Home Story Series Budget Crisis The V.I. Budget Crisis: Part 2, The Hovensa Effect

The V.I. Budget Crisis: Part 2, The Hovensa Effect

The V.I. government is at a crossroads.

Along with this year’s $110 million deficit, the USVI is facing ongoing structural deficits of around $170 million per year out of a locally funded budget of around $850 million. It has outstanding debt of more than $2 billion, not counting the debts of the government-owned Water and Power Authority, which is also facing serious financial problems. It is also facing a $3 billion unfunded pension liability and a pension plan projected to cease being able to pay full pensions by 2023. And for the first time, after two rounds of ratings downgrades in less than a year, lenders have refused to buy V.I. government bonds.

How did we get here and what can we do about it?

Part 1 looked at the history of the territory’s finances and some of the many factors that led to this crossroads. Of all of them, the 2012 closure of Hovensa is by far the most important.

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Figure 2: USVI Revenue Sources 2004-2016 (clustered column) Click on image for larger view.

In 2012, Hovensa closed after several years of losses approaching half a billion dollars per year. The St. Croix refinery was designed to burn oil to generate the heat for refining. Oil prices shot up after the U.S. invaded Iraq in 2003, which increased the cost for Hovensa to refine. Competing mainland facilities switched to cheaper natural gas, which steadily fell in price after 2008.

With massive losses on its books, V.I. tax revenues from Hovensa sharply declined several years before its closure. When the U.S. economy slowly grew out of the recession over the past decade, the loss of Hovensa-related personal income tax and other taxes from employee spending kept the territory ‘s revenues down.

A 2013 V.I. Bureau of Economic Research report calculated the refinery closure caused “an annual decline of approximately $140 million,” in tax revenues.

Hovensa refinery in 2011 (Bill Kossler photo)

You can see the drop in V.I. corporate income tax in the chart above, starting in 2008. The drop begins as the refinery begins losing money. It seems to be somewhat masked in 2012, perhaps because the worldwide economy was beginning to grow, offsetting the abruptly increased loss from Hovensa’s final closure.

The reuse of some of the Hovensa resources as a much smaller oil storage facility under new ownership has reduced that loss a little. But Hovensa’s closure alone accounts for most of the territory’s structural deficit, estimated by the Mapp administration at about $170 million per year. The Mapp administration also implemented pay raises costing about $30 million per year, which contribute to the deficit at one end, but makes it easier to hire government employees and reduce overtime at the other end.

While waste may  be a problem, the data show the losses of revenues from the worldwide recession and the Hovensa closure can almost completely account for the territory’s structural deficits.

Next – Part 3: GERS Time Bomb

Revised Debt and Revenues 1991-2016. Click on image for larger view.

1 COMMENT

  1. William Engler

    USVI

    IT’S TIME TO GET OVER THE LOSS OF THE REFINERY. IN FIVE YEARS THE GOVERNMENT HAS NOT COME UP WITH A VIABLE PLAN TO MINIMIZE THE IMPACT.
    FORGET THE OLD SCHOOL IDEAS OF TOURISM & SIN TAX REVENUE TO RESOLVE THE PROBLEM.
    NEW MONIES MUST COME FROM OUTSIDE INVESTOR’S. I WAS ON ISLAND DURING THE SUMMER OF 2015 AND WITNESSED GOVERNOR MAPP AND SOME GOVERNMENT OFFICIALS TURN THEIR NOSES UP AGAINST THE CASINO AND HOTEL IDEA PROPOSED TO INVIGORATE THE ECONOMY AND HAD THE ARROGANCE OF NOT EXPLAINING THEMSELVES TO THE PEOPLE THEY REPRESENT. NO RISK NO REWARD.
    MANY LOCALS COMPLAIN OF CORRUPT POLITICIANS AND CRONYISM. WHAT GIVES.
    I OWN PROPERTY & WOULD LIKE TO RETIRE ON ST CROIX SOON ONE DAY AND KNOW SEVERAL INDIVIDUALS THAT WOULD LIKE TO DO THE SAME WITH THE GOAL OF INVESTING BUT NOT WITHOUT POSITIVE CHANGE.

    SINCERELY,

    WILLIAM ENGLER