Gov. deJongh compares V.I.'s economy to Detroit's
Published: August 9, 2013
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ST. THOMAS - In his remarks before the St. Thomas Rotary Club on Thursday, Gov. John deJongh Jr. drew a sharp and clear analogy between the economic state of the territory and that of Detroit, which declared bankruptcy in mid-July and gave the country's economic forecasters a severe case of jitters as the aftershocks to municipal bond markets remain unclear.
Also unclear is whether Detroit's filing, the largest municipal bankruptcy in U.S. history, will set off a trend, as Detroit's financial woes, though monstrous in scale, are hardly unique to the city.
"If you look at Detroit's problems: general fund deficit; loss of major manufacturing; pension liability problem. And if you look at the Virgin Islands: general fund deficit; loss of major manufacturing; pension fund problems, that's why I don't sleep every night. I worry every two weeks about payroll. I worry about health care costs," deJongh said.
Specifically, the governor was responding to audience questions about the $1.8 billion unfunded liability associated with the Government Employees Retirement System, which actuarial data studies have projected will be completely insolvent by 2023.
Currently, the governor said, GERS' ratio of contributing employees to retirees is one to one, and every year it continues to be unfunded by between $70 and $84 million, depending on different sources and analyses.
The only real, long-term solution to keeping GERS solvent is the economic growth of the territory to stimulate revenues, according to deJongh. Drawing on lessons learned from the bankruptcies of about 36 municipalities that have declared bankruptcy since 2000, deJongh said of the GERS problem:
"I don't think we can look at tax increases as a way to deal with this problem. It's unsustainable."
What the governor proposes instead is to direct at least 2 percent of rum coverover revenues to the ailing retirement system. He said after his address that he would have liked to have done so as early as 2009, but, because of the recession, rum revenues were fed into the General Fund to give the government a source of much-need working capital.
In his address Thursday, the governor made no bones about his displeasure with the senate's rejection of the proposed fourth amendment agreement with HOVENSA after the closure of its oil refinery on St. Croix, highlighting that the closure had exposed the degree to which the territory relied on HOVENSA as an economic player. The refinery had accounted for more of the Virgin Islands gross territorial product than tourism, and with its closing, "12 percent of the private sector income had been wiped out," he said.
Thus, there are parallels between the loss of the refinery and the crumbling of the auto industry in Detroit, according to the governor.
The third factor which the governor cited as a cause for Detroit's bankruptcy, a General Fund deficit, has presented itself in the Virgin Islands - with the governor and the Legislature still working to patch a $20 million hole in the Fiscal Year 2013 budget and anticipating a similarly sized shortfall for FY 2014 in light of a new Medicaid expansion matching requirement. However, Detroit's per capita debt at the time of its bankruptcy still outstrips the financial situation in the Virgin Islands.
With $18.5 billion in borrowed funds and population reduced by high unemployment and suburban flight from 1.8 million in 1950 to 700,000 today, Detroit's municipal bond ratings had dovetailed to "C" and "D" grade on the Fitch agency scale. With a population of 106,000 and a little more than $2 billion in overall debt, according to V.I. Finance Commissioner Angel Dawson Jr., the Virgin Islands is holding steady with most of its general obligation bonds in the BBB category, making them solidly investment grade.
Also, $1.3 billion in separately rated matching fund bonds, tied to the rum coverover revenues, have equally healthy or better ratings, Dawson said.
Dawson also said the degree to which the V.I. government is relying on bonds for working capital is declining significantly from the height of the recession.
Dawson was supportive of the idea that more money be directed to GERS from rum revenues, and he said, if the administration increases government contributions to the system by 2 percent each year through 2017, the revenues definitely could support that. A 2 percent increase of contributions in FY 2014 would require $5.9 million, for instance, and the projected net revenue from rum would amount to $88 million. Even if a 2 percent contribution from the government reached as much as $24 million by 2017, rum revenues are similarly projected to rise enough to make the governor's idea a viable short-term option, Dawson said.
The caveat, according to Dawson, is that the redirection of rum revenues to GERS would mean less rum money for General Fund deficits, meaning that the government would risk fixing one problem by a solution that could exacerbate another.
Sen. Terrence Nelson voiced concern about the reliance on rum revenues, which has become an economic panacea, with perhaps more debt tied to them than could be born realistically. He added that he was opposed to the agreement with one rum company because he thought that the agreement shortchanged the Virgin Islands.
According to Nelson, many of the economic ailments that led to the comparison with Detroit are the result of bad fiscal policies the administration has put in place, with federal economic stimulus money escaping circulation locally because of the hiring of off-island contractors and subcontractors and an unjustified amount of government money funneled to private consultants who do not contribute to GERS.
"It is amusing to hear that the governor is saying this because the governor created some of this deficit spending through his hiring practices, through his contracting practices and through his borrowing practices," Nelson said.
Nelson said the broader lessons to be drawn from Detroit's failures are: "Not to put all of our eggs in one basket, to diversify our economy, to instead of investing in large corporations, we should focus more on small businesses and startups."
- Contact Amanda Norris at 714-9104 or email firstname.lastname@example.org.