Virgin Islands and Its Power Authority Face Near-term Financial Crises

The U.S. Virgin Islands governor says it may be impossible for the territory to make payroll as soon as Feb. 16, while the power authority executive director warns that the islands could suffer "rotating power outages, or worse, in the not too distant future."

Gov. Mapp made his remark in the annual state of the territory address to the legislature on Monday night. Water and Power Authority executive director Julio Rhymer, Sr. spoke Saturday to the Public Service Commission, after the commission revoked an interim rate increase on Thursday, according to the VI Consortium web site.

Mapp has proposed a five-year plan to bring the islands government to structural balance. Department of Finance Commissioner Valdamier Collens testified Tuesday to the Virgin Islands Senate Finance Committee that the failure of the islands' bonds to sell in mid-January was due to "the lack of confidence that the government would take the steps necessary to implement the five-year plan."

Collens told the committee that not taking steps now to address the government's financial problems would lead the government down the path that Puerto Rico has taken. Collens noted that the federal government had taken over governing Puerto Rico and that the oversight board was proposing a 44% cut in government spending.

Mapp has proposed a specific set of tax increases. As an alternative, members of the island Senate have made two alternative tax increase proposals, 32-005 and 32-007, that would yield $17.7 million less in annual revenues than the governor's own proposals, Collens said.

Collens indicated that the government should pass Mapp's proposed tax rises so as to be able to sell a bond to help cover this year's operating expenses. Unless the government can in this way access "working capital" the current year's budget would have to be cut by 20% and that could only be achieved through "significant reductions or eliminations of services," Collens said. "The situation is real and trending towards critical," Mapp said.

"I assure you that continuing to borrow money to cover operating expenses cannot be a public policy, but rather a temporary stopgap measure that must come to an end," Mapp said in his speech.

Payment of the islands' matching funds and gross receipts taxes aren't in danger as the money for them goes to trustees first, Mapp said. The danger is to the government and those who receive its services.

"The reforms demanded by the financial markets are precisely the reforms we have identified as offering the best path forward to a structurally balanced and growing economy," Collens said.

After Mapp's speech, Senate President Myron Jackson said Mapp was "prudent" to say that austerity was needed. However, he didn't directly approve Mapp's proposed tax increases.

The electric commission approved an interim rate increase on Jan. 12 and revoked it on Thursday. Rhymer said the lack of an increase would limit the authority's ability to lease a power generating unit on St. Thomas, to covert a power plant to liquefied natural gas, and to pay for fuel. If the rate increase isn't restored, "rotating power outages" are likely on St. Thomas and possibly on St. Croix. The Virgin Islands consist of these two islands plus St. John.

Moody's Investor's Service Assistant Vice President Kathrin Heitmann said, "The revoked interim base rate increase, which would have been effective February 1st, could have provided the Virgin Islands Water & Power Authority (WAPA) with around $14.5 million in additional annual revenue. The decision by the PSC highlights our view that VI WAPA cannot disconnect itself from increasing economic and financial stress in the U.S. Virgin Islands, a key element in last week's downgrade. At this stage, we have no visibility if or when the interim decision will be reinstituted and how the final rate increase decision, anticipated in June 2017, might be affected."

Heitmann said the authority had very limited cash on hand and without a restored rate rise was likely to face very difficult financial choices in the next few months. She said that the authority's fully funded debt service funds supported Moody's Caa1 rating on the senior electric system bonds.

The Senate Finance Committee was holding a hearing on what to do concerning the islands' financial crisis as of 4 p.m. E.S.T. on Tuesday.

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