Pointing to improved economic data, Gov. Kenneth Mapp painted an optimistic picture of the territory’s economic outlook in his State of the Territory Address on Monday. While he rightly pointed to genuine good news, he also glossed over some very dark clouds that are not on the horizon but raining on the territory right now.
Early on, Mapp said President Donald Trump’s administration "has requested, and we have provided, a list of five major capital projects that may be included in the first phase of the president’s initiative to invest in America’s infrastructure," going on to list work on Cyril E. King Airport, Veterans Drive, a school on St. John and, on St. Croix, work on Queen Mary Highway and an expansion of the Paul E. Joseph stadium project.
Mapp suggested the territory is slated to receive more than $200 million in federal funds for these projects. If so, that will be great news at some point. But Congress will play a role in deciding what money is actually spent and not everyone predicts good things from the new administration and GOP-led Congress.
V.I. Delegate Stacey Plaskett, a Democrat who has friendly relations with and has worked for GOP officials, said in a statement Monday she was staying in Washington, D.C., and could not attend Mapp’s address, in part to meet with administration and congressional leaders to address potential fallout to the territory. She said Trump’s recent executive orders have the "potential to result in changes in funding to critical programs in the territory," and that there are "signals by the Republican Congress to make deep budget cuts in vital areas of service – many that have the potential to impact funding to vital programs in the territory."
Mapp pointed to a U.S. Department of Commerce and Bureau of Economic Analysis report showing the U.S. Virgin Islands economy grew in 2015 after declining for the four previous years, in the wake of the closure of the Hovensa refinery and worldwide financial collapse.
He crowed that V.I. government spending was lower in 2015 than it had been since 2009. The governor spoke of road projects, flights and $130 million in tax refunds. Unemployment has declined from its peak of a few years ago, he said, and tourist visits are up.
Utility rates are down, thanks to a drop in oil prices and a partial conversion to natural gas. Both current and delinquent tax collections are up. This is all genuinely good news the administration has every right to trumpet.
Mapp said the administration "had no need to borrow money" and had "incurred no new debt," over the past two years. He did not mention that this was not due to balanced budgets or frugality, but to a one-time $220 million windfall from the sale of the old Hovensa refinery and that every dime of that windfall is already spent.
Nor is it entirely accurate that the government "incurred no new debt," as the territory has drawn down $20 million on a $40 million revolving working-capital line of credit and floated a $10 million loan for government vehicles. But those amounts are small compared to many multi-hundred-million dollar borrowings the government engaged in from 1998 through 2014, leading to its current debt load of around $2 billion.
Mapp acknowledged that "recent access to the capital market has been elusive and we need to heed the criticism from the investment community," and that " investors have little appetite" to buy V.I. bond urging the Legislature to act on proposed alcohol and tobacco taxes that are part of his administration’s five-year deficit reduction plan.
"Access to the capital markets will be challenging unless we make some reasonable decisions to implement actions to reduce our operating costs, to identify and enact new revenues, to grow our economy so we can eliminate our structural deficits," Mapp said.
Mapp also said that his five-year plan, "if fully implemented, will eliminate our structural deficit by the year 2021."
But during a Dec. 20 legislative hearing, Finance Commissioner Valdamier Collens confirmed to senators that even "with the initiatives," the government’s current accounting projects a $56.6 million structural deficit in 2021 and thereafter.
The governor spoke about how the territory has never missed a bond payment and has placed rum revenues in a trust account where bond holders get paid first.
But Mapp did not mention the fact that all three major bond rating agencies downgraded the territory’s bonds in January, on top of downgrades in 2016, or that financial analysts are beginning to say out loud that they expect the territory may be forced to restructure its debt at some point.
He mentioned $130 million in tax refunds given out by the government. But he did not address the tens of millions of dollars in remaining unpaid tax refunds.
The governor said utility rates have come down during his tenure, but did not note that the reduction is primarily due to falling oil prices on the world market, which is out of our control.
He emphasized that the Water and Power Authority needs an increased base rate to buy new, more efficient generators. But he did not address the government’s chronic difficulty in paying its own bills to WAPA, its current debt to WAPA of over $30 million, the utility’s resulting critical cash-flow shortage, three bond-downgrades making it unable to borrow, an ongoing lawsuit over failure to pay for fuel from a previous supplier or recent warnings of potential rolling blackouts if its cash situation does not improve.
In last year’s State of the Territory Address, Mapp said putting together a plan to address the government pension plan’s predicted collapse by 2023 was a top priority for 2016. The Mapp administration did not propose a plan during 2016. But on Monday Mapp reemphasized the magnitude of the problem, laid out some broad, unspecific outlines of a potential proposal and said he hopes to forward "comprehensive reforms" to the Legislature "before the end of March of this year."
Mapp said the reforms may include changes to how benefits are calculated, to look at the employee’s last 10 years’ pay levels instead of the last five years’; increasing retirement ages; assessing contributions against higher levels of pay without increasing benefits, and other meaningful, even painful changes.
But the arithmetic suggests even such politically difficult changes, though critical to delay and to soften the blow, may no longer be enough to prevent insolvency and an abrupt forced reduction in pension benefits. The V.I. government dithered for two decades while the crisis deepened and now the V.I. raft is nearing the edge of the waterfall.
The governor’s speech did not shy away from some of the important harsh realities the USVI faces, from the pension crisis to the territory’s difficulty selling bonds. Nor should a governor necessarily focus on bad news in the annual address. Doing so could even do damage to the territory’s position.
Some cheerleading for the territory and the administration is expected. Nonetheless, Virgin Islanders should recognize that the speech accentuated the positive and glossed over some of the more disheartening aspects of the territory’s financial situation if they are to look to the future with clear, unclouded eyes.