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?
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.
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, V.I. tax revenues 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.
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, perhaps because the worldwide economy was beginning to grow, offsetting the abruptly increased loss from Hovensa’s final closure.
The reuse of some of the Hovensa resources as a much smaller oil storage facility under new ownership 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.
While waste may be a problem, the data show the losses of revenues from the worldwide recession and the Hovensa closure can almost completely account for the territory’s structural deficits.
Next – Part 3: GERS Time Bomb