The V.I. government’s recent attempt to refinance outstanding debt of the Public Finance Authority required the creation of a special purpose financing vehicle — titled the Matching Fund Securitization Corporation.
The Matching Fund Securitization Corporation was necessary because the PFA’s extremely poor credit rating precludes its access to the bond market. The PFA is also an special purpose financing vehicle. It was created 32 years ago with similar motivation: to issue debt on behalf of the V.I. government, because its underlying credit was losing favor in the bond markets.
The failure of the financing, the second failed attempt in four years, highlights two related issues concerning the V.I. government’s fiscal and financial management: the PFA is no longer able to fulfill its statutory mandate, and therefore needs to be repurposed; and the use of special purpose financing vehicles to bypass its poor credit rating, is abetting the V.I. government’s dereliction of its duty, to do — according to an Aug. 25 published report — “what is necessary to be considered a financially responsible borrower.”
The PFA was created by the Government Capital Improvement Act of 1988 (Act No. 5365), “due to a general decline in investor acceptance of securities of the Virgin Islands.” It was established as a public corporation and autonomous government entity, with a mandate to aid the V.I. government in performing its fiscal duties, and to raise and manage capital for essential public projects. Pursuant to this mandate, it was authorized to issue and to sell bonds, and to manage the proceeds.
The strategy was that the PFA, with a better credit rating than the V.I. government, will issue bonds and lend the proceeds to it to fund essential public projects. As of the fiscal year ending Sept. 30, 2018, its most recent audited financial statements, the PFA had approximately $2 billion of bonds payable to bondholders, and about the same amount due to it from the V.I. government. However, since its last issuance of bonds in 2014, the PFA has been unable to access the bond market, because its credit is now rated as poorly as the V.I. government — currently categorized as “very-high risk” (Caa3 by Moody’s).
The PFA’s independent auditor provides context for this rating, as follows: “The [PFA’s]ability to repay its obligations … is highly dependent on payments from the government. The government faces various fiscal, economic and liquidity challenges. There are no assurances that the government’s plans will be sufficient to avoid defaulting on its debts to the [PFA].” [FY 2018 Audit Opinion, June 20] In other words, if the V.I. government were to default on its debt to the PFA, it will trigger a PFA default on its debt to bondholders.
With its credit rating entangled by the V.I. government’s, the PFA cannot fulfill its primary statutory purpose — to borrow money to fund essential government projects — unless and until the V.I. government’s underlying credit worthiness is restored. This affirms the published report’s insight that “it’s the government’s credit that needs addressing”. To justify its continued existence, the PFA should be repurposed with a mandate to restore the V.I. government’s credit rating to investment grade: as confirmed by a nationally recognized credit rating agency. It will be authorized, by Virgin Islands statute, to impose the fiscal discipline necessary to put our own fiscal house in order.
Its restated responsibility would be to oversee a strategic plan for the V.I. government’s fiscal and financial rehabilitation. Specifically, it will establish benchmarks and milestones for remediating the key factors that negatively influence the V.I. government’s credit rating: significant structural deficits, high debt levels (particularly the large unfunded pension liability) and chronically weak liquidity. Accordingly, it will be empowered to vet major V.I. government fiscal and financial decisions and initiatives, including the annual budget, for compliance with established guidelines and objectives.
In 2003, then Delegate to Congress Donna Christensen introduced legislation in Congress to require the appointment of a chief financial officer for the Virgin Islands. The stated intent was “to move [the V.I. government] from crisis management to a sound financial standing for the long term.” Predictably, the measure died from vigorous local opposition, but the motive and the message were on point. Seventeen years later, the V.I. government has still not established a sound financial footing; neither for the short nor the long term. Its poor credit rating and resulting inability to access the capital markets on normal commercial terms, are direct consequences of this dereliction.
It is far better that we discipline ourselves, lest it be imposed by default.
— Nellon Bowry, who served as Office of Management and Budget director, resides on St. Croix.