Gov. John deJongh Jr.'s 2014 State of the Territory Address


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"I stand here tonight well aware that this is the last time I will deliver a State of the Territory Address to those of you in this Chamber and to the people of the Virgin Islands. So I wish to take full advantage of this opportunity. Tonight I will not only talk about what we have achieved, but also about what we must do in this coming year.

Seven years ago, when I stood here for the first time, it was a different time. It was a time of hope, as well as a time of accepting responsibility. I stood before you that January night and acknowledged the critical problems that we faced: the troubling challenges of a community where too many children are born into and grow up in poverty, the problems of crime and a crumbling infrastructure, of limited access to health care, and of schools that were failing our children. We recognized that jobs and business opportunities seemed to be passing us by. And we acknowledged openly the reality of corruption and criminal conduct within the halls of government. When I stood before you then, I declared that the state of our territory was troubling.

From the beginning, I knew that we had to bring together all of the agencies of our government - and redirect them to a common purpose. The theme of 'One Government' emerged as nothing less than the determination to change the culture of government to one of common purpose in pursuit of our common future.

Since that time, we have successfully managed our way through the greatest economic collapse in generations, which became known to the world as the Great Recession. We have pulled together and made one difficult decision after another. And we have persevered. We have weathered a swift and severe contraction in private-sector activity that many would have thought unimaginable, and through the collective, determined effort of those across our community, we are now beginning to experience the rebuilding of our private economy. Yes, the destruction of hurricanes Hugo and Marilyn may have been the more easily seen, but the damage that has been done to us recently is just as great and more prolonged.

As trying as this has been, however, as I stand here tonight, I firmly believe that if we do not give back the gains we have worked so hard to achieve, if we do what we must do this year, and if we succeed with the restarting of the HOVENSA refinery, we are on the cusp of our long-sought economic revival. Because, as we have struggled to survive, we have also been working steadily to build the foundation for that revival. We have reinvigorated our economic development programs. We are broadening our economic base to include knowledge-based enterprises. Our own "government-constructed superhighway," our broadband infrastructure, will rival any in the world. We have approved and permitted hotel and resort projects, undertaken the expansion of our piers to handle increased traffic, and we are investing in our downtown areas. And from before they start school, we are investing in the early development of our children, so that they will grow up able to seize these opportunities.

When I came into office, I laid out a long-term plan to achieve fiscal balance and address the chronic underfunding of the Government Employees' Retirement System. I knew that we had to develop new revenues to fund the pension system and our chronic General Fund deficit. We targeted the cover-over program because that was the single most powerful tool provided by Congress.

Our plan was straightforward: We would grow our rum industry by entering into long-term partnerships with rum producers, with a particular focus on owners of rum brands. The logic was simple: If they committed to exclusive production here in the Virgin Islands for the long-term, we would invest in their brands. And the return on our investment - the resulting growth in cover-over revenues - would be dedicated to the pension fund and the deficit.

Our plan succeeded. Since our plan was put into place, our cover-over revenues available for government purposes have already grown from $62 million in 2006 to $146 million this year, assuming that we will get the extenders as we have in all past years. And although we may look back today with regret that we do not have all of this money available for our pension system and the General Fund, we must acknowledge that but for this money, we would never have been able to survive to where we are today. Because, over the first five years of my administration, three events - all of them completely out of local control - undermined not only our plans, but our also ability to fund our Government.

Let me take a moment to review this history. From our first budget year 2008 to 2009, our corporate income tax receipts dropped by over 70 percent, or over $125 million annually. In one fell swoop, almost 15 percent of our total General Fund revenues disappeared. This was due to two factors, the collapse of the HOVENSA refinery's profitability and the federal Internal Revenue Service's now-discredited actions taken against our EDC beneficiaries.

In any normal time, a decline in tax revenues of this magnitude would have been an unmitigated disaster and would have left us with no choice but to cut spending by an amount equal to the lost revenues. But we knew that we would soon have new revenues as a result of our rum industry strategy. And so it was possible for us to avoid the devastation that would follow immediate budget cuts in excess of $125 million.

We should note, that this first blow to our taxes and revenues came before the world was plunged into the 2008 financial crisis. The impact on our economy and tax revenues from this second shock, however, was not immediate. It took well into 2009 before it affected our core revenues, and some actually lived under the illusion that the impact of the global financial crisis might pass us by. But the eye of this storm struck us all.

The combined impact of the Great Recession and the earlier events, all outside of local control, was catastrophic. In one year, our overall revenues dropped 31 percent. Our private sector simply died, as tourism, construction, real estate, retail sales and other economic activity ground to a halt.

The collapse was of such a magnitude that it quickly depleted our cash. The traditional rules of government finance dictate that we should have matched this revenue decline with an immediate layoff of government workers of equal cost, but I was not willing to lay-off such a massive number of our workers, as the impact on our society would have been crippling. The Legislature recognized the urgency of the situation, and ultimately authorized $480 million of funding secured by future Matching Fund revenues - our rum revenues - to keep our economy alive through the worst times, 2009 to 2011. These borrowed funds allowed us to continue to function as an employer, as a provider of critical services and as an underwriter of capital projects that not only supported private sector activity and employment during the crisis but would be part of our future recovery.

The total level of deficit funding during those three years alone represented 21 percent of total General Fund spending, or 36 percent of personnel spending. In other words, we had lost the dollars to pay for one out of every three of our government workers. And that is why, rather than lay off one-third of our workers, not to mention stopping all spending on critical capital projects, support for semi-autonomous entities and support for community organizations, we borrowed. We borrowed to keep people at work and to keep the rest of our economy from further decline.

By 2011, our tax revenues began to pick up as the economy began to improve. As revenues stabilized, however, we had to come to grips with a new fact - a very unwelcome new fact. For even though things were getting better, we never got close to where we were before. Our core revenues remained 20 percent below pre-recession levels. What this meant, in the simplest of terms, is that we still did not have the money to pay for one out of five of our government workers. And so, we redoubled our efforts to reduce our spending. I recommended an 8 percent reduction in staffing across the board to bring down the size of our payroll on an ongoing and permanent basis. The Legislature rejected that proposal, and instead chose to implement an 8 percent across-the-board cut in compensation, but only for two years.

At the beginning of 2012, the third blow came, as our largest single taxpayer and employer, HOVENSA, announced its closing. With no notice at all, we were forced to grapple with a new revenue hit of almost $100 million to our recurring revenue base. This was not a loss of tax revenues from HOVENSA - that we had already suffered before the Great Recession hit. Rather, this was the loss that came when the 2,000 residents who worked at the refinery lost their jobs. And with this came the loss of income at all the places they shopped or ate, the loss of all of the economic activity they generated. By the end of fiscal year 2012, our recurring revenues remained down by almost one-quarter from the levels four years earlier.

In the ensuing year and a half, we were forced to continue to reduce the size of our workforce, because when the Legislature allowed the 8 percent pay cut to expire, it did not legislate any new revenues to offset that cost. Continuing to borrow to fund current operations is no longer a viable long-term strategy, especially in the wake of the closing of HOVENSA. We must wean ourselves off of bond proceeds as a revenue source for budget purposes. We must acknowledge the structural changes in our economy.

The simple reality is that our economy today is not as big as it once was. Overall, our gross territorial product declined 13 percent from 2008 to 2012. In real terms - that is to say after taking inflation into account - the damage to our economy from all of the factors that I discussed earlier has been greater still, as our economy today is 22 percent smaller in real terms than prior to the 2008 collapse. Today, our economy is the smallest it has been in over a decade.

These are the facts.

We have not yet achieved balance in what we spend and what we take in. And just as we must all do at home, we can only spend the money we have - our credit card is maxed out. In government, this means reducing personnel costs, which are far and away our largest expense.

We have already taken steps in this direction. As of the end of fiscal year 2013, the number of executive branch positions funded from the General Fund is down to 5,167, a decline of 1,579 positions, or 23 percent of our workforce. And though there are some for whom facts never seem to matter when seeking to fan political flames and melee, it is worth emphasizing that the number of unclassified positions - political positions - has been reduced by 18 percent, while classified positions have declined by only 5 percent.

Even as we have worked diligently to reduce our spending, we have never taken our focus off of our long-term goals. Economic development has remained a top priority because I knew that we needed to work toward that day when the economy would turn and recover.

Tourism is, has always been, and likely always will be, our largest industry and critical to our well-being. And no one should ever lose sight of that essential truth. And our work in this area has been a great success. An important first fact we recognized is that travel agents, airline representatives, cruise officials, tour guides should not have to come to us, but that we should go to them. We wanted to meet them in their place of business, to ensure that they came to ours. Therefore, we gradually closed our physical offices, transitioned to a sales force, saved on rent and then went out to meet-and-greet.

Our Department of Tourism has worked tirelessly with the airlines to stabilize airlift, to increase the number of carriers serving the territory, even during a period of industry consolidation, and in particular to manage our way through the disruptive changes at American and American Eagle, and the relocation of the headquarters of Seaborne Airlines. These changes highlight the need for us always to keep our focus on what matters, and that is maintaining and growing air service to and between our islands.

Our efforts in cruise and air alike have born fruit, and over the past two years, we have seen the highest levels of air and cruise passenger traffic to our islands in more than a decade. And as we worked to meet the goal it set, St. Croix has grown from two ship calls in 2008 to the rising levels of today. And in one more confirmation that St. Croix is back as a cruise destination, this year the Island will host the Platinum Members Conference of the Florida Caribbean Cruise Association. And we ramped up our efforts to build on our historical ties with Denmark to establish new linkages into the European tourism market that will yield greater numbers in the years ahead, and lay the groundwork for our centennial celebration three years from now.

We have also laid the foundation for new growth. All of the hotel development projects on St. Croix have been locally permitted, and now only await federal agency approvals and improvements in the lending environment for the hospitality sector. We have done all that we can do locally to clear the path for these projects, including the passage of the Hotel Development Act to bring critical inducements to support new projects. These projects may still face other challenges, but we have done all we can locally and we will continue to do all we can to assist and promote those who wish to work with us to build our economy. Additionally, we are participating in a federal program that allows foreign nationals to obtain visas if they invest in job-creating projects here.

On St. Thomas, Jimmy Buffet's Margaritaville project is moving ahead on the site of the old Renaissance Hotel, and on St. John the Westin and Caneel Bay have major renovations under way to their premium properties. Additionally, on Water Island and through the efforts of the Department of Property and Procurement, we are currently evaluating expressions of interest to build a boutique resort on the site of the former Sea Cliff Hotel.

In other project areas, we have initiated the feasibility study for a theme park on St. Croix, and I have submitted legislation for funding a similar study on St. Thomas. The revitalization of Main Street in Charlotte Amalie is in process, and we will soon bid the work associated with the phase one re-design of Veterans Drive. Work has begun this month at Smith Bay Park, which will add parking and new public accommodations. We have put our support behind a marina development on St. John. And, having completed the Boardwalk in Christiansted, we are now moving to completion of the Town Plan. I have submitted legislation to provide the remainder of the funding needed for the demolition of the deChabert Housing. And I have also requested funding for the dredging of the Schooner Bay channel, which will bring small cruise ships to Christiansted.

We have also laid the groundwork for the long-term growth of the new economy, and streamlined business regulation to be more supportive of new business formation. We have eliminated some up front requirements for new businesses at the Bureau of Internal Revenue. An interested bidder can now access government proposals online through the Department of Property and Procurement. The Office of the Lt. Governor is engaging a contractor to fully automate the Division of Corporations and Trademarks. The Department of Labor has instituted its Virgin Islands Electronic Workforce System that provides online workforce development services and a database that helps people find jobs and employers find workers. This past August, we launched the Virgin Islands Virtual Information System. VIVIS is a collaborative effort that aggregates essential information from the Departments of Education, Finance, Labor, Health, Human Services and the university, to assist our residents in developing their education plans and assist them with their career choices.

And as we look toward the future, we do so knowing that the investments we've made in the world of fiber-optic high-speed Internet will pay dividends for years to come. I am speaking, of course, of the Virgin Islands Next Generation Network, which we have come to know as VINGN.

When we began the VINGN project, the Virgin Islands was ranked last in the nation in speed and availability of truly high speed broadband, with most of the community unserved or underserved by high speed Internet. With the combination of the federal grants we were awarded and the local funding approved by the Legislature, the VINGN fiber-optic network will connect all of the Virgin Islands, and when completed we will have as fine a high-speed Internet infrastructure as is found anywhere in the country. Virgin Islands businesses and residents, using the VINGN fiber network will ultimately be able to obtain service at speeds up to 1,000 times faster than previously available.

The VINGN fiber-optic ring connects more than 300 Community Anchor Institutions, which include public and private schools, the university, police and fire stations, VITEMA, and other government agencies, hospitals and clinics, public libraries, the courts, and the Legislature.

Currently, over 100 of the Anchor Institutions have been connected and are in the process of being tested.

VINGN's Public Computer Centers on St. Thomas, St. John, and St. Croix currently offer free use of computers, digital literacy training and free WiFi to the public, so that all our residents can learn to use a computer and access the Internet for research, job searches, starting a business, telework, online courses and the like. I am pleased to report that our residents are already taking advantage of this access. To date, over 3,000 residents have registered and over 1,800 have completed free training courses for their personal and professional development.

I look forward with great expectations to what our Territory will achieve with this technology.

Our business development initiatives have resulted in annual increases in our Economic Development Commission beneficiaries to a currently approved 83 beneficiaries. These companies are now one of our greatest sources of new job growth, and we have a roster of new applicants. In a close collaboration between the Port Authority, the Economic Development Authority and the St. Croix Renaissance Park, we are evaluating the implementation of a free trade zone to build a transshipment facility to handle eastern Caribbean trade.

We have created and successfully utilized tax increment financing, revised the captive insurance laws and recently submitted legislation to spur economic development in our towns and neighborhoods. To assist small business creation, we were approved by the Small Business Administration for participation in their export grant funding programs, which resulted in trade missions by some of our vendors to Denmark, Canada and Brazil, and our State Small Business Credit Initiative lending guarantee program was approved by the U.S. Treasury. To support access to capital and streamline the process, we are working with this body to combine the Government Development Bank and the Small Business Development Agency to create the Economic Development Bank. This will facilitate closer coordination with local commercial banks, and expand our participation in federal loan and grant programs.

Essential to this success has been our work in Washington. It took great time and effort to explain and build support in Congress and in the executive branch to reverse decisions at IRS and Treasury that undermined our EDC program. We have found it important to explain the legal foundation of our rum partnerships. We continue to press for parity with the states in health programs and to ensure our participation in the president's universal pre-K initiative. We have proposed changes in policy and law to allow our marine industry to grow again. We have fought for our fair share of federal stimulus funding, and we are fighting for a higher share of transportation road funding. And we continue to fight for Virgin Islanders to receive the same access to essential programs as all other Americans.

Our relations with the federal government are much improved. Responsiveness, competence and the improvements we have made in transparency and financial reporting have built a new relationship of mutual respect.

I am pleased that in a few days, the government will issue its Fiscal Year 2012 Audited Financial Statements. With the issuance of that report, the government will be up to date with the issuance of its audits for the first time in at least two decades. This milestone is critically important in our dealings with the federal government and to the financial markets and bondholders as well.

This improvement in our effectiveness in dealing with the federal government is also evident at the Virgin Islands Housing Authority, where we are looking forward to the end of years of federal control, and I have appointed and the Legislature has approved an advisory board to prepare for the transition to local control.

It is also evident in the work of the Bureau of Corrections. The difficulties in running jails and prisons when short-staffed and underfunded are easy to point to, but fairness requires recognizing that despite the continuing issues we are fully aware of, significant progress has been made. The long-running litigation brought in federal court by the ACLU has been settled, as has the litigation focused on Golden Grove. This averted a federal takeover of our jail and prison, which would have done little to solve the basic problems of our Corrections system, or any Corrections system, problems we know how to solve and will solve, though not before increased manpower can be hired, trained, and properly compensated.

All of this work with our federal partners is an important element in positioning our territory for the better days that are sure to come; better days that will be built on the foundation we have continued to work on even as we struggled for our economic survival.

And build we have and build we will continue to do.

We have invested over $200,000,000 in critical infrastructure:

- We have completed the Christiansted By-Pass and have begun work on Melvin Evans Highway;

- We have completed the roundabout on St. John, expanded Cruz Bay parking, invested in the beautification of Frank Powell Park, and commenced work on Centerline Road;

- We have developed a new Emergency 911 Response System and have built a new Emergency Management headquarters as part of a complete overhaul of our emergency management and response systems;

- We have committed to a new transportation infrastructure, secured new ferryboats for the St. John-St. Thomas route, and will be issuing a proposal for the St. Croix-St. Thomas route, and have new buses currently being manufactured;

- We will soon introduce harbor transportation to the Port of Charlotte Amalie to relieve traffic congestion;

- We completed and opened the new Charles W. Turnbull Regional Library on St. Thomas, have restarted the renovation of Fort Christian, and are completing Market Square;

- And we have implemented repairs and improvements to our recreational facilities throughout the territory, including the track facilities at our public high schools, and we are about to complete negotiations on a new Paul E. Joseph baseball stadium in the town of Frederiksted;

I have indicated to the Virgin Islands Housing Authority that I want to incorporate the site of the abandoned deChabert Housing into the Christiansted Town Plan; and we are working with the authority on the development of the Sugar Estate Senior Housing facility to start this summer; and,

We are continuing to support the work of the Virgin Islands Housing Finance Authority to promote homeownership at its current projects at Whispering Hills on St. Thomas and Bonne Esperance on St. Croix.

But even with all of this, we need to recognize that our most significant economic development opportunity lies just before us. I am, of course, referring to the future reuse of the HOVENSA refinery. From the announcement of the closure in January 2012 to the Legislature's approval in November 2013, this one item has consumed me and my team every day for those past twenty-two and a half months.

From dealing with the manner in which the owners shut the facility down with no notice and little regard for the impact on the community, to the practical but essential requirements for ensuring the continued availability of fuel for our utility company and gasoline for our cars, to protecting the salary payments and lump-sums due to employees, to convincing the owners to sell the refinery rather than just closing it down, to working through the process with our community, and ultimately to overcoming the opposition of those who were against the sale.

In the end, it was through the efforts of many, and the passage of legislation by this Senate, that we are back on track to getting the refinery reopened and operating. I want to applaud each and every one of you who supported us to get to this point.

Now, we are indeed moving ahead. HOVENSA has retained its investment banking firm, and already they are coordinating their work with the many parties who have expressed interest in acquiring and restarting the refinery. Two years is a long time for a refinery to remain closed, and each month that goes by increases the cost of retrofitting and restarting the facility. But the larger economic conditions in world oil markets remain favorable to a sale.

I expect we will have a continuing dialogue with the Senate over the course of the sales process, and with hard work and determination we will be back before the Legislature later this year with an agreement to reopen the refinery and bring hundreds of needed jobs back to St. Croix.

Although there is presently no heavy industrial activity on the south shore of St. Croix, we have been unrelenting in our efforts to seek redress for damages to our environment from such industrial activity in the past. We now know how better to define obligations with respect to the environment in the future, and such terms will be included in any agreement with a future owner of the oil refinery.

With respect to our efforts to seek redress for environmental damage, we successfully worked with Cruzan Rum to address the effluent and brown-stain discharge, and in the three legal actions associated with natural resources damages, we have settled with Alcoa for a clean-up of the site, are in negotiations with Lockheed for a settlement, and are in mediation with HOVENSA. And as requested by this body, we have met with the U.S. Environmental Protection Agency and U.S. Department of Justice to change the Supplemental Environmental Project approach and use of the $4.8 million to have both the EPA and HOVENSA removed from the process of determining how the funds are utilized.

The high cost of energy in our territory has long been a stressful and frustrating topic for the residents and local businesses of our islands. The issue of energy costs has been a vexing one for my administration and has consumed the hard-earned income of so many individuals and businesses. Yet this is also an issue where I do believe that we have moved from 'hoping we will change' to where we are now on the verge of the most dramatic change to our energy infrastructure in generations.

In retrospect, our long-time agreement with HOVIC and then HOVENSA undermined the rational development of our energy mix in the territory. While the discounted price of oil that we enjoyed for decades was a great benefit, it also provided false comfort that inhibited changes to our energy mix that might otherwise have been made earlier.

I think it is fair to say that over the past year, the momentum at WAPA has built, and a new energy future is coming into view. This year, WAPA broke ground on a solar project in Estate Spanish Town that will supply 4 megawatts of renewable energy to the grid on St. Croix, and is working on other solar, biofuel and wind projects. Water production costs have been lowered through the dedication of two state-of-the art reverse osmosis facilities. WAPA has completed the Anna's Retreat waterline project on St. Thomas and rehabilitated the water catchment on St. John. Most recently, it secured a $13 million loan from the U.S. Department of Agriculture to fund the advanced metering infrastructure and related technologies that will enable both residential and commercial customers to realize the benefits of distributive power generation. And we have contracted with two energy services companies that are making energy saving and water conservation investments, now at 45 educational facilities and the two hospitals, and will deliver guaranteed savings in energy costs.

All would agree, however, that it is WAPA's conversion project from fuel oil to propane that gives real hope of significant relief from high energy costs in the very near future. Last July, WAPA signed a turnkey master agreement with Vitol, a global energy company, for infrastructure construction, supply, and delivery of propane at WAPA's power plants. Vitol is financing all of the capital costs associated with the conversion that promises to reduce energy costs by 30 percent over the near term.

I have said many times, all elements of our future ultimately depend upon our success in improving our educational system. When we began our work, three of our four high schools were not accredited. Our students' performance was marked with low test scores at all levels and high dropout rates when they confronted the dual challenges of adolescence and academics. Our department consistently failed to properly spend or account for millions of federal dollars, which resulted in the oversight of a federally appointed third party fiduciary.

We have fundamentally changed how we look at education and at public schools. If there is any one initiative that I believe is the most important change we have brought to the challenges of preparing our children for a better future, it is that we have re-focused on the early years of our children's lives even before they go to school. Hence our priority on and our investment in early childhood education and the development of a comprehensive approach to social service delivery.

This has been the work of our Children and Families Council, chaired by first lady Cecile de Jongh, and the rationale for our groundbreaking implementation of a quality rating system for development centers. This is why we started the Parents University, to help our parents do the job only they can do, but do it better by being better informed. And this is why I started the Governor's Reading Challenge. And this is why these past years the gifts that Cecile and I are so pleased to route through Santa's hands into the hands of our children at the holiday parties we host on all islands have been books - indeed books written by local authors, local illustrators and local photographers.

Stating the importance of learning is not the issue, that is not enough, the challenge is being sure we expose each and every child to the joys of learning, the fun of reading, the fun of knowing. With a good start, I believe our children will make us proud. And this is our duty, all of us, every day, in big things and in little, a duty we meet by what we do as public officials, as parents and as teachers, and a duty that, most importantly, we must meet every day in the example we set as adults.

There is much that we have done, and it has taken a lot of hard work in our Education Department and in our schools. Our high schools are now all accredited, and we have initiated the process of being released from the stigma and expense of federal oversight. And with the conclusion of a long-standing tax case, I have submitted legislation to direct proceeds from that litigation to increase our support for early childhood education.

We know that we don't succeed with every student, despite that being our goal. We have recognized the drawbacks of social promotions in the early years of school, eliminated the practice, and have put in place drop-out and learning academies to assist those that require the extra push. We know that there is - and always will be - more to do both in existing schools and where we may need new schools. To this end we have continued to put in place the pieces to one day have a new school in St. John, and while movement has been frustratingly slow, I am confident that we will achieve this objective.

We have targeted the investment of professional development dollars to improve the effectiveness of our teachers in the classroom. And we continue to invest in our teachers and administrators with the expectation that as we improve the delivery of instruction by our teachers, and the quality of leadership by our principals and administrators, the outcome will be increasing student achievement and a stronger foundation for our children's learning. We have established standards that we are using to develop professional growth plans, and will use surveys, observations and review of records to evaluate their effectiveness.

A pilot program in 10 schools will be completed by the end this school year, and, based on these results, we will make needed refinements for a full implementation beginning with the next school year. Other education personnel, such as coordinators, directors, counselors and paraprofessionals, will be added to the effectiveness and evaluation system.

I think that we all know, both from our individual experiences, and from all the research into what works in truly preparing our children, that the essential ingredient for success is the special connection between exceptional teachers and their students. And we have two of those special individuals with us here this evening. Both of these individuals are committed to the success of their students, versed in best practices that foster inclusiveness in the classroom, and participate in continuous professional development to improve their ability to provide the best for their students.

And so, it is my honor this year, as every year, to recognize our District Teacher of the Year from the St. Croix District, who is also our State Teacher of the Year, Ms. Shabre Providence, and our St. Thomas-St. John District Teacher of the Year, Ms. Diane Tyson. Ms. Providence is a 4th Grade teacher at Ricardo Richards Elementary School and Ms. Tyson is a math teacher at Lockhart Elementary School.

Ms. Providence, Ms. Tyson, please accept our deepest gratitude for your dedication to your craft, and your commitment to our children.

And let me say once more to each and every student in the Virgin Islands, students fortunate enough to have great teachers like Ms. Providence and Ms. Tyson, and the many other fine teachers found in schools across our Territory, that helping you become successful as students, as citizens belonging to our community, and as individuals eager and prepared to live full and contributing lives, is a duty we work to achieve every day.

I would also note that we have pressed hard to assure that all of our residents at all ages are not hindered in their efforts and desire to fully participate in the life of our community. I appointed the first Americans with Disabilities Act Coordinator for the government, and with this appointment accepted a responsibility long ignored. Seven years ago, we inherited thirty legal actions against the government and we have closed all but four, we have all our departments and agencies conducting self-evaluations and transitions plans, we have re-instated the Development Disabilities Council, and in all our government offices we have individuals in each district who oversee compliance with the ADA.

Health care has been an inherently difficult problem for our territory, with our own fundamental and systemic challenges, in addition to those other problems facing the larger nation. While there seem to be many who have been taking pleasure in attacking President Obama's far-reaching efforts to address much-needed reforms to the health care insurance market, I, for one, embrace his initiatives, and salute his courage.

We have worked diligently and in partnership with Lt. Governor Francis, as chair of the Health Care Task Force, and Delegate Christensen, to aggressively maneuver through the obstacle course of the Affordable Care Act. I would like to express my appreciation to Lieutenant Governor Francis for his leadership and to the members of the Health Care Task Force for their work, which resulted in my decision to undertake Medicaid Expansion as the best option for the Territory under the Affordable Care Act.

We have implemented the first changes to the Medicaid State Plan in more than two decades to broaden the services and the access of those eligible. We transferred the Medicaid program from the Department of Health to the Department of Human Services to streamline the eligibility process for our clients and to improve access to support services. And we established a nationally recognized partnership with West Virginia's Medicaid Management Information System to reduce costs and improve services to our beneficiary community and to our medical providers.

Our health care system of two hospitals, two health centers, two federally qualified clinics, a cancer center, a cardiac center, residential care facilities, several non-government health programs, and employee and retiree health insurance plans, ultimately depends upon over $300 million in annual funding from the central government, and as such it must always be a critical area of attention.

Our most immediate problem is our hospital system and the financial challenges that our hospitals - most especially the Governor Juan F. Luis Hospital and Medical Center - face in a very difficult economic environment. We have good and dedicated staff in the system and our community is dependent on their good work. What we must address is an organizational structure that results in the duplication of resources and prevents the sharing of knowledge and the gaining of efficiencies of scale that could be achieved through system consolidation. I have discussed the challenges and solutions with the leadership of both hospitals, as well as members of the Territorial board, and I am prepared to work with members of this Senate toward the goal of creating a unified organizational structure for our hospitals in time for the next budget submission.

Just as important as the health of our residents is their safety and security, especially in times of emergency.

We have worked hard to ensure that we are well-prepared and ready to monitor and respond to any eventuality. We have placed great importance on the coordination of VITEMA with local agencies, with our federal partners and with the private sector. We have recently expanded this level of preparedness to encompass not just hurricanes but earthquakes and the likelihood of a tsunami, and are developing business continuity plans for the core departments and agencies to ensure the functioning of essential government services in a disaster situation. And this year, we are hosting the UNESCO Tsunami conference that will bring scientists and policymakers together to discuss strategies for dealing with catastrophic events and the need to establish a Caribbean tsunami warning system.

But what no community is prepared for, and what we must address head-on, is the continuing level of violence that has persisted in certain pockets of our community for far too long. We have called on the active support of the community in tackling this problem, and your response has been heartening. With community engagement has come measurable success in our efforts against violence. It is the willingness of the community, either through direct contact with the police or through CrimeStoppers, to report suspicious and dangerous activities that has been the single biggest factor in significant declines in both the murder rates and in burglary rates over the past year.

We have sustained our police staffing levels even as we have been challenged by budget constraints, by retirements, by resignations, and by convictions. And we continue to broaden our recruitment efforts, and have fully instituted the Peace Officer Standards and Training Council to achieve a baseline across all law enforcement agencies.

We have purchased new equipment, expanded our use of cameras, broadened our use of cutting-edge public safety technology, shipped convicted inmates out of the territory and invested in training of personnel. And we are seeing our judges be stricter on applying bail conditions and bail amounts. And a major improvement in the past year has also been the improved relations with our federal partners and their involvement in community based programs and the execution of joint initiatives.

We are doing all of this while implementing a consent decree resulting from a 2005 Use of Force finding that requires even more attention to detail, and sensitivity to process and procedures.

Yet, we continue to be plagued by violence that is driven by turf battles and retaliation; and as fast we put one perpetrator in jail, another raises his head. This vicious cycle continues to challenge us. It requires that we continue to engage at all levels. Our core commitments remain: if you do wrong, we will arrest you and prosecute you. And we will support our judges in doing what they must do under the law. And we will continuously look for new and better ways to reduce this violence.

This year, we will implement a strategy of community engagement that is built on a successful model developed by the National Network for Safe Communities. It builds upon the fact that violence in a community tends to be concentrated in very small areas, what are referred to as "micro" places or "hot" places. It focuses on the reality that the number of people involved in violence is itself small. Once these places and people are identified, law-enforcement personnel work with community leaders, social workers, religious leaders and elders to target and engage with those individuals to combat violent crime, and gun and drug trafficking. This is a strategy that engages with the community at all levels and has yielded results in cities across the country.

Notwithstanding all of the hard work we have done to date, we have not yet completed the journey to financial stability. This year we project a General Fund shortfall of more than $70 million. This deficit must be dealt with. None of the choices and decisions that confront us will be easy to accept or to implement, but choose we must. The need to act is unavoidable.

We have made it through the most difficult financial straits thanks in large part to our rum revenues, the 8 percent two-year salary rollback, and the increase in the Gross Receipts Tax to 5 percent, the only tax increase that has been imposed so far. While this increase was necessary to support the General Fund at a time of extraordinary fiscal strain, the Gross Receipts Tax is clearly a tax we must reduce or replace with a sales tax or other fairer and more easily collected tax. As our economy continues its recovery, I trust that this is a goal that we can accomplish.

Looking into the longer term, we should recognize that we are also no different than any other state or municipality in the United States when it comes to the threat of unfunded pension liabilities. Our Government Employees' Retirement System is our largest single public asset. It represents the savings of all who have worked and are now working for our Government. But it is also the single largest liability of our Government.

As we have discussed often, current projections by the GERS show that the System will run out of money to make its payments to retirees in less than 10 years. Once its investments are depleted, the retirement obligations will fall on the General Fund. Yes, the obligation to pay our retirees will then have to compete for the limited dollars in our budget with our demands for health care, for public safety, for education, and for the salaries of government workers. Today, we are facing a $70 million deficit without having to fund the over $200 million in retirement benefits currently paid by GERS. Just imagine the disaster that will be ours if we have to add this $200 million to the annual budget. This is the future we face if we fail to put the GERS on sound financial footing in the short time we have.

We have begun to take steps to avoid this disaster. I convened a summit meeting with system stakeholders to assure that all were fully aware of its scope of the challenge we face. We have fully implemented the Tier 2 pension reforms that have changed the economics of the system for new workers. We unilaterally increased the level of funding from the government. And in May of 2012, by executive order, I created a Government Pension Reform Task Force and charged it with the task of developing a comprehensive solution.

This task force included representatives of the private sector Chambers of Commerce, the unions, the government agencies most directly responsible for managing the government's budgets and finances, the Legislature, and advocates for the system's workers and retirees. And last May, I submitted the task force recommendations to the Legislature. Now is the time for us to work together to get this done.

Yes, these recommended reforms are harsh, but meeting this challenge is critical to all across our community. No one who participated in the work of the task force would have agreed to them if there were any other viable choices. Each member understood that some pain would be felt by all.

As we work toward balancing our revenues and spending, a further opportunity to help do so lies in the hands of the Tax Collection Task Force I created. Over the years, we have come to better understand the magnitude of the potential revenues that would flow into the General Fund if everyone across our community paid all the taxes that they owe each year.

The Task Force, which is comprised of representatives from the Department of Justice and the Bureau of Internal Revenue, has set upon the task of seeing that our government collects all that it is owed, and ultimately with recalibrating our annual revenue expectations. Their initial focus has been on tax years 2008 and prior. I have instructed them to be fair and equitable, but to also be tough but fair, and that they have been. They have increased the filing of property liens and levies on bank accounts, and will soon publish the names of those who refuse to pay what they owe, and will sue to collect what is owed. The Department of Justice is preparing cases for criminal charges against non-filers who have neglected their filing obligations.

It is now clear that our tax collection problem has grown over the years as a result of deliberate underpayment, as well as intentional non-compliance. That is to say, there are those across our community, both individuals and businesses, who are choosing not to pay what they owe. And let me tell you that the Bureau of Internal Revenue is well aware of the reports of credit card sales transactions being processed through St. Maarten, Alaska and elsewhere to evade taxes. And this problem has been compounded as others look on and say, "If they can get away with it, why can't I. If they don't have to pay, why should I."

Needless to say, this behavior increases the burden on those of us who do pay, and undermines our ability to raise the moneys we need, and indeed we do need more money if we are to balance our budget. 

Let us look at the $70 million budget hole we must fill and why we cannot avoid it any longer. If one looks ahead and knows that we will be $70 million short by the end of the fiscal year in September, we know that we cannot spend the amounts set out in the budget approved by the Legislature. This means spending must be reduced. Not reduced at end of the year, but reduced now. All of us are acutely aware of what this means in terms of the operations of the government. To spend more money now is to run completely out of money sooner.

Approximately half of our budget shortfall reflects the decision by the U.S. Department of the Interior not to advance cover-over funds to us based on the full $13.25 rate. This was a change from what Interior has done in the past and what we have relied upon in preparing our budgets for many years. The irony of this decision by Interior is that at the time of our greatest need - in the wake of the closing of HOVENSA - a closing that cost the government $100 million in revenues - and when the pressure on our budget was at its greatest - Interior changed their practice.

I propose that, if we all acknowledge and accept the risks that we will be taking, we can turn and focus our efforts at this time on how to find the balance of the budget shortfall that we know we must fund locally - regardless of when the cover-over extender payments are made. This we can do even as we continue our work in Washington to urge Interior to advance the cover-over funds, and for Congress to act, as they always have.

The balance of our deficit shortfall reflects our need to fund increased personnel costs resulting from the reinstatement of the 8 percent salary rollback, as well as the continuing increases in health care costs. We can no longer afford to underwrite health care costs with no limit, but until we take action, as I discussed earlier, these ongoing costs will remain a burden on the General Fund. If there is no action to address the overall deficit, our cash resources will not be sufficient to support current spending levels. If we do not immediately find new revenues, we will have no choice but to look again to drastic cuts in spending, which can mean only one thing: immediate action to reduce personnel costs.  

Perhaps we can agree to wait and see about cover-over, but we cannot wait and see about the balance if we are to keep our government operating. We can bicker, we can play the blame game, we can talk about cutting back on things that generate insignificant savings. Or we can do what needs to be done. Last time, you chose to cut salaries 8 percent. I urged you not to remove that cut when you did.  Perhaps it will be your choice to revisit that decision. Perhaps there are other courses of action that have been discussed before. Or perhaps we will come up with a new and different idea. But like it or not, we know what we have to do.

I would like to propose a pathway forward so that we can avoid an acrimonious process that at the end of the day is of no benefit to the community that we serve. We all know what in the past we have each proposed and have each opposed. Now, however, is the time to come to new agreements. Officials of my administration are in constant and ongoing communication with the Post Auditor and members of the Legislature. We have recently been informed that the Senate has tentatively scheduled a hearing on the budget deficit for the middle of February. I commit the full resources of my administration, as always, so that these hearings can be as informative and positive as possible.

What I would like to propose tonight, directly to the Senate president, is that he and I agree to schedule a time when the members of the 30th Legislature and I will meet at Government House, within two weeks following that hearing, and at that time hammer out an agreement as to how we will reduce our budget deficit by 50 percent. This will allow our government to operate, even as we continue our efforts in Washington to secure the cover-over revenues. And if, by the time of our next budget submission, Congress has not acted, or Interior continues to decline to release the funds, we will at that time have to take further action.

I believe that at this meeting we will, because we must, find a way forward. I do not believe that it will be easy, but I do believe that it will be done. We will succeed because we must.

As always, I face the future with faith and with optimism. I know that a bright future awaits our Virgin Islands and is within our grasp. I know that after we have met this immediate crisis, the way forward is clear. For the path that we have been clearing and building these past years is not just a pathway through this immediate crisis, it is a course to the future. Yes, we must take some very difficult steps now if we are to hold that course. But we know what those steps are, and I am confident that we can take them and move forward.

If the recommendations of the GERS Task Force are implemented, if HOVENSA is restarted, and if tax collections are brought to their appropriate levels, we can achieve our goal of a future of financial stability and balanced budgets. GERS will be solvent for years to come. Refinery jobs and revenues will be restored. We will have the funding available to expand health care and Medicaid funding, and we will have the resources to fund education and to build on the progress that has been made.

These measures in turn will improve other aspects of our economy. It will take the stress off the high Gross Receipts Tax that suppresses business development and expansion. It will enable improved funding of public safety and support of tourism. It is a virtuous cycle that will carry us into the future. We will be on the road that we have built, a road to progress and prosperity.

So let us take these steps together. Let us prove ourselves worthy of the mantle of leadership that the public has given us in trust. This is our time, and our opportunity to finally put these years of turmoil behind us.

The honor bestowed on me to serve as your Governor will, by law, be ended at the end of this year. But the work we do together, now and throughout this year, will cement our future, and will ring as our legacy for generations.

Our work - the work of democracy - is never easy. But neither was the long struggle of those who came before us and won for us the freedom and the right to make these decisions for ourselves. We are the proud inheritors of the political freedom that our forefathers and mothers worked and fought so hard to achieve.

As we embrace the opportunities that lie ahead, let us each honor their struggles and demonstrate the same courage on behalf of future generations. Let us act today. Let us act today to build a brighter future for those who come after us. Let us move forward, together.

Thank you, and God bless our Virgin Islands.

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