Wednesday, October 18, 2006

NEW YORK, USA: Credit rating agency Fitch has assigned a 'BBB-' rating to the general obligation (GO) bonds of the United States Virgin Islands (USVI). The rating applies to $593 million in outstanding GO bonds, the bulk of which are payable from gross receipts collections.

According to Fitch, the rating assignment considers overall progress to date in stabilizing the USVI's finances, tempered by continuing fiscal challenges, a narrow, tourism-dependent economy prone to volatility and a high tax-supported debt burden.

Credit improvement will hinge on continued momentum in addressing financial liabilities, commitment to maintaining fiscal balance and adherence to improved financial reporting and controls. The Rating Outlook is 'Stable'.

The USVI is an organized, unincorporated territory of the US about 40 miles east of the Commonwealth of Puerto Rico.

A statement by Fitch said that the USVI's economy is small and narrow, and consequently subject to volatility, although some diversification has occurred. Tourism and related industries comprise approximately 70% of the economy.

It has largely recovered from the downturn precipitated by the events of September 11, 2001, when cruise ship visits slowed sharply and hotel vacancies increased. Data indicate renewed strength, with visitor numbers surpassing 2.6 million in 2004 and 2005, above the pre-recession peak; tourist expenditures reached a record $1.5 billion in 2005.

The USVI is positioning itself as a luxury tourist destination, with conversion of hotels to timeshares and expansion of marina facilities. August 2006 figures show retail employment grew 3.4% over the prior August, reflecting higher visit volume and the recent addition of big box retailers. Other important sectors include oil refining and rum distilling.

Although August 2006 employment is flat compared to the prior year, the employment picture has improved since the recession, with growth of 4.8% between 2003 and 2005. The territory's government, which provides virtually all municipal services, employs nearly 27% of the labor force; government austerity measures have prompted employment in the sector to decline 11.5% in ten years, to 11,500 from 13,000.

The USVI's financial condition is gradually improving, Fitch said, although persistent challenges remain. Financial mismanagement combined with devastating hurricane strikes weakened finances during the 1990s, resulting in $455 million of borrowing for operations between fiscal-years (FYs) 1998 and 2000, equivalent to 34% of revenues over the period.

A 2000 memorandum of understanding with the US Dept. of Interior resulted in a 5-year financial recovery plan, limiting spending, shrinking government payroll, and improving financial controls; a 5-year follow up MOU is pending. Reporting has improved, with audit qualifications reduced to 35 in FY2004 from 126 in FY1999; still, the FY2005 audit is not expected until March 2007.

A number of financial challenges remain; for instance property taxes are levied at 1998 valuations pending court approval of an updated appraisal system, restricting revenue growth. In addition, the territory faces a $392 million liability for negotiated, but unfunded, employee salaries for the FYs1992-2005 period.

Still, fiscal results have improved, with operating surpluses in four of the last five fiscal years; FY2005's operating surplus was $51.2 million, approximately 8.1% of revenues. Preliminary FY2006 figures report revenues and transfers rose 21.6% over the prior year, to $769 million, on the strength of individual and corporate tax collections, the islands' major revenue source.

The FY2007 budget, signed earlier this month, anticipates revenues and transfers rising an additional 13.2%, to $870 million; the territory expects to end the year with a $32 million projected surplus. The budget includes a small, $10 million appropriation for a new rainy day fund.

A very high debt burden constrains financial flexibility and weighs on the USVI's credit quality. Excluding revenue-supported agency debt, tax-supported debt totals about $1.15 billion, equivalent to 52% of personal income and $10,272 per capita.

The USVI has a total of $602 million in GO debt, most of which is supported by a gross receipts tax pledge payable prior to most other governmental uses, and allocated daily to a lockbox pursuant to a collecting agent agreement. Another $537 million is backed by federal matching funds from excise taxes levied on USVI-distilled rum.

Total debt service of $90.6 million equals 13.1% of FY2005 expenditures. Amortization is slow, with 32% maturing in 10 years. The territory also has small amounts of tobacco settlement and federal transportation funding-supported debt outstanding.

The USVI plans to issue debt this year to address persistent pension under funding; the FY2003 funding ratio was 59%, leaving an unfunded liability of $922 million.

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