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RTPark Director Says Puerto Rico Poses New Economic Challenge

The U.S. Virgin Islands is facing a new economic development challenge from Puerto Rico, which has enacted two measures directly impacting progress at the Research and Technology Park.

David Zumwalt, the executive director of RTPark, told the V.I. Senate on Friday that the measures from the neighboring territory have forced the agency to scale down its revenue forecasts and request funding from the Fiscal Year 2014 General Fund budget.

Zumwalt appeared before the Senate Finance Committee to discuss his agency’s budget request. The meeting was held in the Earl B. Ottley Legislative Hall on St. Thomas.

The RTPark is affiliated with the University of the Virgin Islands, with a mandate to foster the development of a sustainable, globally competitive technology sector in the territory. Its economic development program, targeted to knowledge-based businesses, provides incentives and services to encourage high tech businesses to start up in the territory.

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So far the program has been successful. The RT Park currently has 18 active tenant companies generating almost $160 million in aggregate annual revenues and employing more than 200 people in the territory.

The program has achieved its goal of not requiring money from the V.I. government, operating on revenues generated from its program companies, Zumwalt said. For the current fiscal year the board approved an operating budget of $1.9 million to be funded from commercial revenues. In November the budget increased to $2.069 million, reflecting "increasing optimism at the time based on prospective deal flow as well as clarifications of costs related to the operation of the 64 West Center building," Zumwalt said.

However, the second and third quarters of this fiscal year saw those projections turn downward, causing the board to reduce operating costs and revise the budget downward to $1.7 million in July.

At the same time, Zumwalt continued, commercial revenues are expected to reflect a drop of almost $835,000, or 44 percent, from original budgeted levels.

Zumwalt pointed to the approval of seven new tenants in FY12, which fell to only two in the current fiscal year. The primary reason, he said, is the emerging competition from Puerto Rico in the forms of the “Act 20” and “Act 22,” legislation enacted there in 2012.

In January 2012, Puerto Rico approved Act No. 22, known as the Act to Promote the Relocation of Individual Investors to Puerto Rico, which seeks to attract new residents to Puerto Rico by providing a total exemption from Puerto Rico income taxes on all passive income realized or accrued after such individuals become bona fide residents of that territory.

Act 20, which was approved the same month, encourages local service providers to expand their services to people outside the territory. It also promotes the development of new businesses in Puerto Rico and create a special fund for the continuous development of new tax incentives.

"In my opinion, Acts 20 and 22 take direct aim on the U.S. Virgin Islands’ RTPark and EDC incentive programs," Zumwalt said. "In fact, the loss in commercial revenues we have experienced in this Fiscal Year 2013 correlate directly to the loss of applicants and prospective applicants that were in our pipeline for approval this year. These entities have either withdrawn their pending applications before us while submitting new applications in Puerto Rico or delayed making decisions pending closer review of Puerto Rico’s offerings."

Zumwalt said the RTPark would be impacted more than the Economic Development Authority, because RTPark’s business model is more directly tied to commercial revenue sources.

"In that sense, RTPark serves as an early warning system that can help inform policy discussions that involve the diversification and strengthening of our economy in an environment of growing regional competition," he said.

"Act 22 is of particular concern because it provides an expeditious, low cost-of-entry means of attracting and offering tax incentives to high net worth individuals, irrespective of their business activities,” Zumwalt said. “In contrast, the incentive programs of EDA and RTPark are applicable specifically to approved businesses which locate in the USVI, and our incentives apply to individual business owners only to the extent that they participate in an income stream from the underlying approved business activity and through the auspices of a corporate structure that provides for such pass-through treatment.”

“In short,” he concluded, “our territory has focused on attracting businesses. Puerto Rico has added a path to attract and offer broad-based incentives to individuals. Since many of RTPark’s applicant businesses are led by high net worth individuals, it is easy to see why those individuals would want to fully explore their options given that Puerto Rico has clearly strengthened its offerings."

For that reason, the RTPark is requesting appropriations totaling $1.2 million: $400,000 for the current fiscal year to bridge the gap resulting from the loss of applicants and prospects to Puerto Rico, and $800,000 for FY14 to close the gap in its $1.885 million budget.

Zumwalt said the proposed budget "holds the line" on operating expenditures and anticipates commercial revenue streams similar to FY13.

In other business, the Finance Committee heard a presentation from Raymond Williams, chief of staff of the Office of Lieutenant Governor. Williams provided details of that office’s proposed budget.

The Office of Lieutenant Governor manages the Division of Real Property Tax, the Division of Banking and Insurance, the Division of Alternative Markets and International Reinsurance, the Division of Recorder of Deeds, the Division of Corporations and Trademarks, the V.I. Passport Acceptance Facility, the Division of Financial Management (which includes management of Notary and cashier services), the Division of Management Information Systems and the V.I. State Health Insurance Assistance/Medicare subdivision.

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