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The V.I. Budget Crisis Part 4: Debt or Spending? What To Worry About

The V.I. government is at a crossroads, facing budget deficits, growing debt and an inability to borrow.

The first three parts of this series dealt with how we got here and the roles of the closure of Hovensa and growing insolvency of the Government Employee Retirement Plan. But is the problem the growing debt or is it spending that leads to deficits that expand the debt?

How Big A Problem is Debt?

Present and past V.I. government officials, speaking on background, have suggested the problem may not be the size of the debt but the persistence of deficits with no way to cover them except more debt. If so, that would mean budget cuts and revenue increases, whether by direct tax increases, an expanding economy or improved collections, may be the only ways to actually solve the crisis.

Debt is going to be around for awhile and is large. But if the issue is deficits, maybe a few changes can put the territory back on track.

Whether the government is able to borrow or not; whether it defaults on bonds at some point in the future or not, it must find a way to pay for basic government services. It can raise money with higher taxes and it can cut the cost of government by increasing efficiency and eliminating less essential costs.

Mapp proposed a five-year plan, involving $430 million in new borrowing, with $147 million in working capital, or borrowing to directly supplement the government’s operating budget. But that borrowing appears to be off the table now.

Mapp’s plan also aims to increase revenues by about $716 million through a combination of new taxes, economic development through capital expenses and optimistic plans for a massive expansions to the V.I. Economic Development Authority’s tax break program, hoping to bring $25 million per year in new revenue by enticing financial firms to set up shop in the territory and pay relatively small fees in exchange for 90 percent tax breaks.

The Legislature recently approved some tax increases on alcohol, tobacco, soda and time shares, that are expected to generate $25.5 million or so per year, along with a $360 floor on property taxes that should generate a similar amount.

But even if the plan is completely successful and generates as much as the administration projected, it will still leave a $56 million deficit after five years, Finance Commissioner Valdamier Collens told senators in December 2016. And some doubt whether such a large expansion in revenues from the EDA’s tax break program is plausible. After all, expanding the EDA program has been a priority for the government for many years and it has not happened. And in 2012 the government loosened EDA tax break requirements, cutting the number of employees required from 10 to 5, reducing the personal income tax contributions from the program. So more will need to be done.

Figure 6: Debt, Revenues and Debt Service 2004-2016
Figure 6: Debt, Revenues and Debt Service 2004-2016 (Click on image for larger view)


Looking at the territory’s debt, debt service payments and revenues, while debt has skyrocketed, debt service costs have grown much more gradually, and are relatively small compared to the territory’s revenues. So if the deficit is reduced, the payments do not appear at a glance to be too much.

Figure 7: What the USVI spends its budget on; the largest line items, (2004-2017) (Data compiled by Bill Kossler from historical V.I. government budget records)

But if you look at what the government spends on, you see that the costs of debt service, along with the cost of rum subsidies, have not just increased, but are crowding out other spending. This is even more clear if you look at what the USVI spends on, proportionally.

Figure 8: What the USVI Spends On, Proportionally (Click on image for larger view)
Figure 8: What the USVI Spends On, Proportionally (Click on image for larger view)

Debt service may not have increased that much compared to all spending, but any increase means that money cannot go to other programs. So the debt is a growing problem. But if the deficits are removed, the debt will take care of itself. Which brings up spending:

Uncontrolled Spending?

Many Virgin Islanders believe the V.I. government’s wasteful ways and spending are to blame for its budget woes. Is this true?

There is waste to be sure. The V.I. Police Department alone spent more than $14 million just on overtime last year – around 28 percent of its total payroll. Many other departments have been plagued with excess overtime, persisting over many years. More than one audit has found a chronic lack of documentation to prove the overtime work actually happened. The territory’s hospitals have for years spend extravagantly on traveling nurses instead of hiring locally – because of difficulty hiring enough permanent nurses.

It does not help appearances when Mapp increases pay for his commissioners. The governor and senators are among the highest paid in the nation. But the governor’s office budget and the Legislature combined are not a large portion of the total budget. And the territory needs a governor and Legislature.

Looked at from above, it looks like most large government agencies are starved for funds, not overfunded. Most departments have not grown much in recent years when the government’s budget went from small deficits and occasional surpluses to consistent large deficits. Departments are hurting. Education, the biggest department and by far the biggest line item in the budget, has huge unfunded capital needs and shortages of teachers and nurses. Its budget has grown, but shrunk again, so that it is now about the same size as it was in 2004.

The courts have been warning for years they lack sufficient funding to cover basic expenses – and funding has not been steadily rising. The police department is consistently short staffed and department pay is low. The Waste Management Authority lacks the funding to close down its landfills and the territory is right now attempting to get around the funding problem with legislation mandating a comprehensive recycling program to divert much of the territory’s waste away from the landfills. The Bureau of Corrections apparently lacks the resources to meet long-standing consent decrees regarding the condition of its facilities. Both hospitals are routinely unable to pay their utility bills and periodically cannot buy needed supplies. Multiple agencies have faced budget cuts lasting multiple years. And the government has been implementing an array of austerity measures.

When you look at the major spending items, what should be cut? Cutting education means even fewer repairs to the territory’s schools and fewer teachers. Cutting the police department has obvious consequences. Cutting hospitals can cost lives. No government expense large enough to make a difference to the deficit is easily chopped without dire consequences.

What has increased are: debt service; cash subsidies to rum companies, “miscellaneous” funding to an array of special projects, charities, nonprofit and community organizations; and funding to the Human Services department.

More than half the “miscellaneous” budget is insurance premiums, especially the rising cost of health insurance for government retirees, which cost $37 million in 2016. At an April 19 press conference on delinquent tax collection efforts, Gov. Kenneth Mapp raised the idea of changing the contribution structure for retiree insurance, reducing the government’s subsidy for insurance for retirees and especially retiree family members, as a possible money-saving measure. That may be an area to look at.

But unless insurance is eliminated altogether, it will be only a marginal saving that can only help as part of a larger basket of many cost-saving and revenue-generating measures.

But chronic shortfalls where the rubber meets the road might still hide waste and bloat elsewhere. It is still worth looking to see if there is bloat in Education Department management that could be cut without cutting teachers or maintenance, or in Human Services management, without cutting the people actually providing direct services to clients. Since there are large unmet needs in both Education and Human Services, if savings are found, they may be best spent elsewhere in the same department and may not dramatically affect the government’s budgetary bottom line. But providing better services for the same funding would still ease budgetary woes and improve Virgin Islanders’ quality of life.

Later installment in this series will take a closer look at possible bloat in some government agencies and how much surgical cutting might be done without killing the patient.

But in the end, neither waste nor excess spending are the main causes of our difficulties and cutting them is only part of the solution. There are many culprits, but the main ones are loss of revenues due to Hovensa closing and decades of insufficient payments into the Government Employee Retirement System along with benefits and retirement ages that were too generous for the available funding.

Next: Part 5: Weren’t Rum Funds Supposed To Save Us?

Read the whole series:

How Did We Get Here, How Do We Get Out?
The V.I. Budget Crisis: Part 2, The Hovensa Effect
The V.I. Budget Crisis, Part 3: The GERS Time Bomb
The V.I. Budget Crisis Part 4: Debt or Spending? What To Worry About
V.I. Budget Crisis Part 5: Weren’t Rum Funds Supposed To Save Us?
The V.I. Budget Crisis: Part 6, Technology Park Tax Breaks
The V.I. Budget Crisis: Part 7, What About Horse Racing and Casino Gambling?
The V.I. Budget Crisis: Part 8, Gubernatorial BloaThe V.I. Budget Crisis: Part 9, Hyperactive Legislating
The V.I. Budget Crisis: Part 9, Hyperactive Legislating
The V.I. Budget Crisis, Part 10: Chronic Overtime
The V.I. Budget Crisis, Part 11: Education, Where The Big Spending Is
The V.I. Budget Crisis, Part 12: What Else Can the USVI Do To Help? Rationalizing Government Agencies
The V.I. Budget Crisis: Part 13: Finding New Revenues – AirBnB and Marijuana
The V.I. Budget Crisis, Part 14: Medicaid and Medicare
The V.I. Budget Crisis: Part 15, Rum and Congress
The V.I. Budget Crisis, Part 16: Irma and Maria Make A Bad Situation Worse
V.I. Budget Crisis Part 17: Federal Help Is Coming, But Not Enough
V.I. Budget Crisis, Part 18: Honesty Makes the Best Policy
V.I. Budget Crisis, Part 19: Congress Can Still Do a Lot – But If It Doesn’t, Brace For Impact

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