OMB Director Says Proposed Budget Relies on Strengthened Tax Collection

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Nellon Bowry, director of the Office of Management and Budget, discusses the proposed FY 2018 Budget Wednesday with members of the Senate Finance Committee. (Photo by Onaje Simmonds, Legislature of the Virgin Islands 2017 Summer Intern)
Nellon Bowry, director of the Office of Management and Budget, discusses the proposed FY 2018 Budget Wednesday with members of the Senate Finance Committee. (Photo by Onaje Simmonds, Legislature of the Virgin Islands 2017 Summer Intern)
Nellon Bowry, director of the Office of Management and Budget, discusses the proposed FY 2018 Budget Wednesday with members of the Senate Finance Committee. (Photo by Onaje Simmonds, Legislature of the Virgin Islands 2017 Summer Intern)
Nellon Bowry, director of the Office of Management and Budget, discusses the proposed FY 2018 Budget Wednesday with members of the Senate Finance Committee. (Photo by Onaje Simmonds, Legislature of the Virgin Islands 2017 Summer Intern)

Without access to capital markets, the V.I. Government plans to intensify its tax collection efforts to help meet the pared-down budget for FY 2018, director of the Office of Management and Budget Nellon Bowry told the 32nd Legislature’s Committee on Finance Wednesday.

Bowry appeared before the committee with other members of Gov. Kenneth Mapp’s financial team to give senators an overview of the FY 2018 budget, which was submitted by Mapp last Friday.

Bowry said the budget is “one of the most critical of recent times” because it will determine to what degree the territory’s government can cover necessary services without access to debt financing.

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The Finance Committee will hold a series of hearings on the budget over the course of the next two months. The first government entities to testify on the budget will be the Law Enforcement Planning Commission and the Bureau of Information Technology. represenatives of those offices will appear at a Thursday hearing.

At Wednesday’s overview hearing, Bowry said a more efficient collection of current tax obligations and an aggressive pursuit of delinquent taxes is expected to account for $37.7 million in added revenue towards the new budget’s $833.9 million in general fund spending.

He said $15.7 million of that number is a conservative estimate of delinquent taxes to be collected in the upcoming fiscal year via a joint Department of Justice-Internal Revenue Bureau task force, announced by Mapp in April.

Sen. Kurt Vialet chairs Wednesday's hearing the Senate Finance Committee. (Photo by Onaje Simmonds, Legislature of the Virgin Islands 2017 Summer Intern)
Sen. Kurt Vialet chairs Wednesday’s hearing the Senate Finance Committee. (Photo by Onaje Simmonds, Legislature of the Virgin Islands 2017 Summer Intern)

The total amount of delinquent taxes owed to the V.I. Government has been reported to be more than $400 million.

The FY 2018 budget projects a collection of $9.3 million in past due individual income tax revenues, $700,000 in past due corporate income taxes, $8 million from enhanced collection of real property taxes, $14 million from enhanced collection of gross receipts taxes, and $5.7 million in past due gross receipts taxes.

In addition to relying on more thorough and efficient tax collection, the FY 2018 budget contains significant cuts to government spending, including a $68.4 million – or 9.4 percent – cut to General Fund expenditures compared to FY 2017.

Bowry said the FY 2018 budget reflects a sooner-than-expected “fiscal policy pivot” in the government’s proposed five-year plan to achieve a balanced budget without debt financing by FY 2021.

“That timetable assumed some level of debt financing in the earlier years; certainly, in fiscal years 2018 and 2019,” said Bowry. “The underlying strategy was, literally, to buy time to allow economic growth to expand the tax revenue base, and to allow expenditure containment measures to be phased in.”

In 2016 and early 2017, however, the V.I. government saw its credit rating downgraded by all three major credit ratings agencies. V.I. bonds are now categorized as “speculative” in quality or below investment grade. As a result, FY 2018’s budget was formulated without market access.

The budget proposes $656.5 million in expenditures for the executive branch of the V.I. Government, $19.5 million for the Legislature, and $37 million for the Judiciary. An additional $90.3 million is proposed for debt service on the Territory’s general obligation bonds, and $30.6 million for income tax refunds.

The budget funds fewer employee positions than the FY 2017 budget and reduces the government’s contribution to employees’ fringe benefits. It proposes that active government employees cover 40 percent of their health insurance costs instead of 35 percent.

Of the 5,382 positions funded by the FY 2018 budget, 81 percent are in the fields of education, public safety and justice, and health and human services. Only 233 of those positions are unfilled or new positions.

Although the budget does not rely on any new tax increases, Bowry’s report to the Legislature did include the fact that the controversial excise taxes on carbonated drinks, rum, wine and cigarettes – the “sin taxes” signed into law in March – are projected to contribute $11.4 million in revenue in FY 2018.

Bowry said a “period of elevated short-term volatility” may result from spending cuts in the territory’s latest budget. He added that there is still a good deal of uncertainly about the territory’s financial future due in part to the looming insolvency of the Government Employee’s Retirement System, whose unfunded liability, at $4.07 billion, is now greater than the V.I. GDP.

Bowry’s report noted that the V.I. Bureau of Economic Research believes the rapid contraction of the V.I. economy that took place between 2008 and 2014, largely due to the Great Recession the closure of the HOVENSA oil refinery, has likely ended.

During that 5-year period real GDP declined by over 30 percent, but in 2015 GDP essentially remained steady at .02 percent growth. Numbers on real GDP for 2016 have not yet been reported by the bureau.

The territory’s unemployment rate dropped slightly during the first eight months of FY 2017, from 11.3 percent to 10.7 percent, although all of the gain occurred in the St. Thomas-St. John district.

Statistics for 2016 from the Virgin Islands Bureau of Labor Statistics show that salaries increased that year over 2015’s numbers. The average private sector salary in the V.I. made a gain of 1 percent to $34,443. The average government salary rose 2.1 percent to $53,660.

Tourism took a hit during the first eight months of FY 2017, with visitors down 12.3 percent, although that entire decline was attributed to a significant drop in cruise visitors. Visitors arriving by air grew 5 percent over the previous year.

The number of homes sold in the territory registered a growth of 21.4 percent in 2016. The average sale price of homes being sold in the St. Thomas-St. John district was $650,076 that year, registering slight growth, while home sales on St. Croix averaged $336,215, registering a decline of 8.8 percent.

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