Cruzan says it needs more money from V.I. to survive
Published: June 14, 2014
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ST. CROIX - Cruzan Rum officials told the 30th Legislature on Friday that the company is struggling and will need more money from the government's coffers to survive.
Cruzan used to be the industry leader in the bulk rum business, but in just more than two years, it has lost more than 6 million proof-gallons of annual production to Puerto Rico rummakers - money that would provide an additional $45 million to the commonwealth's government in cover-over revenues this year, said Gary Nelthropp, president of the company.
"By offering superior incentives to its producers, Puerto Rico is reaping the rewards of Cruzan's former business as we speak," Nelthropp said.
Nelthropp, along with an official from Cruzan's parent company, Beam Suntory, and members of the governor's financial team testified at a Committee of the Whole meeting on Friday, pleading their case for more government subsidies for the rum-maker through another change to its 2009 agreement with the government.
Senators and government officials have had a number of meetings with the rum-maker behind closed doors leading up to the current proposal that Gov. John deJongh Jr. has submitted.
The 30th Legislature is likely to consider the bill at a session scheduled for Wednesday.
Nelthropp said Friday that with the level of government subsidy Cruzan gets right now - at 25 percent of the cover-over - the company does not have a level playing field because, he said, Puerto Rico "has moved aggressively and quickly to offer more favorable terms to their bulk rum suppliers."
He said Cruzan cannot compete.
"I have an obligation to this body, the people of the Virgin Islands and to the employees at Cruzan Rum to make this crystal clear. If this disparity is not remedied, and if changes are not made to our current agreement, Cruzan Rum will not survive," he said.
Management and Budget Director Debra Gottlieb said that the law in Puerto Rico authorizes government incentives for rum-makers up to 25 percent but allows the governor to increase that level to 46 percent upon a finding of necessity.
When rum produced in the Virgin Islands is sold in the United States, a direct revenue stream is generated for the V.I. government through rum excise tax revenues.
For every proof-gallon of Virgin Islands-produced rum exported to the U.S. mainland, the federal government collects $13.50 in excise taxes, of which $10.50 is returned to the territory. That rebate is also called the rum cover-over.
In 1999, the U.S. Congress passed legislation that temporarily increased the cover-over rate to $13.25 per proof-gallon. Since then, that temporary increase has been renewed or extended multiple times, every year or two with a package of other tax measures. The higher rate currently is expired, but Congress is expected to consider renewing the extenders again this year.
Puerto Rico receives the same types of benefits from the cover-over program as the Virgin Islands.
The legislation that the governor has submitted would:
- Allow the governor to provide enhanced support levels up to 46 percent of the annual cover-over revenues from the company's rum production, upon "a finding that it is necessary to ensure the ability of Cruzan VIRIL Ltd. To compete in the U.S. rum market and to protect the government's cover-over revenues."
- Require that the governor notify the Legislature of any agreement to provide enhanced support levels within 30 days after making such an agreement.
"Pursuant to this authority, if granted by the Legislature, the governor is prepared to execute an agreement with Cruzan that would amend its current agreement and provide Cruzan with enhanced support during an extended transition period in order to enable Cruzan to compete with Puerto Rico producers, regain lost bulk rum volume and ultimately achieve at least 11 million proof-gallons in aggregate rum sales in the U.S. market," Gottlieb said.
Under the bill, the governor would be able to execute such an agreement without getting ratification from the Legislature - and without letting the public know.
Officials testifying in favor of the legislation Friday contended it would give the governor flexibility and discretion and allow Cruzan to be more competitive.
Some senators raised concerns about transparency with public money.
Senators spoke of a Catch-22, in which the government cannot afford to give up additional cover-over revenue but also cannot afford to lose Cruzan, a company for which they expressed strong support.
Senators also suggested there may be amendments forthcoming to change the legislation, possibly requiring Senate ratification for any agreement made under the legislation.
- Contact Joy Blackburn at 714-9145 or email firstname.lastname@example.org.