A regular Source feature, Undercurrents explores issues, ideas and events as they develop beneath the surface in the Virgin Islands community.
The headline reads “Virgin Islands Faces Bankruptcy.” The finance commissioner is quoted as saying that the government is routinely millions of dollars behind in paying its obligations, including to the retirement system. The budget director says that without major tax increases, layoffs are likely. The head of the Senate Finance Committee says, “The government owes more money than any government should owe.”
The article is from 1986. (It was written by this reporter for Gannett News Service.)
It seems the only things that changed in the last 28 years are the names – and the amount owed to various debtors, all of which are higher, even adjusting for inflation.
In fact, viewed on a per capita basis, the territory may now be the United States’ biggest government debtor – outstripping both the city of Detroit and the commonwealth of Puerto Rico.
The largest U.S. city ever to seek bankruptcy protection, Detroit owes a reported $18 billion. With a population of 701,475 (in 2012), that works out to a debt of $25,660 per resident.
Our next-door neighbor Puerto Rico has been getting increasingly unfavorable coverage by the national media because of its $70 billion debt. Spread out among the territory’s 3,725,789 residents (as reported in 2013), that makes a per person debt of $18,788.
Meanwhile, each resident’s share of the Virgin Islands combined bond market debt ($1.74 billion) and retirement system unfunded liability ($1.7 billion) is a whopping $29,965.
That’s based on a population figure of 114,800 as cited on the V.I. Tourism website.
If you add another $300 million to cover the infamous “retroactive salary increases” that were promised to government workers in the 1990s but not funded, the V.I. debt increases to $32,578 each for every man, woman and child living in the islands.
Administration officials have repeatedly said the retroactive increases are more of a moral than a legal obligation, reasoning that they are only legally binding if the government has the money to pay them. The Legislature did authorize the government to borrow $45 million as a sort of down payment in 2010, and some critics argue that that move actually legitimized the debt.
Finance Commissioner Angel Dawson rejected that argument in an interview last week, saying of the $300 million, “That is not really a legal obligation of the government until the Legislature appropriates the money to pay it … if the Legislature identifies a source of money, then they will be paid.”
More significantly, Dawson downplayed comparisons between the Virgin Islands and Puerto Rico’s bond debt, which were the subject of a recent article in “The Bond Buyer” industry publication.
That article quotes a Fitch Ratings senior director describing the V.I. debt level as “extremely high,” with tax-supported debt at 77 percent of personal income, compared to 75 percent for Puerto Rico.
Dawson said the figure is misleading, however. Most of Puerto Rico’s borrowing is “general obligation debt,” meaning repayment comes from the local treasury, he said. In contrast, the bulk of the Virgin Islands’ bond debt is supported by rum excise taxes that are paid by consumers stateside, collected by the federal government and then rebated to the territory – rather than by local taxes which would have a more direct impact on V.I. residents.
The rebate program is solid, Dawson suggested, if for no other reason than because Congress knows how important it is to the territory’s economy and it has no desire to create the need for a federal bailout.
Originally used only for capital projects, the so-called Matching Fund has been tapped a number of times over the years for “working capital” and used to cover shortfalls in the operating budget. The most recent such borrowing is also meant to be the last, Dawson said.
The government borrowed $120 million in 2012, reserving some for use in 2013 and 2014, but the administration’s policy now is not to borrow any more for working capital, “and we have told that to our bond holders,” Dawson said.
If the government can stick to that policy, it will free up future rum-revenue bond money for much-needed infrastructure improvements that have gone unaddressed in recent years.
Meanwhile administration officials are grappling with a more immediate problem – a $40 million deficit in the current year’s budget.
“We are still, budgetary-wise, in a hole,” Dawson said.
Administration officials have been meeting with legislators in an effort to resolve the crisis in what Dawson called “a work in progress” to close the gap. He declined to voice the administration’s position about what should be done.
“I wouldn’t preempt the governor to say what he’ll do if the Legislature can’t find the $40 million,” Dawson said. But he added that the budget director won’t allot funds that don’t exist and “the commissioner of Finance will not bounce any checks.”
The administration is also looking to the Legislature to enact its proposals to reform the Government Employees Retirement System, including delaying and decreasing benefits in attempt to avert a collapse of the system.
Officials point to the recent recession as a primary cause of the current economic dilemma. Dawson said General Fund revenues plummeted from $766 million to $483 million between 2008 and 2009, a 37 percent drop. Figures published by the USVI Bureau of Economic Research indicate a steady climb starting the next year, but after the Hovensa refinery closed in 2012, Dawson said the treasury took another $100 million hit.
But some observers say the downturn only exacerbated a problem that already existed and stretches back decades, over several administrations and numerous legislative bodies: a lack of will to live within our means.
Looking back again at 1986, the Legislature that year directed the Finance commissioner to withhold its contributions to GERS for the second half of the fiscal year. It also authorized inter-fund borrowing (sometimes known as robbing Peter to pay Paul.)
The budget for 1985 was $253 million; the government was routinely running between $8 million and $13 million behind in paying bills, and the deficit was somewhere between $17 million and $50 million, depending on who was making the estimates. Proposals by the governor (Juan Luis) for tax increases were generally ignored by the Legislature as were spending cuts.