil would help lower costs by up to 30 percent "in the near term."

And the governor said he was optimistic the shuttered Hovensa refinery could be sold and brought back into operation in the relatively near future.

"If the recommendations of the GERS Taskforce are implemented, if Hovensa is restarted, and if tax collections are brought to their appropriate levels, we can achieve our goal of a future of financial stability and balanced budgets. GERS will be solvent for years to come. Refinery jobs and revenues will be restored. We will have the funding available to expand health care and Medicaid funding, and we will have the resources to fund education and to build on the progress that has been made," deJongh said during the conclusion of his address.

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