Concerns over U.S. Virgin Islands rum coverage rate

The failure of the US Congress to increase the rum coverage rate has a senator from the Virgin Islands worried about his finances and his retirement fund.

The Virgin Islands government refinanced the matching fund bonds in March, planning to use some of the savings to prop up the ailing pension system, which would otherwise have run out of money as early as next fall.

With the rum coverage rate at $10.50 per gallon of proof, rather than the supposed rate of $13.25, it threatens the financial stability of the U.S. Virgin Islands government, Senator Janelle Sarauw said.

U.S. Virgin Islands delegate Stacey Plaskett believes Congess will increase rum coverage before the end of the year.

The rate had been $13.25 for several years, but in August the US Bureau of Insular Affairs said the rate would be $10.50 this year, which would cost the USVI government $60 million a year, a report said. said Sarauw.

“We certainly can’t sustain a $60 million shortfall indefinitely,” Sarauw said.

The attorney and advisers for the Virgin Islands Public Finance Authority negotiated a settlement assuming a rate of $13.25, but should have used the rate of $10.50, Sarauw said. Lawyers and advisers were paid millions and “dropped the ball”, she added.

Puerto Rico Resident Commissioner Jenniffer González Colón introduced a bill in July to increase the tax rate on rum, as did Virgin Islands Delegate Stacey Plaskett in 2021. So far, drafts of law remain at the House Ways and Means Committee, five paces from the crossing.

With only 16 session days left in this Congress, much would have to be done quickly or a bill would have to be reintroduced in the next Congress.

In August, Plaskett said in a statement that she was “confident” the bill would pass and $13.25 would be applied retroactively, a position she still holds, the press secretary said Friday. Plaskett.

Sarauw said the lower rate has already cost the US Virgin Islands $40 million this year. While it can handle this loss, the rate must be increased before the start of the territorial government’s new fiscal year on October 1, 2023.

Ahead of March’s $995 million repayment, Moody’s Investors Service said the potential for the pension system to run out of money was a key reason for the Caa2 rating it assigned to the fund’s income bonds. first lien consideration, which are reimbursed with the proceeds of the rum tax. If the pension system runs out of money, the government could seek to access the rum tax stream, Moody’s said.

In August, Thomas Aaron, senior credit manager at Moody’s, said: “Reducing the rum tax coverage rate makes less money available to help [the Government Employees’ Retirement System]and contribution receipts are critical for the solvency of GERS.”

If GERS were to run out of assets, the island “probably could not afford the cost of paying pensions in full to retirees while simultaneously providing basic government services and paying debt service”, said said Aaron. “Since USVI is politically unlikely to prioritize debt servicing over retiree pensions, contribution inflows below GERS are credit negative.”

Holders of restructured Puerto Rico Infrastructure Finance Authority tax bonds are also affected by the lower rate. However, the central government’s adjustment plan, which was enacted this spring, took this lower rate into account in calculating the bond’s conditional vehicle instrument payments.

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