Gov. Kenneth Mapp’s administration projects a $110 million budget deficit for Fiscal Year 2017, which they hope to fill with $55 million in new borrowing and $55 million from refinancing existing debt, extending it out for a longer period, Budget Director Nellon Bowry told the Senate Finance Committee on Monday.
That deficit, which is similar in size to V.I. budget deficits each year since 2008, is based in part on revenue estimates that "assume some increase in direct and indirect taxes from a combination of increased employment in the industrial and government sectors, expiring EDC tax benefits and more aggressive collections by a strengthened IRB staff," Bowry said.
In February, Bowry reported that tax revenues were down from previous projections. (See: $220 Hovensa Windfall Honeymoon Already Over, in Related Links below)
Some sectors of the economy are doing well, increasing revenues, he said. Air visitor arrivals were up 1.4, percent, while cruise passenger arrivals were down 3.9 percent. Air visitors spend much more in the territory, he said, suggesting this is a net benefit.
Big capital projects, including sports complexes on St. Croix and waterfront work on St. Thomas, should also help the economy, as will a generally rising U.S. economy, according to Bowry.
"The General Fund will also benefit from proposed legislation accompanying the budget, which will redirect resources that are currently being siphoned off to other funds," he said.
When Sen. Marvin Blyden asked what fund transfers the administration meant to redirect, Bowry said they planned to ask for the $7 million per year in federal excise taxes on V.I. rum production that the Legislature directed toward shoring up the Government Employee Retirement System. The GERS has an unfunded liability in excess of $2 billion and is projected to liquidate its entire trust fund in less than a decade.
In 2011, the Legislature directed $7 million per year go to GERS, starting in 2012, but it never happened, due to budget constraints, and was $21 million overdue, as of last year. Earlier this month, GERS announced it had received a first payment of $7 million.
Bowry indicated the administration hopes that to be the last payment. Regarding GERS’s pending insolvency, Bowry said, "We need to address it structurally. We need to address it comprehensively. Simply dribbling $2 million here or $3 million there doesn’t get you there."
He said the administration would propose a plan to "restructure" GERS before the end of the year.
"My take on it is it is going to require a restructuring of the whole system. … There are going to have to be some very tough decisions," Bowry said, adding they expect to submit a plan before the end of the year. There are few, if any, options for restructuring GERS that will not require sharp benefit cuts combined with extreme contribution increases. (See: GERS Collapse Will Come, Retirees Better Start Planning in Related Links below)
The territory is also struggling with a structural deficit of about $100 million per year, stretching out into the future. Bowry said that, along with debt restructuring, the administration would "come up with a plan that we hope will get us from where we are to substantially eliminating that debt by 2020."
Just cutting the budget is not an option because it would mean sharp cuts in public safety and education to great harm to the community, Bowry said.
He said they would present this plan "by the latter part of this summer. By the (budget) wrap-up sessions."
Borrowing cannot solve the problem indefinitely. Last fall, Finance Commissioner Valdemier Collens told senators the territory has about $400 million in remaining debt capacity. That would be exhausted in about four years, if borrowing alone were used to fill the deficit. (See: Territory Cannot Afford Enough Pension Obligation Bonds to Save GERS in Related Links below)
Sen. Almando "Rocky" Liburd asked if the territory was at risk of a debt situation similar to that of Puerto Rico, which is reeling from a debt crisis and partial default on its debt payments. Liburd mentioned an article in Bloomberg Report (See: Bloomberg News: More in Debt Than Puerto Rico, the Virgin Islands Rejects Rescue in Related Links below) that quotes Mapp and Delegate Stacey Plaskett saying the territory is not in the same situation.
But Liburd said the authors argue "the debt of the Virgin Islands is about $23,000 per person, versus Puerto Rico, which is $20,000, so they are saying our debt is even worse than Puerto Rico and the pattern they are seeing is similar."
"Does that raise a red flag here in the territory to you?" Liburd asked.
Bowry said, "I don’t think we had to wait for Bloomberg to raise the red flag. I’ve been saying for a year now that we have a structural deficit of more than $100 million."
"The answer is, we have to grow the economy. … Right now the economy is being held up by government spending and tourism. We have lost the manufacturing sector. … We need to find replacements," he said. But Bowry insisted the USVI is in a better position than Puerto Rico, for several reasons.
"One of the huge differences between us and Puerto Rico is most of our debt is not general obligation debt. A lot of our debt is tied to the rum revenues. A lot of WAPA’s (the V.I. Water and Power Authority’s) debt is tied to WAPA," while a lot of Puerto Rico’s debt and its utility PREPA’s debt is general revenue debt, he said.
The total proposed budget, including federal funding, revenues for services at the hospitals and other government entities and debt service, comes to $1.35 billion. Of that, $1.16 billion is local funds and $193.5 million in federal funds, according to the draft budget [Fiscal Year 2017 budget]
The General Fund will pay $844.9 million in agency expenses, with another $112.8 million from other local funds and $203.4 million from funds not subject to annual appropriations, such as hospital revenues.
The $844.9 million budget includes a proposed expenditure of $715.5 million for executive departments and agencies; $60.9 million for the Legislature and the Judiciary combined; and $68.5 million for long-term debt service.
The government has about $67 million in cash on hand, or enough to make expenses for around 33 days, Bowry said. The government would prefer to have closer to 180 days of cash on hand, he said.
Many agencies are seeing small increases in overall funding, reflecting pay increases implemented earlier this year. Administration officials said that the pay increases do not hurt the budget as much as their nominal totals, because employees pay taxes on their income, then spend the money in the local economy, increasing tax revenues in other areas.
The Department of Education, by far the largest department with the largest budget, has proposed 2017 General Fund funding of $167.1 million, up from $154.5 million in 2016.
Human Services, which has seen a large increase in clients since the recession and which saw increases in recent years, is budgeted at $69 million, up dramatically from $59.3 million last year and $62.3 million in FY15.
The V.I. Police Department has a proposed 2014 General Fund budget of $63.1 million, up from $59.2 million last year.
The Bureau of Correction’s recommended appropriation is $35.9 million, up from $29.9 million last year.
Health is looking at $23.3 million, up from $19.9 million in FY 2016.
All committee members were present, including Blyden, Sens. Clifford Graham, Jean Forde, Myron Jackson, Positive Nelson, Tregenza Roach, Sammuel Sanes and Kurt Vialet. Noncommittee members present were Liburd, Sens. Kenneth Gittens, Justin Harrigan, Neville James, Nereida Rivera-O’Reilly and Janette Millin Young.