ST. THOMAS — The hands of members of the 32nd Legislature were tied on Friday regarding a $500 million community disaster loan bill, which came with a dangerous caveat: Break a covenant with current bondholders by giving the federal government payment priority over them.
It was described by lawmakers as a damned if you do, damned if you don’t situation. But with the territory in desperate need of funds as it struggles to recover from Hurricanes Irma and Maria, the federal community disaster loan, issued through the Federal Emergency Management Agency (FEMA), with a first drawdown of $300 million, was passed by all but three senators: Janette Millin Young, Tregenza Roach and Alicia Hansen, who couldn’t pull themselves to support the measure. Senator Marvin Blyden was absent.
The U.S. Treasury decided that as part of the agreement to release the first $300 million, it would not accept a subordinate lien. A subordinate lien is any secondary lien that is placed on a property, the property in the territory’s case being Matching Fund Revenue (MFR) and Gross Receipt Tax (GRT) bonds. In basic terms, a subordinate lien is any lien that has less of a payment priority than liens that have already been placed. It would be like having a first and second mortgage.
With the measure now passed, it remains to be seen what will happen. Will the bondholders sue? Just last year, the VI government passed a measure placing a lien on the territory’s MFR bonds to ascertain that bondholders are paid first — no matter what financial constraints the U.S. Virgin Islands may face. And what will the bond market think of the government relative to keeping its covenants? Yesterday’s favorable vote could be translated by bondholders — as have been the recent opinion of the major U.S. ratings firms — that the Government of the Virgin Islands, once placed in a difficult financial position, could renege on its obligations.
“The government has pledged and assigned matching fund revenues to the trustee for the benefit of bondholders, establishing a security interest in the revenues. The statutes are written to create a statutory lien on the revenues,” Moody’s said in January.“We note, however, that these security provisions have not been tested in a stress scenario where the government faces a severe lack of funds to provide basic services and we believe they do not protect bondholders.”
While approval of the federal disaster loan with the priority payment stipulation does not necessarily mean the G.V.I. will cease making payments to its current debtors, it conveys that payment to the federal government would take precedence over the current debtors — and that, in the long run, could spell trouble for bondholders if funds become limited.
A Consortium article published last week concentrated on the sudden volatility that the MFR bonds could face if reductions in taxes that are included in the U.S. Senate’s version of the Republicans’ $1.5 trillion tax cut measure, survives the House and is signed into law.
Every year, over $200 million in rum taxes from Captain Morgan Distillery (Diageo) and Cruzan Rum Distillery is remitted to the G.V.I. The majority of the funds, however, never arrive in the coffers of the local government. Instead, the funds are transferred directly to the bondholders, leaving the territory with a fraction of the total sum.
Spirits are currently taxed at $13.50 per gallon. The U.S. Senate proposal calls for lowering it to $2.70 per gallon for the first 100,000 gallons produced or imported by the industry.
While it is unclear how much the USVI would lose if the law were to pass with the Senate line item, it puts on unstable ground the USVI’s most dependable source of income to pay bondholders. And with the federal government now seeking priority payment over current bondholders, the possibility of the government being unable to meet its covenants, though it has never occurred in the past, becomes a real possibility.
Senators were left feeling helpless on Friday and, relative to the federal government’s stipulation that it be paid first, some drew comparison with colonialism. “That money, I take it, but you gonna get killed for it tomorrow,” said Senator Brian Smith.
But with no other alternative to keep the government afloat, and with Governor Kenneth Mapp already signing $100 million worth of contracts during a Public Finance Authority (PFA) meeting on Thursday, based on the expectation that the $300 million drawdown would be approved, lawmakers grudgingly passed the measure.
“At the end of the day, you have to put bread on the table; this is the critical hour,” Senator Myron Jackson told The Consortium on Friday, even as he held on to his belief that the federal government had dug a trench for the USVI. “It’s like they dig a hole and you got to jump in it. It’s not even a hole; they put us in a trench,” he said.
Lawmakers added three amendments to the measure: one requiring that the PFA include the drawdowns on its website that the public has access to; another requires that the government spend some of the funds on employer contributions to the Government Employees’ Retirement System; and the third amendment secures 0.75 percent of the $300 million for the judicial and legislative branches of government for operational purposes.
Correction: Dec. 2, 2017
A previous version of this story included Senator Alicia Hansen as one of the lawmakers who voted for the measure. Mrs. Hansen joined Tregenza Roach and Janette Millin Young in voting against the measure. The story has been updated.