CHARLOTTE AMALIE, Virgin Islands    
    The U.S. Virgin Islands is best known for its powdery beaches    and turquoise bays, a constant draw for the tourists who    frequent this tiny American territory.  
    Yet away from the beaches the mood is ominous, as government    officials scramble to stave off the same kind of fiscal    collapse that has engulfed its neighbor Puerto Rico.  
    The public debts of the Virgin Islands are much smaller than    those of Puerto Rico, which effectively declared bankruptcy in    May. But so is its population, and therefore its ability to    pay. This tropical territory of roughly 100,000 people owes    some $6.5 billion to pensioners and creditors.  
    Now, a combination of factors  insufficient tax revenue, a    weak pension system, the loss of a major employer and a new    reluctance in the markets to lend the Virgin Islands any more    money  has made it almost impossible for the government to    meet its obligations. In January, the Virgin Islands found    itself unable to borrow and nearly out of funds for basic    government operations.  
    The sudden cash crunch was a warning sign that the financial    troubles that brought Puerto Rico to its knees could soon    spread. All of Americas far-flung territories, among them    American Samoa, Guam and the Northern Mariana Islands, appear    vulnerable.  
    I dont think you can say its a crisis, but they have    challenges  high debt, weak economies and unfunded pensions,    said Jim Millstein, whose firm, Millstein & Co., advised    Puerto Rico on its economic affairs and debt restructuring    until this year and has reviewed the situation in Guam and the    Virgin Islands. He called the combination of challenges in the    territories a recipe for trouble in the future.  
    For decades, these distant clusters of islands in the Caribbean    and the Pacific have played critical roles as U.S. listening    posts, wartime staging grounds, practice bombing ranges and    even re-entry points for astronauts splashing down in the    Pacific.  
    The military presence buoyed their small economies, and a    federal tax subsidy made it relatively easy for them to issue    bonds. Over the years, they have collectively borrowed billions    of dollars to build roads, run schools, treat drinking water    and fund hospitals.  
    Congress has generally relied on the Government Accountability    Office to monitor the financial health of the territories, but    it did not intervene over the years when the auditors brought    back reports of formidable fiscal challenges or serious    internal control weaknesses on the islands. Not, at least,    until Puerto Rico went over the edge.  
    Now the GAO auditors are back, re-examining the debt and    repayment ability of each territory, amid concerns that other    crushing debt burdens may have escaped notice. An agency    spokesman, Fuller O. Griffith, said it would report by the end    of the year on federal options to avert the future    indebtedness of territories. It is not clear what those    options will be.  
    Washington cant appropriately manage its relationship with    the states, much less the territories, said Matt Fabian, a    partner at Municipal Market Analytics.  
    Even the states are not immune, despite their legal status as    sovereigns. Illinois, stuck in political gridlock, is just days    from entering its new fiscal year without a balanced budget, in    violation of its own constitution. The ratings agencies warn    that Illinois bond rating is in peril of being downgraded to    junk. Once that happens, as the territories show, hedge funds    move in and economic management becomes a series of unpleasant    choices.  
    American Samoa, one of the smallest territories, lost one of    the biggest engines of its economy in December when a big tuna    cannery closed after being required to pay the federal minimum    wage. Moodys Investors Service then put the territorys debt    under negative outlook, citing its fragile economy.  
    In the Northern Mariana Islands, the depleted public pension    fund was wreaking such fiscal havoc in 2012 that the territory    declared it bankrupt, but the case was thrown out. The    government then tried cutting all retirees pensions 25    percent, but the retirees have been fighting the cuts, and the    fund is nearly exhausted anyway.  
    Even Guam, which enjoys the economic benefit of several large    U.S. military installations, has been having qualms about its    debt after Puerto Ricos default.  
    Puerto Ricos troubles provide a teachable moment for Guam,    said Benjamin Cruz, speaker of the Legislature, who recently    helped defeat a proposal to borrow $75 million to pay tax    refunds. Spending borrowed money is too easy.  
    But the debt dilemma is now most acute in the Virgin Islands     the three main islands are St. Thomas, St. Croix and St. John     where the government has been struggling ever since a giant    refinery closed in 2012, wiping out the territorys biggest    nongovernment employer and a mainstay of its tax base.  
    Its troubles began to snowball in July, when Puerto Rico    defaulted on most of its debts. In August, Fitch downgraded the    Virgin Islands debt to junk, citing the territorys chronic    budget deficits and habit of borrowing to plug the holes, like    Puerto Rico.  
    More downgrades followed, and in December, Standard &    Poors dealt the territory a rare superdowngrade  seven    notches in one fell swoop  leaving it squarely in the    junk-bond realm. That scared away investors and forced it to    cancel a planned bond offering in January.  
    The failed bond deal meant there was not enough cash to pay for    basic government operations in February or March. As a stopgap,    the territory diverted its workers pension contributions.  
    The Virgin Islands governor, Kenneth E. Mapp, said he had no    intention of defaulting on any bonds.  
    I didnt ask anybody for debt relief, so dont put me in the    debt-relief boat, Mapp said in an interview at Government    House, the ornate seat of the territorial government, perched    on a hillside overlooking the lush palms and bougainvillea of    the capital, Charlotte Amalie, on St. Thomas.  
    Still, Mapp is contending with many of the same problems that    proved too much for Puerto Rico, driving it in May to seek    bankruptcy-like protection under a new law for insolvent    territories, known as Promesa. Puerto Rico is now embroiled in    heated negotiations over how to reduce its roughly $123 billion    in debts and unfunded pensions.  
    When Congress drafted the Promesa law last year, it made it    possible for the other U.S. territories to seek the same kind    of help.  
    Now, even though the Virgin Islands maintains it has no    intention of defaulting on its debts  and has even given    creditors new protections  the mere prospect of bankruptcy has    spooked the markets, putting borrowed money beyond the    territorys reach and greatly limiting its options.  
    In something of a self-fulfilling prophecy, by giving    territories the option to declare bankruptcy, Congress seems to    have made such an outcome more likely.  
    That innocuous provision, when sent to the bond market, said,    Heres an escape valve for your debt obligations,' Mapp said.    That changed the whole paradigm.  
    The problem is that in Puerto Rico, Promesa is turning out to    shred the many legal mechanisms that governmental borrowers use    to make their debts secure. These include liens and allowing    creditors access to the courts.  
    Under Promesa, all the security structures are dissolving,    Fabian said.  
    Investors who thought they were secured creditors before now    find themselves holding moral obligation pledges, which are not    enforceable.  
    After the Virgin Islands bond offer fell through in January,    the fuel supplier to its electric authority stopped shipments,    saying it had not been paid; the authority was in court with    its previous fuel supplier, which had not been paid either.  
    Then came the House of Representatives plan to repeal and    replace the Affordable Care Act. Mapp saw the federal money    that the Virgin Islands relies on for its public hospitals    going up in smoke.  
    Mapp scrambled. He reactivated a five-year economic plan that    had been languishing and pushed higher taxes on alcohol,    cigarettes and soft drinks through the Legislature. He fought    for a permanent electric rate increase. He got $18 million in    new federal funds for health care. He struck a deal to tax    Airbnb rentals.  
    He hired collection agents to go after delinquent property and    income taxes. He scheduled auctions for delinquent properties.    He hired a team to work on the pension system, which is in    severe distress, with only about six years worth of assets    left.  
    Until recently, the pension system was chasing high returns by    investing in high-risk assets, like a $50 million placement in    life viaticals  an insurance play that is, in effect, a bet    that a selected group of elderly people will die soon. It also    made loans to an insolvent inter-island airline, a resort that    went bankrupt, and a major franchisee of KFC restaurants. The    territorys inspector general has declared the loans illegal.  
    Mapp said he hoped to start restructuring the pension system in    the fall. Already, he said, the government had stopped    diverting the workers pension contributions, as residents    began filing their tax returns and payments in April. The tax    payments eased the immediate liquidity crisis.  
    Recently, he met with Treasury Secretary Steven Mnuchin to    discuss possible incentives to attract tech business to the    Virgin Islands. And he hopes to return to the capital markets.  
    The fact that we didnt complete the sale in January gives the    impression that our market access is constrained, said    Valdamier O. Collens, the territorial finance commissioner.  
    Investors have nothing to worry about, said the governor. For    decades, the Virgin Islands has used a lockbox arrangement that    makes default all but impossible.  
    Merchants collect sales taxes and send the money to a trustee    for the bondholders. Not a cent goes to the territorial    government, including the pension fund, until the bond trustee    gets enough to make all scheduled bond payments for the coming    year.  
    We have no access to the moneys before the bondholders are    paid, Mapp said. These moneys are taken out of the pie before    the pie is even in the oven. Our debt has never been in    jeopardy.  
    But in Puerto Rico, such lockbox arrangements have turned out    to be one of the thorniest disputes of the bankruptcy    proceedings. And Collens, the finance commissioner, is all too    aware that the same dynamic could upend the Virgin Islands,    too.  
    We know that there has been a contagion effect with Puerto    Rico, Collens said. The market saw that by the stroke of a    pen, Congress could create a Promesa for the rest of the    territories.  
Original post:
After Puerto Rico's debt crisis, worries shift to Virgin Islands - MyAJC