V.I. to get $60.5 million advance of rum cover-over tax revenues

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ST. CROIX - Federal officials have reconsidered a decision about the territory's advance on rum excise tax revenues and are planning to release additional funding soon that could help the territory bridge an anticipated budget shortfall for Fiscal Year 2014.

The money that the U.S. Department of Interior's Office of Insular Affairs has decided to release, though, will only partially address the territory's projected $70.5 million Fiscal Year 2014 budget gap, likely amounting to less than half of what is needed to close the shortfall.

And the rum money comes with some strings attached.

Insular Affairs has approved a $60,841,505 payment, according to a spokeswoman for the Interior Department.

However, about half of that amount will go to the territory's two rum producers - Cruzan and Diageo - under their current agreements with the V.I. government, which will leave a $40 million budget shortfall for FY 2014.


The money in question is the territory's rum cover-over revenue, which is money the local government receives when Virgin Islands-produced rum is sold in the United States.

The cover-over monies are gleaned from the $13.50 excise tax that the U.S. Government collects on every proof-gallon of Virgin Islands-produced rum sold stateside. A portion of the excise tax is returned - or covered-over - to the territory.

The cover-over rate is $10.50 per proof gallon, but the amount temporarily was increased by Congress to $13.25 per proof gallon in 1999. Since that time, Congress has extended the higher rate of return for the territory multiple times, typically in a package of tax measures called the extenders.

However, at the end of 2013, the cover-over reverted back to the $10.50 rate, and Congress has not taken action yet on the extenders.

Every year, the territory requests an advance payment from the U.S. Department of Interior on its anticipated cover-overs, based on production estimates by the two rum distilleries located here, Cruzan and Diageo.

For FY 2014, the territory had requested an advance payment on the rum cover-over based on the $13.25 rate for the entire year.

However, Interior provided the advance at a rate of $13.25 per proof gallon until the Dec. 31 expiration date and then used the lower $10.50 rate for the rest of the year.


That move sparked controversy, with Gov. John deJongh Jr., V.I. Delegate to Congress Donna Christensen and Senate President Shawn-Michael Malone all trying to get Interior to release the entire advance at the higher level.

Interior Department spokeswoman Jessica Kershaw said in a written response to Daily News inquiries on Friday that the decision to provide all the advance at the $13.25 rate was made after "extensive consultations" with deJongh, Christensen and other leaders in the territory.

The decision was based on an understanding "of the existing challenges faced by the economy of the USVI," she said, adding that the office "is sensitive to the extreme financial hardship the closure of the HOVENSA oil refinery has posed, the impact of potential furloughs and layoffs and measures being undertaken by the governor to mitigate the island's financial constraints."

The payment includes a full adjustment for FY 13 actual collections, according to Kershaw.

However, while all of that $60.8 million will come to the territory, it will not all go into the General Fund.

Strings attached

About half or so of the $60,841,505 will go to Diageo and Cruzan, which have agreements in place with the government to receive some of the cover-over revenues.

Government House expects that after the rum-makers are paid, about $30 million will be left to be deposited into the territory's coffers for offsetting the projected $70.5 million budget gap, according to a statement Government House released Friday night.

That leaves a projected FY 2014 shortfall of about $40.5 million that the government will still have to address.

In addition to addressing the shortfall, it will also be key to the territory's future that Congress pass the extenders, keeping the cover-over rate at the higher level.

Kershaw said the $60.8 million will be advanced to the territory - but with the understanding that "if the retroactive rate increase is not enacted by the Congress for the FY 2014, the USVI will owe the US Department of the Interior the difference based upon the actual U.S. Treasury certifications for FY 2014."

In other words, if the higher rate isn't extended, the territory would have to give the additional money it is getting back to the Interior Department.

To make any needed adjustment, Insular Affairs would deduct any funds the territory owes from the territory's FY 2016 advance payment which will be made in September 2015, Kershaw said.

For now, though, the remainder of the advance is scheduled for payment on March 17, Kershaw said.


Christensen and deJongh both issued press releases about the rum revenue on Friday.

Christensen said she was pleased to learn the news, and had spoken with Interior Insular Affairs Director Nick Pula on Tuesday to again make the case for releasing the remainder of the advance at the $13.25 rate.

"Director Pula has always been supportive of getting us the money," she said. "I recognize that the Interior Department itself was under intense scrutiny and therefore more cautious about giving us an advance without the authorization in place. They have done that in the past, but the government shutdown and sequester in place last year also made the decision more difficult."

Christensen said she and her staff will continue to work to get the extenders passed for 2014 and will continue efforts to make the higher rate permanent.

"We are hopeful that since the House Ways and Means Committee is working to review all of the over 100 extenders of which our rum revenues are one, and deciding which ones should become permanent, that we will achieve the goal that we set out for, a permanent lifting of the cap and the return of the full $13.25 to the Virgin Islands treasury," Christensen said.

The Government House press release noted that deJongh met on Friday with Interior Department officials.

"We met this afternoon with Acting Secretary Lorraine Faeth and Interior Insular Affairs Director Nick Pula and once again made our case for the release of the advance payment at the $13.25 extender rate. In the past several months, my administration had written to officials at Interior explaining the financial hardship that their initial decision represented at a time when the government could least afford a reduction in the advance payment on rum revenues," deJongh said.

The release said the governor contacted Christensen and Senate President Shawn-Michael Malone to tell them of the favorable progress when the determination was made.

DeJongh said in the release that he is "optimistic" about the possibilities Congress will make the $13.25 rate permanent.

"We will continue our efforts to educate members of the U.S. House and Senate on the importance of the rum cover-over revenues to the Government of the Virgin Islands and the need for the extenders to be approved at the higher rate of $13.25," he said.

The governor is in Washington D.C. attending the Winter Meeting of the National Governors Association.

- Contact Joy Blackburn at 714-9145 or email jblackburn@dailynews.vi.

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