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HomeNewsArchivesWHAT DOES INSOLVENCY MEAN IN THE V.I.?

WHAT DOES INSOLVENCY MEAN IN THE V.I.?

Second of two parts
Aug. 24, 2003 –If Congresswoman Eleanor Holmes Norton's definition of insolvency holds, then some say it is unlikely that the V.I. government will become insolvent anytime soon.
If Kenneth Mapp's definition holds, then some might consider that the V.I. government is already insolvent.
If you consider Ira Mills' thoughts, insolvency could be just around the corner — a couple of years if not sooner, unless the V.I. government changes its ways.
Norton said in a television program aired last week on local Public Broadcasting on WTJX-TV that an outside control board becomes necessary when a government becomes "insolvent," which occurs, she said, when it can no longer borrow money.The V.I. Senate recently passed legislation allowing the government to issue another $235 million in bonds — $100 million in the short-term to be borrowed to cover operating expenses — to be paid back out of the bond proceeds.
Mapp, director of the Public Finance Authority, said Friday he hopes the bonds will be issued by the end of the calendar year.
The $100 million short-term loan has been secured from FirstBank Virgin Islands and Banco Popular.
There are those who wonder how the government will manage to meet its ongoing General Fund obligations as it continues to tie payback of bonds to gross receipts taxes, as it did four years ago and as the new borrowing bill also does.
Along with the borrowing bill Gov. Charles W. Turnbull sent down legislation that would have seen the gross receipts tax increase to 4.75 percent — an 18.75-percent jump — in order to replace the funds taken to repay the increased debt-service payment. The Senate did not approve the tax increase.
Mills, director of the Office of Management and Budget, said Friday the government is going to have to find ways to reduce spending and increase revenue if it expects to make up for the losses to the General Fund from the gross receipts tax when it is used to pay the debt service on another round of borrowing.
When asked his definition of insolvency, Mills said, "If we cannot pay our bills and have no opportunity to secure funding to pay our bills — at that point you're stuck in a rut."
When asked to comment on Norton's definition of insolvency, Mapp said he didn't agree with it. He took the time to look up the meaning of insolvency in a Merriam-Webster dictionary.
It defines insolvency as being "unable to pay debts as they fall due in the usual course of business."
It goes on to say: "having liabilities in excess of a reasonable market value of assets held."
Some people argue that, as vendors remain unpaid and tax returns have not been sent, under Webster's definition the V.I. government could already be considered insolvent
Furthermore, under the Organic Act of 1954, the Virgin Islands is restricted to borrowing only up to a percentage of the value of collectable property taxes. Recent court challenges to the property tax assessment process could make — at least for the time being — evaluation of that restriction nebulous.
However, since the government continues — at least up till now — to be able to borrow money to use for working capital, a practice shunned in private borrowing, under Norton's definition the V.I. may be able to continue indefinitely to borrow to meet its deficits.
Currently the V.I. government is not rated by any of the ratings companies — which at least two financial experts say makes its bonds worse than "junk bonds."
But at a seminar in May sponsored by Sen. Shawn-Michael Malone, Mills took strong exception to the suggestion that V.I. bonds were on the same level as "junk bonds."
And Mapp said Friday that the bonds themselves are well-rated, ranging from triple B minus to triple A.
There is a reason for that, according to experts in the bond market. V.I. bonds are triple tax exempt — meaning there is no state, federal or local tax on them. The are also tied to a funding source: the gross receipts tax, which is a commodities tax and therefore, according to Mapp, is a secure repayment source.
Those two qualifications, coupled with the strong belief that the federal government will not allow the Virgin Islands to default, result in investors historically being willing to purchase V.I. bonds despite their relatively low interest rates — around 6 percent.
Mapp said, "It was one of the tasks this year to pursue a rating" for the V.I. government but, given the current state of the economy both in the Virgin Islands and stateside, he said it was "not good timing."
In response to Norton's concern that hurricanes can also be a detriment to the territory's bonding ability, Mapp said, "A disaster doesn't make them any less valuable," because the gross receipts is "a consumption tax." With rebuilding and replacing lost or damaged items after a disaster, he reasoned, there is plenty of consumption.
Despite the territory's ability to continue to borrow money, Mills said "a new day" is called for.
"We still have some access to the markets," he said, adding, "If we do not change the way we are doing things," that could end soon — in a few years or less.
"I want people to understand where we are," Mills said. "You don't have to wait till the hammer hits on your head to know that it is going to hit hard."
On Friday Norton, who was clear that fiscal issues in the territories are very different from those of Washington, D.C., or other stateside jurisdictions, said if the Virgin Islands cannot figure out what insolvency means in the territory, "the Congress can intervene, and tell you what it means."
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