With a firm “no” from investors, the Government of the Virgin Islands has halted its efforts at the bond market and is returning to a five-year plan that proposes a number of new taxes designed to raise enough money to get the territory through this budget year, Gov. Kenneth Mapp said Friday at a news conference on St. Croix.
In late 2016 the Legislature authorized the sale of approximately $247 million in new bonds, but in December the government decided to "turn away" from its first attempt at the bond market because of unfavorable conditions, Mapp said. After a second attempt Wednesday, the government decided to “abort” the transaction after finding that there were orders for only $127 million in senior lien bonds and $13 million in subordinate lien bonds.
The “incomplete appetite” of investors for V.I. government bonds was due to the territory’s growing reliance on debt to pay current expenses, and the federal intervention in neighboring Puerto Rico’s debt crisis, which have affected borrowers’ perceptions of V.I. creditworthiness, leading all three major bond rating companies to downgrade U.S. Virgin Islands debt, increasing the likely cost of borrowing, Mapp said at Friday’s press conference.
In past borrowing transactions, Mapp said, the government was supposed to have put forward a plan for resolving its structural deficit, which would give bond holders more confidence. But in the end, “no plan ever materialized.”
“The point I would like to make is that the option to do nothing and simply borrow money is no longer an option,” Mapp said Friday, adding the government now has to “make some hard decisions” in order address investors’ concerns. And in order to do that, Mapp said that he will re-submit a proposal for new taxes, including taxes on cigarettes, alcohol, sugar – specifically on carbonated sugar beverages – and timeshare rentals that has already failed to gain approval.
Mapp first proposed the five-year package in December and called the Senate into a special session to act, but senators rejected the tax increases for the time being, saying they wanted to get more input from affected businesses before acting.
Mapp said Friday that meetings with the Legislature and members of the business community, including representatives from the Chambers of Commerce in both districts, were recently held and a plan, which included the sin-tax package, was hatched. The plan also calls for a levelized property tax fee that prevents home owners paying more than $360 a year from applying tax credits to bring their payments down.
Mapp said he had submitted all bills, except the property tax proposal, to the Legislature for approval. Meanwhile, he also said that in discussions with the business community, the government also made a commitment to cut down on its General Fund expenses and streamline the Economic Development Tax benefits program so that a certain number of businesses can come in each year and receive a turnaround on their application of 90 days or less.
“In short, the investor community is being very clear and concise and said to us that when and if we enact by our political will a financial plan to move the government to fiscal stability, they will have much interest in giving us full and unfettered access to the capital markets. But on the current trajectory, without having a fiscal recovery plan in place, we are simply adding debt upon existing revenues with very little room to reduce expenses to cover the difference,” Mapp said.
If nothing is approved or put in place, he said, the government will have to take $110 million out of its budget this fiscal year, which could result in the closing of some government offices, furloughs, and a “curtailing” of government operations, including payroll, which he said would be fine for January, more difficult in February, and “impossible” to cover in March.
“The rejection of new and immediate revenues into the territory … would be a decision equal to saying that we will be cutting 11 to14 percent of the budget in order for the government to be sustained,” Mapp said. “That $110 million removal from the current budget, well, I am not prepared to stand before the community and say this is exactly what that means. But I cannot believe that there is any person in this territory that believes that the removal of $110 million from the operating budget of the government would be an action that is painless.”
While Mapp added that he has scheduled tentative meetings with the Legislature and believes its members are ready to work on a solution, some senators issued a joint press release Friday saying that new taxes may not be the right answer.
In a statement issued Friday, Sen. Novelle E. Francis, Jr., said he has a number of concerns about Mapp’s plans and urged the governor to look into "more fiscally responsible measures to avert any possible cash flow issues.”
The senator said the government would be in a better financial position if “long-planned capital projects had begun as promised by Mapp and members of his administration.”
“They have continuously told us that they are ready and we have facilitated the execution of these plans with funding and then nothing has happened,” Francis said.
Meanwhile, Sen. Sammuel Sanes added that increased taxation is not what the territory needs.
“To increase taxes on the backs of the people of this territory will not improve the financial wellbeing of our economy,” he said. “It is essential that input is included from the private sector due to the fact that the economic plight we are facing affects everyone in the Virgin Islands.”