The Virgin Islands Daily News

Legislature to take up budget amid rum cover-over uncertainty

The 30th Legislature is planning to special order to the floor legislation to enact the Fiscal Year 2014 budget during a two-day legislative session that starts today, as the final days of FY 2013 wind down.

The budget bills stalled last week and were held in the Senate Finance Committee on news that the government would have less money in its coffers than anticipated at the start of FY 2014. The unexpected shortfall is the result of the territory receiving a lower advance from the Department of Interior on rum cover-over revenue than it had requested.

Last week, Government House issued a statement that the U.S. Department of Interior reduced the territory's advance payment on rum cover-over revenues by about $71 million from what the territory had requested. The V.I. government had planned to deposit about $35 million of the $71 million into the General Fund for government operations, according to Office of Management and Budget Director Debra Gottlieb.

The reduced money the territory will see stems from the Dec. 31 expiration of a temporary federal excise tax provision that keeps the territory's rum tax rebate, also called the cover-over, at $13.25 per proof gallon for Virgin Islands-produced rum sold in the United States. On Jan. 1, the rate will revert to $10.50 per proof gallon unless Congress passes a measure to extend the higher rate.

For every proof-gallon of Virgin-Islands produced rum sold in the United States, the federal government collects $13.50, of which a portion is returned - or covered-over - to the territory.

Every year, the territory requests an advance payment from the Interior Department on its anticipated cover-overs, based on production estimates by the two rum distilleries located here, Cruzan and Diageo.

For FY 2014, the territory had requested an advance payment on the rum cover-over based on the $13.25 rate for the entire year, but Interior paid the advance based on the $13.25 rate until the Dec. 31 expiration date and then used the lower $10.50 rate for the rest of the year.

This week, Interior released information on the method it used to calculate the $193,166,475 advance payment to the territory, as well as a letter from Nikolao Pula, director of Interior's Office of Insular Affairs, to Gov. John deJongh Jr., explaining why that amount was provided, instead of the $263,928,448 the governor requested.

In the letter, dated last week, Pula acknowledges deJongh's $263.9 million request, notes that it is based on a rate of $13.25 per proof gallon and states that he has instead forwarded a payment that is based on the $13.25 rate for October through December and the $10.50 rate for the rest of the year.

"Please note that the rate calculation was handled in the same manner last year," Pula said in his letter.

Pula said that the advance Interior provided a year ago was based on the $10.50 rate because legislation had not yet been enacted to extend the $13.25 rate. Then, once legislation passed Congress, Interior provided an additional payment to adjust the advance to the $13.25 rate, Pula said.

"If similar legislation is enacted this fiscal year which impacts the rate for fiscal year 2013, I will consider processing an additional adjustment payment at the enacted proof gallon rate," Pula wrote. "If the rate is extended, please submit a written request for this additional payment."

Jessica Kershaw, a spokeswoman for the Interior Department, said in a written response to a Daily News inquiry that the payment calculation method is not new "and has been performed similarly by the Department in recent years with prudent, advance estimated payments based upon the enacted rate, and adjustments have been paid if and when Congress acted to adjust the rates."

The Interior Department also released an explanation of how it calculated the $193,166,475 advance that was provided to the territory.

According to Kershaw, the territory's advance request of $263,928,448 included an adjustment amount for "prior year actuals" for 2013 that cannot be processed until the Office of Insular Affairs receives 12 months of actual data for 2013 from the U.S. Treasury Department.

Those "prior year actuals" account for about $21.9 million of the $263,928,448 request, and that amount was deducted.

The territory's 2014 advance estimate was based on 18,264,471 proof gallons and totaled $242,004,241, Kershaw said.

The Office of Insular Affairs calculated 4,566,118 proof gallons for the first quarter at the $13.25 rate, then calculated the remaining proof gallons - 13,698,353 - at the lower $10.50 rate and added those sums together for a total of $204,333,770, she said.

Next, Insular Affairs deducted $11,167,295 for amounts the territory owed to the Office of Insular Affairs for an overpayment that was made to the territory in 2012, Kershaw said.

That leaves $193,166,475, which was advanced to the territory the week of Sept. 9.

On Wednesday, Senate President Shawn-Michael Malone told The Daily News that the plan at that point was to offer budget bills at the Senate session without considering the estimated $35 million shortfall to the General Fund from the reduced cover-over advance, because the money might be forthcoming at any point during the fiscal year.

The Interior Department, Malone said, has not said the rest of the request won't be paid - just that it won't be paid right now.

"The Senate can also revise the budget as we go along," Malone said. The current situation "doesn't preclude us from passing the budget at the $13.25 level," he said.

Senators already had been working on ways to enhance revenue and reduce spending, to close other anticipated budget gaps, senators have said previously.

Gottlieb and Malone have both sent letters to the Interior Department asking the federal agency to base the rum cover-over advance on the $13.25 rate.

- Contact Joy Blackburn at 714-9145 or email

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