Aug. 29, 2006 — Efforts made by local officials to develop a rating structure for the government have paid off. At a Tuesday press conference, Gov. Charles W. Turnbull announced that the government has received an investment-grade credit rating from Moody's Investors Service, which will improve the territory's cash flow by allowing direct access to the capital markets.
According to representatives from the government's financial team, the rating — a 'Baa3,' which is Moody's fourth-highest — would also give the government access to lower interest rates and discounts on the face value of bonds, which translates into higher net proceeds for the territory — in addition to reducing the need to obtain insurance on bonds issues.
Turnbull was all smiles as he made the announcement, which he described as an "historic and proud moment" for the people of the Virgin Islands. He said the ability to obtain a credit rating ultimately demonstrates the present state of the territory's economy, which can be characterized by increased revenues and investment in capital projects, along with an effort to streamline fiscal policies, eliminate debt and cut unnecessary expenditures.
More simply put, he said the state of the economy has gone from "stormy" to "stable" — a transformation that has culminated in the development of an investment-grade credit rating, which would make it "easier for future administrations to deal with the financial world." According to the investment Web site, Investopedia.com, the 'Baa' rating indicates a medium-grade level of risk for investors, whereas a 'Aaa' rating indicates the lowest level of investor risk. Anything rated below 'Baa' is graded as junk bonds.
The rating will also eliminate the "lock box" system previously used by the government, whereby a portion of revenues collected by the Internal Revenue Bureau — primarily gross receipts taxes and proceeds from the rum tax — has been set aside for debt service payments. "Now that we have the credit rating, we don't have to do that anymore," Office of Management and Budget Director Ira Mills said after the meeting.
Ultimately, the credit rating will give government access to a "myriad" of investors, and will allow these entities to determine how risky it is to invest in bonds floated by the V.I. government.
According to Moody's Web site, an investor is more willing to invest in a country or security with a credit rating rather than those without one. Long-term credit ratings, such as 'Baa3,' indicate that country's ability to pay back the debt and provide a secure investment environment. "This rating reflects factors such as a country's economic status, transparency in the capital market or political stability," the site said.
Based on this criteria, the government has had to do a number of things in order to secure the credit rating, Turnbull and members of his financial team said. While the need to develop a rating structure has been a topic of discussion for the past seven years, the project had been put on the back burner because of the government's need to tighten its financial policies.
According to a report issued by Moody's, the government had, in particular, a record of severe economic strain in the 1990s, marked by "heavy" deficit borrowing, "substantial" deferral of employee salary increases and "historically late" financial audits.
During Tuesday's conference, Turnbull said that the government has addressed these issues by completing 10 "comprehensive" annual audits in the past seven years. Additionally, efforts to replace the old financial management system are well under way, with the new Enterprise Resource Planning System (ERP) expected to go live Oct. 1.
Turnbull described the ERP as an "integrated system of accounting" which will juxtapose government revenues with approved allotments, appropriations and expenditures–along with various procurement, human resources, and payroll documents. Government departments and agencies are expected to have real-time access to this information once the system is launched.
While Turnbull added that the government has cut down on unnecessary costs (such as reducing the government's payroll from approximately 12,000 to 9,000 individuals), members of his financial team said that significant progress has also been made in investing in the local economy and addressing the government's debt — including the more than $1 billion unfunded liability plaguing the Government Employees Retirement System.
Over the past few months, Mills has outlined a number of initiatives that "make it clear that the V.I. is viewed as a very good investment market." Most significantly, he has described a number of appropriations included in the fiscal year 2007 executive budget–including $5 million earmarked for a "Rainy Day Fund"; $20.1 million for negotiated salary increases; and $30 million to address the unfunded liability.
During Tuesday's conference, Mills and Nathan Simmonds, head of the government's financial team, said they would be going a step further in paying off the more than $1 billion debt by issuing a pension obligation bond. While this idea has been discussed at various meetings held over the past year, Simmonds said Tuesday that the cost of issuing such a bond would be reduced since a credit rating has been established.
He said the bond issue is expected to yield between $300 million and $500 million, which would provide GERS with an immediate infusion of cash. The rest of the debt will be covered through various other revenue sources, including appropriations from the General Fund and the Internal Revenue Matching Fund.
"Any improvement in our financial situation, such as this credit rating, will help us with GERS," Turnbull added. "You see, the key here is that this rating makes it possible for us to do many more things, including continuing to improve our financial circumstances."
After the meeting, Mills added that the establishment of a credit rating is a "vindication" to many government officials. "There are those out there that have called for a Chief Financial Officer (CFO) to be installed here in the territory. Well today, I think we have showed that we can do it — that we've been able to get where we want to be without a CFO coming in."
Moody's is the first of three credit-rating agencies to issue reports granting an investment-grade rating to the territory. According to a press release issued Thursday from Government House, analysts from Standard and Poor's and Fitch Ratings are expected to issue reports shortly.
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