October 18, 2017 1:16 pm Last modified: 6:48 am

The V.I. Budget Crisis: Part 2, The Hovensa Effect

The V.I. government is at a crossroads.

Along with this year’s $110 million deficit, the USVI is facing ongoing structural deficits of around $170 million per year out of a locally funded budget of around $850 million. It has outstanding debt of more than $2 billion, not counting the debts of the government-owned Water and Power Authority, which is also facing serious financial problems. It is also facing a $3 billion unfunded pension liability and a pension plan projected to cease being able to pay full pensions by 2023. And for the first time, after two rounds of ratings downgrades in less than a year, lenders have refused to buy V.I. government bonds.

How did we get here and what can we do about it?

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Part 1 looked at the history of the territory’s finances and some of the many factors that led to this crossroads. Of all of them, the 2012 closure of Hovensa is by far the most important.

Figure 2: USVI Revenue Sources 2004-2016 (clustered column) Click on image for larger view.

In 2012, Hovensa closed after several years of losses approaching half a billion dollars per year. The St. Croix refinery was designed to burn oil to generate the heat for refining. Oil prices shot up after the U.S. invaded Iraq in 2003, which increased the cost for Hovensa to refine. Competing mainland facilities switched to cheaper natural gas, which steadily fell in price after 2008.

With massive losses on its books, corporate and other taxes from Hovensa sharply declined several years before its closure. When the U.S. economy slowly grew out of the recession over the past decade, the loss of Hovensa-related personal income tax and other taxes from employee spending kept the territory ‘s revenues down.

A 2013 V.I. Bureau of Economic Research report calculated the refinery closure caused “an annual decline of approximately $140 million,” in tax revenues.

Hovensa refinery in 2011 (Bill Kossler photo)

Hovensa refinery in 2011 (Bill Kossler photo)

You can see the drop in V.I. corporate income tax in the chart above, starting in 2008. The drop begins as the refinery begins losing money. It seems to be somewhat masked in 2012, presumably because the worldwide economy was beginning to grow, offsetting the abruptly increased loss from Hovensa’s final closure.

Its recent reopening as a much smaller oil storage facility has reduced that loss a little. But Hovensa’s closure alone accounts for most of the territory’s structural deficit, estimated by the Mapp administration at about $170 million per year. The Mapp administration also implemented pay raises costing about $30 million per year, which contribute to the deficit at one end, but makes it easier to hire government employees and reduce overtime at the other end.

All in all, the data show the losses of revenues from the worldwide recession and the Hovensa closure are by far the largest culprits in the territory’s structural deficits.

Next – Part 3: GERS Time Bomb

Revised Debt and Revenues 1991-2016.

Revised Debt and Revenues 1991-2016. Click on image for larger view.

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  1. Jim Thorton Reply

    30 million in pay raises made it easier to hire government employees? Give me a break, has the USVI ever had trouble giving out government jobs. Your article has convinced me not to invest in the USVI. With such mismanagement and looming debt…anyone investing in a business in the USVI can count on most their profits being confiscated by the government…

  2. Joe Dude Reply

    As a property owner, I had hopes of building on St Croix. I love the island. I love the culture. But it only gets worse, not better. There needs to be a complete overhaul of the government, the budget, and how USVI operates. The people need to be empowered, not sponging of assistance. Time to bring in some consultants from Cayman and Bermuda!
    No more pensions! And there’s no reason the refinery can’t operate in a limited manner for the benefit of the Caribbean.

  3. DJ Reply

    Pay raises need to be frozen immediately and indefinitely. Hire an executive and a board of directors. Implement an LTIP (Long-term incentive program) for the executive and any employees. I’m considering purchasing a home on St Croix. I see all kinds of potential for the residents to take ownership of their island. They need an experienced and trustworthy individual seeking a challenge.

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