While hearing Gov. Kenneth Mapp’s plans to spend hoped-for but not guaranteed new revenues from hoped-for but not guaranteed new oil refining operations, senators learned Tuesday the $70 million upfront payment in the deal has not been paid yet and there is no certain date.
Budget Director Julio Rhymer and Mapp’s financial team were testifying to the Finance Committee about an amended 2019 budget that adds $38.5 million in new spending, financed by new petroleum refinery operations on St. Croix that have not yet begun or even been guaranteed.
Rhymer also updated senators on the territory’s fiscal outlook, with both good and bad news stemming from last year’s hurricanes and this year’s recovery.
In July, the Legislature approved a new agreement with ArcLight Capital, owners of Limetree Bay Terminals, governing a possible restarting of part of the Hovensa refinery on St. Croix, which shut in 2012. In 2016, Limetree Bay began using part of the refinery for an oil storage business and had an option to restart the refinery. At hearings on the new agreement, V.I. officials, government consultants, ArcLight and Limetree Bay officials testified they believed there was a possibility to restart part of the refinery. The Mapp administration presented the Legislature with an agreement governing how such a refinery would operate and how it would generate revenue for the government. ArcLight and Limetree Bay officials said they planned to spend $1.4 billion and possibly start work in September.
Front and center in that proposal was a promise of $70 million upfront, including $40 million as a loan.
Mapp emphasized the $70 million as an “up front” payment when he announced the proposal on July 2.
“Upon the closing of the transaction, ArcLight Capital will make a $70 million closing payment to the Government of the Virgin Islands,” Government House announced that same day in a press release.
At a July 18 hearing on the deal, Finance Commissioner Valdamier Collens said the deal involved “an up front payment of $70 million.”
All the other testimony at that hearing indicated the payment was going to be nearly immediate.
The text of the new agreement with Limetree Bay says it will pay the $70 million “on closing.”
It also says if there is a refinery restart, the loan will be repaid out of refinery payments in lieu of taxes but if there is no refinery, the loan will be repaid from Limetree Bay’s oil storage business’s payments in lieu of taxes.
On Tuesday, Sen. Novelle Francis (D-STX) asked first about the $70 million.
“The funds haven’t moved yet. That has been pushed back toward the beginning of October or something like that,” Rhymer said.
“Is there a reason for the push back?” Francis asked.
“I think there are several. I think the primary, though, is they are waiting to finish up the negotiations with the actual franchisee that is going to be running the operations,” Rhymer said.
Sen. Tregenza Roach (D-STT) a candidate for lieutenant governor this fall, asked Collens if he had a closing date for the deal and the funding.
“Not at this time,” Collens said.
Roach said when Collens testified in July, urging senators to approve the deal, “your testimony was that there would be immediate capital to meet pressing current needs.”
“So you are saying this money that was represented as coming to us “immediately” as you used the word in July, it could be later than October?” Roach asked.
“The money was always contingent on ArcLight securing the deal with an operator which they have not done yet. When that happens then it will be immediate,” Collens said.
“So it wasn’t contingent on us ratifying this agreement contemplating the restart of the refinery? Do you feel that is what you represented to us in the testimony given to us previously?” Roach said.
“I represented the statement that you have right in front of you. Yes.”
Roach said there was nothing in Collens’ July testimony suggesting the deal hinged on negotiations with a franchisee.
“I am surprised to hear that we haven’t gotten the $70 million because it was represented as being an immediate up front payment and that it could possibly occur in October or some other time because there is no set date for closing on this agreement that we were rushed to ratify before the primary election.” Roach said.
Although it was not discussed at the July hearing to approve the agreement, a close reading finds two brief mentions of a “refinery transfer agreement” which has to be signed before the deal is considered “closed.”
In the agreement’s introduction, there is a clause saying “WHEREAS, in order to facilitate a Refinery Restart, Terminal Operator will enter into on or around the date hereof a transfer and assignment agreement (the “Refinery Transfer Agreement”) with Refinery Operator, which is an indirect subsidiary of Limetree Bay Ventures … .” And buried in the terms for when the deal “closes” it says “the transactions contemplated by the Refinery Transfer Agreement shall have been consummated.”
Since no Refinery Transfer Agreement was before the Legislature or the public, there is no way for the public to know what those transactions are or how or if they are consummated. But the agreement also says closing is “no later than three months following the Effective Date” unless Mapp agrees to extend it three more months. The effective date appears to be July 30, when Mapp signed the legislation approving the deal. Based on that, the closing would have to occur by Oct. 30, shortly before the Nov. 6 election, unless Mapp extends it to Jan. 30.
Surprise Delay Is Reminiscent of 2016 Horse Racing Deal
This surprise delay has similarities to Mapp’s 2016 deal for the territory’s horse tracks that is supposed to bring in more than $25 million in investment. Then, also, Mapp held a press conference saying investment revenues were coming almost immediately. Then, also, Mapp presented the Legislature with an agreement to approve right away. And there, too, the promise of an immediate infusion of cash hid behind an “effective date” that on closer examination proved to be no so immediate.
When the Legislature considered that deal in 2016, Lance Griffith, vice president of VIGL, the prospective horse track franchisee, testified “VIGL will make $25 million in capital improvements to the racetracks” and “40 percent will be completed in 24 months and we will be substantially completed within 42 months.”
That was 20 months ago. But the “effective date” triggering that timeline does not begin until a long list of things happen first, including getting Coastal Zone Management and other permits. Permits are not in place. As of June 25, the V.I. government was doing publicly-funded demolition work at the tracks and VIGL officials said Coastal Zone Management permit hearings were scheduled. To date, no one has publicized any specific projected “effective date” triggering the two-year countdown for investment to begin. (See: V.I. Government Performing Work on Territory’s Horse Tracks, in Related Links below.)
Refinery Still Not a Certainty
Several senators expressed concern the government was planning how to spend revenues when it was not guaranteed those revenues would arrive.
“You and I have something in common. We would love for ArcLight to be successful,” Sen. Janette Millin Young (D-STT) said. Young, who is running for governor, said “there is that one issue; they have up to five years to start up. Do you know when they will start up? September? October? November? December?”
Rhymer said the refinery would not start up for 18 months but money would flow in as soon as construction began.
“The funds that we are actually projecting are from the construction of the facility,” Rhymer said.
The agreement gives ArcLight and Limetree Bay up to five years to decide whether to try to restart the refinery, rather than to actually restart it.
Although its owners have said they hope to restart the refinery and to spend $1.4 billion on the effort, they have not committed to do so and the agreement has multiple clauses addressing what happens if they decide it is not feasible.
“Assuming Limetree is successful in effecting a restart, the proposed project would bring considerable benefits to the USVI,” Jake Erhard of ArcLight Capital, parent to Limetree Bay testified to the Legislature.
“There is not an affirmative duty” to restart the refinery, Geoffrey Eaton from Winston and Strawn told senators at the July hearing.
Plans for the Money
Rhymer said their revenue projection assumes ArcLight spends $1.4 billion over “the next 18 months” to restart part of the former Hovensa refinery. Of that, “$412 million will be personnel cost associated with the restart of the facility. This will generate approximately $33.8 million in withholding taxes and $4.7 million of gross receipts and excise taxes,” Rhymer said.
Rhymer said Mapp is proposing to use the hoped-for revenues as follows:
– $3 million to the Legislature;
– $1.75 million to the territory’s courts;
– $4 million to the Waste Management Authority for outstanding payments to waste haulers;
– $6.4 million to OMB for wage increases;
– $3.5 million to the Labor Department of Labor for Unemployment Insurance and Workman’s Compensation;
– $1 million to the Department of Health for critical service personnel;
– $1.5 million to the Department of Planning and Natural Resources for capital improvements;
– $1 million to Public Works;
– $1.23 million to Human Services for outstanding vendor payments, which may include payments to Behavioral Services for nursing home operations;
– $1.1 million as additional allocation for local nonprofit organizations.
Fed Money Spurring The Economy
Aside from plans for refinery revenues, Budget Director Julio Rhymer had good and bad economic news for the senators. Both stemmed from last year’s hurricanes.
On the bad side, tourism is way down. Air arrivals, which mean hotel guests and lots of spending, were at 271,251, down 57.5 percent for the first nine months of the fiscal year, compared to 637,782 that period last year. Cruise passengers were 920,960 over that time, compared to 1,338,787 in 2017, a drop of 31.2 percent.
Hotel occupancy tax revenues are down 45 percent, or almost $10 million, and will remain low until hotels are fixed and rooms available, he said.
On the plus side, construction jobs are way up, as insurance money, federal money and private money are all spent on repairing, renovating and rebuilding after the storms. Construction jobs have grown by nearly 25 percent, averaging about 2,050 jobs so far this year, versus 1,647 last year, he said, citing data from the V.I. Bureau of Economic Research. That increase is being fed in part by about $2.7 billion the federal government has allocated to the territory since last year’s storms.
“As rebuilding activities continue to occur, the construction sector is expected to have continued job growth and be a major contributor to employment,” Rhymer said.
In other good news, Rhymer reported the federal government has disbursed much more funding from low-interest community disaster loans, which had been hung up over the territory’s fiscal situation and ability to pay.
The Federal Emergency Management Agency gave initial approval for up to $296 million in disaster loans that could be used to offset revenue losses related to the storms – $250 million for the operations of the central government and $46 million for the territory’s hospitals.
But FEMA held up that total, disbursing $85 million in loans as of February, with $65 million going for FY 2018 budget expenses and the rest to the territory’s hospitals. The federal government wanted more security for repayment of the loans.
The situation has improved.
“To date, we have received in $215 million, of which $145 million for the government and $70 million for the territory’s hospitals,” Rhymer said Tuesday.
Young said she was concerned about the territory giving the federal government senior liens on those loans.
“God forbid we need to pay those bondholders first” and are unable to make payroll at some point, she said.
Collens said the bonds will always be paid first and the new loans are “on parity,” or at the same level, as the government’s existing senior liens.
Collens said the V.I. government has taken steps to address its structural deficit and get its finances in order, which, along with the senior liens on the new loans and increased fiscal transparency to bondholders, has helped reassure the federal government and the bond market generally.
He pointed to “sin” tax increases on alcohol, tobacco and soda and a new floor on property taxes, proposed by the Mapp administration and passed by the Legislature in 2017.
“What is termed the sin taxes, that is addressing the matter. That is a positive outcome and the market has responded,” Collens said.
After several bond downgrades, ratings agencies stopped rating V.I. government bonds, saying the territory’s finances were not transparent enough. Collens said the government is working on mending those fences, making it easier for investors to get more information.
Also, the territory has had to balance its budget without access to borrowing.
“This is the second year we have had budgets that were balanced without going out to the market. That is another strong point,” Collens said.
He said the price of V.I. government bonds on the secondary market shows signs of success. V.I. bonds were trading at 25 cents on the dollar a year ago but are now trading at around 95 cents on the dollar, Collens said.
No votes were taken at Tuesday’s session. Present were: Francis, Young, Roach, Sens. Kurt Vialet (D-STX), Dwayne DeGraff (I-STT), Neville James (D-STX), Nereida Rivera O’Reilly (D-STX) Positive Nelson (ICM-STX), Myron Jackson (D-STT) and Brian Smith (D-At Large).