Written By: GARY POKORNY
On January 28, 2019 Governor Albert Bryan Jr. gave his first State of the Territory Address. I would encourage every citizen of the Virgin Islands to read this speech.
Governor Bryan was clear: The General Fund has virtually no cash on hand, and $600 million in short term accounts payables. This is on top of the billions in long-term debt held by bondholders and the massive $5 billion underfunding of GERS.
He said the General Fund has and continues to experience an on-going structural deficit – which means more is committed to spending for current programs than money coming in. It has recently varied between $250 million and $450 million annually. And according to the governor, it potentially gets worse in 2020, once the Fed recovery money is gone and reconstruction is all but wrapped up. The 2018 change in federal tax law and the potential for the courts to eliminate the Excise tax will only serve to further reduce tax revenues to the General Fund in 2019.
According to the United Nations Population Division the population of the Virgin Islands peaked in 1998 and has been falling ever since. They estimate the population will continue declining right through 2100.
Now for the good news. There is a new administration at the helm that has been quite forthright and understands the urgent need for bold action: “We must have bold, aggressive, and long-term plan to grow our economy, create jobs and generate wealth…..The window to restart our private-sector economy to avert fiscal collapse is very small, and it is closing rapidly.”
At the same time, he shared the cost cutting side of the equation, “I assure you that I will stand beside you in making those tough decisions. That means we have to be conservative with our budgeting and certain government expenditures will have to be cut.”
So there you have it, either grow the private sector of the economy enough to bring in an additional $450 million in tax revenue annually. Or cut government spending by $450 million.
The economy would need to grow by $2.2 billion dollars to bring in enough new revenue to cover a $450 million deficit. Looking back at the history of the Virgin Islands, it takes $5 in GDP to deliver $1 to the GVI coffers. So, to raise the needed $450 million we would multiply by five and add to the current GDP of $3.7 billion. In 2020 the economy would need to grow to $6 billion, an astounding +60 percent rate.
Let us be honest. This is not going to happen. Reference my earlier point: as the population has thinned out the ability to produce more (GDP) also declines. Over the long term the population needs to reverse and grow: More people mean more consumption, greater GDP and more tax revenue. But the jobs must be created, and the people must be qualified. How many temporary workers have been flown in from outside the territory to do the work only to have them fail to pay their taxes to the VI but pay them to the federal government instead? To make matters worse, there are many, many vacant high paying jobs going unfilled. For example, the VIPA board at their February 20 meeting agreed to offer $2000 to cover relocation expenses for highly skilled applicants. They can’t fill these positions now!
The EDA sponsored 2040 Vision won’t even be rolled out until October 1, 2019. In the meantime, the government digs a deeper hole to the tune of more than a $1,000,000 a day. In the time it took to write this article, about one hour, $41,600 in new account payables were rung up. And who suffers? Tax payers’ due refunds. Vendors to the government -– I call them small businesses and individuals. Don’t forget about those paying into GERS and those wondering when their pension will be halved. The list goes on and on.
Off course, bondholders and government employees are always the first to be made good.
So, we wait patiently for the governor’s team to put forth the plan that explains how much of the deficit will be covered by new tax revenue in a growing economy and how much planned government expenditures will need to be cut. Let’s face it, you can’t stiff small businesses forever and as he said in the speech you can’t kick the can down the road any longer on GERS – the territory is out of road. The longer the wait, the deeper the accounts payable hole.
The likely outcome will be slight economic growth into 2020, maybe enough to stop digging a deeper cavern of a hole but certainly not enough to significantly reduce the annual GVI deficit.
My only encouraging thought is this: You won’t find $450 million to cut in one place. Rather, you may find a million dollars in 450 places.
Take UVI for example. The General Fund already allocates $30,000,000 annually. They have fewer than 3,000 students enrolled with a dismal graduation rate of 36 percent. The people of the Virgin Islands are subsidizing each student to the tune of $10,000 a year already. And now they want to double down with free tuition and ADD more cost to the General Fund. The university claims they only need three more million to make their budget balance, that they have endowments, etc. Why not keep the tuition in place then cut the outlay to UVI? We might just find more than a million in this one place……. As I said to Governor Mapp when I met him shortly after he took office: Leadership starts at the top, if you aren’t for real, we are all in trouble. I offer the same advice now.