In an apparent bid to reassure potential lenders and save millions on interest, Gov. Albert Bryan Jr. on Tuesday proposed legislation to create a special semi-autonomous government-owned corporation, and sell the rights upwards of $200 million per year in federal alcohol excise tax revenues Congress remits to the territory each year.
Speaking at a Tuesday afternoon news conference, the governor said taking control of this stream out of government hands will create the cash infusion needed to save the Government Employees’ Retirement System and an ongoing cache of funds for future projects.
Bryan called a special session of the Legislature and said the move, if approved, “marks the USVI’s reentry into the bond market for the first time in 11 years,” and “can potentially create a revenue stream of $85 million for each of the next three years by reducing the territory’s annual debt service payment.”
While Bryan said there are no lenders on the horizon yet, the interest is high. Being able to refinance the debt – upwards of $900 million – would ultimately save the territory $106 million.
“We’re not borrowing a penny extra,” he said at Tuesday’s news conference. “We are using existing resources to better position our financial recovery.”
The territory’s last big round of bond borrowing was during Gov. John deJongh’s administration. The territory borrowed heavily to bridge the budget gaps created by the 2008 worldwide financial collapse and pledged federal rum tax revenues to secure bonds to pay to build Diageo’s distillery on St. Croix and a smaller project at the Cruzan Rum Distillery. (See: PFA Votes For $250M in Bonds to Finance Diageo Project and V.I. Budget Crisis Part 5: Weren’t Rum Funds Supposed To Save Us?)
A few years later, when Gov. Kenneth Mapp tried to bridge the territory’s persistent structural deficit with bond debt, investors balked, declining to buy. (Mapp Signs Rum Revenue Lien and Borrowing Bill)
Analysts and rating agencies raised concerns the territory might reach a crisis point where it was unable to both pay bonds and pay for essential services. (See: Financial News Service Questions V.I.’s Ability To Sell Bonds and V.I. Bond Sale Delayed As Investors Request More Time)
Mapp also proposed enacting statutory liens on the territory’s tax revenues and the federal excise tax revenue stream, which the Legislature enacted. But that did not end up enabling the territory to either refinance its existing debt or bring in more debt.
Bryan’s proposal would add another layer of protection for lenders by selling the federal tax revenue stream to a separate “corporation.”
According to Bryan, this would significantly increase cash flow and create a vehicle for the government’s future bonding.
“In plain language, we’re refinancing the existing debt to make monies available now. We are not using a penny extra,” Bryan said. “To be honest, this financial transaction is complicated, and it comes with a very tight time frame; however, it presents an opportunity that is too critical to overlook.”
The proposed legislation creates a company called “The Matching Fund Securitization Corporation” as “a special purpose, independent and autonomous, public corporation and governmental instrumentality of the Virgin Islands,” whose purpose is to “acquire all of the government’s rights, title and interest in and to the Matching Fund Receipts to be paid to or for the account of the government by the U.S. Treasury” during what is described as a “transfer period,” based on a convoluted calculation.
The Matching Fund Receipts are what the V.I. government calls the federal excise taxes the federal government grants to the territory each year.
Bryan’s bill says, “the government is hereby authorized to sell to the corporation all of the government’s rights, title and interest in and to the Matching Fund Receipts and the Related Rights and any earnings or interest thereon payable to the government during the transfer period.”
Not counting several billion dollars in unfunded pension obligations, the V.I. government has about $1.8 billion in debt, of which just over $1 billion is secured by those federal grants. According to Bryan’s 2021 budget, the government projects spending $52.9 million to pay interest on that portion of the debt for the upcoming year. It also projects spending a total of $88.7 million to pay interest on all of its bond debt. The economic contraction due to the pandemic also blew a hole in revenue projections. (See: Pandemic Blows $150 Million Hole in Already Tight V.I. Budget)
Being able to borrow money or refinance debt at lower interest rates would ease the fiscal strain.
According to Bryan, the creation of this new entity and signing over the rights to these federal dollars would provide access to the bond markets, reduce annual debt payments and create “a potential revenue stream for cash flow of $85 million annually to the territory for the first three years alone.”
Bryan said that while shoring up the insolvent government pension system remains a priority for the use of the funds, there are several potential uses and needs for the funds that will become available because of the refinancing.
“With this new revenue we can create a closely monitored revolving fund that will help us to get our projects moving faster,” Bryan said. “We also still owe many of our employees and retirees money in retroactive pay and eight percent. We have not forgotten. Ultimately the Legislature will have the purview to decide how this money is spent, but we must insist that the GERS be our utmost priority.”
Bryan is referring to the Legislature’s 2011 decision to reject Gov. John deJongh’s emergency budget proposal in favor of an across-the-board 8 percent government pay cut. Local unions sued and lost in 2012, then in 2016, the U.S. Third Circuit Court of Appeals overturned the trial decision, sending the case back for reconsideration. The case is still in the courts but could result in a judgment for millions of dollars in back pay.
According to Bryan, the securitization of federal revenues like this is not an uncommon practice in the marketplace and has been used by other jurisdictions successfully.
“Under current market conditions, the Virgin Islands Public Finance Authority is not able to restructure the outstanding matching fund bonds with a more traditional refunding bond structure, and could not achieve the debt service savings that are expected to be achieved by this transaction,” Bryan wrote in his transmittal letter to Senate President Novelle Francis Jr.
Bryan said he expects his proposed measure to reduce the overall debt service payments as soon as October. Approval of the measure by Aug. 19, is necessary to complete the transaction before the next debt service due date, he said.
“We have an opportunity now to chart a new course for our territory,” Bryan said. “We have opportunities to bring closer to resolution many of the issues confronting our community.”