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OMB Cuts $52 Million from Executive Budget

Feb. 8, 2005 – The U.S. Treasury Department's delay in implementing new rules and regulations to govern the Economic Development Commission program has left the V.I. government's financial officers uncertain of what lies ahead for the territory's revenues.
Members of the Senate Committee of the Whole heard the words "I don't know" and "I can't say" time and time again Tuesday, the first day of a two-day session to ascertain the fiscal condition of the territory.
"The Government of the Virgin Islands is facing some of the most difficult financial times in history," Committee Chairman Senate President Lorraine Berry said in her opening statements.
Berry said the government "must usher in a new day" where they are moved to action by objectives rather than crises. Stories of corruption and mismanagement of funds do not help the situation, Berry said, adding they only add fuel to the fire in Washington for a chief financial officer.
In the morning, the committee heard testimony from: Ira Mills, director of the Office of Management and Budget; Finance Commissioner Bernice Turnbull; Louis Willis, director of the Internal Revenue Bureau; Nathan Simmonds, director of the Office of Economic Recovery and chairman of the governor's financial team; Kenneth Mapp, director of finance and administration of the V.I. Public Finance Authority; and Tax Assessor Roy Martin. Larry Soule, a Bank of America Securities, LLC representative, was also available for the senators' questions.
In the afternoon, the senators heard from: Anthony Cruz, representative of KPMG Independent Financial Auditors; David Nissman, former U.S. attorney and chief executive officer of Bridge Capital, LLC; Frank Schulterbrandt, chief executive officer of the Economic Development Authority; and Nadine Marchena, assistant CEO of the Economic Development Authority.
Mills told the senators that the fiscal year 2005 budget allotment level had been reduced to $512.5 million, approximately $52 million less than the original budget submission.
"This is based on the uncertainty with the EDC companies," Mills said. "We will continue to review and revise the allotments as dictated by the level of resources. If revenues materialize, the allotments to the various departments and agencies will be increased."
Cuts were made to various agencies in the executive branch, though no cuts were made to the legislative and judicial branches of government. Mills, in response to questions raised by the senators, said the cuts were made to various departments within the executive branch because the Legislature had previously approved legislation prohibiting the executive branch from making cuts to the allotments of the legislative and judicial branches of government.
Mills said the increasing rates of the V.I. Water and Power Authority have also impacted the 2005 budget and additional funding sources may have to be identified.
Mills said the government does not have a clear picture of the impact of the recently approved American Jobs Creation Act.
"I believe, however, that it behooves us to become proactive in our search for diversified revenue streams," Mills said.
Simmonds told the committee that the administration met many fiscal challenges in 2004.
"However, notwithstanding declining revenues as a result of the federal tax cuts and a slow U.S. economy in 2003, and despite rising costs in providing government services, we ended fiscal year 2004 in a very much improved financial condition," Simmonds said.
Simmonds said the Turnbull Administration was able to increase gross tax revenue by 20 percent in 2004, thereby making up the shortfall for having borrowed $100 million in 2003. He added the government was also able to hold the line on spending for personnel costs, which decreased by 5 percent.
"Unfortunately, however, due to increased operating and utility costs, expenditures for other services and charges and public utility services increased," Simmonds said.
Because the revenue increases only made up for the shortfall experienced in 2003, Simmonds said there is a need for "new revenue streams to be identified, along with the emphasis on economic growth, for us to be able to eliminate future structural deficits."
He added, "The executive and the legislative branches must now come together to arrive at a consensus on new initiatives."
Simmonds told the committee that the changes to be implemented by Treasury has the potential to cause "substantial damage" to the EDC program and "significant revenue loss" to the government, presently estimated to be between $40 million and $60 million.
"Clearly, without corrective legislation or regulations to mitigate the impact of the broad statutory language in the Jobs Act on residency and source of income issues, the territory faces significant and irreversible damage to the EDC program and substantially reduced revenues," Simmonds said.
Schulterbrandt informed the senators that the EDC program has experienced a decrease in the amount of applications for the program from 2003 to 2004 as a result of the "adverse publicity of tax abuses" associated with a few EDC beneficiaries. The Jobs Act has also created uncertainty and lack of confidence in the program by some current and potential investors, he added.
"This has resulted in the closure of some of these businesses and the request for suspension of benefits from a few beneficiaries," Schulterbrandt said. "Hopefully, with the promulgation of rules and regulations, the concerns of current and potential investors will be addressed and certainty and stability will return to this program, which is so vital to the economy of the Virgin Islands."
Schulterbrandt said eight companies have provided notice regarding their closure because of the Jobs Act. Four have requested a suspension of their EDC Certificate, which indicates they are closing their businesses and letting go of all of their employees. Schulterbrandt said the suspension could signal a potential re-opening if the rules and regulations from Treasury would allow them to operate in the territory.
The other four companies have closed permanently. Schulterbrandt did not discuss the names of the companies, but Labor Commissioner Cecil Benjamin earlier told the Source that Belgravia Partnership on St. Thomas, and Bluewater Management, Cambridge Management Group and NASCO Corporate Finance Consultants on St. Croix, would close their doors.
As a result of the closures and suspension of benefits by the EDC beneficiaries, 106 employees are directly affected; 92 of them part time, and 14 full time. In addition, Schulterbrandt said the closures could result in the following losses:
– $4.2 million in income tax,
– expenditures in the territory of $3 million,
– gross wages and benefits of $5.2 million,
– employee taxes of $1.3 million,
– workmen's compensation worth $446,726,
– corporate contributions of $394,849;
– and annual fees to the EDC in the amount of $12,000.
Currently, 102 companies are beneficiaries of the EDC program. Within the last 90 days, 13 companies have applied for EDC benefits, representing 641 potential employees with a payroll of $23.8 million, Schulterbrandt told the committee.
"This also represents an investment of $78.8 million by these applicants," Schulterbrandt said.
On a positive note, Willis told the senators tax collections had improved.
"The collection exceeds the prior fiscal year by 13 percent," Willis said.
A total of $534.2 million in taxes was collected in 2004, compared to $470.8 million in 2003. The $534.2 million reflect $342.9 million in individual income taxes, $40.48 million in corporate income taxes, $113.3 million in gross receipt taxes, $18.3 million in trade and excise taxes, $14.6 million in hotel taxes and $4.6 million in highway users' taxes.
Although tax revenues
increased, Willis said, the government's payout for tax credits were also increased.
"The greatest impact is felt by the earned income tax credit and the child tax credit," Willis said.
Senators questioned Mapp about the state of the territory's capital projects.
"The V.I. Public Finance Authority does not, as a whole, manage capital projects of the government," Mapp told the senators on more than one occasion, except a few projects like the Frederiksted Revitalization Project that the governor specifically requests that the authority handle. Mapp told them to reserve all questions on capital projects to Keith Richards, capital projects coordinator, who will testify before the committee Wednesday.
Sen. Ronald Russell asked Mapp what happened to the $1 million they had appropriated for the purchasing of textbooks. The senators were upset that a private group had decided to conduct a telethon to raise funds to purchase textbooks.
"That money is sitting in the investment portfolio, and all the department has to do is use it," Mapp said to the astonishment of several senators.
Sen. Celestino White said he didn't understand how Gov. Charles Turnbull, who is also the chairman of the PFA, would just have the money sitting there when textbooks needed to be bought.
"If this $1 million is there, why are the monies not forced to be drawn down?" White asked. He urged Mapp to inform Education Commissioner Noreen Michael that the monies were available for the department's use.
All senators were present at Tuesday's meeting. The committee will continue with its quest in ascertaining the fiscal condition of the territory Wednesday and will take testimony from members of the private sector.

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