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1305-1079124 B A S I C F I N A N C I A L S T A T E M E N T S Government of the United States Virgin Islands Year Ended September 30, 2011 With Report of Independent Auditors 1305-1079124 Government of the United States Virgin Islands Basic Financial Statements Year Ended September 30, 2011 Table of Contents Page Report of Independent Auditors .................................................................................................. 1 Management’s Discussion and Analysis (MD&A) ...................................................................... 6 Basic Financial Statements Government-wide Financial Statements: Statement of Net Assets (Deficit) ........................................................................................... 19 Statement of Activities ........................................................................................................... 21 Fund Financial Statements: Balance Sheet – Governmental Funds ..................................................................................... 23 Statement of Revenues, Expenditures, and Changes in Fund Balances – Governmental Funds ........................................................................................................... 24 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities – Governmental Funds ............................... 25 Statement of Revenues and Expenditures – Budget and Actual – Budgetary Basis – General Fund ........................................................................................................... 26 Statement of Net Assets (Deficit) – Proprietary Funds ............................................................ 27 Statement of Revenues, Expenses, and Changes in Fund Net Assets (Deficit) – Proprietary Funds ............................................................................................... 28 Statement of Cash Flows – Proprietary Funds ......................................................................... 29 Statement of Fiduciary Net Assets – Fiduciary Funds ............................................................. 30 Statement of Changes in Fiduciary Net Assets – Fiduciary Funds ........................................... 31 Notes to Basic Financial Statements ....................................................................................... 32 Required Supplementary Information Required Supplementary Information (other than MD&A): Schedule of Funding Progress .............................................................................................. 144 Schedule of Employer Contributions .................................................................................... 146 Other Report Report on Internal Control over Financial and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards ................................................................ 147 1305-1079124 1 A member firm of Ernst & Young Global Limited Ernst & Young LLP 1000 Scotiabank Plaza 273 Ponce de León Avenue San Juan, PR 00917-1951 Tel: 787 759 8212 Fax: 787 753 0808 www.ey.com Report of Independent Auditors The Honorable Governor of the Government of the United States Virgin Islands: We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the Government of the United States Virgin Islands (the Government), as of and for the year ended September 30, 2011, which collectively comprise the Government’s basic financial statements, as listed in the table of contents. These financial statements are the responsibility of the Government’s management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the following component units: x The Virgin Islands Lottery (V.I. Lottery), a nonmajor enterprise fund, which represents 0.4%, and 3.6%, respectively, of the assets, and revenues of the aggregate remaining fund information, and 12.0%, 4.0%, and 30.4%, respectively, of the assets, net assets, and revenue of the business-type activities. The V.I. Lottery net deficit represents $1.6 million of the $1.3 billion net asset/fund balance of the aggregate remaining fund information. x The Tobacco Settlement Financing Corporation, a blended component unit, which represents 0.2%, 0.2%, and 0.4%, respectively, of the assets, net assets/fund balance, and revenue of the aggregate remaining fund information, and 1.0%, 0.7%, and 0.2%, respectively, of the assets, net deficit, and revenue of the governmental activities. x The Employees’ Retirement System of the Government of the Virgin Islands (GERS), a fiduciary component unit (pension trust fund), which represents 90.0%, 95.6%, and 26.1%, respectively, of the assets, net assets/fund balance, and revenue of the aggregate remaining fund information. x The Virgin Islands Housing Authority (VIHA), Virgin Islands Public Television System (VIPTS), Virgin Islands Economic Development Authority (VIEDA), Magens Bay Authority (MBA), Virgin Islands Government Hospital and Health Facilities Corporation (Roy L. Schneider Hospital and Juan F. Luis Hospital and Medical Center), the Virgin Islands Housing Finance Authority (VIHFA), University of the Virgin Islands, and the Waste Management Authority (WMA), discretely presented component units, which collectively represent 41.0%, 50.0%, and 49.0%, respectively, of the assets, net assets, and revenue of the aggregate discretely presented component units. 1305-1079124 2 These financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinions, insofar as they relate to the amounts included for the activities, funds, and component units indicated above, are based on the reports of other auditors. Except as discussed in the following six paragraphs, we conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Government’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Government’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our opinions. The report of the other auditors on the 2011 financial statements of VIHFA, a discretely presented component unit, was qualified because the auditors were unable to obtain sufficient audit evidence to determine whether assets transferred from Department of Planning and Natural Resources of cash and cash equivalents of $17.0 million, investments of $4.4 million, and capital assets of $11.9 million were fairly stated. The report of other auditors on the 2011 financial statements of VIPTS, a discretely presented component unit, was qualified because the auditors were unable to obtain sufficient audit evidence to determine whether capital assets of $5.9 million were fairly stated. The report of other auditors on the 2011 financial statements of GERS, a fiduciary component unit (pension trust fund), was qualified because GERS maintained investments in a limited partnership valued at $52.9 million whose fair value has been estimated in the absence of a readily determinable fair value. GERS’ estimate was based on information provided by the general partner of the limited partnership. The effect on the financial statements as a result of GERS’ inability to document its procedures for determining fair value of the investment was not determinable. 1305-1079124 3 The report of other auditors on the 2011 financial statements of the V.I. Lottery, a nonmajor enterprise fund, was qualified because the auditors were unable to obtain sufficient audit evidence to determine whether the amount due to the general fund of $4.5 million was fairly stated. The report of other auditors on the 2010 financial statements of WMA, a nonmajor discretely presented component unit, was qualified because the auditors were unable to obtain sufficient audit evidence to determine whether capital assets of $79.4 million were fairly stated. As more fully described in Note 1 to the financial statements, the September 30, 2011 balances are supported by the 2010 audit report. The Government did not maintain the requisite documentation to support its accrued retroactive liability of $195.3 million as of September 30, 2011 and the opening balances of its retroactive pay, landfill closure and post-closure costs and accrued compensated absences liabilities for fiscal year 2011. As a result, we were unable to obtain sufficient audit evidence to determine whether adjustments to these balances in the governmental activities were required. The basic financial statements do not include a liability for medical malpractice claims in the reciprocal insurance fund (a non-major enterprise fund) and, accordingly, the Government has not recorded an expense for the current period change in that liability. The Government’s records do not permit it, nor is it practical to extend our auditing procedures sufficiently to determine the extent by which the business-type activities, government insurance fund, and aggregate remaining fund information as of and for the year ended September 30, 2011 may have been affected by this condition. Because of the matters discussed in the preceding paragraph of this report, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the financial position of the business-type activities and aggregate remaining fund information as of September 30, 2011. In addition, we do not express an opinion on the changes in financial position of the business-type activities, government insurance fund, and aggregate remaining fund information and, where applicable, cash flows for the year ended September 30, 2011. In our opinion, based on our audit and the reports of other auditors, except for the effect of the adjustments, if any, as might be determined to be necessary, had the other auditors been able to obtain sufficient audit evidence to determine whether (1) cash and cash equivalents of $17.0 million, investments of $4.4 million, and capital assets of $11.9 million in the financial statements of VIHFA, (2) capital assets of $5.9 million in the financial statements of VIPTS, (3) amount due to the general fund of $4.5 million in the V.I. Lottery financial statements, and (4) capital assets amounting to $79.4 million in the WMA financial statements were fairly stated 1305-1079124 4 as described above, and the effect of the adjustments, if any, as might be determined to be necessary, had we been able to obtain sufficient audit evidence to determine whether the opening balance of the accrued compensated absences liability, retroactively pay liability, and landfill closure and post-closure liability and the ending retroactive pay liability balance in the governmental activities were fairly stated as described in paragraph nine above, the financial statements referred to previously, present fairly, in all material respects, the respective financial position of the aggregate discretely presented component units and the governmental activities of the Government of the United States Virgin Islands, as of September 30, 2011, and the respective changes in financial position for the year then ended in conformity with U.S. generally accepted accounting principles. Finally, in our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of each major fund of the Government of the United States Virgin Islands, as of September 30, 2011, and the respective changes in financial position of the general fund, PFA debt service fund, PFA capital projects fund, and WICO; and respective budgetary comparison for the general fund for the year then ended in conformity with U.S. generally accepted accounting principles. As described more fully in Note 18 to the financial statements, as of October 1, 2010, the beginning net assets (deficit) of governmental activities and component units were restated by $61.3 million and $65.6 million, respectively. As more fully described in Note 1, during the year ended September 30, 2011, the Government adopted Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. In accordance with Government Auditing Standards, we have also issued our report dated June 28, 2013, on our consideration of the Government’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. 1305-1079124 5 The management’s discussion and analysis, and the schedules of funding progress and employer contributions listed under required supplementary information in the table of contents are not a required part of the basic financial statements, but are supplementary information required by the Governmental Accounting Standards Board. We and the other auditors have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.  June 28, 2013 Government of the United States Virgin Islands Management’s Discussion and Analysis Year Ended September 30, 2011 1305-1079124 6 Introduction The following management’s discussion and analysis presents an overview of the financial position and activities of the Government of the United States Virgin Islands (the Government) as of and for the fiscal years ended September 30, 2011 and 2010. Government-wide Financial Statements The government-wide financial statements are designed to present an overall picture of the financial position of the Government. These statements consist of the statement of net assets (deficit) and the statement of activities, which are prepared using the economic resources measurement focus and the accrual basis of accounting. This means that current year’s revenue and expenses are included regardless of when cash is received or paid, producing a view of financial position and changes in financial position similar to that presented by most private-sector companies. The statement of net assets (deficit) combines and consolidates the Government’s current financial resources with capital assets and long-term obligations. Both of the above-mentioned financial statements have separate sections for three different types of the Government programs or activities. These three types of activities are as follows: Governmental Activities – The activities in this section are mostly supported by taxes and intergovernmental revenue (federal grants). Most services normally associated with the primary government (PG) fall into this category, including general government, public safety, health, public housing and welfare, education, transportation and communication, and culture and recreation. Business-Type Activities – These functions normally are intended to recover all or a significant portion of their costs through user fees and charges to external users of goods and services. These business-type activities of the Government include the operations of the (i) unemployment insurance program and (ii) the West Indian Company (WICO). Both of these programs operate with minimal assistance from the governmental activities of the Government. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1305-1079124 7 Discretely Presented Component Units – These are operations for which the Government has financial accountability even though they have certain independent qualities as well. For the most part, these entities operate similar to private sector businesses and the business-type activities described above. The Government’s discretely presented component units are presented in two categories, major and nonmajor. This separation is determined by the relative size of the entities’ assets, liabilities, revenue, and expenses in relation to the total of all component units. Fund Financial Statements Fund financial statements focus on the most significant (or major) funds of the Government. A fund is a separate accounting entity with a self-balancing set of accounts. The Government uses funds to keep track of sources of funding and spending related to specific activities. The Government uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. A major fund is a fund whose revenue, expenditures or expenses, assets, or liabilities (excluding extraordinary items) are at least 10% of the corresponding totals for all governmental or enterprise funds and at least 5% of the aggregate amount for all governmental and enterprise funds for the same item. The general fund is always considered a major fund. In addition to funds that meet the major fund criteria, any other governmental or enterprise fund that the Government believes is particularly important to the financial statements may be reported as a major fund. All of the funds of the Government are divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental Funds Governmental funds are accounted for using the modified accrual basis of accounting, which measures cash and other assets that can be readily converted to cash. The governmental funds statements provide a detailed short-term view of the PG’s general governmental operations and the basic services it provides. The reconciliation following the fund financial statements explains the differences between the governmental activities, reported in the government-wide financial statements, and the governmental funds’ financial statements. The General Fund, the PFA debt service fund and the PFA capital projects fund are reported as major governmental funds. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1305-1079124 8 The General Fund is the PG’s primary operating fund. It accounts for all financial resources of the PG, except those required to be accounted for in another fund. The PFA debt service fund accounts for the resources accumulated, and payments made, for principal and interest on long-term general obligation debt issued by the PFA on behalf of the Government. The PFA capital projects fund accounts for bond proceeds of debt issued by the PFA on behalf of the Government. The bond proceeds have been designated for certain necessary public safety and capital development projects which are accounted for in this fund. The governmental fund activities are reported in a separate balance sheet and statement of revenues, expenditures, and changes in fund balances. Additionally, the government presents a reconciliation of the statement of revenues, expenditures, and change in fund balances, to the statement of activities. Proprietary Funds Services provided to outside (nongovernmental) customers are reported in enterprise funds. Enterprise funds are accounted for using the economic resources measurement focus and the accrual basis of accounting. These are the same business-type activities reported in the government-wide financial statements. The West Indian Company (WICO) fund and the Unemployment Insurance Fund are major proprietary funds. The WICO fund accounts for the activities of WICO, which owns a port facility including a cruise ship pier, and manages a shopping mall complex on the island of St. Thomas. The Unemployment Insurance Fund is a federally mandated program to manage unemployment insurance. The proprietary fund activities are reported in a separate statement of net assets (deficit), statement of revenues, expenditures, and changes in fund net assets (deficit) and statement of cash flows. Fiduciary Funds The fiduciary activities are reported in a separate statement of fiduciary net assets and a statement of changes in fiduciary net assets. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1305-1079124 9 Financial Analysis of the Government as a Whole The PG and its component units continue to experience a downturn in the economy following the economic recession of 2008. The Government has initiated several actions to offset the negative impact of these financial challenges. The Government continues to promote environmentally safe industries into the USVI. The Government is participating in the American Recovery and Reinvestment Act, obtaining: 1) federal grants for energy, health, education and other construction projects, and 2) federal loss recovery for tax initiatives such as the Making Work Pay and Additional Child tax credits. To improve cash flow, the PG overhauled the property tax assessment and valuation system, proposed increases to locally assessed taxes, and enacted expenditure reduction initiatives. In fiscal year 2011, the Government issued the 2010A Working Capital Notes in the amount of $131.4 million to pay the outstanding balance of the 2009B Working Capital Notes of $6.4 million, and to provide $125.0 million in working capital for various operating expenses. The Government also issued the Series 2011A Gross Receipts Tax Loan Notes in the amount of $32.2 million to upgrade Virgin Islands broadband technology infrastructure and equipment, and provided an additional $4.0 million to a private developer under the 2009A Tax Increment Note. During fiscal year 2011, the Government borrowed $10.4 million from the U.S. Treasury to fund Unemployment Trust Fund benefit payments. Financial Analysis of the Primary Government Total assets of the PG as of September 30, 2011 and 2010, were approximately $1.8 billion and $1.9 billion, respectively, a decrease of approximately $142.3 million. Total liabilities as of September 30, 2011 and 2010, were $3.0 billion and $2.9 billion, respectively, an increase of approximately $74.3 million. As of September 30, 2011, the PG net deficit of $1.2 billion consisted of $256.9 million invested in capital assets, net of related debt; $218.0 million restricted by statute or other legal requirements that were not available to finance day-to-day operations of the Government; and an unrestricted net deficit of $1.7 billion. As of September 30, 2010, the PG net deficit of $953.2 million consisted of $264.9 million invested in capital assets, net of related debt; $1.0 billion restricted by statute or other legal requirements that were not available to finance day-to-day operations of the Government; and an unrestricted net deficit of $1.47 billion. For the fiscal year ended September 30, 2011, the PG earned program and general revenue amounting to $1.2 billion and reported expenses of $1.4 billion, resulting in an increase in net deficit of $215.9 million. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1305-1079124 10 For the fiscal year ended September 30, 2010, the PG earned program and general revenue amounting to $1.3 billion and reported expenses of $1.6 billion, resulting in an increase in net deficit of $218.8 million. Overall, revenue decreased by approximately $122.4 million in fiscal 2011, when compared to fiscal 2010, mainly due to a decrease in tax revenue of $178.8 million, an increase in operating grants and revenue of approximately $71.5 million, an increase in capital grants of $11.1 million, and a reduction in other general revenue of $26.2 million. Expenses decreased in fiscal 2011 when compared to fiscal 2010, by $122.9 million. A summary of net assets (deficit) and changes in net assets (deficit) for the primary government follows: 2011 2010 2011 2010 2011 2010 (Restated) (Restated) Current assets 957,705 $ 1,069,987 $ (4,903) $ 5,846 $ 952,802 $ 1,075,833 $ Capital assets 749,156 765,231 56,006 51,294 805,162 816,525 Other assets 40,289 47,345 82 919 40,371 48,264 Total assets 1,747,150 1,882,563 51,185 58,059 1,798,335 1,940,622 Long-term debt outstanding 2,422,939 2,476,792 37,539 56,933 2,460,478 2,533,725 Other liabilities 515,590 413,130 55,549 10,413 571,139 423,543 Total liabilities 2,938,529 2,889,922 93,088 67,346 3,031,617 2,957,268 Invested in capital assets, net of related debt 223,155 234,576 33,830 30,394 256,985 264,970 Restricted 216,015 230,067 2,078 2,402 218,093 232,469 Unrestricted (1,630,549) (1,469,915) (77,811) (42,083) (1,708,360) (1,511,998) Total net assets (deficit) (1,191,379) $ (1,005,272) $ (41,903) $ (9,287) $ (1,233,282) $ (1,014,559) $ Liabilities Net Assets Governmental Activities Business-type Activities Total Net Assets (Deficit) – Primary Government September 30, 2011 and 2010 (In thousands) Assets Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1305-1079124 11 2011 2010 2011 2010 2011 2010 (Restated) (Restated) Revenue: Program revenue: Charges for services 35,632 $ 45,511 $ 50,069 $ 51,517 $ 85,702 $ 97,028 $ Operating grants and contributions 377,727 295,577 14,701 25,257 392,428 320,834 Capital grants and contributions 40,688 29,541 – – 40,688 29,541 General revenue: Taxes 684,199 863,063 – – 684,199 863,063 Interest and other 21,652 36,525 81 108 21,733 36,633 Other general revenue 2,124 2,136 – – 2,124 2,136 Total revenue 1,162,022 1,272,353 64,851 76,882 1,226,873 1,349,235 Expenses: General government 495,458 722,330 – – 495,458 722,330 Public safety 68,166 71,526 – – 68,166 71,526 Health 143,558 160,679 – – 143,558 160,679 Public housing and welfare 142,146 139,689 – – 142,146 139,689 Education 298,610 277,003 – – 298,610 277,003 Transportation and communication 86,505 70,637 – – 86,505 70,637 Culture and recreation 12,252 9,470 – – 12,252 9,470 Interest on long-term debt 99,340 87,208 – – 99,340 87,208 Unemployment insurance – – 40,785 26,005 40,785 26,005 West Indian Company – – 9,779 11,476 9,779 11,476 Workmen’s compensation – – 13,223 13,835 13,223 13,835 VI Lottery – – 20,256 20,495 20,256 20,495 Other – – 12,724 16,733 12,724 16,733 Total expenses 1,346,035 1,538,542 96,767 88,544 1,442,802 1,627,086 Changes in net assets (deficit) before transfers (184,013) (266,189) (31,916) (11,662) (215,929) (277,851) Transfers 700 700 (700) (700) – – 700 700 (700) (700) – – Change in net deficit (183,313) (265,489) (32,616) (12,362) (215,929) (277,851) Net assets (deficit) at beginning of year, (1,005,274) (739,785) (9,287) 3,075 (1,014,561) (736,710) as restated Net assets (deficit) at end of year (1,188,587) $ (1,005,274) $ (41,903) $ (9,287) $ (1,230,490) $ (1,014,561) $ Business-type Activities Changes in Net Assets (Deficit) – Primary Government September 30, 2011 and 2010 (In thousands) Total Governmental Activities Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1305-1079124 12 The Virgin Islands Office of Management and Budget of the PG prepares an annual executive budget subject to approval by the Governor and the Legislature of the Virgin Islands. The executive budget is prepared on a budgetary basis similar to the cash basis of accounting. The executive budget includes only those funds that are subject to appropriation by law. More information regarding budgetary procedures is provided in Note 3 of the basic financial statements. A summary of the budgetary report for the General Fund of the PG, included on page 26 of the financial statements, follows: Original Amended Budget Budget Actual Variance Total revenues 572,322 $ 572,322 $ 636,775 $ 64,453 $ Total expenditures 743,733 781,948 830,083 (48,135) Deficiency of revenues under expenditures (171,411) (209,626) (193,308) 16,318 Other financing sources, net 209,626 209,626 227,174 17,548 Excess (Deficiency) of revenues and net other financing sources over expenditures 38,215 $ – $ 33,866 $ 33,866 $ Revenue and Expenditures – Budget and Actual – Budgetary Basis – General Fund Year Ended September 30, 2011 (In thousands) For fiscal 2011, the PG realized a favorable budgeted revenue variance of $64.4 million mainly due to an increase in federal grants and contributions of $78.2 million, and a decrease of tax collections of $17.8 million. The PG realized a $65.3 million unfavorable expenditure variance due to increases in general government expenditures. The PG realized a $17.5 million variance in other financing sources due to transfers from other funds and the issuance of 2010 Series Notes. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1305-1079124 13 Capital Assets Capital assets additions during fiscal 2011 amounted to $39.5 million for governmental activities and $8.2 million for business-type activities. Capital assets additions during fiscal 2010 amounted to $101.5 million for governmental activities and $2.0 million for business-type activities. The Government’s capital assets include land, land improvements, buildings, building improvements, machinery and equipment, infrastructure, and construction in progress as follows: Note 10 provides detailed information regarding the capital assets of the primary government and the component units of the Government. 2011 2010 2011 2010 2011 2010 (Restated) (Restated) Land and improvements 198,240 $ 195,327 $ 5,495 $ 5,495 $ 203,735 $ 200,822 $ Building and improvements 410,954 397,335 66,434 65,026 477,388 462,361 Machinery and equipment 141,198 134,978 11,213 8,420 152,411 143,398 Infrastructure 223,884 190,105 – – 223,884 190,105 Construction in progress 127,735 147,773 5,661 1,640 133,396 149,413 Total capital assets 1,102,011 1,065,518 88,803 80,581 1,190,814 1,146,099 Less accumulated depreciation (352,855) (320,844) (32,797) (26,228) (385,652) (347,072) Total capital assets, net 749,156 $ 744,674 $ 56,006 $ 54,353 $ 805,162 $ 799,027 $ Governmental Activities Business-type Activities Total Capital Assets – Primary Government (In thousands) Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1305-1079124 14 Debt Administration The Government issues both general obligation bonds and revenue bonds. The Revised Organic Act [48 U.S.C. Section 1574 (b)(ii)] restricts the principal amount of general obligation debt that the Government may issue to no greater than 10% of the aggregate assessed valuation of taxable real property in the U.S. Virgin Islands. Following is a summary of bonds outstanding as of September 30, 2011: Primary Government – Bonds Payable (In thousands) Bonds Payable Maturity Rates (%) Balance 2010 Series A & B Revenue Bonds 2029 4.00 - 5.25 399,050 $ 2009 Series A Revenue Bonds (Cruzan) 2039 3.00 - 6.00 38,640 2009 Series A-1, A-2, B & C Revenue and Refunding Bonds 2040 3.00 - 5.00 450,380 2009 Series A Revenue Bonds (Diageo) 2038 6.00 - 6.75 250,000 2006 Series A Revenue Bonds 2029 3.50 - 5.00 214,385 2006 Series A,B,C & D Tobacco Turbo and Capital Appreciation Bonds 2035 6.25 - 7.625 7,290 2004 Series A Revenue Bonds 2025 4.00 - 5.25 75,235 2003 Series A Revenue Bonds 2033 4.00 - 5.25 248,960 2001 Series A Tobacco Bonds 2031 5.00 15,545 1999 Series A Revenue Bonds 2020 4.20 - 6.50 81,115 Subtotal 1,780,600 Deferred costs on refundings (14,980) Bond premium 31,341 Bond discount (5,465) Bond accretion 3,087 Total 1,794,583 $ Note 11 provide detailed information regarding all bonds of the PG. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1305-1079124 15 In fiscal year 2011, the Government issued the: (1) 2010A Working Capital Notes in the amount of $131.4 million to pay the outstanding balance of the 2009B Working Capital Notes of $6.4 million, and to provide $125.0 million in working capital for various operating expenses, (2) the Series 2011A Gross Receipts Tax Loan Notes in the amount of $32.2 million to upgrade the territory’s broadband technology infrastructure and equipment, and (3) an additional $4.0 million to a private developer in St. Croix under the 2009A Tax Increment Note. During fiscal year 2011, the Government also borrowed $10.4 million from the U.S. Treasury to fund deficits in the Virgin Islands Unemployment Trust Fund. In fiscal year 2010, the Government issued the: (1) 2010 Series A and B Revenue Bonds amounting to $399.1 million to provide working capital to the PG and to refinance a portion of the outstanding Series 2009 B1 and B2 Notes, (2) 2009 Series A Revenue Bonds (the “Cruzan Bonds”) amounting to $39.2 million to finance the costs of a wastewater treatment facility and renovations at the Cruzan VIRIL, Ltd., and (3) 2009 Series A-1, A-2, B and C Revenue and Refunding Bonds amounting to $458.8 million to fund certain capital projects and current refund the 1998 Series A bonds. The current refunding resulted in a saving of approximately $35.9 million and an economic gain of approximately $35.6 million. During fiscal year 2010, the Government also borrowed $13.1 million from the U.S. Treasury to fund deficits in the Virgin Islands Unemployment Trust Fund. The PG made bond principal payments on all outstanding general and special revenue bonds amounting to $25.5 million during fiscal year 2011, and $412.1 million during fiscal year 2010. The Government’s bonds as of the date of this report carry insured ratings of “BBB” and “BBB+” from Fitch Ratings and Standard & Poor’s, respectively. Ratings reflect only the respective views of the rating agencies and an explanation of the significance of each rating may be obtained from the respective rating agency. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1305-1079124 16 Other liabilities of the PG include: Economic Condition and Outlook The PG continues its recovery efforts from the economic recession of 2008 through a combination of revenue initiatives and budgetary restraint on expenditures. Revenue Initiatives The PG has implemented several initiatives to create jobs and promote economic growth including: providing economic incentives to attract a major rum distiller (Diageo) and retain another rum distiller (Cruzan Rum), enactment of tax increment financing legislation, implementation of a broadband infrastructure initiative, continued promotion of tourism through national advertising, and participation in grant awards through the American Recovery and Reinvestment Act (ARRA). The PG has also implemented several tax initiatives including: ARRA reimbursement of losses resulting from the Making Work Pay and Additional Child tax credits, and increases of local taxes, including gross receipts taxes and stamp taxes. 2011 2010 Accrued compensated absences 59 $ 60 $ Retroactive union arbitration 195 232 Litigation 27 21 Post employment benefits 201 145 Landfill closure and post closure costs 72 173 Total other liabilities 554 $ 631 $ Primary Government – Other Liabilities September 30, 2011 and 2010 (In millions) Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1305-1079124 17 In connection with a real property tax case instituted against the PG in the U.S. District Court of the Virgin Islands, the PG was enjoined from appraising and assessing any real property taxes until it modified its system of appraisal to comply with certain court mandates. The PG retained a consultant to modify its system of appraisal and to perform reassessment of properties. This project was completed in fiscal 2009. The U.S. District Court also required an over-haul of the tax review board responsible for hearing tax assessment reviews. The PG is taking steps to comply with the Court order. In fiscal 2010, the PG passed legislation authorizing the issuance of property taxes at the 1998 assessment level. The Government is currently in litigation challenging the computation of its corporate franchise tax. Of the four cases brought against the Government, one is currently before the Virgin Islands Territorial Court, and the remaining three cases are on appeal. Budgetary Control of Expenditures The PG faces the challenge of carryforward liabilities from prior fiscal years and increasing expenditures in fiscal 2011. Carryforward liabilities consist mainly of retroactive salary increases, which accumulated following Hurricanes Hugo, Marilyn and Bertha in the years of 1990 through 1998. At September 30, 2011 and 2010, unpaid retroactive salary increase liabilities amounted to $195.3 and $231.8 million respectively, which is reported as a liability of the Government within other noncurrent liabilities. Increasing expenditures in fiscal year 2011 included estimated landfill closure and post-closure expenses amounting to $64.4 million, and other postemployment benefit expense amounting to $56.2 million. Other increasing general governmental expenditures include increasing health insurance premiums and pharmaceutical premiums. Expenditures are closely monitored and controlled through the budgetary process. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1305-1079124 18 Deficit Reduction Measures In fiscal year 2011, the PG reported an unrestricted net deficit of $1.6 billion. In fiscal year 2010, the PG reported an unrestricted net deficit of $1.5 billion. The PG has implemented a number of deficit reducing measures including: (1) withholding of local gross receipts taxes on Government invoice payments, (2) increasing local taxes such as property tax assessments on time-shares and gross receipts taxes; (3) exerting greater control of expenditures through the budgetary process, and (4) increasing collection efforts for amounts due to the PG from taxpayers. Contacting the Government’s Financial Management This financial report is designed to provide the Government’s citizens, taxpayers, customers, and creditors with a general overview of the Government’s finances. If you have questions about this report, or need additional financial information, contact the Government of the United States Virgin Islands, Department of Finance, No. 2314 Kronprindsens Gade, St. Thomas, VI 00802. Primary Government Governmental Business-type Component Activities Activities Total Units Assets Cash and cash equivalents 187,067 $ 4,223 $ 191,290 $ 77,878 $ Investments 427,107 2,378 429,485 11,999 Receivables, net 291,978 2,702 294,680 59,054 Internal balances 17,110 (17,110) – – Due from component units – – – 408 Notes and other receivables – – – 18,505 Due from primary government – – – 37,514 Due from federal government 19,920 – 19,920 9,025 Inventories – – – 30,220 Other assets 4,616 826 5,442 11,254 Restricted: Cash and cash equivalent 1,272 2,078 3,350 77,335 Investments 8,635 – 8,635 85,279 Other – – – 7,613 Capital assets, net 749,156 56,006 805,162 989,430 Deferred and other expenses 40,289 82 40,371 67,965 Total assets 1,747,150 51,185 1,798,335 1,483,479 Liabilities Accounts payable and accrued liabilities 118,370 2,797 121,167 161,294 Tax refunds payable 93,171 – 93,171 – Unemployment insurance benefits – 15,061 15,061 – Customer deposits – – – 24,354 Due to primary government – – – 83,340 Due to component units 13,854 – 13,854 1,388 Due to federal government – – – 5,047 Interest payable 47,772 591 48,363 5,575 Unearned revenue 125,600 597 126,197 7,752 Other current liabilities 7,502 31,443 38,945 16,917 Noncurrent liabilities: Due within one year: Notes payable 33,788 501 34,289 10,527 Bonds payable 51,518 – 51,518 11,588 Other liabilities 24,015 4,559 28,574 697 Due in more than one year: Line of credit payable – – – 25,500 Notes payable 149,698 21,756 171,454 68,570 Bonds payable 1,743,065 – 1,743,065 271,351 Other liabilities 530,176 15,783 545,959 52,645 Total liabilities 2,938,529 93,088 3,031,617 746,545 (Continued) Government of the United States Virgin Islands Statement of Net Assets (Deficit) September 30, 2011 (In thousands) 1305-1079124 19 Primary Government Governmental Business-type Component Activities Activities Total Units Net assets (deficit) Invested in capital assets, net of related debt 223,155 $ 33,830 $ 256,985 $ 716,652 $ Restricted for: Unemployment insurance – 144 144 – Debt service 214,743 1,934 216,677 – Capital projects 1,272 – 1,272 – Other purposes – – – 140,273 Unrestricted (1,630,549) (77,811) (1,708,360) (119,991) Total net assets (deficit) (1,191,379) $ (41,903) $ (1,233,282) $ 736,934 $ See accompanying notes. Government of the United States Virgin Islands Statement of Net Assets (Deficit) (continued) September 30, 2011 (In thousands) 1305-1079124 20 . Net Revenue (Expense) and Program Revenues Changes in Net Assets Operating Capital Primary Government Charges for Grants and Grants and Governmental Business-type Component Expenses Services Contributions Contributions Activities Activities Total Units Functions: Primary government: Governmental activities: General government 498,250 $ 31,716 $ 147,459 $ 14,475 $ (304,600) $ – $ (304,600) $ – $ Public safety 68,166 319 2,658 2,166 (63,023) – (63,023) – Health 143,558 254 46,222 4,464 (92,618) – (92,618) – Public housing and welfare 142,146 378 77,362 1,392 (63,014) – (63,014) – Education 298,610 1,050 101,993 132 (195,435) – (195,435) – Transportation and communication 86,505 473 2,033 18,059 (65,940) – (65,940) – Culture and recreation 12,252 1,442 – – (10,810) – (10,810) – Interest on long-term debt 99,340 – – – (99,340) – (99,340) – Total governmental activities 1,348,827 35,632 377,727 40,688 (894,780) – (894,780) – Business-type activities: Unemployment insurance 40,785 2,814 14,599 – – (23,372) (23,372) – West Indian Company 9,779 8,735 102 – – (942) (942) – Workmen’s compensation 13,223 7,871 – – – (5,352) (5,352) – VI Lottery 20,256 19,808 – – – (448) (448) – Other 12,724 10,841 – – – (1,883) (1,883) – Total business-type activities 96,767 50,069 14,701 – – (31,997) (31,997) – Total primary government 1,445,594 85,701 392,428 40,688 (894,780) (31,997) (926,777) – Component units: Virgin Islands Housing Authority 45,892 6,192 33,815 13,199 – – – 7,314 Virgin Islands Port Authority 61,870 46,536 – 18,524 – – – 3,190 Virgin Islands Water and Power Authority: Electric system 311,886 279,455 – 5,002 – – – (27,429) Water system 27,120 37,568 – 4,150 – – – 14,598 V.I. Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 93,585 55,975 28,308 26 – – – (9,276) Juan F. Luis Hospital 79,303 41,241 21,949 283 – – – (15,830) University of the Virgin Islands 82,955 18,736 56,160 3,992 – – – (4,067) Other component units 83,503 12,064 69,050 12,070 – – – 9,681 Total component units 786,114 497,767 209,282 57,246 – – – (21,819) Total primary government and component units (894,780) (31,997) (926,777) (21,819) (continued) Government of the United States Virgin Islands Statement of Activities Year Ended September 30, 2011 (In thousands) 1305-1079124 21 Net Revenue (Expense) and Changes in Net Assets Primary Government Governmental Business-type Component Activities Activities Total Units General revenues: Taxes 684,199 – 684,199 – Interest and other 21,652 81 21,733 16,662 Tobacco settlement rights 2,124 – 2,124 – Transfers – internal activities of primary government 700 (700) – – Total general revenue 708,675 (619) 708,056 16,662 Changes in net assets (deficit) (186,105) (32,616) (215,929) (5,157) Net assets (deficit), beginning of year, as restated (1,005,274) (9,287) (1,014,561) 745,337 Net assets (deficit), end of year (1,191,379) $ (41,903) $ (1,230,490) $ 740,180 $ See accompanying notes. Statement of Activities (continued) Government of the United States Virgin Islands Year Ended September 30, 2011 (In thousands) 1305-1079124 22 . PFA PFA Debt Capital Other Total General Service Projects Governmental Governmental Cash and cash equivalents 95,376 $ 3,574 $ 28,004 $ 61,385 $ 188,339 $ Investments 54,501 276,117 93,602 11,522 435,742 Receivables: Taxes, net 230,790 59,387 – – 290,177 Accrued interest and other 48 – – 151 199 Due from: Other funds 11,746 – 7,759 16,612 36,117 Federal government – – – 19,920 19,920 Other assets – – – 32 32 Total assets 392,461 $ 339,078 $ 129,365 $ 109,622 $ 970,526 $ Liabilities and Fund Balances (Deficit) Accounts payable and accrued liabilities 92,667 $ – $ 1,856 $ 23,847 $ 118,370 $ Tax refunds payable 93,171 – – – 93,171 Due to: Other funds 15,229 – – 3,778 19,007 Component units 13,853 – – – 13,853 Deferred revenue 245,977 124,336 – 3,500 373,813 Other current liabilities 5,402 – – 2,100 7,502 Total liabilities 466,299 124,336 1,856 33,225 625,716 Fund balances (deficits): Restricted – 214,743 127,509 91,776 434,028 Committed 29,571 – – 34,006 63,577 Assigned – – – – – Unassigned (103,408) – – (49,385) (152,793) Total fund balances (deficit) (73,837) 214,743 127,509 76,397 344,812 Total liabilities and fund balances (deficit) 392,462 $ 339,079 $ 129,365 $ 109,622 $ Amounts reported for governmental activities in the statement of net assets (deficit) are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. 749,156 Expenditures identified as related to a future, period recognized as a prepaid asset in the statement of net assets. 4,616 Deferred bond issue costs are not financial resources and, therefore, are not reported in the funds. 40,289 Other long-term assets, primarily taxes receivable, will not be available to pay for current period expenditures and, therefore, are deferred in the funds 249,780 Interest on long-term debt is not accrued in the funds, but rather is recognized as an expenditure when due. (47,772) Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds. (2,532,260) Deficit of governmental activities (1,191,379) $ See accompanying notes. (In thousands) Assets Government of the United States Virgin Islands Balance Sheet – Governmental Funds September 30, 2011 1305-1079124 23 . PFA PFA Debt Capital Other Total General Service Projects Governmental Governmental Revenues: Taxes 518,811 $ 195,551 $ 4,509 $ 12,360 $ 731,231 $ Federal grants and contributions 87,624 403 – 333,850 421,877 Charges for services 26,459 – – 9,172 35,631 Tobacco settlement rights – – – 2,094 2,094 Interest and other 3,882 4,139 281 13,350 21,652 Total revenues 636,776 200,093 4,790 370,826 1,212,485 Expenditures: Current: General government 386,954 – 76,548 80,246 543,748 Public safety 60,896 – – 5,432 66,328 Health 99,197 – – 43,286 142,483 Public housing and welfare 57,718 – – 84,106 141,824 Education 189,153 – – 103,266 292,419 Transportation and communication 27,603 – 265 29,802 57,670 Culture and recreation 8,562 – – 1,541 10,103 Capital outlays 7,786 – 31,360 14,808 53,954 Debt service: Principal 6,400 24,290 3,922 1,300 35,912 Interest 3,012 89,040 433 832 93,317 Total expenditures 847,281 113,330 112,528 364,619 1,437,758 Excess (deficiency) of revenue over expenditures (210,505) 86,763 (107,738) 6,207 (225,273) Other financing sources (uses): Loans issued 131,400 816 35,419 – 167,635 Transfers from other funds 99,346 4 14,343 9,281 122,974 Transfers to other funds (3,572) (101,998) (2,679) (14,025) (122,274) Total other financing sources (uses), net 227,174 (101,178) 47,083 (4,744) 168,335 Net change in fund balances 16,669 (14,415) (60,655) 1,463 (56,938) Fund balance at beginning of year (90,506) 229,158 188,164 74,934 401,750 Fund balance at end of year (73,837) $ 214,743 $ 127,509 $ 76,397 $ 344,812 $ See accompanying notes. (In thousands) Government of the United States Virgin Islands Statement of Revenues, Expenditures, and Changes in Fund Balances í Governmental Funds Year Ended September 30, 2011 1305-1079124 24 . Net change in fund balances – total governmental funds (56,938) $ Government funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current year. 21,813 Tax revenue in the statement of activities, which do not provide current financial resources, are not reported as revenue in the funds. 47,032 The issuance of long-term debt provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of the governmental funds. This is the amount by which debt loan and bond proceeds of $167.6 million exceeded debt repayments of $35.9 million. (131,723) Some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. This is the amount by which the increase in certain liabilities reported in the statement of net assets of the previous year increased expenses reported in the statement of activities that do not require the use of current financial resources. (50,090) Some expenses reported as prepaid assets in the statement of net assets in the prior year are recognized as expenses in the current year in the statement of activities. (4,616) Bond issue costs are expended in the governmental funds when paid, and are capitalized and amortized in the statement of activities. This is the amount of bond issuance costs amortized in the statement of activities. (1,973) Bond premiums and discounts are reported as other financing sources and uses in the governmental funds when the bonds are issued, and are capitalized and amortized in the government-wide financial statements. This amount represents additional net interest expense reported in the statement of activities related to the amortization of premiums, discounts deferred refunding loss, and accreted interest on capital appreciation bonds during the current year. (793) Certain interest reported in the statement of activities does not require the use of current financial resources and therefore is not reported as expenditures in the governmental funds. This amount represents the increase in interest payable reported in the statement of net assets. (6,025) Change in net assets of governmental activities (183,313) $ See accompanying notes. (In thousands) Government of the United States Virgin Islands Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities – Governmental Funds Year Ended September 30, 2011 1305-1079124 25 . Original Amended Budget Budget Actual Variance Revenues: Taxes 536,676 $ 536,676 $ 518,810 $ (17,866) $ Federal grants and contributions 9,417 9,417 87,624 78,207 Charges for services 12,662 12,662 26,459 13,797 Interest and other 13,567 13,567 3,882 (9,685) Total revenues 572,322 572,322 636,775 64,453 Expenditures: – Current: General government 172,383 193,182 386,954 (193,772) Public safety 139,896 140,255 60,896 79,359 Health 74,384 88,659 99,197 (10,538) Public housing and welfare 65,891 66,016 57,718 8,298 Education 232,717 233,784 189,153 44,631 Transportation and communication 35,483 36,983 27,603 9,380 Culture and recreation 22,979 23,069 8,562 14,507 Total expenditures 743,733 781,948 830,083 (48,135) Deficiency of revenues over expenditures (171,411) (209,626) (193,308) 16,318 Other financing sources (uses): Loans Issued 125,000 125,000 131,400 6,400 Transfers from other funds 91,346 91,346 99,346 8,000 Transfer to other funds (6,720) (6,720) (3,572) 3,148 Total other financing sources, net 209,626 209,626 227,174 17,548 Excess (deficiency) of revenues and net other financing sources over expenditures 38,215 $ – $ 33,866 $ 33,866 $ See accompanying notes. Year Ended September 30, 2011 (In thousands) Government of the United States Virgin Islands Statement of Revenues and Expenditures – Budget and Actual – Budgetary Basis – General Fund 1305-1079124 26 . Business-type Activities – Enterprise Funds West Indian Unemployment Other Company Insurance Enterprise Totals Assets Current assets: Cash and cash equivalents 2,028 $ 746 $ 1,449 $ 4,223 $ Investments at fair value – – 2,378 2,378 Receivables, net: Premiums receivable – 1,147 – 1,147 Other receivables 272 – 1,283 1,555 Due from other funds – – 739 739 Other assets 668 – 158 826 Total current assets 2,968 1,893 6,007 10,868 Noncurrent assets: Restricted cash and cash equivalents 1,934 144 – 2,078 Capital assets 38,567 – 17,439 56,006 Deferred expenses 82 – – 82 Total noncurrent assets 40,583 144 17,439 58,166 Total assets 43,551 2,037 23,446 69,034 Liabilities Current liabilities: Accounts payable and accrued liabilities 1,278 591 6,341 8,210 Due to other funds 3,300 – 14,549 17,849 Unemployment insurance benefits – 15,061 – 15,061 Unearned revenue – – 597 597 Workers compensation – – 4,559 4,559 Loan payable to U.S. Treasury – 26,621 – 26,621 Loans payable related to capital assets 501 – – 501 Total current liabilities 5,079 42,273 26,046 73,398 Noncurrent liabilities: Workers compensation – – 15,783 15,783 Loans payable related to capital assets 21,756 – – 21,756 Total noncurrent liabilities 21,756 – 15,783 37,539 Total liabilities 26,835 42,273 41,829 110,937 Net assets (deficit) Invested in capital assets, net of related debt 16,391 – 17,439 33,830 Restricted 1,934 144 – 2,078 Unrestricted (1,609) (40,380) (35,822) (77,811) Total net assets (deficit) 16,716 $ (40,236) $ (18,383) $ (41,903) $ See accompanying notes. Statement of Net Assets (Deficit) – Proprietary Funds September 30, 2011 (In thousands) Government of the United States Virgin Islands 1305-1079124 27 . Business-type Activities – Enterprise Funds West Indian Unemployment Other Company Insurance Enterprise Total Operating revenues: Charges for services 8,735 $ 2,813 $ 38,520 $ 50,068 $ Total operating revenues 8,735 2,813 38,520 50,068 Operating expenses: Cost of services 6,349 40,179 44,986 91,514 Depreciation and amortization 1,918 – 1,217 3,135 Total operating expenses 8,267 40,179 46,203 94,649 Operating loss 468 (37,366) (7,683) (44,581) Non-operating revenues (expenses): Federal assistance 102 14,599 – 14,701 Interest income 38 7 36 81 Interest expense (1,511) (606) – (2,117) Total non-operating revenues (expenses), net (1,371) 14,000 36 12,665 Loss before operating transfers (903) (23,366) (7,647) (31,916) Transfers to other funds (700) – – (700) Change in net assets (1,603) (23,366) (7,647) (32,616) Net assets at beginning of year 18,319 (16,870) (10,736) (9,287) Net assets (deficit) at end of year 16,716 $ (40,236) $ (18,383) $ (41,903) $ See accompanying notes. Year Ended September 30, 2011 (In thousands) Government of the United States Virgin Islands Statement of Revenues, Expenses, and Changes in Fund Net Assets (Deficit) í Proprietary Funds 1305-1079124 28 . Business-type Activities – Enterprise Funds West Indian Unemployment Other Company Insurance Enterprise Total Cash flows from operating activities Receipts from customers and users 9,026 $ 2,661 $ 38,214 $ 49,901 $ Payments to beneficiaries, suppliers and employees (6,966) (27,498) (33,530) (67,994) Net cash provided by (used in) operating activities 2,060 (24,837) 4,684 (18,093) Cash flows from noncapital financing activities Federal grants 102 14,599 – 14,701 Net cash provided by (used in) noncapital financing activities 102 14,599 – 14,701 Cash flows from capital and related financing activities Acquisition and construction of capital assets (652) – (7,618) (8,270) Disposal of capital assets – – 262 262 Issuance of long-term debt – 10,496 – 10,496 Principal paid on long-term debt (748) – – (748) Interest paid on long-term debt (1,435) (606) – (2,041) Net cash provided by (used in) capital and related financing activities (2,835) 9,890 (7,356) (301) Cash flows from investing activities Interest on investments 38 8 36 82 Sale of investments – – 855 855 Net cash provided by investing activities 38 8 891 937 Net decrease in cash and cash equivalents (635) (340) (1,781) (2,756) Cash and cash equivalents at beginning of year 4,597 1,230 3,230 9,057 Cash and cash equivalents at end of year 3,962 $ 890 $ 1,449 $ 6,301 $ Reconciliation of operating loss to net cash provided by (used in) operating activities Operating loss 468 $ (37,366) $ (7,683) $ (44,581) $ Adjustments to reconcile operating loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,918 – 1,217 3,135 Change in assets and liabilities: Receivables, net 477 (153) (161) 163 Unearned revenue 10 – 14 24 Other assets 83 – (84) (1) Accounts payable and accrued liabilities (896) 592 1,658 1,354 Unemployment insurance benefits – 12,090 – 12,090 Workers compensation – – 2,443 2,443 Due to other funds – – 7,280 7,280 Net cash provided by (used in) operating activities 2,060 $ (24,837) $ 4,684 $ (18,093) $ Reconciliation of cash and cash equivalents to the statement of net assets Cash and cash equivalents – current 2,028 $ 746 $ 1,449 $ 4,223 $ Cash and cash equivalents – restricted 1,934 144 – 2,078 Total cash and cash equivalents at end of year 3,962 $ 890 $ 1,449 $ 6,301 $ See accompanying notes. Government of the United States Virgin Islands Statement of Cash Flows í Proprietary Funds Year Ended September 30, 2011 (In thousands) 1305-1079124 29 . Pension Trust Agency Fund Funds Assets Cash and cash equivalents: Unrestricted 112,444 $ 20,733 $ Restricted 17 – Investments 1,177,582 8,316 Receivables, net: Loans and advances 139,470 – Accrued interest 3,720 – Other 8,604 Other assets 18,665 – Total assets 1,460,502 29,049 Liabilities Accounts payable and accrued liabilities – 20,733 Cash overdraft with bank 3,203 – Unsettled securities purchased 9,919 – Securities lending collateral 166,343 – Other liabilities 7,054 8,316 Total liabilities 186,519 29,049 Net assets held in trust for employees’ pension benefits 1,273,983 $ – $ See accompanying notes. (In thousands) Government of the United States Virgin Islands Statement of Fiduciary Net Assets – Fiduciary Funds September 30, 2011 1305-1079124 30 . Pension Trust Fund Additions: Contributions: Employer 80,850 $ Plan members 42,997 Total contributions 123,847 Investment income: Net depreciation of fair value of investments (17,597) Net depreciation of fair value of real estate (87) Interest, dividends, and other, net 36,772 Real estate – net rental income 3,539 22,627 Less investment expense 5,870 Net investment income 16,757 Other income 4,125 Total additions 144,729 Deductions: Benefits paid 202,900 Refunds of contributions 5,281 Administrative and operational expenses 14,853 Total deductions 223,034 Change in net assets (78,305) Net assets, beginning of year 1,352,288 Net assets, end of year 1,273,983 $ See accompanying notes. (In thousands) Government of the United States Virgin Islands Statement of Changes in Fiduciary Net Assets - Fiduciary Funds Year Ended September 30, 2011 1305-1079124 31 . Government of the United States Virgin Islands Notes to Basic Financial Statements September 30, 2011 1305-1079124 32 1. Summary of Significant Accounting Policies The Government of the United States Virgin Islands (the Government) is an unincorporated organized territory of the United States of America (United States). The powers of the Government are derived from and set forth in the Revised Organic Act of 1954, as amended. The Government assumes responsibility for public safety, health, public housing and welfare, education, transportation and communication, and culture and recreation. The accompanying basic financial statements of the Government have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) as prescribed by the Governmental Accounting Standards Board (GASB). The accompanying basic financial statements have been prepared primarily from accounts maintained by the Department of Finance of the Government. Additional data has been derived from reports prepared by other departments, agencies, and public corporations based on independent or subsidiary accounting systems maintained by them. Financial Reporting Entity The Government follows the provisions of GASB Statement No. 14, The Financial Reporting Entity, as amended by GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units. These standards require that the Government’s financial reporting entity be defined according to specific criteria. According to the standard, for financial reporting purposes, the Government is a primary government (PG). The PG includes all Government departments, agencies, boards, and organizations that are not legally separate. In addition to the PG, the financial reporting entity includes blended and discretely presented component units. Component units include all legally separate organizations for which the Government’s elected officials are financially accountable and other organizations for which the nature and significance of their relationship with the Government are such that exclusion would cause the basic financial statements to be misleading or incomplete. The criteria used to define financial accountability include appointment of a voting majority of an organization’s governing body and (i) the ability of the PG to impose its will on that organization or (ii) the potential for the organization to provide specific financial benefits to or impose specific financial burdens on the PG. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 33 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) The Government financial reporting policy is to require current audited financial statements for major component units in order to support the Government’s financial figures. However, due to the relevance of nonmajor component units in relation to the Government financial statements figures as a whole, nonmajor component units may provide audited financial statements up to one (1) year in arrears. For fiscal year 2011, two nonmajor component units (Research & Technology Park and Waste Management Authority) provided audited financial statements in arrears. The Government included those 2010 audited financial statements as part of its fiscal year 2011 audited financial figures and disclosures. The financial statements of the following component units are included in the financial reporting entity either as blended or as discretely presented component units in accordance with GAAP: (a) Blended Component Units The following public benefit corporations, while legally separate from the Government, meet the criteria to be reported as part of the PG because they provide services entirely or almost entirely to the Government: Virgin Islands Public Finance Authority (PFA) PFA was created as a public corporation and autonomous governmental instrumentality by Act No. 5365, the Government Capital Improvement Act of 1988, with the purpose of aiding the Government in the performance of its fiscal duties and in effectively carrying out its governmental responsibility of raising capital for essential public projects. Under the enabling legislation, PFA has the power, among other matters, to borrow money and issue bonds and to lend the proceeds of its bonds to the Government or any governmental instrumentality. The powers of PFA are exercised by a board of directors consisting of the Governor (Chairperson), the Commissioner of Finance, the Director of the Office of Management and Budget, and two representatives of the private sector appointed by the Governor with the advice and consent of the USVI Legislature (the Legislature). PFA activities are blended within the PG because it is so intertwined with the Government that, in substance, they are the same. The PFA funds are reported as major funds, with the exception of PFA Special Revenue Fund, which is included in the other aggregate remaining fund information. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 34 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (a) Blended Component Units (continued) PFA has a component unit, the West Indian Company (WICO), which is presented as an enterprise fund in the Government’s basic financial statements. Tobacco Settlement Financing Corporation (TSFC) TSFC was created in September 2001 under Act No. 6428 as a separate and independent corporation of the Government to purchase the rights, title, and interest in tobacco settlement litigation awards and to issue revenue bonds supported by the tobacco settlement rights. The responsibility for the operations of TSFC is vested in a board of directors composed of three Government officials appointed by the Governor and two private citizens. The activities of TSFC are limited to activities conducted on behalf of the Government. The TSFC is reported in the other aggregate fund information. Complete audited financial statements of the PFA and TSFC blended component units can be obtained directly by contacting their respective administrative offices: Administrative Offices of Blended Component Units Virgin Islands Public Finance Authority 32-33 Kongens Gade St. Thomas, VI 00802 Tobacco Settlement Financing Corporation 32-33 Kongens Gade St. Thomas, VI 00802 (b) Discretely Presented Component Units The following component units, consistent with GASB Statements Nos. 14 and 39 are discretely presented in the basic financial statements because of the nature of the services they provide and the Government’s ability to impose its will. The component units are reported in a separate column to emphasize that they are legally separate from the PG and governed by separate boards. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 35 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely Presented Component Units (continued) Major Component Units Virgin Islands Housing Authority (VIHA) VIHA was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality by Act No. 903 on June 18, 1962, with the purpose of providing housing for low and moderate income families residing in the U.S. Virgin Islands. From June 1962 through August 2003, the powers of VIHA were exercised by a board of commissioners consisting of seven members. In August 2003, the U.S. Department of Housing and Urban Development (HUD) determined that because of the severity of compliance violations, VIHA was declared to be in substantial default of its annual contributions contract (ACC) dated July 12, 1996 with HUD. VIHA was placed in receivership and HUD assumed control of all assets, projects, and programs. The Authority is governed by a board of commissioners which is autonomous to HUD. An executive director is appointed by the Authority’s Board to manage the day-to-day operations of the Authority. Given the nature of VIHA’s operations and the significance of its relationship with the Government, management believes that its exclusion from the financial reporting entity would cause the Government’s basic financial statements to be incomplete and misleading. Virgin Islands Port Authority (VIPA) VIPA was created as a body corporate and politic constituting a public corporation and autonomous government instrumentality by Act No. 2375 on December 23, 1968, with the purposes of owning, operating, and managing all types of air and marine terminals. The powers of VIPA are exercised by a board of governors consisting of the Commissioner of Economic Development and Agriculture (Chairperson), the Attorney General, the Commissioner of Public Works, the Director of the Small Business Development Agency, and five other persons appointed by the Governor with the advice and consent of the Legislature. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 36 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely Presented Component Units (continued) Major Component Units (continued) Virgin Islands Water and Power Authority (WAPA) WAPA was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality by Act No. 1248 on August 13, 1964, with the purpose of operating the water production and electric generation plants in the U.S. Virgin Islands. The powers of WAPA are exercised by a governing board consisting of nine members, all appointed by the Governor with the advice and consent of the Legislature, from which three are heads of cabinet-level executive departments or agencies and six other persons, who shall not be employees of the Government. WAPA is required by its bond resolutions to maintain separate audited financial statements for each system (the Electric and Water Systems). Virgin Islands Government Hospital and Health Facilities Corporation (VIGHHFC) VIGHHFC was created by Act No. 6012 on August 23, 1994 and became active on May 1, 1999, with the purpose of providing healthcare services and hospital facilities to the people of the U. S. Virgin Islands. The powers of VIGHHFC are exercised by a board of directors consisting of 15 members as follows: the Director of the Office of Management and Budget, the Commissioner of Finance, and 13 other members appointed by the Governor with the advice and consent of the Legislature. The VIGHHFC is composed of the Roy L. Schneider Hospital located in St. Thomas and the Juan F. Luis Hospital and Medical Center located in St. Croix. Both entities issue separate audited financial statements. The Roy L. Schneider Hospital’s financial statements include its component units: the Myra Keating Smith Community Health Center (“Health Center”) of St. John and the Charlotte Kimelman Cancer Institute (“Cancer Institute”) on St. Thomas. The Health Center and Cancer Institute are legally separated organizations for which the Roy L. Schneider Hospital is financially accountable. The Juan F. Luis Hospital and Medical Center’s financial statements include its component unit: the Virgin Islands Cardiac Center at the Governor Juan F. Luis Hospital and Medical Center Foundation, Inc. (VICC Foundation). VICC Foundation is a legally separate nonprofit corporation for which the Juan F. Luis Hospital and Medical Center is financially accountable. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 37 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely Presented Component Units (continued) Major Component Units (continued) University of the Virgin Islands (the University) The University was organized as an instrumentality of the Government under Act No. 852 on March 16, 1962, in accordance with Section 16(a) of the Revised Organic Act of 1954, as amended. The purpose of the University is the stimulation and utilization of the intellectual resources of the people of the U.S. Virgin Islands and the development of a center of higher education. The powers of the University are exercised by a board of trustees consisting of 17 members as follows: Chairman of the Board of Education, Commissioner of Education, and the President of the University, all serving as members ex-officio, 9 other members appointed by the Governor with the advice and consent of the Legislature, two other members elected by the board of trustees, one representative of the student body, one alumnus of the University, and another representative of the teaching faculty. The University was not organized as a self-sustaining entity and therefore receives substantial financial and other support from the Government. The University’s financial statements include its component units: The Foundation for the University of the Virgin Islands and The Reichhold Foundation. The Foundation for the University of the Virgin Islands is a not-for-profit corporation whose purpose is to assist and support the University in accomplishing its charitable and educational mission. The Reichhold Foundation is a not-for-profit corporation that supports the arts and provides financial assistance in operating the Reichhold Center for the Arts on St. Thomas. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 38 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely Presented Component Units (continued) Nonmajor Component Units Virgin Islands Economic Development Authority (EDA) EDA was created by Act No. 6390 on December 21, 2000 as a body corporate and politic constituting a public corporation and semiautonomous instrumentality of the Government. EDA was created as an umbrella authority to assume, integrate, and unify the functions of the Economic Development Commission, the Small Business Development Agency, the Government Development Bank, and the Virgin Islands Industrial Development Park Corporation. The powers of EDA are exercised by a board of directors consisting of the members of the Virgin Islands Economic Development Commission, the Director of the Virgin Islands’ Bureau of Internal Revenue, and five members not employed by the Government, but appointed by the Governor with the advice and consent of the Legislature. Magens Bay Authority (MBA) MBA was created as a corporate instrumentality by Act No. 2085 on December 20, 1967, with the purpose of acquiring, improving, and operating parks and beaches. The powers of MBA are exercised by a board of directors consisting of the Governor and six members initially appointed by the Governor. The board of directors is responsible for the appointment and reappointment of subsequent board members except that the Governor, with the advice and consent of the Legislature may, by appointment, fill any vacancy on the board of directors remaining unfilled for sixty days. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 39 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely Presented Component Units (continued) Nonmajor Component Units (continued) Virgin Islands Housing Finance Authority (VIHFA) VIHFA was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality of the Government by Act No. 4636 on October 20, 1981, with the purpose of stimulating low and moderate-income housing construction and home ownership through the issuance of revenue bonds to obtain funds to be used for low-interest mortgage loans to qualified purchasers of low and moderate- income housing. On October 31, 2008, VIHFA established the Virgin Islands Housing Management, Inc. (VIHM), a wholly owned not-for-profit subsidiary for the purpose of managing VIHFA’s rental properties. The financial statements of VIHM are separately issued, and not blended into the PG. The powers of VIHFA are exercised by a board of directors consisting of the Commissioner of the Department of Housing, Parks, and Recreation (the Chairman), the Director of the Office of Management and Budget, and three persons not employed by the Government appointed by the Governor with advice and consent of the Legislature. Virgin Islands Public Television System (VIPTS) VIPTS was created as a body corporate and politic constituting a public corporation and autonomous instrumentality by Act No. 2364 on November 15, 1968, with the purpose of advancing the general welfare, education, cultural development, and awareness of public affairs of all the population of the U.S. Virgin Islands as well as to provide an effective supplement to the in-school education of children. The powers of VIPTS are exercised by a board of directors consisting of the Commissioner of Education, the Chairman of the Board of Education, three members appointed by the President of the Legislature, and four members, not more than two of whom should be employed by the Government and appointed by the Governor with the advice and consent of the Legislature. In addition, the Director of the Office of Management and Budget, the President of the University of the Virgin Islands, and the General Manager of VIPTS are ex-officio members of the board who are not entitled to vote. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 40 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely Presented Component Units (continued) Nonmajor Component Units (continued) Virgin Islands Waste Management Authority (VIWMA) VIWMA was established as a nonprofit, public, autonomous instrumentality of the Government by Act No. 6638 and approved by the Governor of the Virgin Islands on January 23, 2004. VIWMA provides environmentally sound management for the collection and disposal of solid waste in the territory, including operation and closure of landfills and wastewater collection, treatment and disposal. VIWMA is governed by a Board of Directors consisting of seven members. University of the Virgin Islands Research and Technology Park (RTPark) RTPark was established as a public, autonomous instrumentality of the Government by Act 6502 on February 21, 2002, as amended, by Act 6725, the Protected Cell Amendments Act of 2005. RTPark was organized for internet commerce and technology, providing an enabling environment for research, development, business incubation and technology- driven businesses. RTPark is governed by a Board of Directors consisting of seven members, including the Chairman of the Board of Trustees of the University, the President of the University, two trustees selected from among the Board of Trustees of the University, and three members selected by the Governor. Complete audited financial statements of the discretely presented component units can be obtained directly by contacting their administrative offices: Administrative Offices Virgin Islands Housing Authority 402 Estate Anna’s Retreat PO Box 7668 St. Thomas, VI 00801 Virgin Islands Port Authority PO Box 301707 St. Thomas, VI 00803 Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 41 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) Administrative Offices (continued) Virgin Islands Water and Power Authority PO Box 1450 St. Thomas, VI 00804 Virgin Islands Government Hospital and Health Facilities Corporation 9048 Sugar Estate St. Thomas, VI 00802 University of the Virgin Islands 2 John Brewer’s Bay St. Thomas, VI 00802 Virgin Islands Economic Development Authority 1050 Norre Gade #5 St. Thomas, VI 00802 Magens Bay Authority PO Box 10583 St. Thomas, VI 00801 Virgin Islands Housing Finance Authority 3202 Demarara Frenchtown Plaza, Suite 200 St. Thomas, VI 00802 Virgin Islands Public Television System PO Box 7879 St. Thomas, VI 00801 Virgin Islands Waste Management Authority #1 La Grande Princesse, Suite BL1 Christiansted, VI 00820 Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 42 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) Administrative Offices (continued) University of the Virgin Islands Research and Technology Park Corporation RR1 Box 10000 Kingshill, St. Croix, VI 00850-9781 All financial statements of the discretely presented component units have a fiscal year-end of September 30, 2011, except for WAPA and VIHA that have a year-end of June 30, 2011 and December 31, 2010, respectively. (c) Fiduciary Component Unit The following public benefit corporation is legally separate from the Government, meets the definition of a blended component unit, and is presented in the fund financial statements along with other fiduciary funds of the Government. Fiduciary funds are not reported in the government-wide financial statements. Employees’ Retirement System of the Government of the Virgin Islands (GERS) GERS was created as an independent and separate agency of the Government with the purpose of administering the Government’s, and component units, cost-sharing, multiple- employer defined-benefit pension plan. GERS was established on October 1, 1959. The responsibility for the operation of GERS is vested in a board of trustees composed of seven members appointed by the Governor with the advice and consent of the Legislature. Employee and employer contributions to GERS are recognized as additions to net assets held in trust for employees’ pension benefits in the period in which employee services are performed, except for contributions pursuant to the Early Retirement Act of 1994, which are recorded as the cash is received. Benefits and refunds are recognized when due and payable in accordance with the terms of the plan, except for benefits pursuant to sections 8(a) and 8(b) of the Early Retirement Act of 1994, which are recorded when the subsidy provided by the Government is receivable and payable. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 43 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (c) Fiduciary Component Unit (continued) Complete audited financial statements of this component unit can be obtained directly by contacting their administrative office: Employees’ Retirement System of the Government of the Virgin Islands 3438 Kronprindsens Gade St. Thomas, Virgin Islands 00802 Government-wide and Fund Financial Statements The government-wide financial statements (that is, the statement of net assets and the statement of activities) report information on all of the nonfiduciary activities of the PG and its component units. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenue, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. Likewise, the PG is reported separately from certain legally separate component units for which the PG is financially accountable. The statement of net assets (deficit) presents the reporting entities’ nonfiduciary assets and liabilities, with the difference reported as net assets or net deficit. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenue. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include (1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and (2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenue. Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 44 1. Summary of Significant Accounting Policies (continued) Measurement Focus, Basis of Accounting, and Financial Statement Presentation (a) Government-wide Financial Statements The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenue is recorded when earned, and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenue in the year for which they are levied. Grants and similar items are recognized as revenue when as all eligibility requirements have been met. (b) Governmental Fund Financial Statements The governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenue is recognized as soon as it is both measurable and available. Revenue is considered to be available when it is collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the Government considers most revenue to be available if collected within 90 days of the end of the current fiscal year-end. Specifically, gross receipts taxes, property taxes, and income taxes are considered to be available if collected within 30, 60, and 90 days, respectively, after the end of the current fiscal year-end. Grant revenue is considered to be available if collected within the 12 months after the end of the current fiscal year-end. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures are recorded only when payment is due. Income taxes, gross receipts taxes, real property taxes, and grant funding are all considered to be susceptible to accrual and so have been recognized as revenue of the current fiscal period to the extent they are considered available. All other revenue items are considered to be measurable and available only when cash is received by the Government. (c) Proprietary Funds, Fiduciary Funds, and Discretely Presented Component Units Financial Statements The financial statements of the proprietary funds, fiduciary funds, and discretely presented component units are reported using the economic resources measurement focus and the accrual basis of accounting, similar to the government-wide financial statements described above. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 45 1. Summary of Significant Accounting Policies (continued) Measurement Focus, Basis of Accounting, and Financial Statement Presentation (continued) (c) Proprietary Funds, Fiduciary Funds, and Discretely Presented Component Units Financial Statements (continued) Each proprietary fund has the option under GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities that Use Proprietary Fund Accounting, to elect and apply all Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989, unless these conflict with a GASB pronouncement. The PG and most blended and discretely presented component units have elected not to apply FASB pronouncements issued after November 30, 1989 for its proprietary fund types. VIPA has elected to follow the FASB’s pronouncements issued after November 30, 1989. Proprietary funds distinguish operating revenue and expenses from nonoperating items. Operating revenue and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. Fund Accounting The Government reports its financial position and results of operations in funds, which are considered separate accounting entities and discrete presentations of those component units, which are not required to be blended. The operations of each fund are accounted for within a set of self-balancing accounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with legal, financial, and contractual provisions. GASB No. 34, Basic Financial Statements – and Management’s Discussions and Analysis – for State and Local Governments, establishes criteria (percentage of the assets, liabilities, revenue, or expenditures/expenses of either fund category or the governmental and enterprise funds combined) for the determination of major funds. Indirect costs are automatically allocated and reported in the program expense for each fund. Nonmajor funds are combined in a single column in the fund financial statements. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 46 1. Summary of Significant Accounting Policies (continued) Fund Accounting (continued) (a) Governmental Funds The Government reports the following major governmental funds: x General Fund – The general fund is the Government’s primary operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. x PFA Debt Service Fund – The PFA debt service fund accounts for the resources accumulated, and payments made, for principal and interest on long-term general obligation debt issued by PFA on behalf of the Government. x PFA Capital Projects Fund – The PFA capital projects fund accounts for bond proceeds of debt issued by the PFA on behalf of the Government. The bond proceeds have been designated for certain necessary public safety and capital development projects which are accounted for in this fund. (b) Proprietary Funds These funds account for those activities for which the intent of management is to recover, primarily through user charges, the cost of providing goods or services to the general public. The government reports the following major proprietary funds: x West Indian Company – WICO, a component unit of PFA, accounts for the activities of a cruise ship pier and shopping mall complex on the island of St. Thomas. x Unemployment Insurance Fund – The unemployment insurance fund accounts for the collection of unemployment premiums from employers in the U.S. Virgin Islands, and the payment of unemployment benefits to eligible unemployed recipients. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 47 1. Summary of Significant Accounting Policies (continued) Fund Accounting (continued) (c) Fiduciary Funds Fiduciary funds are used to account for assets held by the Government in a trustee capacity, or as an agent for individuals, private organizations, and other governmental units. The following are the Government’s fiduciary funds: x Pension Trust Fund – The pension trust fund accounts for the activities of GERS, which accumulates resources for pension benefit payments to qualified employees. x Agency Fund – The agency fund is custodial in nature (assets equal liabilities) and does not involve measurement of the results of operations. Cash and Cash Equivalents The Government follows the practice of pooling cash. The balance in the pooled cash accounts is available to meet current operating requirements and any excess is invested in various interest-bearing accounts and time deposits with eligible depository institutions. Cash equivalents of the proprietary funds and discretely presented component units consist of demand accounts, money market accounts, certificates of deposit with maturities of not more than 90 days from the date of acquisition, short-term U.S. government and its agencies’ obligations, and repurchase agreements with a U.S. commercial bank maturing within three months and collateralized by U.S. government obligations. Cash and cash equivalents of the discretely presented component units are maintained in separate bank accounts from those of the PG, in their own names. By law, banks, or trust companies designated as depository of public funds of the Government are to maintain corporate surety bond or pledge collateral satisfactory to the Commissioner of Finance to secure all governmental funds deposited. Investments The PG and its component units follow the provisions of GASB Statement No. 40, Deposit and Investment Risk Disclosures, an Amendment of GASB Statement No. 3. GASB Statement No. 40 establishes and modifies the following disclosure requirements related to investment risks: credit risk (including custodial credit risk and concentrations of credit risk), interest rate risk, and foreign currency risk. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 48 1. Summary of Significant Accounting Policies (continued) Investment Policies Investment policies of the PG, its blended component units, major funds, and major component units are as follows: x Primary Government Investment Policies – Title 33, Chapter 117 of the Virgin Islands Code (V.I. Code) authorizes the Government to invest in U.S. Government and its agencies’ obligations, mortgage-backed securities, repurchase agreements, commercial paper, local government obligations, and corporate debt and equity obligations. As of September 30, 2011, the General Fund, the Virgin Islands Lottery, a non-major governmental fund, and an agency fund had invested in certificates of deposit with two local banks. Investments are reported at fair value. x PFA Investment Policies – Under GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for Most External Investment Pools, investments of the PFA are reported at fair value. Various bond resolutions of the PFA restrict investments to direct obligations of the U.S. Government, territories, possessions and states, specific bank obligations, investment agreements or similar funding agreements, shares or other interests in mutual funds, trusts or investment companies, corporate commercial paper, and money market portfolios consisting of any of the foregoing. The PFA has retained investment managers and investments are held in trust by a commercial bank on behalf of the PFA. The PFA handles investments for two major governmental funds of the Government: the PFA debt service fund and the PFA capital projects fund. x Tobacco Settlement Financing Corporation Investment Policies – Various bond resolutions of this blended component unit restrict investments to direct obligations of the U.S. Government, territories, possessions and states, specific bank obligations, investment agreements or similar funding agreements, shares or other interests in mutual funds, trusts or investment companies, corporate commercial paper, and money market portfolios consisting of any of the foregoing. The PFA has retained investment managers and investments are held in trust by a commercial bank on behalf of the PFA. Investments are reported at fair value in the non-major governmental fund of the Government. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 49 1. Summary of Significant Accounting Policies (continued) Investment Policies (continued) x West Indian Company Limited Investment Policies – This blended business-type major fund of the Government maintains an investment policy that (1) limits investments in bonds to a maximum remaining maturity of 30 years (or estimated average life on mortgage-backed issues), (2) limits fixed income securities to a maximum of 40% and a minimum of 30% of the overall assets of the WICO portfolio, (3) limits corporate bond exposure to 45% of the fixed income portfolio, and (4) has no provision which limits or restricts investments in U.S. Government Treasury or Agency issues. WICO reports investments at fair value. x Pension Trust Fund Investment Policies – The board of trustees of GERS have enacted policies that limit investments in certain investment categories and provide requirements for the institutions with which investment transactions may be entered into. Under those policies, GERS may invest in U.S. Government and agencies obligations, bonds or notes of any state, territory or possession of the United States, municipal bonds and obligations, foreign bonds, bonds of domestic railroad corporations, public utility bonds, industrial corporate bonds or trust certificates, common and preferred shares of foreign and domestic corporations, mutual funds, mortgage or personal loans to GERS members or retirees, and mortgage and asset-backed securities. Investments in bonds are subject to rating restrictions of BBB and may not exceed 2% of the portfolio. Investments in stock of a single corporation may not exceed 1% of the market value of the fund, or exceed 1% of the outstanding stock of the corporation. The aggregate amount of investments in stock may not exceed 60% of the market value of total investments of GERS. Investment in foreign stock should be limited to 10% of the market value of the total investments of GERS. Any investment of 20% or more of the aggregate value of the portfolio must be approved by two-thirds of the membership of the board of trustees. The investments are administered by several professional investment managers and are held in trust by a commercial bank on behalf of GERS. GERS is authorized to invest in life settlement policy contract investments provided the investment is in a group of life insurance policies, with a minimum number of 100 measured lives; the face value of any single policy investment does not exceed $5.0 million or 2% of the aggregate face value of policy investments, and; the aggregate face value on any individual life does not exceed the greater of $10.0 million or 1% of the aggregate face value of policies purchased as investments by GERS. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 50 1. Summary of Significant Accounting Policies (continued) Investment Policies (continued) Investments in equity securities in the GERS pension trust fund are reported at quoted market values. Shares of mutual funds are reported at the net asset value of shares held by GERS at year-end. Purchases and sales are recorded on a trade-date basis. Realized gains and losses on securities are determined by the average cost method. In December 4, 2009, GERS executed a loan agreement with Seaborne Virgin Islands, Inc., a seaplane service operating on the islands of St. Croix and St. Thomas. The agreement provided for a first lien term loan of $1.3 million at an initial interest rate of 8.25%, and a senior secured convertible loan of $2 million at an interest rate of 14.5%, secured by real and personal property of Seaborne Airlines, the unconditional guarantee of Coastal Airways, Inc., the parent company of Seaborne, and all of the issued and outstanding stock of Seaborne. On September 20, 2012 the parties agreed to an amendment/modification to the loan agreement and term note and provided for the modification of the convertible note. The original principal indebtedness of the term note was amended and restated to be $2.3 million with an interest rate of 6.25% per annum for the unpaid principal of the term note. The original principal indebtedness of the convertible note was amended and restated to be $1 million. The interest is accrued at the rate of 8.25% per annum payable quarterly in arrears until the maturity date. The note may be prepaid in whole or in part with a prepayment penalty of $300 thousand. As of September 30, 2011, the loan investment was $3.1 million. On December 8, 2009, GERS executed a loan agreement with Carambola Northwest, LLC (“Carambola’), a condominium, hotel and golf resort on the island of St. Croix. The five year term loan in the amount of $15 million is collateralized with all real property holdings of Carambola, with an interest rate of 10.5% per annum. As of September 30, 2010, the loan investment amounted to $10.9 million. Carambola subsequently went into default on the loan agreement. On May 11, 2012, GERS exercised its rights under the loan agreement and executed a preliminary disposition agreement with Carambola assuming management of the resort complex. On November 2, 2012, GERS executed a final disposition agreement with Carambola, transferring all assets of Carambola to GERS in settlement of the loan agreement. GERS has invested in a shopping and pier complex on the island of St. Thomas. The property is reported at fair market value. GERS owns administrative facilities on the islands of St. Thomas and St. Croix that are reported at historical cost, net of accumulated depreciation. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 51 1. Summary of Significant Accounting Policies (continued) Investment Policies (continued) x WAPA and VIPA Investment Policies – These major component units are authorized under bond resolutions and the V.I. Code to invest in open accounts, time deposits, certificates of deposit, repurchase agreements, guaranteed investment contracts, obligations of the United States government, and obligations of any state within the United States, obligations of international banking institutions, mutual funds, corporate commercial paper, money market accounts and investment pools. Investments are reported at fair value. x The University Investment Policies – The board of trustees of this major component unit is responsible for the management of the University’s investments which consist of U.S. Government securities and securities backed by the U.S. Government or its agencies and instrumentalities, common and preferred stocks, and mutual funds. The University is in the process of finalizing a formal investment policy for review and approval by the board of trustees. The University’s component unit Foundation for the University of the Virgin Islands, issued an investment policy in February 2012. The members of the board of trustees of the Reichhold Foundation are responsible for their specific investment policy. x VIGHHFC Investment Policies – The board of trustees of this major component unit have not developed a formal investment policy. At September 30, 2010, investments were comprised of a 40% interest in a U.S. Virgin Islands corporation that provides radiology services at Juan F. Luis Hospital and Medical Center. The investment in the U.S. Virgin Islands Corporation is accounted for under the equity method. x VIHA Investment Policies – This major component unit is required by the U.S. Department of Housing and Urban Development (“HUD”) to invest excess funds in obligations of the United States, certificates of deposit, or any other federally insured investment. HUD requires that deposits be fully collateralized at all times, and may be held by an unaffiliated bank or trust company for the account of the VIHA. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 52 1. Summary of Significant Accounting Policies (continued) Receivables Taxes receivable represent amounts owed by taxpayers for individual and corporate income taxes, gross receipts taxes and real property taxes. Tax revenue is recognized in the governmental fund financial statements when they become both measurable and available based on actual collections during the seven months subsequent to the fiscal year end. Federal government receivables represent amounts owed to the Government for reimbursement of expenditures incurred pursuant to federally funded programs. Accounts receivable are reported net of estimated allowances for uncollectible amounts, which are determined, based upon past collection experience and current economic conditions. Subject to the provisions of the V.I. Code, and subject to rules and regulations prescribed by the board of trustees of GERS, members of GERS have the right to obtain loans from GERS to finance a home, automobile, or other personal needs. The maximum mortgage loan that could be granted to members who have been contributing to GERS for at least five years is $350,000. The interest rate on new first mortgages was 8% and on second mortgages, 9% throughout the year. Members may also borrow up to $50,000 to purchase land. Members who have contributed to GERS for at least five years can borrow up to $18,000 for the purchase of an automobile. Auto loans bear interest at rates that range between 8.75% and 9.5% with a maximum term of five years. Active members may also borrow up to 75% of their contributions paid into GERS to a maximum borrowing of $50,000 as a personal loan. The interest rate offered on personal loans was 8% to 8.5% for the year. Retired members may qualify for personal loans up to $10,000 at the same interest rates as active members; however, effective fiscal year 2009, retirees have the option of refinancing their personal loan provided the original amount is paid down by at least 50%. Member loans in GERS are valued at the outstanding loan principal balance less an allowance for estimated loan losses. The accounts receivable from non-governmental customers of the discretely presented component units are net of estimated uncollectible amounts. These receivables arise primarily from service charges to users. Accounts receivable from the PG and other component units that arise from service charges do not have significant allowances for uncollectible accounts. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 53 1. Summary of Significant Accounting Policies (continued) Restricted Assets Restricted assets in the PG and discretely presented component units are set aside primarily for the payment of bonds, notes, construction funds, unemployment benefits, and other specific purposes. Capital Assets Capital assets, which include land, land improvements, buildings, building improvements, machinery and equipment, construction in progress, and infrastructure assets are reported in the applicable governmental, business-type activities, and component unit columns in the government-wide financial statements as well as in the applicable proprietary funds reported in the fund financial statements. The PG defines capital assets as assets that have an initial, individual cost and useful lives of: (1) $5,000 for personal property with a useful life of five years; (2) $50,000 for buildings and building improvements with estimated useful lives of 40 years and 20 years, respectively; (3) $100,000 for land improvements with an estimated useful life of 20 years; and (4) $200,000 for infrastructure with an estimated useful life of 30 years. The value of all land acquired is capitalized. Capital assets purchased or acquired are carried at historical cost or normal cost. The normal costing method to estimate cost based on replacement cost indexed by a reciprocal factor of the price increase from the appraisal date to the actual or estimated acquisition date was used to estimate the historical cost of certain land, buildings, and building improvements because invoices and similar documentation was no longer available in certain instances. Donated capital assets are recorded at fair value at the time of donation. Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest costs are capitalized during the construction period only for business-type activities and proprietary component units. The costs of routine maintenance and repairs that do not add value to the assets or materially extend asset lives are expensed as incurred. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 54 1. Summary of Significant Accounting Policies (continued) Capital Assets (continued) Capital assets utilized in the governmental funds are recorded as expenditures in the governmental fund financial statements. Depreciation expense is recorded in the government-wide financial statements, as well as the proprietary funds and component units’ financial statements. Capital assets of the PG, excluding land and construction in progress, are depreciated on the straight-line method over the assets’ estimated useful lives. The capital assets of the component units are recorded in accordance with the applicable GASB and FASB statements and under their own individual capitalization thresholds. The estimated useful lives of capital assets reported by the component units are (1) 7 years to 50 years for buildings and building improvements; (2) 20 years to 40 years for airports and marine terminals; and (3) 3 years to 20 years for vehicles and equipment. Tax Refunds Payable During the calendar year, the Government collects individual income taxes through withholdings and payments from taxpayers. At September 30, the Government estimates the amount owed to taxpayers for overpayments during the first nine months of the calendar year. These estimated amounts and the actual tax refunds claimed for prior years but not paid at year-end are recorded as tax refunds payable and as a reduction of tax revenue. Deferred and Unearned Revenue Deferred revenue at the governmental fund level arises when potential revenue neither meets measurable nor available criteria for revenue recognition in the current period. Deferred revenue also arises when resources are received before the Government has a legal claim to them. In subsequent periods, when the revenue recognition criteria are met, or when the Government has a legal claim to the resources, deferred revenue is reduced from the balance sheet and the revenue is recognized. Unearned revenue at the government-wide and proprietary fund levels arises only when the Government receives resources before it has a legal claim to them or revenue recognition criteria have not been met. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 55 1. Summary of Significant Accounting Policies (continued) Long-term Liabilities The liabilities reported in the government-wide financial statements include the Government’s bonds, long-term notes, and other long-term liabilities including: compensated absences, retroactive union arbitration salaries, landfill closure and post closure, workers compensation loss claims, postemployment benefit costs and legal claims. Bond premiums and discounts, losses incurred on bond refundings, and debt issuance costs are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premiums or discounts and deferred refunding losses. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Losses incurred on bond refundings are not recognized in the fund financial statements as the corresponding liability for the bonds is only recorded in the government-wide financial statements. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. Fund Balance Fund balances are reported in classifications provided by the Government Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. Statement No. 54 provides a hierarchy of classifications based primarily on the extent to which the Government is bound to honor constraints on the specific purposes for which amounts in funds may be spent. Following are the fund classifications: x Restricted Fund Balance – Fund balances constrained by externally imposed constraints such as constitutional provisions, laws and regulations, debt covenants and grantors. The Government’s policy is to consider restricted amounts to have been spent when expenditures are incurred for which both restricted and unrestricted fund balances are available. x Committed Fund Balance – Fund balances subject to constraints imposed by the Government’s highest level of decision making authority including legislation enacted by the Legislature of the Virgin Islands, and resolutions or ordinances enacted by Government elected regulatory boards and authorities. Committed fund balances may be modified or rescinded by enacted legislation, or amendment of resolutions or ordinances. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 56 1. Summary of Significant Accounting Policies (continued) Fund Balance (continued) x Assigned Fund Balance – Fund balances subject to budgetary constraints of the Legislature, the Office of Management and Budget, or authorizing boards of the Government, that are not restricted or committed. Budgetary authority of the Office of Management and Budget is provided by Title 2, Sections 22, 23, 26 and 27 VIC, and Executive Order No. 371-1997. The Government’s policy is to expend assigned or committed amounts, before unassigned amounts, when an expenditure is incurred. x Unassigned Fund Balance – Unassigned fund balance is the residual classification for the General Fund. This classification represents fund balance that has not been assigned to other funds and that has not been restricted, committed or assigned to specific purposes within the General Fund. x Nonspendable Fund Balance – The nonspendable fund balance classification includes amounts that cannot be spent because they are either (a) not in spendable form (such as inventories or prepaid amounts), or (b) legally or contractually required to be maintained intact (such as a permanent endowment fund). Net Assets Net assets are reported in three categories: x Invested in Capital Assets, Net of Related Debt – These consist of capital assets, net of accumulated depreciation and amortization, and reduced by outstanding balances for bonds, notes, and other debt that are attributed to the acquisition, construction, or improvement of those assets. Debt pertaining to significant unspent debt proceeds is not included in the calculation of invested in capital assets, net of related debt. The unspent portion of the debt is presented, net of the related debt, as restricted net assets for capital projects. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 57 1. Summary of Significant Accounting Policies (continued) Net Assets (continued) x Restricted Net Assets – These result when constraints placed on net assets’ use are either externally imposed by creditors, grantors, contributors, and the like, or imposed by law through constitutional provisions or enabling legislation. x Unrestricted Net Assets – These consist of net assets, which do not meet the definition of the two preceding categories. Unrestricted net assets often are designated to indicate that management does not consider them to be available for general operations. Unrestricted net assets often have constraints on resources that are imposed by management, but can be removed or modified. When both restricted and unrestricted resources are available for use, generally it is the Government’s policy to use restricted resources first, then the unrestricted resources, as needed. Compensated Absences The vacation policy of the Government provides for the accumulation of four, six, or eight hours for each full biweekly pay period depending on the time of entry into government service. At the beginning of each calendar year, vacation leave is limited to 480 hours (60 days). However, the excess of 480 hours is considered by GERS for service credit towards the employees’ retirement. This vacation policy does not apply to professional educational personnel of the Virgin Islands Department of Education, who receive compensation during the school breaks. Upon retirement, an employee receives compensation for unused vacation leave at the employee’s base pay rate. Employees accumulate sick leave at a rate of four hours for each full biweekly pay period up to a maximum of 180 days. Separated employees do not receive payment for unused sick leave; therefore, a provision for accumulated sick leave is not required. Compensated absences accumulation policies for the blended component units and discretely presented component units vary from entity to entity, depending upon negotiated bargaining agreements and other factors agreed upon between the management of these entities and its employees. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 58 1. Summary of Significant Accounting Policies (continued) Interfund and Intra-entity Transactions The Government has the following types of transactions among funds: x Interfund Transfers – Legally required transfers are reported as interfund transfers in (out) when incurred. x Intra-entity Transactions – These are transactions between the PG and its component units, and among the component units. Transfers between the PG and its blended component units are reported as interfund transfers, except for transfers within the same fund type. Similarly, receivables and payables between the PG and its blended component units are reported as amounts due from (to) other funds. Transfers between the PG and discretely presented component units (and among those component units) are reported separately as revenue and expenses or expenditures. Amounts owed to and from discretely presented component units by the PG are reported separately from interfund payables and receivables as due from (to) component units, net of allowance for estimated uncollectible amounts. Risk Management With some exceptions, the Government does not carry general casualty or liability insurance coverage on its properties or the acts of its employees, relying instead on self-insurance and/or statutory liability limitations. However, as a result of an agreement with the Federal Emergency Management Agency (FEMA), with respect to properties and structures damaged by Hurricane Hugo and repaired with federal disaster assistance funds, the Government has obtained insurance for certain hospitals, schools, and other insurable public buildings that were repaired with such federal assistance. The Government purchases commercial insurance covering physical losses or damages against its property. The limit of liability for all risks, excluding earthquake, windstorm, and flood, is $1 million for each and every occurrence except for windstorm and flood losses, which has a $45 million limit. For physical losses arising from earthquake, the insurance policy has a limit of $100 million for each and every occurrence and in the annual aggregate. The Government does not maintain accounting records in support of individual claim liabilities or for claims incurred but not reported (IBNR). Accordingly, medical malpractice claims are accounted for on a cash basis. Therefore, the basic financial statements do not include a liability for medical malpractice claims outstanding, including related IBNR, as of September 30, 2011, as required by GAAP. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 59 1. Summary of Significant Accounting Policies (continued) Future Adoption of Accounting Requirements GASB has issued the following statements that the Government or its component units have not yet adopted: Statement Required in Number Fiscal Year 57 OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans 2012 60 Accounting and Financial Reporting For Service Concession Arrangements 2013 61 The Financial Reporting Entity; Omnibus- An Amendment of GASB Statements No. 14 and 34 2013 62 Codification of Accounting and Financial Reporting Guidance Contained in pre-November 30, 1989 FASB and AICPA Pronouncements 2013 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position 2013 64 Derivative Instruments: Application of Hedge Accounting Termination Provisions-an Amendment of GASB Statement No. 53 2012 65 Items Previously Reported as Assets and Liabilities 2014 66 Technical Corrections - 2012 - an amendment of GASB Statement No. 10 and No. 62 2014 67 Financial Reporting for Pension Plans 2014 68 Accounting and Financial Reporting for Pensions 2015 69 Government Combinations and Disposals of Government of Government Operations 2015 The impact of these statements has not yet been determined by the Government. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 60 2. Component Units The basic financial statements include the financial statements of the following discretely presented component units: x Virgin Islands Housing Authority x Virgin Islands Port Authority x Virgin Islands Water and Power Authority x Virgin Islands Government Hospital and Health Facilities Corporation x University of the Virgin Islands x Virgin Islands Economic Development Authority x Magens Bay Authority x Virgin Islands Housing Finance Authority x Virgin Islands Public Television System x Virgin Islands Waste Management Authority x University of the Virgin Islands Research and Technology Park Corporation Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 61 1305-1079124 2. Component Units (continued) Condensed financial information as of September 30, 2011, of all discretely presented component units follows (expressed in thousands): Virgin Islands Government Virgin Islands Water Virgin Virgin and Power Authority Islands Islands Roy L. University Total Information on Housing Port Electric Water Schneider Juan F. Luis of the Other Component net assets Authority Authority System System Hospital Hospital Virgin Islands Entities Units Assets: Current assets 18,496 $ 26,346 $ 53,504 $ 8,108 $ 23,497 $ 12,022 $ 16,691 $ 18,555 $ 177,219 $ Due from primary government – 145 25,051 2,245 – – 1,884 8,189 37,514 Due from federal government 850 1,270 – 1,085 – 887 3,493 1,440 9,025 Restricted assets 1,531 10,936 55,488 12,267 574 1,617 46,862 40,952 170,227 Capital assets, net 72,322 248,980 296,736 65,182 60,779 43,117 54,667 147,647 989,430 Deferred expenses – 1,066 58,312 8,587 – – – – 67,965 Other noncurrent assets 60 – 52 33 495 2,807 10,197 18,455 32,099 Total assets 93,259 288,743 489,143 97,507 85,345 60,450 133,794 235,238 1,483,479 Liabilities: Current liabilities 4,115 11,178 107,137 9,278 24,362 36,249 4,679 11,142 208,140 Due to primary government – – – – 30,762 52,578 – – 83,340 Due to federal government – – 5,047 – – – – – 5,047 Due to other component units – – – – – – – 1,388 1,388 Bonds payable – 32,836 226,101 21,592 – – – 2,410 282,939 Notes payable – 1,515 36,520 – – – 39,062 2,000 79,097 Line of credit payable – – 23,000 2,500 – – – – 25,500 Deferred revenue 41 – – – – – 3,693 4,018 7,752 Other noncurrent liabilities 7,376 – 23,570 5,371 – 237 5,298 11,490 53,342 Total liabilities 11,532 45,529 421,375 38,741 55,124 89,064 52,732 32,448 746,545 Net assets (deficit): Invested in capital assets, net of related debt 66,391 216,144 143,616 46,794 60,779 42,880 25,523 114,525 716,652 Restricted 1,800 10,936 24,962 11,191 1,773 1,617 39,030 48,964 140,273 Unrestricted (deficit) 13,536 16,134 (100,810) 781 (32,331) (73,111) 16,509 41,501 (119,991) Total net assets 81,727 $ 243,214 $ 67,768 $ 58,766 $ 30,221 $ (28,614) $ 81,062 $ 204,990 $ 736,934 $ Hospital and Health Facilities Corporation Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 62 2. Component Units (continued) Program revenue Operating Capital Total Charges for Grants and Grants and Component Expenses Services Contributions Contributions Units Virgin Islands Housing Authority 45,892 $ 6,192 $ 33,815 $ 13,199 $ 7,314 $ Virgin Islands Port Authority 61,870 46,536 – 18,524 3,190 Virgin Islands Water and Power Authority: Electric System 311,886 279,455 – 5,002 (27,429) Water System 27,120 37,568 – 4,150 14,598 Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 93,585 55,975 28,308 26 (9,276) Juan F. Luis Hospital 79,303 41,241 21,949 283 (15,830) University of the Virgin Islands 82,955 18,736 56,160 3,992 (4,067) Other component units 83,503 12,064 69,050 12,070 9,681 Total activities 786,114 $ 497,767 $ 209,282 $ 57,246 $ (21,819) General revenue: Interest and other 16,662 Changes in net assets (5,157) Net assets at beginning of year (as restated) 742,091 Net assets at end of year 736,934 $ Information on statements of activities Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 63 3. Stewardship, Compliance, and Accountability Budgetary Process and Control The V.I. Code requires the Governor to submit an annual balanced executive budget to be adopted by the Legislature for the ensuing fiscal year. The Governor is required by law to submit to the Legislature the annual balanced executive budget no later than May 30. The annual balanced executive budget is prepared on a GAAP basis, except for encumbrances, which are reported as expenditures for budget reporting purposes, by the Virgin Islands Office of Management and Budget (OMB) working in conjunction with other Government offices and agencies. If the annual executive budget has not been approved before the commencement of any fiscal year, then the appropriations for the preceding fiscal year, insofar as they may be applicable, are automatically deemed re-appropriated item by item. The annual balanced executive budget, which includes those funds of the Government subject to appropriation pursuant to law, is composed of all proposed expenditures and estimated revenue for the Government. The Legislature enacts the annual executive budget through passage of lump-sum appropriations for each department. The Legislature may add, change, or delete any items in the annual executive budget proposed by the Governor. Upon passage by the Legislature, the annual executive budget is submitted to the Governor, who may veto the budget partially or in its entirety and return it to the Legislature with his objections. A veto by the Governor can be overridden only by a two-thirds majority of all members of the Legislature. The Legislature is obligated by law to pass a final annual executive budget no later than September 30, the last day of the fiscal year. Supplemental budgetary appropriations bills that are signed into law may be created during the year without the identification of a specific revenue source to finance them. In August 1999, the Legislature enacted the Financial Accountability Act (Act No. 6289). The purpose of the Financial Accountability Act is to require by law that the budget of the Government be balanced each year, and the appropriations in each fiscal year not exceed a verifiable revenue source. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 64 3. Stewardship, Compliance, and Accountability (continued) Budgetary Process and Control (continued) Once the budget has been enacted, fiscal control over expenditures made pursuant thereto is exercised by the Governor through the Director of OMB. During any fiscal year in which the resources available to the Government are not sufficient to cover the appropriations approved for such year, the Governor, through the Director of OMB, may take administrative measures to reduce expenditures. The Governor may also make recommendations to the Legislature for new taxes or any other necessary action to meet the estimated deficiency. Budgetary control is exercised at the department level through an allotment process. Encumbrances and expenditures cannot exceed total allotment amounts. The Government’s department heads may make transfers of appropriations within the department. Appropriation transfers between departments and supplemental appropriations require executive and legislative branch approval. Unencumbered and unexpended appropriations, not designated, lapse at fiscal year-end. Also, encumbrances are established at fiscal year-end to pay certain expenditures for travel and utility costs payable against current year appropriation authority, but to be expended in the subsequent year. Budget/GAAP Reconciliation The following schedule presents a comparison of the general fund legally adopted budget with actual data on a budgetary basis. Because accounting principles applied for purposes of developing data on a budgetary basis differ significantly from those used to present financial statements in conformity with GAAP, a reconciliation of timing and entity difference in the excess (deficiency) of revenue and net other financing sources over expenditures for the year ended September 30, 2011, is presented below (expressed in thousands): Excess of revenues and net other financing sources over expenditures 33,866 $ Entity difference – deficiency of revenues and net other financing over expenditures – activities with budgets not legally adopted (17,197) Excess of revenues and net other financing sources over expenditures – GAAP basis (net change in fund balance) 16,669 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 65 3. Stewardship, Compliance, and Accountability (continued) Budget/GAAP Reconciliation (continued) Controls over spending in special revenue funds and non-appropriated funds are maintained at the Department of Finance by use of budgets and available resources (revenues). The Government makes appropriations to authorize expenditures for various capital projects. Budgets for capital projects normally remain available until completion of the project unless modified or rescinded. 4. Cash and Cash Equivalents Primary Government At September 30, 2011, the PG reported $191.2 million in unrestricted cash and cash equivalents, and $3.3 million in restricted cash and cash equivalents. All of the PG’s bank balances were fully collateralized. Pension Trust Fund GERS considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. At September 30, 2011, GERS held $112.4million in cash and cash equivalents consisting of: $71 million in money market accounts, $41.4 million in operational accounts. Component Units At September 30, 2011, component units held $77.8 million in unrestricted cash and cash equivalents and $77.3 million in restricted cash and cash equivalents, of which $3.5 million was not insured, bonded or collateralized as required for public funds of the Government. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 66 5. Investments Primary Government Investments Following is a summary of the investments of the PG, categorized by investment type and maturity as of September 30, 2011: Fair Less Than 1 to 5 Over 5 Value 1 Year Years Years Investments with contractual maturities Certificates of Deposit 11,013 $ 11,013 $ – $ – $ Portfolio investments Commercial Paper 39,549 39,160 – 389 U.S. Government Agencies & Notes 45,171 18,171 27,000 – Total investments with contractual maturities 95,733 68,344 $ 27,000 $ 389 $ Investments without contractual maturities Money Market & Mutual Funds 342,387 Total Primary Government Investments 438,120 $ Primary Government Investments (in thousands) Maturity (in years) Interest-Rate Risk – Interest-rate risk represents the exposure to fair value losses arising from increasing interest rates. The PG does not have a formal investment policy that limits investment maturities as a means of managing such exposure. As a means of keeping the interest-rate risk low, virtually all investments held by the PG are short-term in nature. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 67 5. Investments (continued) Primary Government Investments (continued) Credit Risk – The authorizing legislation of the PG does not limit investments by credit rating categories. Authorizing legislation does limit the investment choices of the PG to direct obligations or obligations guaranteed by the United States, obligations of states, territories, possessions and commonwealths of the United States, obligations of international banking institutions, repurchase agreements, investment contracts, certificates of deposit, guaranteed investment contracts, shares in mutual funds, investment companies, corporate commercial paper, money market portfolio investments, and investment pools. At September 30, 2011, the PG’s investments in money market funds were rated AAAm by Standard & Poor’s, and Aaa-mf by Moody’s Investor Service; PG’s investment in commercial securities were rated A- by Standard & Poor’s, and A2 by Moody’s Investor Services; and the PG’s investment in U.S. government agencies were rated AA+ by Standard & Poor’s and Aaa by Moody’s Investor Services. Concentration of Credit Risk – The PG places no limit on the amount that may be invested in one issuer. At September 30, 2011, more than 5% of the PG’s investments were invested in: Goldman Financial Square Money Market #524 (49.52%), Goldman Financial Securities Money Market #474 (12.22%), Silver Tower Funding, LLC CP (8.03%), and Invesco Treasury (8.38%). Custodial Credit Risk – The PG does not have a custodial risk policy. This is the risk that the PG will not be able to recover the value of its investments that are in the possession of an outside party. At September 30, 2011, $438.1 million of investments were held in the name of The Bank of New York Trust Company, N.A, as trustee for the Government. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 68 5. Investments (continued) Pension Trust Fund Investments Following is a summary of pension trust fund investments as of September 30, 2011: Fair Less Than 1 to 5 6 to 10 More Than Value 1 Year Years Years 10 Years Investments with contractual maturities US government and agency obligations 24,393 $ 6,221 $ 12,626 $ 2,135 $ 3,411 $ US Treasury notes 45,332 – 18,421 26,911 – US Treasury bonds 25,655 – – 1,867 23,788 Municipals 7,721 – 1,893 1,548 4,280 Corporate obligations 74,604 2,167 34,043 23,970 14,424 Foreign bonds 8,310 – 4,755 3,555 – Government obligations - foreign 53,410 10,713 17,667 7,041 17,989 Mortgage and asset backed securities 71,333 – 2,618 4,415 64,300 Investment loan 18,613 – 18,613 – – 329,371 19,101 $ 110,636 $ 71,442 $ 128,192 $ Investments without contractual maturities Equity Securities Common stocks - U.S. 418,529 Common stocks - foreign 68,296 Real Estate Investments Real estate investment trusts 3,810 Havensight Mall - US Virgin Islands 66,600 GERS Complex - US Virgin Islands 30,210 Limited partnership 52,915 Securities lending short-term collateral investment pool 166,343 Mutual funds 13,536 Certificates of deposit 27,972 Total pension fund investments 1,177,582 $ Maturity (in years) Pension Trust Fund Investments (In thousands) Total investments with contractual maturities Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 69 5. Investments (continued) Pension Trust Fund Investments (continued) Interest Rate Risk – Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. GERS does not have a specific policy to manage interest rate risk, but requires investment managers to diversify by issue, maturity, sector, coupon, and geography. Investment managers retained by GERS follow specific investment guidelines and are evaluated against specific market benchmarks that represent their investment style. Any exemption from general guidelines requires approval from GERS’ board of trustees. Credit Risk – GERS investment policy is designed to minimize credit risk by restricting authorized investments to only those investments permitted by statute, subject to certain additional limitations. These additional limitations consist of prohibitions against investments in derivative securities, options, futures or short positions. GERS investment policy allows investments in mortgage pass-through securities. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 70 5. Investments (continued) Pension Trust Fund Investments (continued) The credit ratings of GERS debt and equity securities include: Standard & Fair Value Poor Moody's US government and agency obligations 737 $ A AA2 US government and agency obligations 1,015 A- AA1 US government and agency obligations 15,113 AA+ AAA US government and agency obligations 7,528 Not Rated Not Rated US Treasury notes 45,332 AAA AAA US Treasury bonds 25,655 Not Rated Not Rated Corporate obligations 74,604 BBB- to AAA BAA3 to AAA Foreign bonds 6,952 AAA AAA Foreign bonds 249 A- BAA1 Foreign bonds 1,109 Not Rated Not Rated Government obligations - foreign 10,342 AA- to AA+ AA2 to AA1 Government obligations - foreign 37,561 AAA AAA Government obligations - foreign 5,507 Not Rated Not Rated Municipals 5,786 A- to AA- A2 to AA2 Municipals 714 AA1 AAA Municipals 1,221 BB- to BBB B3 to BAA3 Mortgage and asset backed securities 3,043 D to AA+ C to AA1 Mortgage and asset backed securities 60,323 AAA AAA Mortgage and asset backed securities 7,967 Not Rated Not Rated Common stocks- US 418,529 Not Rated Not Rated Common stocks - foreign 68,296 Not Rated Not Rated Real estate investment trust 1,397 Not Rated Not Rated Real estate investment trust 2,413 Not Rated Not Rated Real estate holdings - US Virgin Islands 96,810 Not Rated Not Rated Investment loans 18,613 Not Rated Not Rated Limited partnership 52,915 Not Rated Not Rated Securities lending short-term collateral investment pool 166,343 Not Rated Not Rated Mutual funds 13,536 Not Rated Not Rated Certificate of deposit 27,972 Total investments 1,177,582 $ Credit Ratings Pension Trust Fund Investment Credit Ratings (in thousands) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 71 5. Investments (continued) Pension Trust Fund Investments (continued) Custodial Credit Risk – The custodial credit risk for investments is the risk that, in the event of the failure of a depository financial institution or other counterparty, GERS will not be able to recover the value of an investment or collateral securities that are in the possession of an outside party. With the exception of underlying securities on-loan amounting to $5.8 million, secured by non-cash collateral, the entire investment portfolio of GERS was held with a single third-party custodian on behalf of GERS as of September 30, 2011. Cash collateral held for securities lending transactions is invested in a collective investment pool maintained by the securities lending agent. Foreign Currency Risk – Foreign currency risk is the risk of holding investments in foreign currencies and the risk that those foreign currencies may devalue. GERS has no general investment policy with respect to foreign currency risk. As of September 30, 2011, $130.2 million of GERS’ portfolio was held in foreign currencies, with $39.7 million held in Euro, $26.8 million held in pound sterling, $16.0 million held in Australian dollars, $10.7 million held in Japanese yen, $7.8 million held in Swiss francs, $6.3 million held in Canadian dollars, $5.5 million held in Mexican peso, $4.0 million held in Norwegian krone, $3.3 million held in New Zealand dollar, $2.0 million held in Hong Kong dollars, and $8.1 million in other currencies. GERS entered into various forward currency exchange contracts to manage exposure to changes in foreign currency exchange rates, and to facilitate the settlement of foreign security transactions. Risks associated with foreign exchange contracts include the movement in the value of foreign currency relative to the U.S. dollar and the ability of the counterparty to perform in accordance with the terms of the contract. Changes in the market value of open and closed forward contracts are recorded with interest, dividends, and other income or losses reported at fair value. During the fiscal year ended September 30, 2011, GERS reported $41.3 million in forward currency purchases, $39.2 million in forward currency sales, and a foreign exchange loss of $3.1 million. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 72 5. Investments (continued) Pension Trust Fund Investments (continued) Securities Lending Transactions –The Government’s statutes permit GERS to participate in securities lending transactions, and GERS has, via a securities lending authorization agreement (the Agreement), authorized State Street Bank and Trust Company (the Custodian) to lend its securities to broker-dealers and banks pursuant to a form of loan agreement. Lent securities are collateralized with cash, securities issued or guaranteed by the U.S. government, or irrevocable bank letters of credit. GERS does not have the ability to pledge or sell collateral securities delivered absent a borrower default. No restrictions were imposed during 2011 as to the amount of loans the Custodian can make on behalf of GERS. Under the terms of the Agreement the Custodian must indemnify the Government for losses attributable to violations by the Custodian under the “standard of care” clause described in the Agreement. There were neither such violations during fiscal years 2011 or 2010, nor losses resulting from the default of the borrowers or the Custodian. Loans are generally terminable on demand. The collateral received shall, in the case of loaned securities denominated in U.S. dollars or whose primary trading market is located in the U.S. or sovereign debt issued by foreign governments, have a market value of 102% of the market value of the security for domestic borrowers and 105% for foreign borrowers at the inception of the securities lending transaction. Such collateral should be kept at a minimum of 100% of the market value of the security for all borrowers throughout the outstanding period of the transaction. At September 30, 2011, approximately $165.9 million of U.S. government and agency securities, fixed income, and equity corporate securities were on loan. The cash collateral received with a corresponding liability of an equal amount is recorded in the statement of fiduciary net assets. The cash collateral received on each loan was invested, together with the cash collateral of other lenders, in a collective investment pool. As of September 30, 2011, such investment pool had a weighted average maturity of 13 days and an average expected maturity of 133 days. Because the loans were terminable on demand, their duration did not generally match the duration of the investments made with cash collateral. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 73 5. Investments (continued) Component Unit Investments Following is a summary of component unit investments and maturities as of September 30, 2011: Fair Less Than 1 to 5 6 to 10 Over 10 Value 1 Year Years Years Years Investments with contractual maturities Certificates of deposit 19,857 $ 17,035 $ 2,822 $ – $ – $ Mortgage backed securites 3,218 – – – 3,218 Corporate bonds 5,569 – 1,000 733 3,836 Guaranteed investment contracts 139 – – – 139 U.S. Government agencies and notes 37,872 20,914 15,195 – 1,763 Total investments with contractual maturities 66,655 37,949 $ 19,017 $ 733 $ 8,956 $ Investments without contractual maturities Common stock 8,592 Mutual funds 22,031 Total component unit investments 97,278 $ Maturity (in years) Component Unit Investments (in thousands) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 74 5. Investments (continued) Component Unit Investments (continued) Interest Rate Risk – Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The component units of the Government have not established formal policies which limit investment maturities as a means of managing such exposure and have some exposure to interest rate risk. Credit Risk – The authorizing legislation of the component units does not limit investments by credit rating categories. Authorizing legislation limits the investment choices of the component units, as described in Note 1. The University of the Virgin Islands’ investments includes corporate bonds amounting to $4.8 million with ratings of A- to BBB by Standard & Poor’s. Custodial Credit Risk – The component units of the Government do not have custodial credit risk policies. This is the risk that the component unit will not be able to recover the value of its investments that are held in the possession of an outside party. 6. Receivables Primary Government Receivables Receivables for governmental funds at September 30, 2011, consist of the following (expressed in thousands): PFA Debt General Service Total Income taxes 193,409 $ – $ 193,409 $ Real property taxes 236,114 – 236,114 Hotel occupancy taxes 1,820 – 1,820 Excise taxes 1,252 – 1,252 Gross receipts taxes – 133,446 133,446 Tax receivables 432,595 133,446 566,041 Less allowance for doubtful accounts (201,805) (74,059) (275,864) Net tax receivables 230,790 $ 59,387 $ 290,177 Other long-term receivables – tobacco settlement rights and other 1,801 Total receivables reported in 291,978 $ the statement of net assets (deficit) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 75 6. Receivables (continued) Primary Government Receivables (continued) The Naval Appropriations Act created a separate tax structure for the U.S. Virgin Islands that mirrors the Internal Revenue Code of 1986, as amended. Income taxes are due from every corporation, partnership, individual, association, estate, or trust that meets the filing requirements of the U.S. Internal Revenue Code. A U.S. taxpayer who is a permanent resident of the U.S. Virgin Islands satisfies his Virgin Islands income tax obligations by filing his return with and paying income taxes to the Government. Virgin Islands residents are taxed by the Virgin Islands on their world-wide income. A nonresident of the U.S. Virgin Islands pays income taxes on his U.S. Virgin Islands source income to the Government. The revenue is recognized in the general fund in the fiscal period for which the income tax return was filed. The revenue from income tax withholding and estimated payments are recognized in the general fund as collected, net of estimated tax refunds. Corporate income taxes are due by the 15th day of the third month following the close of the fiscal year and become delinquent if not paid on or before the due date. Partnership and trust income taxes are due by April 15 of the following year for which the income tax was levied. Trust income taxes must be paid by the tax filing date. Property taxes are assessed each calendar year on all taxable real property located in the U.S. Virgin Islands. The receivable is recognized, net of estimated uncollectable amounts, in the general fund in the fiscal period for which the tax was assessed. The revenue is recognized in the general fund in the fiscal period for which the property tax is levied, provided the tax is collected within 60 days subsequent to fiscal year-end, unless the facts justify a period greater than 60 days. Receivables recognized before that period are recorded as deferred revenues. The Office of the Tax Assessor is responsible for the assessment of all taxable real property. Noncommercial real property subject to taxation is reassessed once every five years and commercial real property subject to taxation is reassessed biannually. The Tax Assessor prepares an annual assessment roll and schedule of collections for each parcel of real property that is used by The Office of the Tax Collector, as the basis for issuing tax bills to all taxpayers in the U.S. Virgin Islands. Property taxes are to be levied by May 15 of each year in the name of the record owner on January 15 of the same year. The taxes are due on June 30 and become delinquent if not paid by August 31. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 76 6. Receivables (continued) Primary Government Receivables (continued) For businesses with gross receipts of $120,000 per annum or less, gross receipts taxes are levied on an annual basis based on the amount of gross receipts in excess of $9,000 per month. Businesses with annual gross receipts greater than $120,000, but less than $225,000, are levied on a monthly basis, based on the amount of gross receipts in excess of $9,000 per month. Businesses with annual gross receipts of more than $225,000 are levied on a monthly basis, based on all gross receipts, with no $9,000 per month exemption. Gross receipts tax assessment rates, applied to taxable gross receipts, were as follows: October 1, 2010 through April 30, 2011: 4.0% June 1, 2011 through February 28, 2012: 4.5% March 1, 2012 and thereafter: 5.0% Monthly gross receipts tax filings are due within 30 calendar days following the last day of the calendar month collected. Annual gross receipts tax filings are due within 30 calendar days following the last day of the calendar year. Component Unit and Pension Trust Fund Receivables Component unit receivables at September 30, 2011, consist of the following (expressed in thousands): Utility service charges 22,485 $ Port fees 3,060 Students 2,221 Patients 24,974 Other 6,314 Total 59,054 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 77 6. Receivables (continued) Component Unit and Pension Trust Fund Receivables (continued) Loans and advances receivable, net at September 30, 2011, consist of the following (expressed in thousands): Fiduciary Funds Component Pension Trust Units Mortgage loans 8,458 $ – $ Personal loans 131,608 – Other loans and advances 171 49 Subtotal 140,237 49 Less allowance for uncollectible accounts (767) (49) Loans and advances receivable, net 139,470 $ – $ 7. Deferred Revenue The components of deferred revenue for the general fund as of September 30, 2011, consist of the following (expressed in thousands): Property tax $ 137,956 Matching excise tax 48,349 Income tax 59,672 $ 245,977 Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 78 8. Interfund Transactions Interfund transfers for the year ended September 30, 2011, consisted of the following (expressed in thousands): PFA PFA West Debt Capital Indian Nonmajor Transfers to General Service Projects Company Governmental Total General – $ 96,146 $ 1,500 $ 700 $ 1,000 $ 99,346 $ PFA Debt Service 4 – – – – 4 PFA capital projects – 1,318 – – 13,025 14,343 Nonmajor governmental 3,568 4,534 1,179 – – 9,281 West Indian Company – – – – – – Total 3,572 $ 101,998 $ 2,679 $ 700 $ 14,025 $ 122,974 Transfer from General – $ 4 $ – $ – $ 3,568 $ 3,572 $ PFA Debt Service 96,146 – 1,318 – 4,534 101,998 PFA Capital Projects 1,500 – – – 1,179 2,679 Nonmajor governmental 1,000 – 13,025 – – 14,025 West Indian Company 700 – – – – 700 Total 99,346 4 14,343 – 9,281 122,974 Interfund transfers constitute the transfer of resources from the fund that receives the resources to the fund that utilizes them. The most significant transfers to the general fund from other governmental funds include a $96.1 million transfer from the PFA Debt Service Fund (a major governmental fund) representing gross receipt tax revenue in excess of bond service requirements, and a $13.0 million transfer from a non-major debt service fund, the PFA Operating Fund, to the PFA Capital Projects Fund, representing reprogrammed investment income. Significant transfers made from the General Fund include a transfer of $2.0 million to the St. Croix Capital Improvement Fund (a non-major governmental fund) and a transfer of $1.0 million to the Crisis Intervention Fund (a non-major governmental fund). Significant transfers from the PFA Debt Service Fund include a transfer of $4.5 million to the PFA Operating Fund (a non-major governmental fund), representing interest earned from unexpended bond proceeds, and $1.3 million to the PFA Capital Projects Fund. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 79 8. Interfund Transactions (continued) Due From/To Other Funds The following table summarizes interfund receivables and payables at September 30, 2011 (expressed in thousands): PFA PFA West Debt Capital Nonmajor Indian Nonmajor Due from other funds General Service Projects Governmental Company Enterprise Total General – $ – $ – $ 3,778 $ 3,300 $ 4,668 $ 11,746 $ PFA Debt Service – – – – – – – PFA capital projects – – – – – 7,759 7,759 Nonmajor governmental 14,490 – – – – 2,122 16,612 Total Governmental F 14,490 – – 3,778 3,300 14,549 36,117 Nonmajor enterprise 739 – – – – – 739 Total Enterprise Funds 739 – – – – – 739 Total 15,229 $ – $ – $ 3,778 $ 3,300 $ 14,549 $ 36,856 $ Due to other funds General – $ – $ – $ 14,490 $ – $ 739 $ 15,229 $ Nonmajor governmental 3,778 – – – – – 3,778 Total Governmental F 3,778 – – 14,490 – 739 19,007 3,300 – – – – – 3,300 Nonmajor enterprise 4,668 – 7,759 2,122 – – 14,549 Total Enterprise Funds 7,968 – 7,759 2,122 – – 17,849 Total 11,746 $ – $ 7,759 $ 16,612 $ – $ 739 $ 36,856 $ West Indian Company The due from (to) other funds includes the following amounts due from the general fund: $4.9 million due to the emergency molasses fund (a non-major governmental fund) for unpaid appropriations, $1.3 million due to the elected governor retirement fund, and $3.5 million due to the PFA special revenue fund for unpaid matching funds. The due to the General Fund is mainly composed of $4.4 million due from the Virgin Islands Lottery, consisting primarily of 20% of the net lottery revenue that is required to be transferred to the General Fund, and $2.7 million owed from the bond proceeds fund (a non-major governmental fund) to the general fund. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 80 8. Interfund Transactions (continued) Due From/To Other Funds (continued) The due to other governmental funds includes $859 thousand due from the Virgin Islands Lottery to the Pharmaceutical Assistance to the Aged Fund and $943 thousand due from the Virgin Islands Lottery to the VI Educational Initiative Fund consisting primarily of 15% of revenue derived from lottery games under contract between the Virgin Islands Lottery and private contractors be transferred to these funds. Contributions from the Virgin Islands Lottery (a non- major enterprise fund) amounted to $3.4 million, which represented contributions to the VI Educational Initiative Fund (a non-major governmental fund) of $1.7 million and a contribution to the Pharmaceutical Assistance to the Aged Fund (a non-major governmental fund) of $1.7 million. The due to PFA Capital Projects funds includes $7.4 million due from the Non-Major Business Type Fund viNGN in connection with start-up costs in connection with the broadband project. 9. Restricted Assets Primary Government Restricted assets of proprietary funds and business-type activities as of September 30, 2011, include cash and cash equivalents as follows (expressed in thousands): Restricted Assets – Proprietary Funds and Business-type Activities Unemployment insurance funds 144 $ WICO debt service funds 1,934 Total restricted assets of proprietary funds and business-type activities 2,078 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 81 9. Restricted Assets (continued) Component Units Restricted assets of component units include cash and cash equivalents, investments, and receivables as follows (expressed in thousands): Restricted Assets – Component Units Cash and cash equivalents: Debt service and sinking fund requirements 20,237 $ Endowment funds 18,130 HUD project funds 1,531 Revolving loan funds 18,657 Construction funds 1,959 Renewal and replacement funds 5,856 Other 10,965 Total cash and cash equivalents 77,335 Investments: Debt service and sinking fund requirements 25,576 Construction funds 24,605 Endowment funds 25,955 Renewal and replacement funds 2,075 Revolving loan funds 7,068 Total investments 85,279 Other: Pledged funds 7,613 Total restricted assets of component units 170,227 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 82 10. Capital Assets Primary Government The capital assets activity for the governmental activities for the year ended September 30, 2011, is summarized as follows (expressed in thousands): Beginning Ending Balance Additions Transfers Disposals Balance Capital assets not being depreciated: Land 190,022 $ 2,915 $ – $ – $ 192,937 $ Construction in progress 147,773 – (16,963) (3,075) 127,735 Total capital assets not being depreciated 337,795 2,915 (16,963) (3,075) 320,672 Capital assets being depreciated: Land improvements 5,305 – – – 5,305 Infrastructure 190,105 17,851 15,928 – 223,884 Buildings and improvements 397,335 12,890 727 – 410,952 Machinery and equipment 134,978 5,912 308 – 141,198 Total capital assets being depreciated 727,723 36,653 16,963 – 781,339 Less accumulated depreciation for: Land improvements (3,218) (196) – – (3,414) Infrastructure (57,113) (10,335) – – (67,448) Buildings and improvements (162,818) (11,268) – – (174,086) Machinery and equipment (97,695) (10,212) – – (107,907) Total accumulated depreciation (320,844) (32,011) – – (352,855) Total capital assets being depreciated, net 406,879 4,642 16,963 – 428,484 Governmental activities capital assets, net 744,674 $ 7,557 $ – $ (3,075) $ 749,156 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 83 10. Capital Assets (continued) Primary Government (continued) Capital assets activity for the business-type activities for the year ended September 30, 2011, is summarized as follows (expressed in thousands): Beginning Ending Balance Additions Transfers Disposals Balance Capital assets not being depreciated: Land 5,147 $ – $ – $ – $ 5,147 $ Construction in progress 275 5,648 – (262) 5,661 Total capital assets not being depreciated 5,422 5,648 – (262) 10,808 Capital assets being depreciated: Land improvements 348 – – – 348 Buildings and improvements 66,104 330 – 66,434 Machinery and equipment 9,193 2,158 – (138) 11,213 Total capital assets being depreciated 75,645 2,488 – (138) 77,995 Less accumulated depreciation for: Land improvements (340) (1) – – (341) Buildings and improvements (22,227) (1,554) – – (23,781) Machinery and equipment (7,206) (1,580) – 111 (8,675) (29,773) (3,135) – 111 (32,797) Total capital assets being depreciated, net 45,872 (647) – (27) 45,198 Business-type activities capital assets, net 51,294 $ 5,001 $ – $ (289) $ 56,006 $ Total accumulated depreciation Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 84 10. Capital Assets (continued) Primary Government (continued) Depreciation expense was charged to functions/programs of the PG for the year ended September 30, 2011, as follows (expressed in thousands): Governmental activities: General government 12,674 $ Public safety 1,840 Health 1,075 Education 6,280 Public Housing and Welfare 322 Culture and recreation 402 Transportation and communication 9,418 Total depreciation expense – governmental activities 32,011 $ Business-type activities: WICO – depreciation 1,918 $ Other enterprise funds – depreciation 1,217 Total depreciation – business-type activities 3,135 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 85 10. Capital Assets (continued) Component Units The capital assets activity for the discretely presented component units for the year ended September 30, 2011, is summarized as follows (expressed in thousands): Beginning Ending Balance Additions Transfers Disposals Balance (As Restated) Capital assets not being depreciated: Land 119,918 $ 119 $ – $ 1,768 $ 118,269 $ Construction in progress 98,305 83,504 (51,651) 65,352 64,806 Total capital assets not being depreciated 218,223 83,623 (51,651) 67,120 183,075 Capital assets being depreciated: Buildings and improvements 1,467,758 68,849 41,255 19,740 1,558,122 Airport and marine terminal facilities 133,474 – 7,219 – 140,693 Personal property and equipment 191,295 13,472 3,177 183 207,761 Intangible assets 2,604 – – – 2,604 Total capital assets being depreciated 1,795,131 82,321 51,651 19,923 1,909,180 Less accumulated depreciation: Buildings and improvements 855,030 49,958 – 4,734 900,254 Airport and marine terminal facilities 94,924 6,653 – – 101,577 Personal property and equipment 90,158 10,496 – 108 100,546 Intagible assets 274 174 – – 448 Total accumulated depreciation 1,040,386 67,281 – 4,842 1,102,825 Total capital assets being depreciated, net 754,745 15,040 51,651 15,081 806,355 Component unit capital assets, net 972,968 $ 98,663 $ – $ 82,201 $ 989,430 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 86 10. Capital Assets (continued) Component Units (continued) Depreciation expense charged by each component unit for the year ended September 30, 2011, was as follows (expressed in thousands): Virgin Islands Housing Authority 5,516 $ Virgin Islands Port Authority 19,822 Virgin Islands Water and Power Authority: Electric System 21,588 Water System 4,046 Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 4,831 Juan F. Luis Hospital 3,663 University of the Virgin Islands 2,524 Other component units 5,291 Total depreciation expense– component units 67,281 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 87 11. Long-Term Liabilities The change in long-term bonds and loans for governmental activities was as follows for the year ended September 30, 2011 (expressed in thousands): Amounts Amounts Beginning Ending Due Within Due Balance Additions Reductions Balance One Year Thereafter Governmental activities: Bonds payable: 2010 Series A & B Revenue Bonds 399,050 $ - $ - $ 399,050 $ – $ 399,050 $ 2009 Series A Revenue Bonds (Cruzan) 39,190 – (550) 38,640 565 38,075 2009 Sereis A-1, A-2, B & C Revenue and Refunding Bonds 458,840 – (8,460) 450,380 29,650 420,730 2009 Series A Revenue Bonds (Diageo) 250,000 – – 250,000 – 250,000 2006 Series A Revenue Bonds 215,965 – (1,580) 214,385 2,705 211,680 2006 Series A Tobacco Bonds 7,290 – – 7,290 – 7,290 2004 Series A Revenue Bonds 78,860 – (3,625) 75,235 3,805 71,430 2003 Series A Revenue Bonds 252,455 – (3,495) 248,960 3,635 245,325 2001 Series A Tobacco Bonds 16,845 – (1,300) 15,545 1,265 14,280 1999 Series A Revenue Bonds 87,695 – (6,580) 81,115 6,950 74,165 Total bonds payable 1,806,190 – (25,590) 1,780,600 48,575 1,732,025 Plus (less): Deferred costs on refundings (15,834) – 854 (14,980) (854) (14,126) Bonds premium 32,788 – (1,447) 31,341 1,447 29,894 Bonds discount (6,202) – 737 (5,465) (737) (4,728) Bonds accretion 2,438 649 – 3,087 3,087 – Total bonds payable, net 1,819,380 649 (25,446) 1,794,583 51,518 1,743,065 Loans payable: Series 2011 A Note – 32,235 – 32,235 32,235 – Series 2010 A Working Capital Notes – 131,400 – 131,400 – 131,400 Series 2009 A Tax Increment Notes 10,031 4,000 – 14,031 – 14,031 Series 2009 B Working Capital Notes 6,400 – (6,400) – – – Series 2009 Note 7,292 – (1,472) 5,820 1,553 4,267 Series 2008 Note 2,449 – (2,449) – – – Total loans payable 26,172 135,400 (10,321) 151,251 1,553 149,698 Total governmental bonds and loans 1,845,552 $ 136,049 $ (35,767) $ 1,945,834 $ 53,071 $ 1,892,763 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 88 11. Long-Term Liabilities (continued) The changes in other long-term liabilities for governmental activities were as follows for the year ended September 30, 2011 (expressed in thousands): Beginning Ending Due Within Due Balance Additions Reductions Balance One Year Thereafter Other liabilities: Accrued compensated absences 60,088 $ – $ (1,499) $ 58,589 $ 8,545 $ 50,044 $ Retroactive union arbitration 231,835 – (36,549) 195,286 – 195,286 Litigation 20,804 20,995 (14,536) 27,263 15,470 11,793 Landfill closure and postclosure costs 173,311 64,424 (166,105) 71,630 – 71,630 Post employment benefit 145,202 56,221 – 201,423 – 201,423 Total other liabilities 631,240 $ 141,640 $ (218,689) $ 554,191 $ 24,015 $ 530,176 $ Accrued litigation, retroactive union arbitration liabilities, compensated absences, and landfill closure and post-closure costs are generally expected to be liquidated with resources derived from the general fund. Changes in long-term liabilities for business-type and fiduciary activities were as follows for the year ended September 30, 2011 (expressed in thousands): Amounts Amounts Beginning Ending Due Within Due Balance Additions Reductions Balance One Year Thereafter Business-type activities: Workers compensation claims 17,900 $ 11,094 $ (8,652) $ 20,342 $ 4,559 $ 15,783 $ Capital Lease - WICO 188 – (188) – – – Note payable - WICO 22,721 – (464) 22,257 501 21,756 Total business-type activities 40,809 $ 11,094 $ (9,304) $ 42,599 $ 5,060 $ 37,539 $ Fiduciary activities: Note payable: Pension trust fund 9,963 $ – $ (9,963) $ – $ – $ – $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 89 11. Long-Term Liabilities (continued) Debt Margin Pursuant to 48 U.S.C. Section 1574(b)(i) of the Revised Organic Act, the Government may issue revenue bonds for public improvements or undertakings authorized by an act of the Legislature, without limitation as to principal amount. Such revenue bonds are payable solely from the revenue directly derived from and attributable to such public improvements or undertakings. Pursuant to 48 U.S.C. Section 1574(b)(ii), the Government is authorized to issue general obligation bonds for any public purpose provided that no such indebtedness is in excess of 10% of the aggregate assessed valuation of the taxable real property in the U.S. Virgin Islands. In addition, pursuant to 48 U.S.C. Section 1574(a) (Public Law 94-932), the U.S. Virgin Islands is authorized to cause to be issued bonds or other obligations in anticipation of the matching funds to be received from the federal government pursuant to 26 U.S.C. Section 7652(b)(3). There is no legal limit on the value of bonds that the Government may issue pursuant to 48 U.S.C. Section 1574(a). The Legislature of the U.S. Virgin Islands must authorize all bond issuances. PFA is authorized to issue bonds for the purpose of financing any project or for the purpose authorized by the Legislature. Given that PFA’s powers to issue bonds are derived from 48 U.S.C. Section 1574(b), the bonds issued by PFA are subject to the limitations of said 48 U.S.C. Section 1574(b). On August 23, 1999, the Legislature amended the V.I. Code to add a Mandatory Balanced Budget Provision. Such provisions, specifically Title 2 of the V.I. Code Section 256, provide that the amount of debt of the Government existing on October 1, 2000 shall be the debt limit of the Government, exclusive of bond principal and interest that may become due. The debt limit specified under Title 2 of the V.I. Code Section 256 does not include bonds authorized by law for which a specific source of revenue is identified and committed to retiring those bonds. As used in Title 2 of the V.I. Code Section 256, the term “debt” means the total accumulated unpaid obligations that are due and payable, including unpaid income tax refunds, amounts owed to vendors, and current year unpaid debt service obligations, if any. As used in the statute, the term “debt” does not include that portion of principal or interest on bonds that is not yet due and payable. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 90 11. Long-Term Liabilities (continued) Bonds Payable Bonds payable outstanding at September 30, 2011, are comprised of the following (thousands): Final Interest Bonds Payable Maturity Rates (%) Balance 2010 Series A & B Revenue Bonds 2029 4.00 - 5.25 399,050 $ 2009 Series A Revenue Bonds (Cruzan) 2039 3.00 - 6.00 38,640 2009 Series A-1, A-2, B & C Revenue and Refunding Bonds 2040 3.00 - 5.00 450,380 2009 Series A Revenue Bonds (Diageo) 2038 6.00 - 6.75 250,000 2006 Series A Revenue Bonds 2029 3.50 - 5.00 214,385 2006 Series A, B, C & D Tobacco Turbo and Capital Appreciation Bonds 2035 6.25 - 7.625 7,290 2004 Series A Revenue Bonds 2025 4.00 - 5.25 75,235 2003 Series A Revenue Bonds 2033 4.00 - 5.25 248,960 2001 Series A Tobacco Bonds 2031 5.00 15,545 1999 Series A Revenue Bonds 2020 4.20 - 6.50 81,115 Subtotal 1,780,600 Plus (less): Deferred costs on refundings (14,980) Bonds premium 31,341 Bonds discount (5,465) Bonds accretion 3,087 Total 1,794,583 $ Primary Government - Bonds Payable Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 91 11. Long-Term Liabilities (continued) Bonds Payable (continued) On July 8, 2010, the Public Finance Authority (“PFA”) issued the 2010 Series A and B Revenue Bonds, the proceeds of which amounted to $399.1 million. The Government has pledged matching funds, described below, for the timely payment of the principal and interest on the 2010 Series A and B Revenue Bonds. The 2010 Series A Bonds, amounting to $305.0 million, bear interest at rates ranging from 4.0% to 5.0% mature from 2012 to 2029. The 2010 Series B Bonds, amounting to $94.1 million, bear interest at rates ranging from 4.2% to 5.2% and mature from 2020 to 2029. The bonds were issued to: (i) provide working capital to the PG to finance various operating expenses, (ii) refinance a portion of the outstanding Series 2009 B1 and B2 Notes, (iii) fund the debt service requirements of the bond issuance, and (iv) pay the costs of issuing the bonds. The 2010 Series A Bonds maturing on October 1, in the years 2012, 2025, and 2029 are subject to mandatory sinking fund redemptions at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption. The 2010 Series B Bonds maturing on October 1, in the years 2020 and 2029 are subject to mandatory sinking fund redemptions at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption The matching funds pledged for the payment of the bonds consist of annual advance payments received from the U.S. Department of the Treasury of excise taxes imposed and collected under the Internal Revenue laws of the United States on rum products produced in the U.S. Virgin Islands and exported to the United States from the Virgin Islands. The amount required to be remitted to the Government by the U.S. Department of the Treasury is an amount no greater than the total amount of local revenue (primarily taxes) collected by the Government in each fiscal year. As a result, the term “matching fund revenue” is used to denote these payments. Amounts to be received by the Government from federal rum excise tax are deposited directly into trust accounts in accordance with the Indenture of Trust for bond debt service payments. The amounts to be received are subject to adjustment for the amount of local revenue actually collected by the U.S. Department of the Treasury during such year. Prepayments of matching fund revenue are recorded as deferred revenue in the accompanying statement of net assets, and recognized as income in the subsequent fiscal year. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 92 11. Long-Term Liabilities (continued) Bonds Payable (continued) The rate of federal rum excise tax is determined by Congress. In November 1999, Congress increased the federal rum excise tax rate from $10.50 to $13.25 per proof gallon. Since then, Congress has extended the higher rate six times. Under the 2010 Tax Relief Act, it will be in effect through January 1, 2012. On December 17, 2009, PFA issued the 2009 Series A Revenue Bonds (the “Cruzan Bonds”) amounting to $39.2 million. The Government has pledged matching funds generated from the sale of Cruzan rum products for the timely payment of the principal and interest of the Cruzan Bonds. The Cruzan Bonds bear interest at rates ranging from 3.0% to 6.0% and mature from 2010 to 2039. The proceeds of the Cruzan Bonds were used to: (i) finance the costs of a wastewater treatment facility and renovations at the Cruzan VIRIL, Ltd. (“Cruzan”) rum distillery on the island of St. Croix, (ii) fund debt service reserve accounts and (iii) pay the costs of issuing the bonds. The bonds maturing October 1, 2039 are subject to mandatory sinking fund redemptions beginning October 1, 2020, at a redemption price equal to 100% of the principal amount plus interest accrued to the date of redemption. In association with the issuance of the Cruzan Bonds, the Government entered into an agreement with Cruzan on October 6, 2009, to provide marketing support payments, production incentive payments, continuation of molasses subsidies and other tax incentives to retain Cruzan as part of the rum industry in the U.S. Virgin Islands. Marketing and incentive payments to Cruzan amounted to $54.7 million, $40.2 million and $3.9 million for the years ended September 30, 2011, 2010 and 2009. On October 1, 2009, PFA issued the 2009 Series A-1, A-2, B and C Revenue and Refunding Bonds, the proceeds of which amounted to $458.8 million. The Government has pledged matching funds for the timely payment of principal and interest on the 2009 Series A-1, A-2, B and C Revenue and Refunding Bonds. The 2009 Series A-1 Bonds amounted to $86.4 million. The 2009 Series A-1 Bonds bear interest at rates ranging from 3.0% to 5.0% and mature from 2010 to 2039. The Series A-1 Bonds were issued to: (i) fund certain capital projects, (ii) fund debt service reserve accounts, and (iii) pay certain costs of issuing the bonds. The 2009 Series A-2 Bonds amounted to $8.7 million. The 2009 Series A-2 Bonds bear an interest rate of 3.00% and mature from 2010 to 2011. The Series A-2 Bonds were issued to: (i) fund certain capital projects, (ii) fund debt service reserve accounts and (iii) pay certain costs of issuing the bonds. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 93 11. Long-Term Liabilities (continued) Bonds Payable (continued) The 2009 Series B Bonds amounted to $266.3 million, bear an interest rate of 5.0%, and mature from 2010 to 2025. The 2009 Series B Bonds were issued to: (i) current refund the 1998 Series A Bonds, (ii) fund debt service reserve accounts, and (iii) pay certain costs of issuing the bonds. The 2009 Series C Bonds amounted to $97.4 million, bear an interest rate of 5.0% and mature from 2010 to 2022. The 2009 Series C Bonds were issued to: (i) current refund the 1998 Series E Revenue and Refunding Bonds, (ii) fund debt service reserve accounts and (iii) pay certain costs of issuing the bonds. The current refunding of the 1998 Series A and E Bonds, on October 28, 2009, was made in order to obtain lower interest rates. The economic gain obtained by this current refunding is the difference between the present value of old debt service requirements and the new debt service. This refunding resulted in a debt service saving of approximately $35.9 million and an economic gain of approximately $35.6 million. The 2009 Series A-1, B and C Bonds are subject to mandatory sinking fund installment redemptions beginning October 1, 2020 at a redemption price equal to 100% of the principal amount, plus interest accrued, to the date of redemption. On July 9, 2009, PFA issued the 2009 Series A Bonds (the “Diageo Bonds”) amounting to $250.0 million. The Diageo Bonds mature from 2013 to 2038 at interest rates ranging from 6.0% to 6.75%. The proceeds of the bonds were issued to: (i) provide a grant to Diageo USVI, Inc. (the producer of Captain Morgan rum products) to construct a rum distillery and warehouse on the island of St. Croix, (ii) to redeem the Subordinated Revenue Bond Anticipation Notes Series 2009A issued to finance preliminary costs of the Diageo construction project, (iii) to fund debt service reserve accounts, and (iv) to finance capitalized interest and costs associated with the issuance of the bonds. The PG has pledged matching funds generated from the sale of Captain Morgan rum products for the timely payment of the principal and interest on the Diageo Bonds. The Diageo Bonds maturing on or after October 1, 2020 are subject to optional redemption on or after October 1, 2019, at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 94 11. Long-Term Liabilities (continued) Bonds Payable (continued) On September 28, 2006, PFA issued the 2006 Series Gross Receipts Revenue Bonds (“2006 Series Bonds”), the proceeds of which amounted to $219.5 million. The Government has pledged gross receipts tax revenues for the timely payment of the principal and interest on the 2006 Series Bonds. The 2006 Series Bonds bear interest at 3.5% to 5.0% and mature from 2007 to 2029. The proceeds of the bonds were issued to: (i) advance refund a portion of the Series 1999A Revenue Bonds, (ii) pay the cost of a termination fee in connection with an outstanding swap option agreement, (iii) fund certain capital projects, (iv) fund debt service reserve accounts, (v) pay certain costs of issuing the Series 2006 Bonds, and (vi) fund a net payment reserve account for a new swap agreement in connection with the refunding. The 2006 Series Bonds maturing on or before October 1, 2016 are not subject to optional redemption. The advance refunding of the 2020 through 2029 maturities of the 1999 Series A Bonds was made in order to obtain lower interest rates. The economic gain obtained by this advance refunding is the difference between the present value of old debt service requirements and the new debt service. This refunding resulted in a debt service saving of approximately $40.8 million and an economic gain of approximately $25.6 million. The proceeds of the 2006 Series Bonds related to the refunding were placed in a trust account to provide for all future debt service payments on the 2020 through 2029 maturities of the 1999 Series A Bonds. Approximately $180 million in funds were deposited into the Escrow Fund accounts. At September 30, 2011, $162.9 million of defeased 1999 Bonds remained outstanding. On March 15, 2006, the Tobacco Settlement Financing Corporation (“TSFC”) issued the 2006 Tobacco Settlement Asset-Backed Bonds, Subordinated Series 2006 A, B, C & D Turbo and Capital Appreciation Bonds amounting to $48.1 million, with an issue value of $7.3 million (net of accretion of $40.8 million). The bonds are secured and payable from collections including all Tobacco Settlement Revenues to be received by TSFC, reserves, amounts held in other accounts established by the indenture and TSFC’s rights under the purchase agreement. The proceeds have been used for the purpose of (i) financing several capital hospital and health development projects for the benefit of the Virgin Islands and its residents, (ii) pay certain costs of issuance relating to the Series 2006 Bonds, and (iii) fund operating costs. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 95 11. Long-Term Liabilities (continued) Bonds Payable (continued) Interest on the Series 2006 Tobacco Settlement Asset-Backed Bonds is not paid currently, but accretes from the date of delivery, compounded every May 15 and November 15, commencing May 15, 2006 through the final maturity date of May 15, 2035. Interest yields on the Bonds range from 6.25% to 7.625%. The series are subject to early redemption at accreted value beginning May 15, 2023, provided that the 2001 Tobacco Settlement Asset-Backed Series A Bonds have been paid in full. On December 1, 2004, PFA issued the 2004 Series A Bonds, the proceeds of which amounted to $94.0 million. The Government has pledged the Matching Fund Revenues to the timely payment of principal and interest on the 2004 Series A Bonds. The bonds bear interest at 4.0% to 5.25% and mature from 2005 to 2025. The proceeds of the bonds were issued to: (i) finance the planning, development, constructing, renovating, and equipping of wastewater treatment facilities and collection systems on St. Thomas and St. Croix, (ii) finance the repairs, renovations, and construction of solid waste facilities in the Territory, (iii) finance the repair and construction of public roads in the Territory, (iv) provide start-up capital for the Virgin Islands Waste Management Authority, (v) fund the Series 2004A Senior Lien Debt Service Reserve Subaccount, and (vi) pay certain costs of issuing the Series 2004A Bonds. The Series 2004A Bonds are not subject to optional redemption prior to October 1, 2014. On December 17, 2003, PFA issued the Series 2003A Revenue Bonds, the proceeds of which amounted to approximately $268.0 million. The bonds were issued to: (i) repay the Government outstanding Revenue Bond Anticipation Notes, Series 2003, (ii) fund certain necessary public safety and other public sector capital development projects, (iii) fund debt service accounts for the bond issuance, and (iv) to pay certain costs of issuing the bonds. The Government has pledged gross receipts taxes for the timely payment of the principal and interest on the Series 2003A Revenue Bonds. Interest is payable semiannually on April 1 and October 1, and principal is payable annually on October 1. The Series 2003A Revenue Bonds are not subject to optional redemption prior to October 1, 2014. On November 20, 2001, TSFC issued the 2001 Tobacco Settlement Asset-Backed Series A Bonds amounting to $23.7 million of the aggregate principal. The proceeds were used for the purpose of (i) purchasing all rights, title, and interest in certain litigation awards under the master settlement agreement (MSA) entered into by participating cigarette manufacturers, (ii) issuance of Tobacco Settlement Asset-Backed Bonds to pay the purchase price for the rights, and (iii) to provide funds for hospital and healthcare projects in the U.S. Virgin Islands. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 96 11. Long-Term Liabilities (continued) Bonds Payable (continued) Interest on the 2001 bonds is payable semiannually each May and November 15 for the term bonds amounting to $15.5 million and convertible capital appreciation bonds amounting to $8.2 million, with a nominal value of $6.2 million. The convertible capital appreciation bonds accrete interest prior to November 15, 2007 and accrue interest subsequent to that date. Interest on the capital appreciation bonds will compound on May 15th and November 15th. 2001 Series A Tobacco Bonds payable at September 30, 2011 amounted to $15.5 million. Under early redemption provisions, any MSA payments exceeding annual debt service requirements of the 2001 Series A Tobacco Bonds must be applied to early redemption of principal. MSA payments and interest earnings on the trust funds during the year ended September 30, 2011, resulted in early redemption of $135 thousand during fiscal year 2011. On November 16, 1999, PFA issued the 1999 Series A Revenue Bonds amounting to $299.9 million. These bonds were issued to (i) pay certain working capital obligations of the Government, (ii) repay the Government outstanding tax and revenue anticipation notes, (iii) fund the Series debt service accounts, and (iv) finance certain costs of issuing the bonds. On September 28, 2006, PFA advance refunded a portion of the 1999 Bonds with maturity dates of October 1, 2020 to October 1, 2029 totaling $162.9 million. The proceeds of the refunding were placed in a trust account to provide for all future debt service payments on the 2020 through 2029 maturities of the bonds. Approximately $180.0 million was deposited with the refunding bond escrow agent to fund the Escrow Fund accounts. At September 30, 2011, $81.1 million of the defeased 1999 Series A Revenue Bonds remain outstanding. The Government has pledged gross receipts taxes for the timely payment of the principal and interest on the 1999 Series A Bonds. Interest is payable semiannually on April 1 and October 1, and principal is payable annually on October 1. Gross receipts revenue amounted to $147.9 million for the year ended September 30, 2011. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 97 11. Long-Term Liabilities (continued) Bonds Payable (continued) Revenue Bonds Series 2006 Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Maturity Year: 2012 6,950 $ 4,948 $ 1,265 $ 771 $ 3,635 $ 12,448 $ 3,805 $ 3,814 $ 2,705 $ 10,330 $ 2013 7,395 4,485 1,335 711 3,815 12,262 3,995 3,619 2,805 10,192 2014 7,865 4,057 1,405 647 4,010 12,066 4,195 3,414 2,905 10,049 2015 8,365 3,546 – 577 4,210 11,860 4,405 3,199 3,015 9,901 2016 8,900 2,885 – 577 4,420 11,639 4,625 2,967 3,125 9,748 2017 – 2021 41,640 5,460 3,495 2,885 25,840 54,363 27,020 10,829 29,565 46,007 2022 – 2026 – – – 2,011 33,270 46,769 27,190 2,946 87,710 31,104 2027 - 2031 – – 8,045 2,011 64,830 36,779 – – 82,555 7,871 2032 - 2036 – – – – 104,930 8,040 – – – – Total 81,115 $ 25,381 $ 15,545 $ 10,190 $ 248,960 $ 206,226 $ 75,235 $ 30,788 $ 214,385 $ 135,202 $ Tobacco Bonds Revenue Bonds Revenue Bonds Series 2009 A (Diageo) Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Maturity Year: 2012 – $ – $ – $ 16,703 $ 1,505 $ 3,974 $ 6,650 $ 100 $ 15,145 $ 12,763 $ 2013 – – – 16,703 1,550 3,928 – – 15,920 11,986 2014 – – 4,040 16,581 1,600 3,881 – – 16,740 11,170 2015 – – 4,290 16,331 1,650 3,830 – – 17,600 10,311 2016 – – 4,575 16,048 1,705 3,773 – – 18,505 9,409 2017 – 2021 – – 28,120 74,985 9,615 17,782 – – 107,760 31,798 2022 – 2026 – – 39,245 63,863 12,090 15,309 – – 71,160 8,103 2027 – 2031 – – 54,665 48,439 15,460 11,938 – – – – 2032 – 2036 48,145 – 76,475 26,624 19,850 7,546 – – – – 2037 – 2041 – – 38,590 2,649 19,865 2,049 – – – – Less unamortized discount (40,855) – – – – – – – – – Total 7,290 $ – $ 250,000 $ 298,926 $ 84,890 $ 74,010 $ 6,650 $ 100 $ 262,830 $ 95,540 $ Revenue Bonds Revenue Bonds Revenue Bonds Revenue Bonds Series 2009 C Series 2009 A (Cruzan) Series 2010 A Series 2010 B Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Maturity Year: 2012 6,350 $ 4,642 $ 565 $ 2,227 $ – $ 15,188 $ – $ 4,833 $ 48,575 $ 92,741 $ 2013 6,675 4,316 585 2,210 1,990 15,148 – 4,833 46,065 90,393 2014 7,015 3,974 605 2,186 2,065 15,067 – 4,834 52,445 87,926 2015 7,210 3,618 640 2,154 2,155 14,983 – 4,834 53,540 85,144 2016 7,745 3,244 670 2,122 2,270 14,883 – 4,834 56,540 82,129 2017 – 2021 42,900 9,964 3,910 10,051 13,330 72,534 1,050 24,145 334,245 360,803 2022 – 2026 18,115 841 5,205 8,756 92,260 61,609 37,460 20,922 423,705 262,233 2027 – 2031 – – 7,035 6,933 190,930 19,689 55,540 6,023 479,060 139,683 2032 – 2036 – – 9,490 4,472 – – – – 258,890 46,682 2037 – 2041 – – 9,935 1,237 – – – – 68,390 5,935 – – – – – – – – (40,855) – 96,010 $ 30,599 $ 38,640 $ 42,348 $ 305,000 $ 229,101 $ 94,050 $ 75,258 $ 1,780,600 $ 1,253,669 $ Less unamortized discount Series 2009 A-1 Tobacco Bonds Series 2001 A Series 2003 A Total Government Revenue Bonds Series 2004 A Revenue Bonds Revenue Bonds Series 2006 Activities Governmental Activities – Bonds Series 1999 A Revenue Bonds Revenue Bonds Series 2009 B Series 2009 A-2 Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 98 11. Long-Term Liabilities (continued) Conduit Debt In March 2007, the PFA issued private activity bonds, the Refinery Facilities Senior Secured Tax-Exempt Revenue Bonds (HOVENSA Refinery), the “Series 2007 Tax-Exempt Bonds”, amounting to $104.1 million, to finance modifications to diesel and gasoline desulfurization units for a refinery on the island of St. Croix. The bonds have an interest rate of 4.7% and are limited obligations of PFA, payable solely from, and secured by, a pledge and assignment of the amounts payable under a loan agreement between PFA and the refinery. The refinery is responsible for all debt service payments of the private activity bonds. The Government is not obligated for the repayment of the bonds. The bonds are not reported as liabilities in the Government’s basic financial statements. The amount outstanding at September 30, 2011 of $104.1 million was subsequently defeased by HOVENSA under a buy-back option offered to bondholders in January 2012. In April 2004, the PFA issued private activity bonds, the Refinery Facilities Senior Secured Tax- Exempt Revenue Bonds (HOVENSA Refinery), the “Series 2004 Tax-Exempt Bonds”, amounting to $50.6 million, to finance construction of a delayed coking unit for a refinery on the island of St. Croix. The bonds have an interest rate of 5.9% and are limited obligations of PFA, payable solely from, and secured by, a pledge and assignment of the amounts payable under a loan agreement between PFA and the refinery. The refinery is responsible for all debt service payments of the private activity bonds. The Government is not obligated for the repayment of the bonds. The bonds are not reported as liabilities in the Government’s basic financial statements. The amount outstanding at September 30, 2011 of $50.6 million was subsequently defeased by HOVENSA under a buy-back option offered to bondholders in January 2012. In December 2003, the PFA issued private activity bonds, the Refinery Facilities Senior Secured Tax-Exempt Revenue Bonds (HOVENSA Refinery), the “Series 2003 Tax-Exempt Bonds”, amounting to $74.2 million, to finance the costs of a Clean Fuels Program for a refinery on the island of St. Croix. The Clean Fuels Program consists of three major projects to comply with regulatory standards for low sulfur gasoline. The Clean Fuels Program is a federally mandated program effective January 2004. The bonds have an interest rate of 6.1% and are limited obligations of PFA, payable solely from, and secured by, a pledge and assignment of the amounts payable under a loan agreement between PFA and the refinery. The refinery is responsible for all debt service payments of the private activity bonds. The Government is not Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 99 11. Long-Term Liabilities (continued) Conduit Debt (continued) obligated for the repayment of the bonds. The bonds are not reported as liabilities in the Government’s basic financial statements. The amount outstanding at September 30, 2011 of $74.2 million was subsequently defeased by HOVENSA under a buy-back option offered to bondholders in January 2012. In November 2002, the PFA and the PG issued private activity bonds, the Refinery Facilities Revenue Bonds (HOVENSA Coker Project), the “Series 2002 Tax-Exempt Bonds”, amounting to $63.8 million and $63.0 million respectively ($126.8 million in total) to finance costs of construction of a coker plant for a refinery on the island of St. Croix. The bonds have an interest rate of 6.50% and are limited obligations of PFA and the PG, payable solely from and are secured by, a pledge and assignment of the amounts payable under a loan agreement between PFA, PG and the refinery. The refinery is responsible for all debt service payments of the private activity bonds. The Government is not obligated for the repayment of the bonds. The bonds are not reported as liabilities in the Government’s basic financial statements. The amount outstanding at September 30, 2010 of $126.8 million was subsequently defeased by HOVENSA under a buy-back option offered to bondholders in January 2012. Notes Payable On April 29, 2011, PFA entered into the Subordinate Lien Revenue Bond Anticipation Notes (the “Series 2011A Notes”), in the amount of $32.2 million, for the purpose of upgrading the broadband infrastructure, equipment and technology in the U.S. Virgin Islands. The Series 2011 A Notes are a general obligation of the PG, secured by gross receipts taxes. Interest accrues quarterly at the rate of 4.75% and the Notes reach maturity on April 29, 2012, at which time principal and accrued interest are due. Proceeds of the Series 2012A and 2012B were used in part to refinance broadband project obligations, Series 2011A Notes. Debt service requirements for the Series 2011A Notes at September 30, 2011, are as follows (expressed in thousands): Principal Interest 32,235 $ 1,140 $ 32,235 $ 1,140 $ Year 2012 Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 100 11. Long-Term Liabilities (continued) Notes Payable (continued) On November 4, 2010, PFA entered into the Subordinated Lien Revenue Bond Anticipation Notes (the “Series 2010A Notes”), which modified and amended the Series 2009B Notes, extending the maturity date to October 1, 2013, with a maximum amount of $78.8 million from the Agent Lender and $52.5 million from the Syndicate Lender. The Series 2010A Notes are a general obligation of the PG, secured by gross receipts taxes and, commencing October 1, 2012, a set-aside amount equal to four percent (4%) of matching fund revenues. The Series 2010A Notes accrue interest at a rate of 400 points above the 90-day LIBOR rate, not to exceed a maximum rate of 5.50%, with interest payments due on the first business day of the month. Debt service requirements for the Series 2010A Notes at September 30, 2011, are as follows (expressed in thousands): Principal – $ 131,400 131,400 $ Year 2012 2013 On September 25, 2009, PFA entered into the Tax Increment Revenue Bond Anticipation Note Purchase Agreement (the “Agreement”) with a local bank. Under the terms of the Agreement, the bank will purchase up to $15.7 million in federally taxable Bond Anticipation Notes (the “Series 2009A Notes”). The purpose of the Series 2009A Notes is to provide a loan to the PG (the “Series 2009A Tax Increment Revenue Loan Note”) to finance the developmental costs of a shopping complex on the island of St. Croix. The Series 2009A Notes have a term of three years, maturing on October 1, 2012, with interest of 300 points above the J.P. Morgan Chase Prime Rate or 6.25%, whichever is higher. On October 1, 2012, the Series 2009A Notes will convert to a term loan with payments in eleven quarterly payments, based on a twenty-five (25) year amortization schedule, with a final payment on October 1, 2015. Under the terms of the Agreement, PFA may issue Tax Increment Revenue Bonds to defease the debt prior to that date. As of September 30, 2011, PFA had sold $14 million in Series 2009A Notes. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 101 11. Long-Term Liabilities (continued) Notes Payable (continued) The proceeds were used to: (i) fund a capitalized interest account and (ii) fund the first phase of the development of the shopping center complex. The debt is a special limited obligation of the PG, secured by Tax Incremental Financing (“TIF”) revenues. TIF revenues consist of 100% of the incremental property taxes and 90% of the incremental gross receipts taxes, derived from the development project. Debt service requirements for the Series 2009A Notes at September 30, 2011, were as follows (expressed in thousands): Principal – $ 180 253 269 13,329 14,031 $ Year 2012 2015 2014 2016 2013 On September 18, 2009, PFA issued the Subordinated Lien Revenue Bond Anticipation Notes (Series 2009B Notes) in two series: the Series 2009 B-1 Notes in the aggregate amount of $150 million with the agent lender First Bank of Puerto Rico and the Series B-2 Notes in the aggregate amount of $100 million with the syndicate lender Banco Popular de Puerto Rico. The purpose of the Notes was to provide working capital to the PG for operating expenses and to pay the costs of the issuances. As of September 30, 2010, $6.4 million of the credit facility remained outstanding. On November 4, 2010, this amount was defeased with the issuance of the Series 2010A Notes. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 102 11. Long-Term Liabilities (continued) Notes Payable (continued) In August 2009, the current unemployment insurance taxes and reserve balances of the Unemployment Trust Fund (UTF) held by the U.S. Treasury became inadequate to cover territory expenditures for unemployment compensation (UC) benefits. UC benefits are an entitlement program and the PG is legally liable to pay benefits even if the UTF becomes insolvent. As of September 30, 2011, the PG had borrowed $26.6 million from the U.S. Treasury Federal Unemployment Account (FUA) to meet U.C. obligations. The American Recovery and Reinvestment Act of 2009 (P.L. 111-5 Section 2004) temporarily waives interest payments and the accrual of interest on FUA loans. On February 12, 2009, PFA issued the Subordinate Lien Revenue Bond Anticipation Notes (“Series 2009 Notes”), in the amount of $8.0 million. The Government has pledged gross receipts taxes for the timely payment of the Series 2009 Notes. The Series 2009 Notes initially had an interest rate of 4.8% and a due date of February 1, 2010. PFA elected a conversion of the Series 2009 Notes to term notes with principal and interest payable semi-annually on February 1 and August 1, at an interest rate of 5.4% and a maturity date of August 1, 2015. The proceeds of the Series 2009 Notes were issued: (i) to finance the purchase and installation of 911 emergency communication equipment for the Virgin Islands Police Department and (ii) to pay certain costs of issuing the Series 2009 Notes. Debt service requirements for the Series 2009 Notes at September 30, 2011, were as follows (expressed in thousands): Principal Interest 1,553 $ 294 $ 1,639 208 1,728 119 900 24 Total 5,820 $ 645 $ Year 2015 2012 2013 2014 Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 103 11. Long-Term Liabilities (continued) Notes Payable (continued) On August 12, 2008, PFA issued the Subordinate Lien Revenue Notes, Series 2008 (Virgin Islands Gross Receipts Taxes Loan Note) in the aggregate amount of $7.7 million (the “Series 2008 Notes”). The Series 2008 Notes accrued interest monthly at a rate of 4.8% for 36 months. The proceeds of the Series 2008 Notes were loaned to the PG under the same terms, for the purposes of (i) financing the acquisition of a fleet of vehicles for the Virgin Islands Police Department and (ii) paying certain costs of issuing the Series 2008 Notes. The PG pledged gross receipts taxes for the payment of the Series 2008 Notes, which were defeased in August 2011. On June 1, 2008, WICO refinanced its outstanding notes payable and obtained an additional $2.3 million in financing for infrastructure improvements. The consolidated notes amounted to $23.6 million, to be repaid in 120 consecutive monthly installments of $154.9 thousands at a fixed interest rate of 6.2%, plus a final payment of the balance of principal, plus any unpaid interest, in 2018. The notes may be prepaid, in whole, or in part, at any time without penalty. WICO has pledged all leases and revenues to secure the notes, and may not declare dividends, or issue additional equity interests without lender approval. As of September 30, 2011, WICO was not in compliance with note covenants requiring 1) minimum operating revenue thresholds and 2) the maintenance of a restricted debt service reserve account equal to debt service requirements for the following year. On May 13, 2011, WICO obtained a waiver from the lender for its failure to comply with these covenants. Debt service requirements for the WICO loan at September 30, 2011, were as follows (expressed in thousands): Principal 2012 501 $ 2013 533 2014 567 2015 603 2016 641 2017 - 2018 19,412 Total 22,257 $ Year: Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 104 11. Long-Term Liabilities (continued) Fiduciary Funds – Notes Payable On October 2, 2006, GERS entered into a loan agreement with Banco Popular de Puerto Rico to provide working capital and to pay issuance and closing costs associated with the agreement. The line of credit is a revolving credit facility with a maximum principal amount of $25.0 million, which accrues interest at a fixed interest rate of 6.3% calculated on a 360-day basis and is due and payable quarterly, commencing on the first day of the fourth calendar month following the closing of the loan. The line of credit facility is available to GERS for a period up to three years, subject to annual renewals. At any time that an event of default occurs, the loan will bear interest at a rate equal to 3.0% above a variable interest rate based on the bank’s transfer rate. The bank retains a certificate of deposit in the amount of $20.0 million as security on the loan agreement. As of September 30, 2011, there was no outstanding balance under the line-of-credit agreement. Standby Credit Facility On October 9, 2010, PFA entered into a standby credit facility (“credit facility”) with Banco Popular de Puerto Rico in an aggregate principal amount of up to $45.0 million. The purpose of the credit facility is to provide financial liquidity for payments required under Chapter 10 of Title 22 of the VIC upon the failure of a Virgin Islands insurance carrier. Under that legislation, the Virgin Islands Insurance Guaranty Fund is to maintain a minimum balance of $50.0 million for claimant payments. The credit facility is secured and payable from gross receipts taxes. The credit facility will terminate once the Virgin Islands Insurance Guaranty Fund has been restored to an amount of $50.0 million. The initial term of the credit facility is three (3) years at an interest rate on drawn funds equal to the 90-Day LIBOR plus 400 basis points with a minimum rate of 5.5%, payable quarterly in advance, with an option to extend the credit facility for an additional three (3) year term. The credit facility is subject to: (i) an issuance fee of one- hundred seventy-five (175) basis points annually, payable quarterly in advance, on the outstanding amount of the credit facility for the principal not drawn upon, (ii) a fee upon each draw of twenty-five (25) basis points, and (iii) extension fees to be negotiated with Banco Popular de Puerto Rico, should the credit facility be extended. As of September 30, 2011, no draws have been made on the credit facility, and the amount in the Virgin Islands Insurance Guaranty fund was $18.9 million. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 105 11. Long-Term Liabilities (continued) Component Units – Bonds Payable Bonds payable of discretely presented component units are those liabilities that are paid out of resources pledged by such entities. Bonds payable, outstanding at September 30, 2011, are as follows (expressed in thousands): Interest Bonds Payable Maturity Rates (%) Balance Virgin Islands Water and Power Authority (Electric System) Revenue bonds of 2010 2033 5.0 85,335 $ Revenue bonds of 2007 2031 5.0 57,585 Revenue bonds of 2003 2023 4.00 – 5.00 60,385 Revenue bonds of 1998 2021 4.25 – 5.30 16,965 Virgin Islands Water and Power Authority (Water System) Revenue bonds of 1998 2017 4.90 – 5.50 22,005 Virgin Islands Port Authority Series A Revenue bonds of 2003 2023 5.00 – 5.25 18,005 Series B Revenue bonds of 2003 2015 3.73 – 5.43 6,555 Series C Revenue bonds of 2003 2023 4.40 8,171 Virgin Islands Housing Finance Authority: Revenue bonds of 1998 2028 4.10 – 5.25 1,420 Revenue bonds of 1995 2025 5.50 – 6.50 990 Subtotal 277,416 $ Plus unamortized premium 6,029 Less unamortized discount (131) Less deferred costs on debt refunding (375) Bonds payable, net 282,939 $ Less amount due within one year (11,588) Bonds payable, due in more than one year 271,351 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 106 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) Following is a schedule of changes in bonds payable, loans payable and other long-term liabilities for discretely presented component units for fiscal year ended September 30, 2011, (expressed in thousands): Amounts Amounts Beginning Ending Due Within Due Balance Additions Reductions Balance One Year Thereafter Bonds payable: University of the Virgin Islands 40,746 $ – $ (40,746) $ – $ – $ – $ Virgin Islands Water and Power Authority: Electric System 233,901 – (7,800) 226,101 6,635 219,466 Water System 23,828 – (2,236) 21,592 2,670 18,922 Virgin Islands Port Authority 34,782 – (1,946) 32,836 2,023 30,813 Virgin Islands Housing Finance Authority 2,810 – (400) 2,410 260 2,150 Total bonds payable, net 336,067 – (53,128) 282,939 11,588 271,351 Notes payable: Virgin Islands Economic Development Authority 544 – (70) 474 55 419 Virgin Islands Water and Power Authority: Electric System 28,461 15,200 (7,141) 36,520 7,342 29,178 Virgin Islands Port Authority 1,301 3,173 (2,959) 1,515 1,515 – Virgin Islands Housing Finance Authority 1,816 – (290) 1,526 112 1,414 University of the Virgin Islands 1,733 37,445 (116) 39,062 1,503 37,559 Total loans payable 33,855 55,818 (10,576) 79,097 10,527 68,570 Line of credit payable: Virgin Islands Water and Power Authority: Electric System 26,000 – (3,000) 23,000 – 23,000 Water System – 2,500 – 2,500 – 2,500 Total line of credit payable 26,000 $ 2,500 $ (3,000) $ 25,500 $ – $ 25,500 $ Other long-term liabilities: University of the Virgin Islands 115 5,183 – 5,298 – 5,298 Virgin Islands Housing Authority 6,514 1,351 (489) 7,376 511 6,865 Virgin Islands Water and Power Authority: Electric System 16,809 6,761 – 23,570 – 23,570 Water System 3,943 1,428 – 5,371 – 5,371 Economic Development Authority – 234 – 234 – 234 Juan F. Luis Hospital 477 – (240) 237 186 51 Waste Management Authority 2,725 383 – 3,108 – 3,108 Virgin Islands Housing Finance Authority 20,309 – (12,161) 8,148 – 8,148 Total other long-term liabilities 50,892 $ 15,340 $ (12,890) $ 53,342 $ 697 $ 52,645 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 107 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) In June 2011, the University of the Virgin Islands entered into two capital project loan agreements (loan agreements) in the amounts of $44.0 million and $16.0 million, with Rice Capital Access Program, LLC. The purpose of the capital project loans was to: (i) advance refund the University’s 1999 Series A Bonds and 2004 Series A Bonds, and (ii) to pay for construction costs of a 100 bed student residence facility and other construction improvement costs of facilities on the St. Thomas and St. Croix campuses. The advance refunding resulted in a difference between the reacquisition price and the net carrying amount of the old outstanding bonds of approximately $4.5 million and an economic gain of $6.8 million. On March 30, 2010, the Electric System of WAPA issued the $39.1 million 2010A Electric System Revenue Refunding Bonds; the $8.9 million 2010B Electric System Revenue Bonds; and the $37.3 million 2010C Electric System Revenue Refunding Bonds. The proceeds of the Series 2010A Bonds were used to: i) refund a portion of the Electric System Revenue Refunding Bonds, Series 1998, and ii) pay certain costs of issuance of the Series 2010A Bonds. The proceeds of the Series 2010B and 2010C Bonds were used to: i) finance certain capital expenditures temporarily funded through draws on a line of credit ($9.0 million) and, ii) to make certain deposits into the Debt Service Revenue Fund sufficient to satisfy the Debt Service Reserve Fund requirement. The proceeds of the three series were also used to pay certain costs of issuance of the 2010A, 2010B, and 2010C Revenue and Refunding Bonds. On June 28, 2007, the Electric System of WAPA issued the $57.6 million 2007A Electric System Subordinated Revenue Bonds, to pay certain costs of issuance of the bonds, to finance the costs of certain capital improvements, refinance capital improvements funded through draws on a Line of Credit and to reinstall a $10.0 million Line of Credit. On June 15, 2003, the Electric System issued the Electric System Revenue Bonds, Series 2003, amounting to $69.9 million. The proceeds from the bonds were used to finance capital improvements, repay $18.0 million of then outstanding lines-of-credit, cover underwriters’ costs, and establish a debt service fund. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 108 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) On June 1, 1998, the Electric System of WAPA issued $110.9 million of 1998 Series A Electric System Revenue and Refunding Bonds. The proceeds from the bonds, and approximately $14.0 million in funds from the existing debt service and debt service funds, were used to repay outstanding line-of-credit balances, to provide for approximately $30.0 million in funds for the construction of certain capital projects, and to pay underwriters discount and issuance costs of approximately $1.7 million. The remaining proceeds were used to purchase direct obligations of the U.S. government which were placed in an irrevocable trust with an escrow agent to provide all future debt service on the remaining $69.0 million principal amount of the 1991 Series A Electric System Revenue Bonds. Under the terms of the Bond Resolution relating to the Electric System Revenue and Refunding Bonds, payment of the principal and interest is secured by an irrevocable lien on the Electric System’s net revenue, (exclusive of any funds that may be established pursuant to the Bond Resolution for certain specified purposes), including the investments and income, if any, thereof. Under the General Resolution, the Authority is required to maintain a Debt Service coverage ratio at least equal to 1.25 times the principal of and interest on all Outstanding Senior Bonds for the current and each future fiscal year (the Senior Coverage). Under the Electric System Subordinated Revenue Bond Resolution, adopted by the Authority on May 17, 2007, as amended and supplemented (the Subordinated Bond Resolution), the Authority must satisfy the Debt Service coverage ratio of the General Resolution for the Senior Bonds, must maintain a Subordinated Debt Service coverage ratio at least equal to 1.15 times the principal of and interest on all Outstanding Bonds (the Senior and Subordinate Coverage) and all Outstanding Subordinated Bonds for the current and each future fiscal year, and must maintain at least 1.0 times the Maximum Aggregate Debt Service for each such fiscal year (total debt coverage). For the year ended June 30, 2011, the Authority’s debt coverage ratio was .91. Section 606(2) of the Subordinated Bond Resolutions provides that if the Authority fails to achieve the required coverage ratios, then the Authority must “take whatever steps it can to produce the amount of net electric revenues required in the following year”. Section 701(3) of the Subordinated Bond Resolutions further provides that if the covenant default continues for 60 days after notice of default without the Authority proceeding with diligence to cure the default. The Authority believes it is taking such steps currently to ensure future compliance with required debt coverage ratios. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 109 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) The Series 2003 Bonds maturing on or after July 1, 2023 are subject to redemption prior to their stated maturity date, at the option of the Electric System, on or after July 1, 2013, as a whole or in part at any time, at a redemption price equal to the principal amount thereof plus accrued interest thereon to the date fixed for redemption. The Electric System Revenue Bonds are subject to mandatory redemption if (i) any significant part of the Electric System was damaged, destroyed, taken, or condemned, or (ii) any for-profit nongovernmental investor shall acquire an ownership interest in some or all of the assets of the Electric System. On June 1, 1998, the Water System of WAPA issued the 1998 Water System Revenue and Refunding Bonds amounting to $44.1 million. The proceeds from the bonds were used to repay the 1990 Series A Water System Revenue Bonds at a redemption price of 100% and to refund the 1992 Series B Water System Revenue Bonds, repay outstanding lines of credit balances, pay underwriters’ costs, provide funding for a Renewal and Replacement Reserve Fund, and to purchase obligations of the United States Government, which were placed in an irrevocable trust with an escrow agent to provide all future debt service on the remaining principal amount of the 1992 Series B Bonds. Payment of principal and interest of the 1998 Series Bonds is secured by an irrevocable lien on the Water System’s net revenues (exclusive of any funds that may be established pursuant to the Bond Resolution for certain other specified purposes) and funds established under the Bond Resolution, including investment securities. To provide additional security, the Water System has conveyed to the bond trustee, a subordinate lien and security interest in the Water System’s General Fund. The Water System is also required to make deposits in a debt service reserve fund in accordance with the Bond Resolution. The Bond Resolution contains certain restrictions and commitments, including the Water System’s covenant to establish and maintain reasonable rates, fees, rentals, and other charges to produce net water revenue, as defined, that will be at least 125% of aggregate annual principal and interest payments. The Water System’s net water revenue for the fiscal year ended June 30, 2010 was 109% of the aggregate debt service as defined in the Bond Resolution. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 110 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) The 1998 Series Bonds maturing on or after July 1, 2010 are subject to redemption prior to their stated maturity date, at the option of the Water System, as a whole or in part at any time, at a redemption price of 101% through June 30, 2010 and 100% thereafter. The Water System Revenue Bonds are subject to mandatory redemption if (i) any significant part of the water system shall be damaged, destroyed, taken, or condemned or (ii) any for-profit non- governmental investor shall acquire an ownership interest in some or all assets of the Water System. On January 16, 2003, VIPA issued the Marine Revenue Bonds Series 2003A (AMT) and 2003B (federally taxable) with principal amounts of approximately $18.0 million and $17.4 million, respectively. VIPA is using the proceeds of the bonds to finance the dredging, rehabilitation, and construction of berthing piers for cruise and seagoing vessels at Crown Bay in St. Thomas, and the construction of a mixed used commercial facility. On October 20, 2003, VIPA issued the Marine Revenue Bonds Series 2003C (non-AMT), with an authorized principal amount not to exceed approximately $10.8 million. VIPA used the proceeds of the bonds to finance the completion of several projects of rehabilitation and construction of berthing piers and dredging for cruise and seagoing vessels at Crown Bay on the island of St. Thomas, and the construction at Red Hook, Enighed Pond, Gallows Bay Dock, and dredging of the Charlotte Amalie Harbor. The bonds’ indentures contain certain account restrictions and funding covenants to cover interest, debt service, maintenance, and other costs as specified in the corresponding bond indentures. The bonds’ indentures also specify certain debt service coverage requirements determined from net available revenue (as defined) of the Authority’s Marine Division. The provisions of each of the bonds’ indentures require that rates and fees charged for the use of each facility should be sufficient to generate enough revenue to pay all operation and maintenance expenses, exclusive of depreciation and certain noncash charges, of the respective facilities, plus: (i) at least 125% of the principal and interest and redemption account sinking fund deposit requirement of each of the bonds becoming due during such year; (ii) the amount of the debt service reserve fund deposit requirement for such period; (iii) the deposit required to the Renewal and Replacement Fund; and (iv) the amount of the capital improvements appropriations for such period. VIPA did not Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 111 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) comply with the requirement to issue the audited financial statements within 150 days after year- end. However, as per the Authority’s bond indenture, this noncompliance event does not constitute an event of default until the Trustee sends a notification of failure and such failure continues for 90 days. As of February 24, 2012, the Authority has not received a notification of failure from the Trustee. On August 1, 1998, VIHFA issued the 1998 Revenue Bonds Series A in the amount of $3.0 million, and on March 1, 1995, VIHFA issued the 1995 Revenue Bonds Series A in the amount of $6.2 million, for the purpose of building single-family housing. The indenture agreements for the bonds require the VIHFA to deposit with the trustee the full amount of the bond proceeds, to purchase Government National Mortgage Association (GNMA) certificates. The servicer is obligated to pay the principal and interest due on the GNMA certificates to the trustee in an amount equal to the scheduled principal and interest payments of the underlying mortgages. All mortgage loans issued by the VIHFA must be originated by the participants and secured by a first priority mortgage lien on the applicable single-family residences. Fixed maturities required to pay principal and interest on discretely presented component units’ bonds payable with fixed maturities at September 30, 2011, are as follows (expressed in thousands): Principal Interest Total 2012 11,588 $ 13,185 $ 24,773 $ 2013 12,105 12,656 24,761 2014 12,388 12,125 24,513 2015 12,962 11,558 24,520 2016 13,577 10,940 24,517 2017 – 2021 74,087 45,204 119,291 2022 – 2026 55,134 31,862 86,996 2027 – 2031 57,705 18,267 75,972 2032 – 2036 27,870 4,239 32,109 Total 277,416 160,036 $ 437,452 $ Plus unamortized premium 6,029 Less unamortized discount (131) Less deferred costs on debt refunding and reacquisition (375) Bonds payable, net 282,939 $ Year Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 112 12. General Tax Revenue For the year ended September 30, 2011, general tax revenue of the PG consisted of the following (expressed in thousands): PFA Debt PFA Capital Other General Service Projects Governmental Total Income taxes 291,755 $ – $ – $ – $ 291,755 $ Real property taxes 79,648 – – 6,783 86,431 Gross receipts taxes 3,486 140,121 4,509 250 148,366 Excise taxes rum products 95,915 55,430 4,027 155,372 Other taxes 48,007 – – 1,300 49,307 Tax revenue 518,811 $ 195,551 $ 4,509 $ 12,360 $ 731,231 Tax revenue not recognized on the modified accrual basis (47,032) Total tax revenue - government-wide 684,199 $ 13. Governmental Fund Balances For the year ended September 30, 2011, the PG implemented Statement No. 54 of the Governmental Accounting Standards Board, “Fund Balance Reporting and Governmental Fund Type Definitions.” This Statement establishes criteria for classifying fund balances into specifically defined classifications and clarifies definitions for governmental fund types. The classifications reported by the PG include: nonspendable fund balance, restricted fund balance, committed fund balance, assigned fund balance, and unassigned fund balance. The PG utilizes the classification of nonspendable fund balance to report prepaid expenses, restricted fund balance to report debt service accounts, committed fund balance to report those fund balances restricted by grantors, external parties, regulations and litigation, assigned fund balances to report those funds assigned by the legislature, boards and authorities of the PG, and unassigned fund balances of the General Fund. The PG’s policy is to expend unassigned fund balances before assigned, committed or restricted balances. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 113 13. Governmental Fund Balances (continued) Following is a detail of the aggregated fund balances presented in the Balance Sheet – Governmental Funds as of September 30, 2011: PFA Debt PFA Capital Other General Service Projects Governmental Total Fund balances: Restricted for: Debt Service – $ 214,743 $ – $ – $ 214,743 $ Capital Projects – – 127,509 – 127,509 General Government – – – 29,597 29,597 Health – – – 7,025 7,025 Public Housing & Welfare – – – 10,318 10,318 Education – – – 30,875 30,875 Transp. & Communication – – – 13,953 13,953 Culture & Recreation – – – 8 8 Total Restricted: – 214,743 127,509 91,776 434,028 Committed to: General Government 29,090 – – 25,663 54,753 Public Housing & Welfare – – – 361 361 Transp. & Communication – – – 7,509 7,509 Culture & Recreation 481 – – 473 954 Total Committed: 29,571 – – 34,006 63,577 Unassigned: (103,408) – – (49,385) (152,793) Total Fund Balances (73,837) $ 214,743 $ 127,509 $ 76,397 $ 344,812 $ The assigned fund balance includes approximately $48.8 million in unexpended encumbrances. Encumbrances are utilized to determine commitments related to unperformed (executor) contracts for goods and services, and to prevent the over-spending of an appropriation. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 114 14. Commitments and Contingencies Primary Government Collective Bargaining Agreements The current labor relations environment of the Government is defined by 13 distinct labor organizations subject to approximately 26 collective bargaining agreements. Fourteen bargaining units are without collective bargaining agreements. As specific disciplines are not grouped under a single pay plan, it is common to have clerical and nonprofessional workers in different departments throughout the Government, represented by different unions. Of the approximately 9,600 government workers, including employees of the executive branch of the Government, approximately 7,200 belong to unions. The present collective bargaining statute requires binding arbitration for certain classified employees in the event of an impasse during salary negotiations between the Government and any union. Under this process, each side chooses an arbitrator and a third impartial arbitrator is selected by the chosen arbitrators. The arbitration panel investigates and reviews the issues in dispute and renders a final and binding decision. For other classified employees, the Government must decide to go to impasse or to enjoin any strike. As of September 30, 2011, the Government has contractual liabilities for retroactive union arbitration salary increases estimated at $195.3 million accruing from fiscal years 1993 through 2011, as established by the Virgin Islands Retroactive Wage Commission. Under Title 24, Section 374(h) of the Virgin Islands Code, the PG may not make any payments of retroactive salaries until there is an appropriation of funds by the Legislature. Federal Assistance Programs The Government receives financial assistance from the federal government in the form of loans, grants, and entitlements. Loans received are described in Note 11. Monetary and nonmonetary federal financial assistance to governmental funds amounted to approximately $339.2 million and $47.9 million, respectively, for the year ended September 30, 2011. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 115 14. Commitments and Contingencies (continued) Primary Government (continued) Federal Assistance Programs (continued) In February 2009, the federal government passed the American Recovery and Reinvestment Act (“ARRA”) to create jobs and stimulate the economy. Under Title I, Section 1001(b) of ARRA, the federal government acknowledged that certain refundable tax credits authorized by the Act imposed an economic hardship on United States territories that operate under “mirror” income tax systems. To alleviate this economic hardship, Congress provided for federal loss reimbursements to the mirrored system territories. During fiscal years 2009, 2010 and 2011, the PG received $23.4 million, $21.1 million and $7.7 million in loss reimbursements for the Making Work Pay refundable tax credit. During fiscal year 2011, the PG received $18.6 million in loss reimbursements of the Additional Child Tax refundable tax credit. Receipt of grants and loss reimbursements is generally conditioned upon compliance with terms and conditions of the grant agreements and applicable federal regulations, including the expenditure of resources for eligible purposes. Substantially all grants are subject to audit under OMB Circular A-133. Disallowances as a result of these audits may become liabilities of the Government. Management of the Government believes that the future outcome of any changes in federal financial assistance programs will not have a material adverse effect on the basic financial statements. Compliance Agreement U.S. Department of Education On September 23, 2002, the Government entered into a three-year compliance agreement with the U.S. Department of Education requiring that the Government develop integrated and systemic solutions to problems in managing its federally funded education programs. The compliance agreement focuses on the areas of program design and evaluation, financial management, human capital, and property management and procurement. The compliance agreement expired on September 23, 2005. The Government had not fully complied with all terms and conditions of the compliance agreement. The U.S. Department of Education subsequently implemented a special condition for the Government to designate a third-party fiduciary to administer U.S. Department of Education grants. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 116 14. Commitments and Contingencies (continued) Primary Government (continued) Compliance Agreement U.S. Department of Education (continued) On August 22, 2006, the PG entered into a contract with a third-party fiduciary to administer U.S. Department of Education grants, effective October 1, 2006. The terms and conditions of the original compliance agreement have been extended until the Government is in full compliance with the agreement. Legal Proceedings and Litigation Claims The Government is a defendant in numerous legal proceedings pertaining to matters incidental to the performance of routine governmental operations. Under Title 33, Section 3411(c) of the V.I. Code, no judgment shall be awarded against the Government in excess of $25,000 for tort claims filed under Government statutes. In cases involving several survivors, each award must be construed separately for purposes of applying the limitation upon recovery imposed by the Tort Claims Act. Under Title 27, Section 166(e) of the V.I. Code, the Government’s waiver of immunity is expanded to $250,000 for medical malpractice actions, including actions for wrongful death based on malpractice. Under certain circumstances, as provided in Title 33, Section 3414 of the V.I. Code, the Government may assume the payment of a judgment entered against an officer or employee who acted reasonably and within the scope of his employment. The Government may pay up to a maximum amount of $100,000 of the settlement. With respect to pending and threatened litigation, the Government has accrued a provision for legal claims and judgments of approximately $27.2 million for awarded and anticipated unfavorable judgments as of September 30, 2011. Management believes that any liability in excess of amounts recorded will not have a material effect on the basic financial statements. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 117 14. Commitments and Contingencies (continued) Primary Government (continued) Legal Proceedings and Litigation Claims (continued) Changes in the reported provision for legal claims since October 1, 2009, resulted from the following activity (expressed in thousands): Beginning Balance at October 1, 2009 New Claims Claim Payments and Changes in Estimates Ending Balance at September 30, 2010 Provision for legal claims 16,639 $ 6,449 $ (2,284) $ 20,804 $ Beginning Balance at October 1, 2010 New Claims Claim Payments and Changes in Estimates Ending Balance at September 30, 2011 Provision for legal claims 20,804 $ 20,995 $ (14,536) $ 27,263 $ The breakdown of the provision for legal claims at September 30, 2011 is as follows (expressed in thousands): Current portion of provision for legal claims 15,470 $ Long-term portion of provision for legal claims 11,793 27,263 $ Governmental activities Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 118 14. Commitments and Contingencies (continued) Primary Government (continued) Property Tax Assessments As of September 2002, the Government was a defendant in a lawsuit regarding the assessment of property taxes. Under the lawsuit, taxpayers asserted that properties should be assessed at actual value in accordance with the Organic Act of 1933. The U.S. District Court agreed with the plaintiffs and, in May 2003, imposed an injunction on the collection of real property taxes at values higher than the 1998 assessed value. The Government complied with the Court order to develop a plan to implement the new valuation method. In February 2007, the 2005 property tax assessments, based on 1998 assessment levels, were issued. In August 2008, the 2006 property tax assessments, based at actual value in accordance with the Organic Act of 1933, were issued. In September 2008, the 2006 property tax bills were rescinded by court order. In May 2009, the Government received court approval to reissue the 2006 property tax assessments; however, that approval was rescinded in June 2009. The Government subsequently issued the 2006, 2007 and 2008, 2009 property tax assessments, based on 1998 assessment levels, in April 2010, February 2011, August 2011, and February 2012 respectively. The 2010 and 2011 property tax assessments were issued in June 2012 and March 2013, at the 2008 assessment levels. Landfill Closure and Post-Closure Costs Federal laws and regulations, including the Clean Air Act, 42 U.S.C. § 7401 et seq. (“CAA”), and regulations promulgated thereunder, including the federal standards set forth in 40 C.F.R. Part 62, Subpart GGG (“Federal Plan”), and the National Emission Standards for Hazardous Air Pollutants for Municipal Landfill Maximum Achievable Control Technology, set forth in 40 C.F.R. Part 63, Subpart AAAA (“Landfill MACT”), and the Solid Waste Disposal Act, 42 U.S.C. § 6901 et seq. (“RCRA”), and regulations promulgated thereunder, including federal municipal solid waste landfill operating, closure, and post-closure criteria set forth in 40 C.F.R. Part 258, and three EPA administrative orders issued pursuant to RCRA § 7003(a), 42 U.S.C. § 6973(a), and Territorial laws and regulations, including V.I. Code Title 19, Chapter 56 (Solid and Hazardous Waste Management), Title 12, Chapter 9 (Air Pollution Control), and Title 12, Chapter 21 (Virgin Islands Coastal Zone Management), and regulations promulgated thereunder, require the Government to construct and operate certain environmental control systems and otherwise comply with certain requirements during operation of each of its landfill sites, properly close the site (including placement of a final landfill cover) when the landfill (or portion thereof) stops accepting waste, and perform certain post-closure maintenance and monitoring functions at the site for 30 years following closure. Compliance costs during the operational phase will be paid prior to closure. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 119 14. Commitments and Contingencies (continued) Primary Government (continued) Landfill Closure and Post-Closure Costs (continued) Although closure and post-closure costs will be paid only near or after the date that the landfill stops accepting waste, the Government reports a portion of these closure and post-closure care costs as an operating expense in each period based on landfill capacity used as of each balance sheet date. The $71.6 million reported as landfill compliance, closure, and post-closure care liability at September 30, 2011, represents the cumulative amount reported to date based on the use of the estimated capacity of each landfill. The Government will recognize the remaining estimated cost of closure and post-closure care as the remaining estimated capacities are filled. These amounts are based on what it would cost to perform all closure and post-closure care as of September 30, 2011. The estimated used capacity and expected closure of each of the Government landfills is as follows: Estimated Estimated Landfill used capacity closure date Bovoni 66% 2020 Angilla 100% Closed Susannaberg 100% Closed The actual cost to perform closure and post-closure may be higher due to inflation, changes in technology, or changes in regulations. The Government is required by state and federal laws and regulations to make annual contributions to a trust to finance closure and post-closure care. The Government began making annual contributions to a trust in fiscal year 2007 to finance closure and post-closure costs. The Government expects that future inflation costs will be paid from interest earnings on these annual contributions and other financing measures. However, if interest earnings and financing measures should prove to be inadequate, or additional post- closure care requirements are determined due to changes in technology or applicable laws or regulations, these costs may need to be covered by charges to future landfill users. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 120 14. Commitments and Contingencies (continued) Primary Government (continued) Wastewater Treatment Plant Consent Decree Since 1985, the Government has been subject to a consent decree issued by the Virgin Islands District Court, governing the operation of its wastewater treatment plants. The consent decree was amended in 1996 and further modified with the 2002 Stipulation to the Amended Consent Decree (the Stipulation) to establish deadlines for the construction of new secondary treatment facilities, including the replacement of the existing St. Croix and Airport Lagoon (Charlotte Amalie) wastewater treatment plants. The Stipulation requires that the new St. Croix wastewater treatment plants be completed by the end of 2006 and the new Charlotte Amalie wastewater treatment plants be completed by the end of 2007. However, the plants were completed by the end of 2007 and 2008, respectively. The cost of both facilities is estimated at approximately $50 million. The Stipulation also establishes certain interim deadlines and performance standards that must be met by the Government pending completion of the new facilities. In addition, the Stipulation establishes specified penalties for violation of any of the deadlines or performance standards set forth therein. As of the date of the basic financial statements, the Government is current on all of its outstanding obligations pursuant to the stipulation. In January 2004, the Government’s Legislature authorized the creation of the Virgin Islands Waste Management Authority (WMA) for the purpose of meeting environmental requirements of waste treatment in the U.S. Virgin Islands. On December 2004, the PFA issued revenue bonds amounting to $94 million for the purpose of constructing and rehabilitating wastewater treatment plants noted above. Memorandum of Understanding - EPA On August 21, 2002, the Government and the United States Environmental Protection Agency (EPA) entered into a memorandum of understanding documenting the EPA’s agreement to support the renewal of the Territorial Pollutant Discharge Elimination System permit for its St. Croix distillery operations provided that the Government make certain funding available to (1) conduct treatability studies regarding the Virgin Islands Rum Industries, Ltd. effluent and the means to mitigate its potential environmental effects in the vicinity of the discharge, (2) identify practicable, available, reliable, and cost-effective potential mitigation measures, and (3) implement (or assist in the implementation of) such mitigation measures in the event such measures are determined by the V.I. Department of Planning and Natural Resources after consultation with EPA to be necessary and appropriate. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 121 14. Commitments and Contingencies (continued) Primary Government (continued) Memorandum of Understanding – EPA (continued) Pursuant to the memorandum of understanding, the Government’s obligation to fund such activities is limited to $6 million in the aggregate, commencing on October 13, 2003. In June 2004, the Government entered into a three year contract with a locally licensed environmental consulting firm to facilitate the Government’s commitments with the memorandum of understanding with the EPA. Workers’ Compensation Liability The Government is exposed to risk of loss related to workers’ compensation claims. The Government is self-insured for this risk. Self-insured risk liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. Because actual claims liabilities depend upon such complex factors as inflation, changes in legal doctrines, and damage awards, the process used in computing claims liabilities does not necessarily result in an exact amount. Claims liabilities are reevaluated periodically to take into consideration recently settled claims, the frequency of claims, and other economic and social factors. Changes in the claims liability amount in fiscal year 2011, as recorded in the Government Insurance Fund was as follows (expressed in thousands): 2011 2010 Claims payable - October 1 17,900 $ 15,495 $ Incurred claims and changes in estimates 11,094 10,705 Payments for claims and adjustments expenses (8,652) (8,301) Claims payable - September 30 20,342 $ 17,899 $ The Government continues to carry commercial insurance for all other risks of loss. Settled claims resulting from these risks have not exceeded commercial insurance coverage in any of the past three fiscal years. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 122 14. Commitments and Contingencies (continued) Component Units In September 1989, WAPA Electric facilities were damaged by Hurricane Hugo. WAPA reconstructed the facilities with proceeds from insurance and FEMA. Subsequent to the receipt of funds, FEMA de-obligated approximately $7.9 million in questioned costs. Approximately $2.6 million of these questioned costs related to an oil spill that was subsequently settled with FEMA. During 1998, WAPA submitted a second appeal for $4.4 million of the remaining questioned costs, and agreed to refund approximately $900 thousand of questioned costs to FEMA. During 1999, FEMA denied the second appeal and formally closed the disaster claim. WAPA has recorded a liability for $5.0 million related to the questioned costs. FEMA has not made a formal request for repayment of the funds. In September 2005, WAPA Electric facilities were damaged by Tropical Storm Jeanne. Damages amounted to $1.3 million, and FEMA has determined that $438 thousand is eligible for reimbursement. WAPA has reported a receivable of $438 thousand as of June 30, 2011. In October 2008, WAPA Electric facilities on the island of St. Croix were damaged by Hurricane Omar. WAPA has expended $2.7 million for storm cleanup and system restoration as of June 2010. The territory was declared a federal disaster after the hurricane and is eligible for reimbursement of 75% of what was expended according to the category of the damage. WAPA Electric has recorded a receivable from FEMA through the Office of Management and Budget – Public Assistance (OMB-PA) amounting to approximately $2.3 million. In August 2010, WAPA Electric facilities were damaged by Hurricane Earl. WAPA has expended over $2 million for storm clean-up and restoration, which was completed in October 2010. The territory was declared a Federal disaster area after the Hurricane and is eligible for reimbursement of 75% - 80% of what was expended according to the category damage. WAPA recorded a receivable of $1.1 million from FEMA through the Virgin Islands Territorial Emergency Management Agency (VITEMA) Public Assistance Program as of June 30, 2011. Six former employees have individually filed suits against the VIHA for wrongful discharge over the period 1997 through 2006. Three of the lawsuits were settled, with VIHA being required to pay $174,000 in settlement costs. Three lawsuits remain open as of September 30, 2011. A subcontractor has sued the VIHA for nonpayment for work done in 2000. It is not possible to predict the eventual outcome, nor estimate the amount or range of potential loss in the event of an unfavorable outcome. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 123 14. Commitments and Contingencies (continued) Component Units (continued) In 2002, the Federal Aviation Administration (FAA) conducted an on-site wildlife evaluation of the Anguilla Landfill, which is located next to the St. Croix airport. The FAA determined that the landfill posed an environmental and navigational threat to the airport due to flocks of birds that reside in the landfill area. The FAA may require VIPA to repay $9.3 million in federal grants and has refused further discretionary grants for the airport until VIPA shows progress toward closing the landfill. The landfill is now under the jurisdiction of the WMA. VIPA negotiated a remediation plan with FAA to close the landfill by December 2009, and subsequently WMA received an extension on the closure date to January 31, 2012. In connection with the purchase of lands adjacent to the St. Croix airport, VIPA was awarded federal financial assistance from 1990 to 2002, totaling $8.02 million under a Real Property Acquisition Relocation Assistance Program. VIPA is in noncompliance with certain federal requirements of the assistance program. Noncompliance with requirements of federal financial assistance programs may result in a refund of the funds granted. VIPA management believes that noncompliance instances should not materially affect VIPA’s financial position. WAPA, VIPA, and other discretely presented component units are presently a defendant or codefendant in various lawsuits. The financial managers of the component units have advised the PG that any adverse outcome involving a material claim is expected to be substantially covered by insurance. Government property is exempt from lien, levy, or sale as a result of any judgment under the Virgin Islands Code. 15. Retirement Systems Plan Description GERS is the administrator of a cost-sharing, multiple-employer, defined-benefit pension plan established as of October 1, 1959 by the Government to provide retirement, death, and disability benefits to its employees. The following description of the plan is provided for general information purposes only. Refer to the actual text of the retirement law in the V.I. Code, Title 3, Chapter 27 for more complete information. Regular employees are eligible for a full-service retirement annuity when they have completed 30 years of credited service or have attained the age of 60 with at least 10 years of credited service. Members who are considered “safety employees,” as defined in the V.I. Code, are eligible for full retirement benefits when they have Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 124 15. Retirement Systems (continued) Plan Description (continued) earned at least 20 years of government service or have reached the age of 55 with at least 10 years of credited service. Regular employees who have attained the age of 50 with at least 10 years of credited service can elect to retire early with a reduced benefit. Senators and members of the Legislature may receive a retirement annuity when they have attained the age of 50 and upon the completion of 6 years of credited service as a member of the Legislature. Funding Policy The monthly annuity benefit payment is determined by applying a stipulated benefit ratio to the member’s average compensation. Average compensation is determined by averaging the three highest years of salary the member earned within the last 10 years of service. The maximum annual salary that can be used in this computation is $65,000, except for senators and judges, whose annual salary is used. The board of trustees of GERS may set cost-of-living increases for annuitants and pensioners and determine when the annuity should be paid on the basis of the most recent actuarial valuation and the Consumer Price Index. GERS is a blended component unit included in the financial reporting entity and is presented as a pension trust fund of the PG. GERS issues a publicly available financial report that includes financial statements and required supplementary information. That report may be obtained by writing to Employees’ Retirement System of the Government of the Virgin Islands, 3438 Kronprindsens Gade, St. Thomas, Virgin Islands 00802. Contributions to GERS are made by the Government and the members. Government and members contributions are not actuarially determined but are set by statute. The Government and members’ contributions together with the income of GERS should be sufficient to provide an adequate actuarially determined reserve for the benefits prescribed by the VI Code. The contributions required to fund GERS on an “actuarial reserve basis” are calculated periodically by the GERS actuarial consultant. The actuarial valuation as of September 30, 2006, indicates that the current combined statutory employer and employee contribution rates are not sufficient to meet the cost of the pension trust fund on an actuarial basis, as required by law. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 125 15. Retirement Systems (continued) Funding Policy (continued) The Government’s required contribution for the year ended September 30, 2011 was 17.5% of the member’s annual salary. Since April 1, 1991, required member contributions are 8.0% of annual salary for regular employees, 9.0% for senators, 11.0% for judges, and 10.0% for safety (hazardous employees) and eligible employees under Act 5226. Prior to June 29, 2000, member contributions were refundable without interest upon withdrawal from employment before retirement. Effective July 1, 2009, legislation was passed that provided for annual interest on refunded contributions of not less than 2.0%, nor more than 4.0%, per annum. GERS Board of Trustees approved a 2.0% effective annual interest rate on refunded contributions effective July 1, 2009. The Government’s estimated annual required contributions (based on a fiscal year 2006 actuarial valuation), actual contributions made, and percentage contributed to the plan for the years ended September 30, 2011, 2010, and 2009, were as follows (expressed in thousands): Contractually Required Contributions Percentage Contributions Made Contributed 2009 80,177 $ 80,177 $ 100% 2010 77,005 $ 77,005 $ 100% 2011 80,850 $ 80,850 $ 100% In August 1994, legislation providing an early retirement incentive was passed. The legislation was subsequently amended on October 13, 1994, December 30, 1994, and December 5, 1995. Among other matters, the legislation allows a member of GERS who has a combined aggregate number of years of credited service plus number of years of age, equal to at least 75 years as of the date of the legislation, to retire without reduction of annuity. Members, who have attained the age of 50 with at least 10 but less than 30 years of credited service, may add an additional 3 years to their age for this computation. Members with 30 years of service or who can retire without penalty under the V.I. Code shall have their average compensation increased by 4 percentage points. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 126 15. Retirement Systems (continued) Funding Policy (continued) For each employee electing to retire pursuant to Section 8(a) of the Early Retirement Act of 1994 (the Act), the Government contributes to GERS, on a quarterly basis, an amount equal to the employer and employee contributions that would have been made until the employee reached the age of 62 had the employee not elected to retire under this provision. For employees electing to retire under Section 8(b) of the Act, the Government contributes to GERS a sum equal to the additional contribution the employer and employee would have made had the employee received a salary four percent higher during the three years used to compute the employee’s average compensation figure, plus a sum of $5,000. Based on this calculation, the amount due to GERS was $26.9 million as of September 30, 2011, of which $26.8 million had been remitted to GERS. The actuaries of GERS have determined that the specific funding provided under the Act is inadequate to cover the costs of the program. GERS is seeking to recover any unfunded costs of the program under a newly enacted provision of the retirement law, which provides that the Government will compensate GERS for the costs of any special early retirement program. The University has two retirement plans in which all eligible employees are required to participate, the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) and GERS. The TIAA-CREF is a defined-contribution pension plan covering participating, full-time faculty members and other exempt employees, under which the contributions, including employees’ contributions, are used to purchase annuities. There are no unfunded past service costs, and vested benefits are equal to the annuities purchased under TIAA-CREF. As of September 30, 2011, 255 faculty members and other employees were TIAA-CREF participants. The number of active participants from the University participating in GERS as of September 30, 2011 was 243. Total contributions made by the University to TIAA- CREF and GERS participant accounts amounted to $2.4 million and $1.4 million, respectively. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 127 15. Retirement Systems (continued) Postemployment Benefits In addition to the pension benefits described in Note 15, the Government provides other postemployment benefits (OPEB) of healthcare, prescription, dental and life insurance coverage. These benefits are provided in accordance with Title 3, Chapter 25, Subchapter VIII of the VI Code as part of a cost-sharing, multiple employer defined benefit OPEB plan, in which all component units of the PG participate and contribute. All employees who retire from government service after attaining age 55 with at least 30 years of service; except for policemen and firemen who can retire with at least 20 years of service, are eligible for these benefits. Based on census data included in the October 1, 2009 actuarial valuation of OPEB, approximately 10,751 active employees, 5,915 service retirees, 1,581 spouses of service retirees covered for medical and dental benefits, 104 disability retirees and 158 deferred vested (i.e., non- retired employees who have already terminated employment with the PG, but who are eligible for medical and life insurance benefits when they subsequently reach the qualifying age) meet the eligibility requirements of OPEB. Healthcare, prescription and dental insurance is provided through negotiated contracts with private insurance companies. Participants in the plan may elect coverage for their spouses and dependent children. Participants are required to contribute 35% of medical, prescription and dental premiums. Retirees of UVI that participate in the 403(b) retirement plan may obtain coverage on a fully contributory basis. Life insurance is offered to retirees on a fully contributory basis. The contribution requirements of plan members and the PG are legislated within the Virgin Islands Code, and may be amended, by the Virgin Islands Legislature. The plan is a non-funded pay-as-you-go plan, and expenditures are paid as they become due. For the years ended September 30, 2011 and 2010, the Legislature budgeted, and paid, $22.3 million and $19.6 million for retiree health insurance payments. The PG’s postemployment benefit cost is calculated on the annual required contribution of the PG, an amount actuarially determined. The first actuarial valuation was prepared as of October 1, 2007, in accordance with provisions of GASB Statement 45, “Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions.” This standard was implemented prospectively. Prior to the implementation of GASB Statement 45, the PG did not report an OPEB obligation. In future years, the actuarial valuation will be prepared bi-annually. For the fiscal year ended September 30, 2011, a roll-forward actuarial report was prepared by the actuarial consultant. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 128 15. Retirement Systems (continued) Postemployment Benefits (continued) The annual required contribution represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year, and amortize any unfunded actuarial liabilities over a period not to exceed an open thirty (30) year period. The following table shows the components of the PG’s annual postemployment benefits cost for the fiscal year ended September 30, 2011, and the changes in the net estimated obligation for future payments of benefits: Annual OPEB Cost and Net Postemployment Benefit Obligation In thousands Annual required contribution 89,925 $ Interest on underfunded OPEB obligation 5,720 Adjustment to underfunded OPEB obligation (5,683) AAnnual OPEB cost 89,962 Employer contributions (31,541) 58,421 $ Net OPEB obligation - beginning of year 143,002 $ OChange in the net OPEB obligation 58,421 Net OPEB obligation - end of year 201,423 $ Actuarial Accrued Liability and Funding Status In thousands Actuarial Valuation Date October 1, 2009 Actuarial Accrued Liability (AAL) $1,069,562 Unfunded AAL $1,069,562 Funded Ratio 0% Change in the net OPEB obligation Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 129 15. Retirement Systems (continued) Postemployment Benefits (continued) The PG’s obligation to provide health insurance to retirees is an unfunded plan. The actuarial valuation of the amount required to fund the plan involves estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Estimated annual required contributions are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members), and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the PG and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short term volatility in actuarial accrued liabilities, and the actuarial value of assets, consistent with the long-term perspective of the calculations. In the actuarial valuation dated October 1, 2007, liabilities at October 1, 2008 were rolled back to October 1, 2007, and actual benefit payments were used for the fiscal years ending September 30, 2009, 2010 and 2011. Covered health care and dental care expenses were assumed to increase in future years with an initial increase of 10.0% for medical and 7.5% for dental and an ultimate rate of 5.0% for both medical and dental care expenses. The entry age normal actuarial cost method with costs on a level percentage of payroll basis was used to determine the annual required cost of OPEB benefits to retirees. Amortization is over an open thirty (30) year period as a level percentage of payroll. Payroll growth is assumed to be 3.0% per year for purposes of amortization. This method is consistent with the cost method used by GERS and typically produces the most level annual required contribution each subsequent year as a percentage of payroll. The normal cost was rolled back using the ultimate trend rate. A discount rate of 4.0% per annum was used, compounded annually. The valuation assumed that the annual unit cost per covered individual (i.e., retiree or spouse) for medical, prescription drugs and dental care for fiscal year 2009 was $6,155, $1,401 and $184 for retirees under age 65; and $1,591, $1,885 and $184 for retirees over age 65. The normal cost reflects the average age of the covered population and is based on claims experience for fiscal years 2008 and 2009, with a two-thirds weighting applied to the more recent year. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 130 15. Retirement Systems (continued) Postemployment Benefits (continued) Combined experience and a combined cost were used for the pre-65 and post-65 populations. A composite cost was determined for retirees and spouses by combining their claim experience. Dependent children claims were included in developing the composite retiree and spouse cost. Costs were trended forward to fiscal year 2011 and adjusted to reflect the fiscal 2011 plan design and the anticipated lag in claim payment. 16. Liquidity Governmental Activities At September 30, 2011, the Government reported an unrestricted net deficit in governmental activities amounting to $1.72 billion. The net deficit resulted from: (1) the 2008 financial markets collapse and subsequent recession resulting in a reduction in income tax revenue and increase in unemployment, (2) the delay in the issuance of the 2009, 2010 and 2011 property taxes due to a class action lawsuit, and (3) the negative effect of Internal Revenue Service regulations redefining the requirements for residency, and sourcing of income, for the Territory. The revised Internal Revenue Service regulations negatively impacted economic growth in the Territory and reduced the participants in the Government’s economic development programs. Following is a summary of the Government’s unrestricted net deficit for governmental activities for fiscal years 2007 through 2011: Governmental Activities Unrestricted Net Deficit (In thousands, as restated) Governmental Decrease Fiscal Year Unrestricted Net Deficit (Increase) 2007 $ (335,924) $ (29,457) 2008 (513,201) (177,277) 2009 (1,110,871) (597,670) 2010 (1,408,601) (297,730) 2011 (1,548,488) (139,887) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 131 16. Liquidity (continued) Governmental Activities (continued) The Government has initiated specific actions to improve its liquidity and future cash flows. The Government established the Office of Economic Opportunity to pursue grants through the American Recovery and Reinvestment Act of 2009, to generate jobs, to promote energy efficient appliances and automobiles, and to improve infrastructure. The Government has successfully attracted a rum producer (Captain Morgan) and retained an existing rum producer (Cruzan Rum) within the Territory. The Government has imposed budgetary restraints, including incentives for early retirement of government workers, salary reductions, personnel reductions and budgetary cut-backs for the entire government. The Government has also legislated increases in local taxes such as the gross receipts taxes and hotel taxes. The Government has met certain District Court requirements in connection with a taxpayer class-action lawsuit, allowing the release of 2007 and 2008 property tax assessments in fiscal year 2011, and the release of 2009 and 2010 property tax assessments in fiscal year 2012. General Fund At September 30, 2011, the Government reported a deficit fund balance in the General Fund of $73.8 million. This deficit represents an increase in the General Fund balance of $16.6 million from the 2010 fiscal year, mainly due to the issuance of working capital loans to offset deficits resulting from a decrease in tax revenue and expenditures exceeding revenues. Following is a summary of the General Fund balance for fiscal years 2010 and 2011: General Fund Unreserved Fund Balance (Deficit) (In thousands) Fiscal Year Committed Unassigned Total 2011 $29,571 $358,255 $(73,837) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 132 17. Fund and Net Assets Deficit The following non-major funds have a fund or net assets deficit as of September 30, 2011 (in thousands): Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 133 17. Fund and Net Assets Deficit (continued) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 134 17. Fund and Net Assets Deficit (continued) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 135 18. Restatement and Component Units and Enterprise Fund Audit Report Modifications Restatement During the 2010 audit, the Waste Management Authority (WMA) restated its 2009 financial statements for $63.4 million to correct identified errors and properly reflect capital contributions and transfers in from the Government. As previously noted in Note 1, the balances of the WMA, which are reported as a nonmajor component unit, are reported one year in arrears. Therefore, the restatement to the 2009 WMA balances must be reflected as a restatement to the 2010 Government balances of the component units. Because the capital assets were previously recorded by the Government within governmental activities, the previously reported balances of governmental activities also require restatement. In addition, during 2011 the Virgin Islands Port Authority (VIPA) restated the 2010 financial statements to correct errors in the accounting of federal government capital contributions which were understated by $2.2 million. The following table represents the impact of the restatements on the Government’s net assets (deficit) as of September 30, 2010: As previously reported Adjustment As Restated Governmental activities (943,958) $ (61,316) $ (1,005,274) $ Component units 679,712 65,625 745,337 The following table represents the impact of the restatements on the Government’s changes in net assets (deficit) for the year ended September 30, 2010: As previously reported Adjustment As Restated Governmental activities (204,173) $ 707 $ (203,466) $ Component units (356) 3,602 3,246 Component Units and Enterprise Fund Audit Report Modifications For the year ended September 30, 2011 the audit reports for the following component units and enterprise fund were modified to include qualifications over certain balances. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 136 18. Restatement and Component Units and Enterprise Fund Audit Report Modifications (continued) Virgin Islands Housing Finance Authority (VIHFA) Effective March 11, 2008 the Legislature of the Virgin Islands transferred the housing components of the Virgin Islands Department of Housing, Parks and Recreation, the Community Development Block Grants and the Emergency Shelter Grants programs, which were previously operated by the Virgin Islands Department of Planning and Natural Resources, to VIHFA. Significantly all loans and unobligated cash balances were also transferred subsequent to March 11, 2008. VIHFA has not been able to record the assets which were transferred because titles and related values of such assets have not been provided. The independent auditor’s report included a qualification on cash and cash equivalents of $17.0 million, investments of $4.4 million and capital assets of $11.9 million for the effects of not including the transferred assets in the September 30, 2011 financial statements. Virgin Islands Public Television System (VIPTS) Because of significant deficiencies in the management of capital assets VIPTS has not been able to provide a reliable inventory record of all assets owned by VIPTS, proper quantification of recorded values on the statement of net assets and proper accounting for the expiration and usefulness of capital assets the independent auditor’s report included a qualification of the capital assets balance for $5.9 million as of September 30, 2011. Virgin Islands Lottery Financial Statements (VI Lottery) The Lottery did not maintain sufficient documentation for the amount Due to the Treasury of the Virgin Islands of $4.4 million in 2011; therefore the amount could not be substantiated. Accordingly, the independent auditor was unable to conclude whether such amount was fairly stated. Consequently, the VI Lottery audit report includes a qualification for the effects of adjustments, if any, to the Due to Treasury balance as of September 30, 2011. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 137 18. Restatement and Component Units and Enterprise Fund Audit Report Modifications (continued) Employees’ Retirement System of the Government of the Virgin Islands (GERS) The financial statements of GERS include investments in limited partnerships valued at $52.9 million. GERS lacks the procedures to assess the reasonableness of the reported values provided by the fund managers. GERS estimate of the recorded limited partnerships’ value is based on information provided by the general partner of the limited partnerships. At September 30, 2011 GERS management elected to maintain the investment balance reported in the prior year for one of the limited partnerships due to uncertainty regarding the ultimate recoverability of the investment. In the opinion of the auditor, those procedures are not adequate to determine whether the investments approximate fair value is in conformity with accounting principles generally accepted in the United States of America. The effect of on the September 30, 2011 financial statements of GERS of not applying adequate procedures to determine the fair value of the securities is not determinable. The audit report was qualified due to this reason. Virgin Islands Waste Management Authority (WMA) In 2004 PFA issued Series 2004A revenue bonds for the purpose of using the proceeds to finance the planning, development, construction, renovation and equipping of a wastewater treatment facility, certain waste water collection systems and solid waste facilities. The maximum allocation to WMA of proceeds for the projects was $79 million. As of September 30, 2009, WMA has been able to record approximately $67 million of such assets; however, because of the effects of a possible adjustment resulting from the recording assets for the remaining $12 million, if any, the capital assets balance as of September 30, 2010 for $79.4 has been qualified. As previously discussed, the balances of the WMA, which are reported as a nonmajor component unit, are reported one year in arrears. Therefore, the VMA capital assets balance of $79.4 million which has been qualified is reflected in the component units’ capital asset balance at September 30, 2011. The resolution of the qualifications described above could result in the restatement of previously reported amounts of component units. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 138 19. Subsequent Events Primary Government On November 14, 2011, PFA entered into a Property Tax Revenue Anticipation Note Loan Agreement (“the Retirement Incentive Program Notes”). Under the terms of the Loan Agreement, a local bank will loan PFA $13 million to fund: (i) payments made to employees who elect to retire under the Virgin Islands Economic Stability Act and receive the incentive payment of $10,000, (ii) expenses incurred by the Office of the Lieutenant Governor related to processing, issuing and collecting property tax bills, and (iii) loan issuance costs. The Retirement Incentive Program Notes have a term of five years, with interest based on the current rate of a five-year US Treasury Note, at the time of closing, plus 400 basis points. After the five year term expires, the Retirement Incentive Program Notes will convert to a term loan not to exceed two years. On January 18, 2012, Hovensa, LLC, an oil refinery and major employer on the island of St. Croix, announced that it will cease operations in February 2012, due to significant operating losses. The refinery employs 1,200 people and has approximately 960 contractors. The company proposed a conversion of the facility to an oil storage terminal that will employ approximately 100 people, including contractors. In August 2012, the PG has requested HOVENSA to reopen the refinery using more fuel efficient technology, either under current ownership or new ownership. On January 25, 2012, Hovensa, LLC published an offer to repurchase the outstanding tax-exempt private activity bonds, issued through PFA, amounting to $355.8 million, at a purchase price of $1,000 per $1,000 in aggregate principal amount, plus accrued but unpaid interest. The offer was accepted by the bond holders before the expiration date of February 17, 2012. On February 15, 2012, property tax assessments for 2009 were issued at the 1998 assessment rates. On June 30, 2012, property tax assessments for 2010 were issued at the 2008 assessment rates. On March 5, 2013, property tax assessments for 2011 were issued at the 2008 assessment rates. The issuance of property taxes was delayed due to a Third Circuit Court of Appeals decree issued in June 2009 in connection with a class action lawsuit, which enjoined the Government from collecting property taxes at the 2008 assessment rate. The injunction was lifted in January 2011. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 139 19. Subsequent Events (continued) Primary Government (continued) On September 7, 2012, PFA issued the 2012 Series A Working Capital Bonds (“2012 Series A Bonds”), the proceeds of which amounted to $142.6 million. The Government has pledged matching fund excise tax revenues for the timely payment of the principal and interest on the 2012 Series A Bonds. The 2012 Series A Bonds bear interest at 3.8% to 4.5% and mature from 2022 to 2032. The proceeds of the bonds were issued to: (i) provide a loan to the PG to be used for working capital required to finance certain operating expenses and other PG obligations; (ii) to fund certain debt service reserve accounts of the 2012 Series A Bonds, and (iii) to pay certain costs of issuing the Series 2012 Series A Bonds. The 2012 Series A Bonds maturing on or after October 1, 2023 are subject to optional redemption on or after October 1, 2022. The Series 2012 Series A Bonds maturing on October 1, 2022 are subject to mandatory sinking fund redemptions beginning on October 1, 2014. The PG has covenanted, commencing October 1, 2012, to annually set aside 4% of the matching fund revenues transferred to the PG pursuant to the Cruzan and Diageo Agreements and Indentures, and to apply that amount first to the outstanding principal of the 2012 Series A Bonds, if any, and next, for the early optional redemption of outstanding bonds issued for working capital purposes, including the 2012 Series A Bonds. On September 4, 2012, the U.S. Department of Justice, and the PG, reached a proposed agreement that would settle the legal battle for control of the Golden Grove Correctional Facility (the “Facility”) on the island of St. Croix. The case was first brought against the PG in 1986 when the U. S. Department of Justice alleged unconstitutional conditions at the prison under the Civil Rights of Institutionalized Persons Act. The settlement agreement would allow the PG to continue to run the Facility, if it complies with the U.S. Department of Justice requirement to hire an independent monitor to oversee implementation of court orders that would bring prison conditions up to constitutional standards. On November 9, 2012, PFA issued the Series 2012A and Series 2012B Revenue Refunding Bonds amounting to $228.8 million, to pay working capital obligations amounting to $197.1 million, and to refinance broadband project obligations amounting to $31.7 million. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 140 19. Subsequent Events (continued) Primary Government (continued) On February 12, 2013, Moody’s Investors Service withdrew the ratings on the U.S. Virgin Islands general obligation gross receipts tax debt, issued through PFA, due to the lack of sufficient financial and operating information. The territory released its fiscal 2010 audited financial statements on November 30, 2012, twenty-six (26) months after the end of the fiscal year. Component Units As of September 30, 2011, a significant amount of work was completed by viNGN’s architects on a NOC/DC/HQ building. On October 27, 2011, the viNGN Board met and decided to remove the CEO of viNGN and on December 8, 2011, the Board met and voted to have the agreement with viNGN’s architect amended, to delete the design of the NOC/DC/HQ. As a consequence the work performed by viNGN’s architects had to be written down. This resulted in an impairment loss of $262 thousand. On September 30, 2011, The WAPA Governing Board held an emergency meeting to approve an extension of the $10 million working capital line of credit WAPA has with Banco Popular. In addition, the Board approved the extension of the $3 million fuel hedge line of credit with the bank until December 31, 2011. On September 30, 2011, WAPA entered into a Memorandum of Agreement (MoA) with viNGN, Inc., a Virgin Islands Corporation and wholly owned subsidiary of the Virgin Islands Public Finance Authority (PFA), an autonomous instrumentality of the PG. Under the terms of the MoA, WAPA provided an in-kind land match amounting to $15.2 million in connection with the development and construction by viNGN of underground broadband lines utilizing the roadwork systems of the Virgin Islands. The term of the MoA is twenty-five (25) years upon execution, with two additional twenty-five (25) year terms unless either party provides a written notice of non-renewal not less than twelve (12) months, but no sooner than twenty-four (24) months prior to the expiration of the original term or any additional term. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 141 19. Subsequent Events (continued) Component Units (continued) On October 1, 2012, PFA converted the Series 2009A Notes to the 2012A Loan Note. The notes have a term of five years, maturing on October 1, 2017 with interest of 300 points above the J.P. Morgan Chase Prime Rate, or 6.25%, whichever is higher. On November 9, 2012, PFA issued the Series 2012A and Series 2012B Revenue Refunding Bonds amounting to $228.8 million, to pay PG working capital obligations amounting to $197.1 million, and to refinance viNGN project obligations amounting to $31.7 million. On December 17, 2012, PFA issued the Series 2012C Revenue Bonds amounting to $35.1 million to (i) finance capital projects, (ii) fund debt service on the 2012C Bonds, and (iii) pay the costs and expenses of issuing the 2012C Bonds. On December 15, 2011, the Legislature passed Act 7327, which forgave $30.8 million owed to the primary Government by the Governor Roy L. Schneider Hospital, and $52.6 million owed to the primary Government by the Governor Juan F. Luis Hospital and Medical Center, as of the date the Act was passed. In January, 2013, the extension on the rum excise tax at a rate of $13.25 per proof gallon was approved by the US Congress through December 31, 2013, and made retroactive to January 1, 2012. On April 15, 2012, WAPA Electric issued the 2012 Series A, B and C Electric System Revenue Refunding Bonds amounting to $65 million. The 2012 Series A Bonds amounted to $16 million and were issued to: i) refund WAPA Electric’s outstanding Series 1998 bonds, and ii) pay certain costs associated with the issuance of the 2012 Series A bonds. The 2012 Series B Bonds amounted to $19 million and were issued to: i) refinance short-term loans, ii) fund certain debt service reserve accounts and iii) pay certain costs associated with the issuance of the 2012 Series B Bonds. The 2012 Series C Bonds amounted to $30 million and were issued to: i) refinance WAPA’s working capital lines of credit and overdraft credit facilities, ii) fund certain debt service reserve accounts, and iii) pay certain costs associated with the issuance of the Series C Bonds. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 142 19. Subsequent Events (continued) Component Units (continued) On June 28, 2012, WAPA filed an emergency rate increase with the Public Service Commission (PSC), WAPA was seeking a $16.2 million increase in base electric rate and a $2.6 million increase in base water rate. On July 6, 2012, the PSC approved an increase of $8.6 million for the electric system and $1.5 million for the water system, to be effective with bills rendered after August 1, 2012. Should WAPA be unable to realize an increase in net assets in 2013, Management believes they will discontinue the application of ASC No. 980. ACT 7373 prohibits WAPA from back billing customers for the water system or the electric system except for faulty meters and billing errors after three months. There are proposed changes to the retirement system that could affect WAPA’s employees going forward. The GERS is proposing increasing the Tier 1 regular employee and Tier 1 Class 3 hazardous duty employee contribution rate by 1 percent each year for three years beginning October 1, 2013. The Tiers are based on an employee's hire date relative to when the GERS Reform Act of 2005 went into effect; those before October 1, 2005, are Tier 1 and those hired after that date are Tier 2 employees. Pension Trust Fund On October 1, 2011, the Virgin Islands Economic Stability Act of 2011 requires any member of GERS with thirty or more years of credited service, not electing early retirement on or before September 30, 2011, to pay an additional 3 percent GERS member contribution based on gross salary. The Virgin Islands Economic Stability Act also mandated an 8% reduction in the salaries of all employees of autonomous and semi-autonomous agencies that receive funding from the general fund for the period July 4, 2011 through July 3, 2013. Eligible government employees that elect to retire on or before July 3, 2013 are permitted to have their retirement annuity calculated on gross wages before the 8% reduction amount. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) September 30, 2011 1305-1079124 143 19. Subsequent Events (continued) Pension Trust Fund (continued) On November 14, 2011, the GERS entered into a loan agreement with the Government of the Virgin Islands (GVI) in the amount of $13 million at an interest rate of 4.91% and a maturity date of December 15, 2016. The security for the note is the pledged real property tax receipts from the delinquent real property tax receivables, including penalties and interest for tax years prior to and including 2005 totaling approximately $36 million. On November 2, 2012, GERS entered into a loan agreement with Seaborne Virgin Islands, Inc. in the amount of $1.5 million as part of a modification agreement of existing loans with Seaborne Virgin Islands, Inc. The loan term is five (5) years with an interest rate of 6.25% per annum. The loan is payable in twenty (20) quarterly installments of principal in the amount of $75 thousand each, plus interest, with the entire balance due with the 20th payment. On July 18, 2012, GERS executed a credit facility n the amount of $10 million with a per annum interest rate of 15% with the limited partnership Attilanus L. P. The purpose of the credit facility is to meet on-going premium costs and certain other expenses in connection with senior life insurance policies owned by GERS for retirees age 65 and older who have a life expectancy of 5 to 7 years. The facility is structured as a note where principal repayments eliminate the future amount available. Unpaid principal and accrued interest become due on July 10, 2017. 1305-1079124 Required Supplementary Information 1305-1079124 144 Required Supplementary Information (other than MD&A) Government of U.S. Virgin Islands Schedules of Funding Progress September 30, 2011 Employees Retirement System of the Government of the U.S. Virgin Islands Actuarial valuation Date (a) Actuarial value of assets (b) Unfunded actuarial accrued liability (UAAL) (c) Actuarial accrued liability (a) + (b) (d) Funded Ratio (a)/(c) (e) Annual covered payroll UAAL as a percentage of covered payroll (b)/(e) Pension Plan 2009(*) 1,534,899,736 1,397,261,661 2,932,161,397 52.35% 458,154,309 304.98% 2010(**) 1,505,970,212 1,513,059,673 3,019,029,885 52.53% 458,154,309 343.86% 2011(***) 1,448,926,591 1,719,110,906 3,168,037,497 45,74% 403,473,988 426.08% (*) Estimated based on the financial information provided as of September 30, 2009, for the actuarial value of assets. For the unfunded actuarial accrued liability (UAAL) amount was projected from the last completed actuarial valuation as of October 1, 2006, assuming that actual experience during the October 1, 2006 to September 30, 2009, matched that assumed by the actuarial assumptions. (**) Estimated based on the financial information provided as of September 30, 2010, for the actuarial value of assets. For the unfunded actuarial accrued liability (UAAL) amount was projected from the last completed actuarial valuation as of October 1, 2006, assuming that actual experience during the October 1, 2006 to September 30, 2010, matched that assumed by the actuarial assumptions. (***) Estimated based on the financial information provided as of September 30, 2011, for the actuarial value of assets. For the unfunded actuarial accrued liability (UAAL) amount was projected from the last completed actuarial valuation as of October 1, 2006, assuming that actual experience during the October 1, 2006 to September 30, 2011, matched that assumed by the actuarial assumptions. Actuarial valuation -September 30, 2006 and thereafter: Actuarial accrued liability determined under the Entry Age Normal Method. 1305-1079124 145 Required Supplementary Information (other than MD&A) Government of United States Virgin Islands Schedules of Funding Progress (continued) Postemployment Benefits Other Than Pensions Actuarial valuation Date (a) Actuarial value of assets (b) Unfunded actuarial accrued liability (UAAL) (c) Actuarial accrued liability (a) + (b) (d) Funded Ratio (a)/(c) (e) Annual covered payroll UAAL as a percentage of covered payroll (b)/(e) OPEB 2007 $ – $ 976,455,000 $ 976,455,000 – N/A N/A 2009 $ – $1,069,562,000 $1,069,562,000 – $418,467,000 255.59% 1305-1079124 146 Required Supplementary Information (other than MD&A) Employees’ Retirement System of the Government of U.S. Virgin Islands Schedule of Employer Contributions September 30, 2011 Annual required contributions Contributions made Percentage contributed Year ended September 30, 2008* $138,488,871 $75,871,146 54.79% 2009* 147,490,851 80,177,004 52.35% 2010* 157,817,709 77,004,630 48.79% 2011* 162,841,336 80,849,762 49.65% * Estimated based on Fiscal Year 2006 actuarial valuation. 1305-1079124 159