The U.S. Virgin Islands is still in a state of financial crisis, and the government’s structural debt has continued to increase, Gov. Albert Bryan’s financial team told the Senate Finance Committee Tuesday in remarks that echoed Bryan’s State of the Territory address.
“The state of our territory is distressed and still very much mired in financial and economic crisis,” said Kirk Callwood, Finance commissioner nominee, reporting deficits as high as $415 million at their peak, that he stressed had “accumulated over time.”
Tom Vouzakis, deputy director at the Virgin Islands Public Finance Authority, reported $861 million in general obligation debt, backed by gross receipts taxes, as of Jan. 31 and some $802 million in revenue obligation debt backed by matching fund revenues.
Callwood said that with the current debt load, accessing capital markets is impossible and turning that situation around might take up to three years.
“We need to really gain the confidence of the markets, of the investors, we need to reduce our structural deficits,” Callwood said. “For the the most part, we need to show that the Virgin islands can handle its fiscal priorities and really spur economic growth.”
The V.I. government currently has $36 million for cash-at-hand, according to Callwood, which did not sound right to Sen. Donna Frett Gregory (D-STT), who chairs the Senate Finance Committee.
“That is concerning to me because $36 million equates to 16 days. This is not a true representation because there are vendors that are still unpaid,” she said.
Callwood reiterated what previous finance commissioners stated before: that the territory was already in financial trouble long before the 2017 hurricanes, and since the storms hit the Virgin Islands has been hanging on to liquidity largely through Community Disaster Loans. Some $215 million in gross receipts-backed CDL was split between three main entities: the central government received $145 million, Juan Luis Hospital got $42 million and Schneider Regional Medical Center received $28 million.
Revenue collections showed an increase compared to last year, with some $737 million collected as of Sept. 30, $710 million of which came from tax collections. But a variety of factors might drag this number down, Callwood warned. While the Virgin Islands government expects to collect $808 million by the end of fiscal year 2019, that amount is projected to drop to $793 million in fiscal year 2020, partly due to the recent court-ordered halt in gross receipts tax collection that has cost the territory $9 million as of Jan. 31.
New tax laws also come into play. A majority of the territory’s revenues coming from taxes, and the Trump administration’s Tax Cuts and Jobs Act is projected to reduce total income taxes, including individual and corporate taxes, by as much as 24 percent over the next five years.
Salary increases also ate up additional funding after the Mapp administration approved some $25 million in pay increases for fiscal year 2019. The Department of Education received a majority of that amount, some $14.9 million, while the Health Department and Human Services Department received more than $1.2 million and $2.5 million for salary increases respectively.
For fiscal year 2018, Callwood reported some $668 million in allotments to various government and semi-autonomous agencies. About $428 million went to the Executive Branch’s 29 agencies, roughly $40 million for the court system, $21 million for the Legislature and $98 million to semi-autonomous agencies, including the two hospitals, the University of the Virgin Islands and the Waste Management Authority.
Unspent Capital Projects Funding
Lawmakers pointed out that while the territory is in a fiscal crisis, millions in capital projects funding are barely touched. Vouzakis reported $105 million in unspent funding for capital projects, including $2.3 million for the Bureau of Information Technology, $2 million for the Bureau of Corrections, and other amounts meant for 911 upgrades and Department of Education projects.
“Of course, as much of this money should be spent as quickly as possible, and it’s up to the individual agencies to figure out how best to spend that. We have been in contact with the respective agencies, informing them of what’s unspent,” said Vouzakis.
Frett Gregory pointed out that some of the capital projects go as far back as 2001 and might not be fully aligned with the territory’s post-recovery work. Many of the projects, she said, including a $6-million Department of Education project, need to be assessed and realigned with the infrastructural repairs happening after the hurricanes. That conversation needs to happen and should involve the Legislature, she said.
“A full review has not been completed for each capital project. However, a number of agencies and departments have come to us in the past recommending that funds not going to be spent on the project to be repurposed or for that money to be used to pay off the debt service,” said Vouzakis.
Sen. Allison Degazon (D-STX) asked why the projects are not moving faster, but Vouzakis said it was hard for him to speak to the specific nature of each project, with much of the specifics known largely to individual agencies, not the PFA.
Tax Refunds and Collection
The government still lags behind on its tax refund payments, with roughly $128 million in tax refunds owed, according to acting Bureau of Internal Revenue Director Joel Lee. Approximately $40 million, or 10 percent of individual income tax revenues, were disbursed in fiscal year 2018, and an even lower amount, $38 million, is the executive budget for tax refunds for fiscal year 2019.
Lee also reported some $300 million in tax collection receivables, something that will become a main focus under his watch, he said.
“I know this is going to be challenging for taxpayers, but I am definitely going to be open for offering compromises to encourage them to come so that we get something instead of nothing,” Lee said.
Frett Gregory said the BIR needs to work closely with the Department of Licensing and Consumer Affairs to align business licenses with W2s and 1099s to better track who are neglecting to pay their taxes or filing them outside of the territory when they should be filing here. Lee said he is trying to build an internal system to align BIR and DLCA data to reduce gaps in collection.
Tax Assessor Ira Mills also said he projects $61 million in fiscal year 2019 collections, with 27 percent of that total already collected. Mills’ department is also pursuing roughly $25 million in delinquent taxes, he said.
Editor’s Note: This has been updated to clarify that the peak deficit of $415 million is not the annual structural deficit- which hovers closer to $150,000 – but the high-water mark, the peak deficit level, over several years of ongoing structural deficits.