Plaskett Says It’s Now Governor’s Turn To Move On Potential $100 Million Rum Cover-Over Windfall

ST. CROIX — Could it be the Virgin Islands’ saving grace? Delegate to Congress Stacey Plaskett sent a dose of positive news throughout the territory on Monday when she announced that her office had potentially identified over $100 million in rum cover-over (matching fund) monies that the U.S. Treasury had failed to allocate to the territory because of miscalculations.

What is rum cover-over funds?

Rum cover-over, or matching fund revenues are remittances paid by the federal government to the Virgin Islands’ government, pursuant to U.S. statutes, of a portion of federal excise taxes collected on rum produced in the Virgin Islands and shipped to the US mainland. They have been paid to the government annually for over 50 years. Payments are made based on a “cover-over rate” set by Congress. Current statutes provide for a cover-over rate of $10.50 per proof gallon. Congress has annually increased the cover-over rate to $13.25 since 1999, in some cases retroactively. In August of each year, the Virgin Islands’ governor requests a matching fund prepayment from the US Department of Interior based on estimated rum shipments for the ensuing fiscal year. Prepayment is received in September and subject to a subsequent adjustment based on actual rum shipments during the year.

Diageo, which produces the Captain Morgan brand, completed its Virgin Islands distillery in 2010 and began shipments in February 2012. Prior to constructing its new facility, Diageo purchased bulk rum produced outside of the Virgin Islands on a contract basis. Rum’s share of the U.S. distilled spirits market increased steadily through 2011, but declined from 2012 through 2015. Together, Cruzan and Diageo branded rum products accounted for 28.8% of the U.S. rum market in 2015. Cruzan is also the largest supplier of bulk rum to the U.S. Cruzan and Diageo have both entered into 30-year agreements to produce rum exclusively in the Virgin Islands in return for capital grants, operating subsidies and tax exemptions.

Why Plaskett thinks the territory is owed the money

According to Ms. Plaskett, under the Caribbean Basin Initiative (CBI) of 1983, Congress provided both Puerto Rico and the Virgin Islands with additional cover-over of rum excise tax revenues derived from rum imported into the United States by other nations. The allocation of these additional cover-over revenues is apportioned according to the relative import of rum into the United States by Puerto Rico and the USVI, she said. Treasury regulations provide that the Virgin Islands may earn between 12-49%, with Puerto Rico qualifying for approximately 51-88% (depending upon each territory’s respective local production percentages) of these additional worldwide rum excise tax revenues, she explained.

The delegate said that the Government Development Bank of Puerto Rico has indicated that Puerto Rico’s percent of production fell to approximately 49% with the Virgin Islands’ increase in rum production. The CBI allocation to the Virgin Islands, however, has not changed as contemplated by the law, resulting over time in nearly $100 million in lost revenues to the Virgin Islands, Ms. Plaskett said. Ms. Plaskett said she formally requested that the production amounts be reviewed and, if it is in fact determined to be the case, the correct allocation of monies be given to the Virgin Islands as soon as possible.

The governor must now step in

While Ms. Plaskett will continue her lobbying efforts, she told this publication yesterday that the ball is now in the governor’s court. “I can make request of Treasury to give us the money. However, if Treasury shortchanged us and we’d have to aggressively go after Treasury, it’s going to have to be from the Government of the Virgin Islands because it was miscalculated, and the Virgin Islands Government and its general fund was shortchanged,” she said. “Which is why the governor and our Legislature would have to be involved in it, because only the governor bind the territory.”

Ms. Plaskett revealed that Treasury has traditionally been very closed-mouth about what they will or will not say publicly. However, when Ms. Plaskett explained her contention about the missing rum cover-over funds to Treasury officials, they said, ‘That seems to be a reasonable request, and on the face of it, it seems to be something that we need to revisit, and we will do that.’

But that’s the result of one meeting, Ms. Plaskett cautioned, stressing that Treasury’s position on the matter could change anytime — which he is why, she added, the governor needs to now aggressively investigate the matter, especially in light of the USVI’s financial crisis.

The congresswoman’s announcement comes amid a fiscal collapse in the USVI, as the territory — facing a $110 million deficit and no access to the bond market — is being forced to cutback in a myriad of areas. Department of Finance Commissioner Valdamier Collens told The Consortium Wednesday that the Mapp administration was preparing furloughs, layoffs and deep cuts at government departments and agencies; Mr. Mapp later denied that he’d spoken to Mr. Collens about such actions.

“It’s not even an assumption anymore, we have to act in a way in which we don’t have access until we demonstrate to ourselves — not to the bond market — that we want to fix our structural deficit. So for starters we know $110 million is out of the budget, and so we have to act accordingly to adjust and revise our budget,” Mr. Collens said.

If the money is indeed owed to the territory, it would serve as a saving grace for the USVI, as local leaders grapple with ways of offsetting the $110 million shortfall. Currently going through the legislative process is Mr. Mapp’s sin tax measure, which introduces or increases taxes on products such as tobacco, rum, sugary drinks and beers. Taxes on timeshare unit owners and an internet sales tax are also part of the measure.