Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 09:30 AM

The Honorable Charles Turnbull

Statement

 

of the

 

Honorable Charles W. Turnbull

Governor

 

of the

 

United States Virgin Islands

 

 

 

 

 

 

 

 

Before the

Committee on Energy and Natural Resources

United States Senate

Washington, D.C.

 

 

March 1, 2006


            Mr. Chairman and distinguished Members of the Senate Committee on Energy and Natural Resources, I am pleased to have this opportunity to testify on the economic and fiscal challenges facing the United States Virgin Islands. 

 

            Our economic and fiscal challenges are many.  We are a small group of islands geographically isolated from the mainland of the United States and global commercial markets.  We have no reservoir of natural resources to develop industry and manufacturing.  We do not have full constitutional and political rights, including the right to vote for President; and we do not have voting representation in the United States Congress which wields plenary authority over our economic lives. 

 

            We are vulnerable to hurricanes and natural disasters.  We are disproportionately affected by national and international economic conditions.  Our ability to develop our economy and generate the revenues required to provide essential public services depends, to a large extent, on provisions of tax and trade law controlled, and subject to arbitrary change, by the United States Congress.

 

            Notwithstanding these structural impediments, the Territory of the United States Virgin Islands has, since its acquisition in 1917, made significant progress under the American flag.  While our per capita income is barely half of the U.S. median, we have the highest standard of living in the Caribbean and provide our people the broadest-array of public services of any country in the region.  We are proud of our American citizenship and we are honored to have the privilege of serving in the United States armed forces around the globe to help defend the liberty of all Americans. 

 

            Our path to political and economic equality has not always been smooth, and it has not come without struggle.  Our institutions are relatively new.  We are still in the process of perfecting our democratic form of government.  We have only had elective governors since 1970.  We have only had authority to devise a government of our choosing, through the calling of a constitutional convention, since 1976. 

 

            Like many states and local governments, we have experienced fiscal problems over the years as a result of our historical underdevelopment, a relatively small economic and fiscal base, the immense structural damage caused by two major 100-year hurricanes over the last 15 years, and changes in federal tax laws which have slowed U.S. investment into the Territory. 

 

            I assumed office in January 1999 when the fiscal condition of the Virgin Islands Government, following the destruction of Hurricane Marilyn, was at a low point. The accumulated General Fund deficit was $288 million.  The structural deficit for the then current fiscal year was projected to exceed $100 million.  Vendors were owed over $100 million and taxpayers were owed similar amounts in income tax refunds dating back to 1995.  Most of the Government’s budget was committed to payroll costs, leaving insufficient funds for maintenance, supplies and materials required to ensure quality public services, as well as investment in, and the modernization of, our public infrastructure.  The Government owed hundreds of millions of dollars to hardworking government employees for negotiated salary increases with no plan for payment.  Revenue collections were on a steady decline, the Federal Government was owed nearly a quarter of a billion dollars in FEMA loans, and the specter of bankruptcy loomed large on the horizon.

 

            To prevent a financial collapse, we rolled up our sleeves and went to work.  We made tough and painful decisions to restore fiscal discipline and reduce government spending.  We imposed a strict hiring freeze, and downsized the Government without resorting to the massive layoffs that some people had urged.  We cut our budget, refinanced our debt, reorganized the Government, attracted new businesses and capital investment to the Territory, and increased Government revenues.

 

            The success of our plan to grow the economy and cut government spending is reflected in the audited financial statements the Government prepares in accordance with the federal Single Audit Act.  General Fund revenues, net of debt service, have grown from $417 million in FY 1999 to $633 million in FY 2005, an increase of 50 percent.  [The increase in actual revenues is even higher but Government Accounting Standards require that certain tax revenues used to secure the Government’s bonds be recorded as revenues in the Debt Service Fund rather than the General Fund.]  The same audited financial statements record that, over the same period,  General Fund expenditures increased just over 4 percent, from $559 million in FY 1998, the year before I assumed office, to $582 million in FY 2005.  Over the same period, the growth of all State budgets increased almost nine times as much, or an average increase of more than 35 percent.  Indeed, facing spiraling deficits, my Administration took swift action to cut spending 10 percent in Fiscal Year 1999 and an additional 7 percent in FY 2000.  As a result of this fiscal discipline, we were able to narrow our structural deficit in FY 2000, and we achieved a significant surplus in FY 2001.  This fiscal strengthening allowed the Government to increase spending in that year for long deferred or underfunded needs.  This path to structurally balanced budgets was temporarily interrupted for two years following 9/11 and the ensuing national recession.  By renewing our commitment to fiscal discipline and by focusing on private sector growth, the Government returned to fiscal balance in FY 2004, earning surpluses in that year and in FY 2005.  The disciplined fiscal stewardship of my Administration is reflected in the 10-year revenue and expenditure chart attached hereto as Appendix A.  This chart also shows that, while the Government experienced accumulated General Fund deficits for each of the four years prior to the commencement of my Administration, we have generated accumulated General Fund surpluses in each of the last four fiscal years. 

 

            The cuts in government spending were not easy and did not come without pain or political cost.  We could not afford to fund every important program or to fill every critical position left open as a result of attrition. Yet, over the last seven years, we were able to shrink the size of government by 20 percent without resorting to mass layoffs.  We cut spending while preserving the most essential services for the neediest in the Territory.  I was not hesitant to wield my veto powers in order to restrain overspending by the Legislature.  We paid overdue debts and long delayed salary increases to our hardworking government employees.  But with 20 percent fewer employees in our government workforce, total employee compensation has grown less than five percent since 1999. 

 

            Equally important, we have learned to manage and timely account for the funds that we have spent.  Prior to assuming office, the Virgin Islands had completed only one of the comprehensive annual audits required by the Federal Government over a fourteen-year period.  Today, my Administration has completed nine such audits in a six-year period and the Fiscal Year 2004 audit will be completed and issued in a matter of weeks, putting the Government into compliance with the requirements of the Federal Single Audit Act.  Under my Administration, this task has become an important, regular and ordinary responsibility of government service.  In addition, my Administration has, over the course of the last several years, resolved the vast majority of the outstanding audit recommendations performed by the federal Office of Inspector General.  And we have vastly improved the Government’s overall audit compliance record on  a going forward basis.  Most importantly, however, we are taking steps to provide our financial managers with the modern financial tools they need to obtain, and act upon, real time financial data and to improve our financial management of both local and federal funds.  I am pleased to report to you today that we are not waiting for long promised federal assistance.  We are using the financial surplus we have generated to fund the procurement of a new state-of-the-art financial management system to replace the outdated and inadequate system acquired from the federal government in the 1980’s.

 

            Lastly, but not least important, we have strengthened the financial condition of the Government by eliminating, consolidating and refinancing our debt, including cancellation of nearly a quarter of a billion dollars of FEMA disaster loans.  The FEMA debt relief alone, which involved creative and never-before-tried remedies under little known federal statutes, has saved the Virgin Islands over $30 million a year in annual debt service payments. 

 

            As a result of our fiscal and budgetary successes, the Virgin Islands is now positioned to make new, but measured investments in our schools, health care system, roads and transportation system, environmental, tourism and public infrastructure as well as the social services required by the neediest in our community.  While we have made important improvements in our physical plants and social infrastructure over the course of my Administration, including the construction of new schools, wastewater treatment plants, health care and transportation improvements, the solid improvement in our financial condition will allow us to accelerate and increase our investment in these and other critical areas over the next several years. 

 

            In spite of this undeniable progress, many challenges remain.  The strengthening of our Government’s financial position has been fueled, in large part, by the success of our Economic Development Commission (EDC) program and the consequent growth of our private sector.  Under this program, which was reorganized and revitalized in the second year of my Administration, the Virgin Islands provides tax incentives to qualified investors who establish businesses in the Territory and make qualified investments.  A recent study by PricewaterhouseCoopers LLP found that this program generates almost one third of our total income tax revenues and creates, directly or indirectly, nearly 10 percent of total employment in the Territory.  Indeed, the EDC program has the potential to completely transform the economy of the Virgin Islands, lessen our dependence on the Federal Government, and narrow the income gap between our residents and those on the mainland. 

 

            The continued success of our EDC program, however, has been under a cloud since 2004 when Congress enacted, without hearings or consultation, changes to the federal tax laws that govern the relationship between the Virgin Islands and the United States.  While these changes were aimed at preventing tax abuse by persons who neither lived nor worked in the Virgin Islands, we submit that the changes went too far, forcing many legitimate businesses to close their doors and causing the loss of many millions of dollars to the Virgin Islands Treasury.  Indeed, the Director of the Virgin Islands Bureau of Internal Revenue two weeks ago estimated that, based on last quarter’s tax payments, the Territory could lose as much as $80 million in the current fiscal year.  Losses of this magnitude will inevitably erode our budget surpluses and put at risk our recently hard-earned fiscal solvency.  It will, at the very least, force a return to the fiscal austerity of the early years of my Administration and require further deferral of needed investments in our social and public infrastructure. 

 

            Over the past year, we have been working with the Congress to “rebalance” the tax rules governing the EDC in order to allow legitimate businesses to operate in the Territory while still precluding any possibility of tax abuse.  The position of the Government of the Virgin Islands on these rules is set forth in a memorandum attached hereto as Appendix B.  In this endeavor, I am pleased to report that we have the full support of the Department of the Interior, which testified in support of the changes we proposed at a Treasury hearing last July.  We also have the support of individual members of the Senate Finance Committee, as well as the support of Members of this Committee who have visited the Virgin Islands and seen first hand the contributions of this important program to the economy and people of the Virgin Islands. 

 

            Mr. Chairman, I would like to note for the record that this distinguished Committee used to have jurisdiction over the tax systems in the U.S. insular territories.  Indeed, the Revised Organic Act of 1954, as originally enacted, included the basic tax rules that were designed to lead to financial self-sufficiency for the Virgin Islands.  The 1986 Tax Reform Act altered these rules but provided, after extensive consultation with the Government of the Virgin Islands, new incentives that formed the backbone of our EDC program.  The American Jobs Creation Act of 2004 (“Jobs Act”), however, sharply cut back on those incentives and put at risk our hard-won fiscal gains and future economic development.

 

            Accordingly, I respectfully urge the distinguished Members of this Committee to reassert the historic role of this Committee on federal tax issues involving the insular territories.  In particular, I urge this Committee to support our request for a legislative amendment to the Jobs Act to ensure fair and reasonable residency and income rules for our EDC program.  In addition, in order to give voice to our underrepresented citizens, I respectfully request that this Committee seek, in the future, sequential referral from the Committee on Finance of all tax matters affecting the insular areas, including, most importantly, issues relating to the taxing jurisdiction of the Virgin Islands and other United States Territories.

 

            Similarly, the Revised Organic Act provided in 1954 that all taxes imposed by the United States on all products imported from the Virgin Islands into the United States shall be “covered over,” or returned to the Treasury of the Virgin Islands.  Under this provision, the United States returned to the Virgin Islands all of the federal excise taxes collected on Virgin Islands rum shipped to the United States.  In 1984, Congress capped the amount of rum excise taxes returned to the Virgin Islands at $10.50 per proof gallon of rum, even though the federal excise tax on rum has since risen to $13.50 per proof gallon.  Beginning in 1999, Congress increased the cap on the cover-over amount to $13.25 per proof gallon on a temporary basis, which requires Congress to affirmatively extend the rum tax formula on a regular basis.  While the temporary extensions have played an important role in improving our fiscal situation, the uncertainty caused by the temporary nature of the increase makes it more difficult for the Government to develop long range budget plans and to use such revenue streams to securitize the bonds we issue to finance our public infrastructure.  Accordingly, I respectfully request this Committee to reassert its original jurisdiction over such issues of tax jurisdiction and to work with the Committee on Finance to seek a permanent extension of the rum tax cap. 

 

            I also note that our ability to assure adequate health care to our residents is hampered by the discriminatory cap on Medicaid funds provided to the Virgin Islands and the other U.S. Territories.  Medicaid is a federal-state program to provide for the health care needs of the poorest and neediest persons in our country.  The quality of health care should not depend on whether an individual lives in California, Alaska or in a United States Territory.  While Congress approved last year an increase in the amount of Medicaid funds provided to the Virgin Islands, such increases only narrow the gap between the funds allocated to the Virgin Islands and funds we would be entitled to if the Virgin Islands were treated as a State under the Medicaid formula.  Again, I respectfully urge this Committee  to work with us to make further improvements in the Medicaid formula and to ensure that our neediest residents receive no less favorable treatment than the neediest residents in the United States. 

 

            Last fall, Lt. Governor Vargrave A. Richards testified before this Committee in support of S. 1829, legislation introduced by the distinguished Chairman of this Committee and the distinguished Ranking Member to repeal a 1936 federal statute which limits the authority of the Virgin Islands Government to assess and collect local property taxes.  That statute, originally enacted in furtherance of a legislative objective long since relegated to the dust bins of a bygone colonial era, was generally believed to have been repealed by the Revise Organic Act of 1954.  A recent court decision, however, breathed new life into the statute, overturning local laws designed to protect homeowners and generally wreaking havoc in the administration of our property tax laws.  Accordingly, I respectfully urge this Committee to act quickly on this legislation, which is supported by the Department of the Interior, in order to assure that the Government is able to properly exercise its fiscal responsibilities, and to timely assess and collect property taxes in the Territory. 

 

            Mr. Chairman, I have focused my testimony today on the need to correct some of the structural impediments and other inequities that exist in our current relationship with the United States.  Notwithstanding these impediments, I am proud of the progress we have made over the course of the last seven years to strengthen the economy of the Territory and improve the financial performance of the Virgin Islands Government.  At the same time, I would like to provide a few brief comments on a House-passed bill (H.R. 62), referred to this Committee, which would remove the authority to manage essential budget functions from the elected Virgin Islands leadership, and place that authority for five years in the hands of an unelected bureaucrat who — as a practical matter — could not be removed from office and would not be accountable to anyone.

 

On behalf of the Government and people of the Virgin Islands, I would like to express my steadfast opposition to H.R. 62.  This bill passed the House under suspension of the rules on March 14, 2005, without consultation with the Government of the Virgin Islands, without hearings, and without a committee report.  In relying upon the record made in the previous Congress, the House ignored the fact that our Government has been in structural budget balance, that revenues are strong, and that expenditures are under control.  The premise of this bill is that the people of the Virgin Islands are incapable of managing their affairs under a republican form of government, and that representative democracy has failed in our Territory.  This premise is profoundly wrong and offensive as a matter of theory, and it is simply wrong as a matter of fact.

 

The bill would create the office of Chief Financial Officer (CFO) of the Government of the Virgin Islands.  The CFO would assume the duties of the Director of the Virgin Islands Office of Management and Budget (VIOMB), and all VIOMB employees would report to him or her.  Under the Virgin Islands Code, the Director has extraordinary powers of budget preparation and execution.  Among other duties, the Director has the authority to mandate revision of the spending and operations plan of every department and agency.  The Director also has the power under certain circumstances to modify or withhold appropriated expenditures at any time. 

 

Under current law, the Director serves at the pleasure of the elected Governor.  Under H.R. 62, the CFO would serve a fixed term of five years, and could not be removed from office except for “cause.”  The bill establishes neither a procedure nor a standard for removal from office.  The practical effect would be that the CFO, absent criminal abuse of office, would have absolute control of fiscal and budget policy throughout his or her tenure.

 

Since I assumed office in January 1999, the Government has achieved significant improvements in financial performance and fiscal management.  The budget is in balance.  Revenues have increased while spending has been kept under control.  Indeed, the Government has achieved budget surpluses in recent years.  In contrast to practices prior to my Administration, the Government regularly completes audited financial statements.  As a result of the Government’s overall improvement in financial performance, the country’s leading bond agencies have upgraded the ratings on our recent bond issues for Federally-mandated environmental infrastructure and other capital projects. 

 

            The Government is committed to making the tough decisions to maintain fiscal discipline, increase the efficiency of government, and to improve the delivery of essential public services to the people.  The Government is not facing fiscal insolvency or collapse.  There simply is no basis for removing from political accountability the essential functions of budget preparation and execution.

 

            This concludes my testimony.  I would be pleased to answer any questions.