Hurricane Irma was still a Category 5 storm when it ravaged the U.S. Virgin Islands last week. Damage to the territory’s tourism infrastructure may compel the government to use the bankruptcy process that Congress created for neighboring Puerto Rico last year.
The islands of St. John and St. Thomas — which have most of the territory’s hotel rooms — were devastated. Tourists had to be evacuated on cruise ships to Puerto Rico, and it is unclear when they will be able to return. With the storm destroying much of St. John’s lush flora, it may be a long time before the island becomes an attractive destination again.
Since tourism is the territory’s major industry, Irma’s long-term impact is likely to be a sharp decline in tax revenues. Aside from lost hotel occupancy taxes and reduced income tax revenues from tourist-sector employees, resorts may be unable to make property tax payments.
The U.S. Virgin Islands was already in deep financial trouble before the hurricane hit. In its 2016 financial statements, the government reported $2.1 billion in outstanding bonds and loans — about $20,000 per capita, far in excess of any U.S. state. Although the central government balanced its budget in 2016, the public power authority, government hospital and university all ran large operating deficits.
After years of underfunding, the territory’s public pension system is deeply underwater. The 2016 actuarial valuation report showed an increase in its net pension liability from $4.1 billion to $4.7 billion. The system’s funded ratio was just 16.54 percent and actuaries project that its assets will be fully depleted in 2023.
Finally, U.S. Virgin Islands has a $357 million liability arising from health care and other benefits it provides to retired former employees, but it does not pre-fund these benefits.
Before Irma struck, the islands’ fiscal problems were drawing attention in the creditor community. In January, the government was unable to sell a new bond issue. In February, the U.S. Department of Labor classified its Virgin Islands counterpart as a “high-risk grantee” placing the territory at risk for losing federal funds.
In August, S&P and Fitch lowered their ratings on the Virgin Islands to CCC+ and CCC respectively — deep in junk territory. Later in the month, the Virgin Islands government informed the rating agencies that it would no longer supply them with information needed to evaluate the territory’s liquidity, making the withdrawal of credit ratings likely.
All of this suggests that, without a federal bailout, a default on Virgin Islands debt is likely. Although the federal government will undoubtedly provide large amounts of near-term disaster assistance and help with rebuilding, it is less clear that U.S. taxpayer money will be used to fill the empty coffers of the Virgin Islands government. With billions being spent on Harvey and Irma relief in the politically potent states of Texas and Florida, Congress may be less inclined to provide funding for a small, out-of-the-way territory that does not have its own representative.
During last year’s debate over the PROMESA bill creating a fiscal plan for Puerto Rico, Republican lawmakers insisted that the legislation include no financial aid to that island’s government. Instead, the bill imposed a fiscal control board and created a legal mechanism for adjusting that territory’s obligations. Neither retirees nor bondholders are getting 100 cents on the dollar, and that outcome may well set a precedent for the Virgin Islands.