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GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Basic Financial Statements September 30, 2004 (With Independent Auditors’ Report Thereon) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Table of Contents Financial Section: Independent Auditors’ Report Management’s Discussion and Analysis Basic Financial Statements: Government-wide Financial Statements: Statement of Net Assets (Deficit) Statement of Activities Fund Financial Statements: Balance Sheet - Governmental Funds Statement of Revenue, Expenditures, and Changes in Fund Balances — Governmental Funds Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances to the Statement of Activities - Governmental Funds Statement of Revenue and Expenditures — Budget and Actual — Budgetary Basis — General Fund Statement of Net Assets — Proprietary Funds Statement of Revenue, Expenses, and Changes in Fund Net Assets — Proprietary Funds Statement of Cash Flows — Proprietary Funds Statement of Fiduciary Net Assets — Fiduciary Funds Statement of Changes in Fiduciary Net Assets Notes to Basic Financial Statements: Summary of Significant Accounting Policies Component Units Stewardship, Compliance, and Accountability Cash and Investments Receivables 18 20 21 22 23 24 25 26 27 28 29 47 49 53 Table of Contents Page Interfund Transactions 54 Restricted Assets 57 Capital Assets 58 Long-Term Liabilities 62 General Tax Revenue 76 Commitments and Contingencies 77 Retirement Systems 82 Liquidity 84 Restatements of Net Assets and Fund Balances 85 Subsequent Events 86 American International Plaza Suite 1100 250 Mufioz Rivera Avenue San Juan, PR 00918-1819 Independent Auditors’ Report 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, 2004, 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: The Virgin Islands Public Finance Authority (PFA), a blended component unit, which represents 100% of the assets, fund balance, and revenue of the PFA Debt Service Fund (a major fund); 100% of the assets, net assets, and revenue of the PFA Capital Projects Fund (a major fund); 100% of the assets, net assets, and revenue of the West Indian Company (a major fund); 1.17%, 1.29%, and 1.96% of the assets, net assets/fund balance, and revenue of the aggregate remaining fund information; 25.2%, 87.6%, and 17.6% of the assets, net assets, and revenue of the governmental activities; and 59.65%, 49.56%, and 35.34% of the assets, net assets, and revenue of the business- type activities, respectively. Virgin Islands Lottery (VI Lottery), a nonmajor enterprise fund, which represents 0.06%, 0.48%, and 2.06%, respectively, of the assets, net assets/fund balance, and revenue of the aggregate remaining fund information, and 1.14%, 11.26%, and 21.21%, respectively, of the assets, net assets, and revenue of the business-type activities. The Tobacco Settlement Financing Corporation, a blended component unit, which represents 0.73%, 1.09%, and 0.28%, respectively, of the assets, fund balance, and revenue of the aggregate remaining fund information, and 0.91%, 4.10%, and 0.14%, respectively, of the assets, net assets, and revenue of the governmental activities. The Virgin Islands Port Authority, Virgin Islands Water and Power Authority, Virgin Islands Housing Authority (VIHA), University of the Virgin Islands, Virgin Islands Public Television System, Virgin Islands Economic Development Authority (VIEDA), Magens’ Bay Authority, Virgin Islands Government Hospital and Health Facilities Corporation (Roy L. Schneider Hospital and Juan F. Luis Hospital and Medical Center), and the Virgin Islands Housing Finance Authority (VIHFA), discretely presented component units, which collectively represent 100% of the assets, net assets, and revenue of the aggregate discretely presented component units. KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative. M2 Micy 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 the other auditors. Except as discussed in the following eight paragraphs, we conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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, as well as 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 basic financial statements include a receivable for corporate income taxes in the general fund (a major fund) and the governmental activities of $8.7 million as of September 30, 2004. The basic financial statements of September 30, 2003 did not include a receivable for corporate income taxes pertaining to tax year 2002 in the general fund (a major fund) and the governmental activities due to inadequate records. The receivable for corporate income taxes at September 30, 2003, enters into the determination of revenue and change in fund balance/net assets for the year ended September 30, 2004. The Government’s records do not permit, nor is it practicable to extend our auditing procedures sufficiently to determine the extent to which the revenue and change in fund balance/net assets of the general fund (a major fund) and the governmental activities for the year ended September 30, 2004 may have been affected by this condition. The report of the other auditors on the financial statements of VIHA, a discretely presented component unit, as of and for the year ended December 31, 2003, was qualified because they were unable to obtain sufficient audit evidence to determine whether capital assets amounting to $67 million were fairly stated. The report of the other auditors on the 2004 financial statements of VIHFA, a discretely presented component unit, was qualified because they were unable to obtain sufficient audit evidence to determine whether land held for sale amounting to approximately $25.7 million was fairly stated. The basic financial statements include a receivable for unemployment insurance contributions in the unemployment insurance fund (a major fund) and the business-type activities of $1.1 million as of September 30, 2004. The basic financial statements of September 30, 2003 did not include a receivable for unemployment insurance contributions in the unemployment insurance fund (a major fund) and the business-type activities due to inadequate records. The receivable for unemployment insurance contributions at September 30, 2003, enters into the determination of revenue, change in net assets, and, where applicable, cash flows for the year ended September 30, 2004. The Government’s records do not permit, nor is it practicable to extend our auditing procedures sufficiently to determine the extent to which the revenue, change in net assets, and, where applicable, cash flows of the unemployment insurance fund (a major fund) and the business-type activities for the year ended September 30, 2004 may have been affected by this condition. 2 (Continued) Rane The report of the other auditors on the 2004 financial statements of the VI Lottery, a nonmajor enterprise fund, was qualified because they were unable to obtain sufficient audit evidence to determine whether capital assets of $45 thousand, net accounts receivables of $887 thousand, due to the general fund of $4.5 million, and other liabilities of $115 thousand were fairly stated. The basic financial statements do not include a liability for workers’ compensation claims. The Government’s records do not permit, nor is it practical to extend our auditing procedures sufficiently to determine the extent by which the business-type activities as of and for the year ended September 30, 2004 may have been affected by this condition. The Employees’ Retirement System of the Government of the Virgin Islands (GERS), a fiduciary component unit (pension trust fund), is recording contributions pursuant to the Early Retirement Act of 1994 as the cash is received which, in our opinion, should be accrued in order to conform with U.S. generally accepted accounting principles. If these contributions were accrued, contributions receivable and net assets held in trust for employees’ pension benefits would be increased by $7.2 million and the change in net assets would be increased by $1.1 million. In addition, GERS maintains its real estate investment in the GERS complex related to the portion of the St. Thomas building held for lease based on historical cost. As of September 30, 2004, this real estate investment amounted to approximately $8.6 million. Such investment should be presented at fair value in accordance with U.S. generally accepted accounting principles. GERS has not performed a recent valuation of this real estate investment. Finally, we were unable to obtain sufficient audit evidence about the cash overdraft balance reported by GERS with the Department of Finance of approximately $10.5 million in specially designated pooled accounts. The basic financial statements include a provision for landfill closure and postclosure costs as required by U.S. generally accepted accounting principles in the governmental activities of $28.8 million as of September 30, 2004. The basic financial statements of September 30, 2003 did not include a provision for landfill closure and postclosure costs in the governmental activities because no calculation had been made. The provision for landfill closure and postclosure costs at September 30, 2003, enters into the determination of expenses and change in net assets for the year ended September 30, 2004. The Government’s records do not permit, nor is it practicable to extend our auditing procedures sufficiently to determine the extent to which the expenses and change in net assets of the governmental activities for the year ended September 30, 2004 may have been affected by this condition. Because of the matters discussed in the sixth, seventh, and eighth paragraphs 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 business-type activities as of September 30, 2004 and the changes in financial position for the year then ended. In our opinion, based on our audit and the report of other auditors, except for: ° the effects of not being able to determine the extent to which the expenses and change in net assets of the governmental activities may have been affected by the exclusion of a provision for landfill closure and postclosure costs in the beginning net assets, as described in paragraph ten above, the financial statements referred to above present fairly, in all material respects, the financial position of the governmental activities of the Government as of September 30, 2004 and the changes in financial position thereof for the year then ended in conformity with U.S. generally accepted accounting principles; ° the effects of not being able to determine the extent to which the revenue and change in fund balance/net assets of the general fund (a major fund) and the governmental activities may have been affected by the exclusion of a receivable for corporate income taxes pertaining to tax year 2002 in the beginning fund balance/net assets due to inadequate records, as described in paragraph three above, the financial statements referred to above present fairly, in all material respects, the financial position of the general fund and the governmental activities of the Government as of September 30, 3 (Continued) Rae 2004 and the changes in financial position thereof for the year then ended in conformity with U.S. generally accepted accounting principles; ° the effects of not being able to determine the extent to which the revenue, change in net assets, and cash flows of the unemployment insurance fund (a major fund) may have been affected by the exclusion of a receivable for unemployment insurance contributions in the beginning net assets due to inadequate records, as described in paragraph six above, the financial statements referred to above present fairly, in all material respects, the financial position of the unemployment insurance fund of the Government as of September 30, 2004, and the changes in financial position and, where applicable, cash flows thereof for the year then ended in conformity with U.S. generally accepted accounting principles; ° the effects of the adjustments as might have been determined to be necessary, had the other auditors been able to obtain sufficient audit evidence to determine whether capital assets and land held for sale amounting to $67 million and $26 million in the financial statements of VIHA and VIHFA, respectively, were fairly stated, as described in paragraphs four and five above, the financial statements referred to above present fairly, in all material respects, the financial position of the discretely presented component units of the Government of the United States Virgin Islands as of September 30, 2004, and the respective changes in financial position thereof for the year then ended in conformity with U.S. generally accepted accounting principles; and ° the effects of (i) GERS not accruing contributions pursuant to the Early Retirement Act of 1994 and not recording its real estate investment in the GERS complex related to the portion of the St. Thomas building held for lease at fair value, and (ii) the adjustments as might have been determined to be necessary, had we been able to obtain satisfactory evidence with respect to the cash overdraft of GERS with the Department of Finance, as described in paragraph nine above, the financial statements referred to above present fairly, in all material respects, the financial position of the aggregate remaining fund information of the Government of the United States Virgin Islands, as of September 30, 2004, and the respective changes in financial position thereof 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 the PFA Debt Service Fund, PFA Capital Projects Fund, and the West Indian Company of the Government of the United States Virgin Islands as of September 30, 2004, and the respective changes in financial position and, where applicable, cash flows thereof, and the respective budgetary comparison for the general fund for the year then ended in conformity with U.S. generally accepted accounting principles. As discussed in note 14 to the basic financial statements, the Government has restated beginning net assets and fund balances. 4 (Continued) Rane The management’s discussion and analysis on pages 6 through [5 is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We 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. KPIc LEP June 7, 2006 Stamp No. 2102947 of the Puerto Rico Society of Certified Public Accountants was affixed to the record copy of this report. GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2004 Introduction The following 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, 2004 and 2003. 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 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 similar to that presented by most private-sector companies. The statement of net assets 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 (4) 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. 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. 6 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2004 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 fund 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, and the PFA Capital Projects Fund are reported as major governmental funds. 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 accounts for the resources accumulated, and payments made, for principal and interest on long-term general obligation debt issued by the Virgin Islands Public Finance Authority (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. 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 unemployment insurance fund and the West Indian Company (WICO) fund are major proprietary funds. The unemployment insurance fund is a federally mandated program to manage unemployment insurance. The WICO fund accounts for the activities of WICO, which owns a port facility including a cruise ship pier, and manages a shopping mall and a rental complex. 7 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2004 Fiduciary Funds The Government is the trustee, or fiduciary, for several agency funds. The fiduciary activities are reported in a separate statement of fiduciary net assets and a statement of changes in fiduciary net assets. Financial Analysis of the Government as a Whole The primary government (PG) and its component units experienced an economic downturn following the slowdown of the U.S. economy in fiscal year 2002 and the events of September 11, 2001. As explained in note 13 to the basic financial statements, the Government has initiated specific actions to improve its future cash flows through the issuance of long-term debt, the development of a series of detailed revenue enhancement and expenditure reduction initiatives, and the enactment of certain laws directed toward improving the Government’s financial situation. In fiscal year 2004, the Government issued the 2003A Series Revenue Bonds amounting to $268 million to repay the bond anticipation note and to fund necessary capital projects of the PG. Financial Analysis of the Primary Government Total assets of the government as of September 30, 2004 and 2003 were $1.564 billion and $1.337 billion, respectively, an increase of approximately $227 million. Total liabilities as of September 30, 2004 and 2003 were $1.836 billion and $1.637 billion, respectively, an increase of approximately $199 million. For the year ended September 30, 2004, the PG net deficit of $272 million consisted of $239 million invested in capital assets, net of related debt; $173 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 $684 million. For the year ended September 30, 2003, the PG net asset deficit of $300 million consisted of $245 million invested in capital assets, net of related debt; $148 million restricted by statute or other legal requirements and were not available to finance day to day operations of the government; and an unrestricted net deficit of $693 million. For the fiscal year ended September 30, 2004, the PG earned program and general revenue amounting to $977 million, and reported expenses of $946 million, resulting in a decrease in the net deficit, before transfers, of $31 million. For the fiscal year ended September 30, 2003, the PG earned program and general revenue amounting to $854 million, and reported expenses of $888 million, resulting in an increase in the net deficit, before a special item and transfers, of $34 million. During fiscal year 2003, the Government reported a special item of $159 million resulting from the forgiveness of the 1996 Community Disaster Loan (CDL) resulting in an overall reduction in the net deficit of $125 million. 8 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2004 In overall, revenue demonstrated an increase of approximately $123 million in fiscal year 2004, when compared to fiscal year 2003. Expenses increased in fiscal year 2004 when compared to fiscal year 2003 by $58 million, including $29 million in landfill closure and postclosure care cost recognized in fiscal year 2004. A summary of net assets (deficit) and changes in net assets (deficit) for the primary government follows: Assets Current assets $ Capital assets Other assets Total assets Liabilities Long-term debt outstanding Other liabilities Total liabilities Net Assets Invested in capital assets, net of related debt Restricted Unrestricted (deficit) Total net assets (deficit) $ Net Assets (Deficit) —- Primary Government (In thousands) September 30, 2004 and 2003 Governmental activities Business-type activities Total 2004 2003 2004 2003 (a) 2004 2003 (a) 836,161 626,829 43,833 54,979 879,994 681,808 625,530 608,158 42,693 43,008 668,223 651,166 15,421 3,211 437 553 15,858 3,764 1,477,112 1,238,198 86,963 98,540 1,564,075 1,336,738 1,061,655 913,925 21,376 22,015 1,083,031 935,940 743,737 693,964 9,610 6,917 753,347 700,881 1,805,392 1,607,889 30,986 28,932 1,836,378 1,636,821 217,677 224,189 21,318 20,993 238,995 245,182 131,496 105,633 41,375 42,464 172,871 148,097 (677,453) (699,513) (6,716) 6,151 (684, 169) (693,362) (328,280) (369,691) 55,977 69,608 (272,303) (300,083) (a) The 2003 balances were not restated to reflect the restatements that were made to the beginning net asset balances because the 2003 information is not readily available. (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2004 Changes in Net Assets (Deficit) — Primary Government September 30, 2004 and 2003 (In thousands) Governmental activities Business-type activities Total 2004 2003 2004 2003 (a) 2004 2003 (a) Revenue: Program revenue: Charges for services $ 28,932 26,988 41,294 29,590 70,226 56,578 Operating grants and contributions 151,118 143,295 —_— — 151,118 143,295 Capital grants and contributions 9,553 20,564 — — 9,553 20,564 General revenue: Taxes 664,510 594,616 _— — 664,510 594,616 Interest and other 77,848 33,991 2,749 3,785 80,597 37,776 Other general revenue 1,102 1,577 — — 1,102 1,577 Total revenue 933,063 821,031 44,043 33,375 977,106 854,406 Expenses: General government 381,282 350,600 — _ 381,282 350,600 Public safety 55,677 49,394 —_— — 55,677 49,394 Health 92,694 97,243 — — 92,694 97,243 Public housing and welfare 62,712 63,874 —_— — 62,712 63,874 Education 186,122 186,293 — —_ 186,122 186,293 Transportation and communication 45,987 29,240 — —_ 45,987 29,240 Culture and recreation 7,549 14,365 — — 7,549 14,365 Interest on long-term debt 60,024 49,633 —_ — 60,024 49,633 Unemployment insurance — — 7,117 19,664 7,117 19,664 West Indian Company — — 9,926 8,432 9,926 8,432 Workmen’s Compensation —_ — 8,431 8,922 8,431 8,922 VI Lottery — — 11,663 — 11,663 — Other business-type activities _— _— 17,004 10,521 17,004 10,521 Total expenses 892,047 840,642 54,141 47,539 946,188 888,181 Increase (decrease) in net assets before special item and transfers 41,016 (19,611) (10,098) (14,164) 30,918 (33,775) Special item —_— 159,271 — — — 159,271 Transfers 395 (1,379) (395) 1,379 — — 395 157,892 (395) 1,379 = 159,271 Change in net assets 41,411 138,281 (10,493) (12,785) 30,918 125,496 Net assets (deficit), beginning of year, as previously reported (369,691) (508,798) 69,608 77,212 (300,083) (431,586) Restatements to beginning net assets — 826 (3,138) 5,181 (3,138) 6,007 Net assets (deficit), end of year, as restated $ (328,280) (369,691) 55,977 69,608 (272,303) (300,083) (a) The 2003 balances were not restated to reflect the restatements that were made to the beginning net asset balances because the 2003 information is not readily available. 10 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2004 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 23 of the financial statements, follows: Revenue and Expenditures — Budget and Actual — Budgetary Basis — General Fund Year ended September 30, 2004 (In thousands) Original Amended budget budget Actual Variance Total revenue $ 526,849 526,849 478,387 (48,462) Total expenditures 566,282 596,545 531,007 65,538 Excess of expenditures over revenue (39,433) (69,696) (52,620) 17,076 Other financing sources (uses) 70,968 70,968 81,709 10,741 Excess of revenue and other financing sources (uses) over expenditures $ 31,535 1,272 29,089 27,817 For fiscal year 2004, the PG realized a revenue variance $(48) million due to a slower-than-expected recovery following the 2002 recession. The PG realized a $66 million variance in expenditures due to control spending imposed by revenue shortfalls. The PG realized a $11 million variance in other financing sources due to the fact that transfers to the General Fund were higher than budgetary estimates. Capital Assets Capital assets additions during fiscal years 2004 and 2003 amounted to $36 million and $34 million, respectively, for governmental activities and $1.6 million and $7.5 million, respectively, for business-type activities. 11 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2004 The Government’s capital assets include land, land improvements, buildings, building improvements, machinery, equipment, infrastructure, and construction in progress as follows: Capital Assets — Primary Government (In thousands) Governmental activities Business-type activities Total 2004 2003 2004 2003 (a) 2004 2003 (a) Land and improvements $ =: 188,523 188,109 5,357 5,358 193,880 193,467 Building and improvements 402,450 400,309 47,575 46,490 450,025 446,799 Machinery and equipment 78,159 69,788 3,791 2,585 81,950 72,373 Infrastructure 126,249 121,413 — — 126,249 121,413 Construction in progress 24,578 4,046 809 722 25,387 4,768 Total assets 819,959 783,665 57,532 55,155 877,491 838,820 Less accumulated depreciation (194,429) (175,507) (14,839) (12,147) (209,268) (187,654) Total capital assets $ 625,530 608,158 42,693 43,008 668,223 651,166 (a) The 2003 balances were not adjusted to reflect the restatements that were made to the beginning net asset balances because the 2003 information is not readily available. 12 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2004 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, 2004: Primary Government — Bonds Payable (In thousands) Final Interest Bonds payable maturity rates (%) Balance 1998 Series A, C, D, and E Revenue and Refunding Bonds 2023 5.50to7.11 $ 473,745 1999 Project Revenue Bonds 2005 6.25 1,550 1999 Series A General Obligation Bonds 2010 6.50 5,650 1999 Series A Revenue Bonds 2033 4.20 to 6.40 283,335 2001 Series A Tobacco Bonds 2031 5.00 22,310 2002 Series Garvee Bonds 2009 2.50 to 5.00 15,840 2003 Series A Revenue Bonds 2033 4.00 to 5.25 268,020 Subtotal 1,070,450 Deferred amount on refundings (2,464) Bond premium 3,819 Bond discount (9,052) Bond accretion (1,098) Total $ 1,061,655 Note 9 provides detailed information regarding all bonds of the U.S. Virgin Islands. During fiscal year 2004, the 2003 Series A revenue bonds amounting to $268 million were issued. The PG made bond principal payments on all outstanding general and special revenue bonds amounting to $25 million during fiscal year 2004, and $24 million during fiscal year 2003. The Government’s bonds carry insured ratings of “AAA” and “Aaa” from Fitch Ratings and Moody’s Investors Services, 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. 13 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2004 Other liabilities of the PG include: Primary Government — Other Liabilities September 30, 2004 and 2003 (In millions) 2004 2003 Accrued compensated absences $ 60 52 Retroactive union arbitration liability 384 375 Accrued litigation 15 13 Landfill closure and post closure costs 29 — Accrued federal cost disallowances 6 13 Total other liabilities $ 494 453 Economic Condition and Outlook The PG ended fiscal year 2004 with a deficit amounting to $272 million, of which $684 million relates to an unrestricted deficit. The PG is working towards a recovery from the recession of 2002 through a combination of revenue initiatives and budgetary restraint on expenditures. Revenue Initiatives The PG collects income tax revenue under the “mirror” income tax system. The Government’s tax laws mirror the U.S. Internal Revenue Service (IRS) Code, Rules, and Regulations. The 2003 and 2004 Tax Acts passed by U.S. Congress may have a negative impact on revenue due to changes in sourcing of revenue rules as defined for the U.S. Virgin Islands, restrictions on residency rules, a decrease in tax rates, expanded tax credits, and expanded tax deductions. In April 2005, the U.S. Treasury issued draft tax regulations for the territories and possessions defining residency and source of income. The Government has proactively responded to these changes through meetings with the U.S. Treasury. The regulations have not been issued and the Government’s response is under review by the U.S. Treasury. In connection with a real property tax case instituted against the PG in the U.S. District Court of the Virgin Islands, the Government was enjoined for a four-month period in fiscal year 2003 from appraising and assessing any real property taxes until it modified its system of appraisal to comply with certain court mandates. As a result, effective August 2003, it has been using the 1998 assessment value to issue tax bills and collect taxes, and expects to continue to do so until a new appraisal system is implemented, which is intended to satisfy the court’s decision, or the decision is reversed on appeal. In fiscal year 2004, the Government retained a consultant to modify its system of appraisal and to comply with the court mandates. 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 currently on appeal. 14 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2004 Budgetary Control of Expenditures The PG faces the challenge of carryforward expenditures from prior fiscal years and increasing expenditures in the current fiscal year. Carryforward expenditures consist mainly of retroactive salary increases, which accumulated following Hurricanes Hugo, Marilyn, and Bertha in the years of 1990 through 1998. Current increasing governmental expenditures include increased health insurance premiums, pharmaceutical premiums, and salary expense. Expenditures are closely monitored and controlled through the budgetary process. Deficit Reduction Measures The PG has implemented a number of deficit reducing measures including: (i) increasing of local taxes including the highway users tax and stamp tax; (ii) implementation of new local taxes including an excise tax on importation of personal goods and a petroleum tax; and (iii) exerting greater control of expenditures through the budgetary process, and (iv) implementation of tax amnesties for property and gross receipts taxes. Contacting the Government’s Financial Management This financial report is designed to provide the Government’s citizens, taxpayers, customers, and investors 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. 15 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Net Assets (Deficit) September 30, 2004 (In thousands) Primary Government Governmental Business-ty pe Component activities activities Total units Assets: Cash and cash equivalents $ 247,100 8,004 255,104 58,153 Investments 349,120 — 349,120 29,388 Receivables, net 179,632 3,352 182,984 54,210 Internal balances 6,999 (6,999) — — Loans and advances —- —_ — 1,622 Due from component units 29,382 _ 29,382 — Note receivable —_— _ — 7,486 Due from primary government — _ — 3,531 Due from federal government 22,963 — 22,963 4,204 Inventories — 435 435 20,866 Other assets 965 843 1,808 18,856 Restricted: Cash and cash equivalents — 38,198 38,198 34,544 Investments — — — 91,794 Other — —_ — 1,188 Capital assets 625,530 42,693 668,223 764,325 Deferred expenses 15,421 437 15,858 21,167 Total assets 1,477,112 86,963 1,564,075 1,111,334 Liabilities: Current liabilities: Accounts payable and accrued liabilities 52,003 5,637 57,640 73,605 Tax refunds payable 75,352 — 75,352 — Unemployment insurance benefits — 1,744 1,744 _— Customer deposits — — _ 16,710 Due to primary government — —_ _— 29,382 Due to component units 3,531 —_— 3,531 — Due to federal government _— _ _ 5,690 Interest payable 29,133 — 29,133 5,281 Unearned revenue 87,250 — 87,250 4,545 Other current liabilities 1,990 2,229 4,219 6,619 Due within one year: Loans payable — 813 813 8,298 Bonds payable 22,467 _ 22,467 8,476 Other liabilities 39,663 — 39,663 — Noncurrent liabilities: Due in more than one year: Loans payable _ 20,563 20,563 2,583 Bonds payable 1,039,188 — 1,039,188 277,923 Other liabilities 454,815 —_— 454,815 28,708 Total liabilities $ 1,805,392 30,986 1,836,378 467,820 16 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Net Assets (Deficit), continued September 30, 2004 (In thousands) Primary Government Net assets: Invested in capital assets, net of related debt $ Restricted for: Unemployment insurance Debt service Other purposes Unrestricted (deficit) Total net assets (deficit) $ Governmental Business-type Component activities activities Total units 217,677 21,318 238,995 538,835 — 33,840 33,840 = 131,496 — 131,496 — — 7,535 7,535 71,790 (677,453) (6,716) (684, 169) 32,889 (328,280) 55,977 (272,303) 643,514 See accompanying notes to basic financial statements. 17 (panunu0D) 8I 99L'T _ _ _— LSY'87 6€9'ZZI LZE'E67 LS9‘CPP (tszT) — _— = TILT OLe'9 669% 8Z0'CT 16L'7 _— _— _ 76I'E OLY'SP L09‘€T p8r'6s (960'9) _ _— _ Te9'T 6h7'8T L987 €ps'0S Ese _ _ _ Tps‘p SLLIZ SEZ‘0P TLT‘99 LS8'p _ _ _ 880'T _— 90P'SZ LE9‘TZ (€18) - 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Those assets are offset by deferred revenue in the funds. 152,323 Interest on long-term debt is not accrued in the funds, but rather is recognized as an expenditure when due. (29,133) Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds. (1,556,133) Deficit of governmental activities $ (328,280) See accompanying notes to basic financial statements. 20 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Revenue, Expenditures, and Changes in Fund Balances Governmental Funds Year ended September 30, 2004 (In thousands) PFA PFA debt capital Other Total General service projects governmental governmental Revenue: Taxes $ 459,809 152,449 — 18,248 630,506 Federal grants and contributions —_ 3,651 —_ 157,020 160,671 Charges for services 21,424 _ _ 7,508 28,932 Tobacco settlement rights —_ _ —_— 1,102 1,102 Interest and other 42,514 5,143 2,608 27,583 77,848 Total revenue 523,747 161,243 2,608 211,461 899,059 Expenditures: Current: General government 246,658 — 2,702 87,717 337,077 Public safety 40,954 _— — 13,152 54,106 Health 70,808 _— — 18,514 89,322 Public housing and welfare 31,231 -— 426 31,055 62,712 Education 149,077 —_— —_— 31,300 180,377 Transportation and communication 29,950 _ 6,562 4,939 41,451 Culture and recreation 6,203 — — 1,076 7,279 Capital outlays — _— 22,461 14,089 36,550 Debt service: Principal _ 120,570 —- 4,125 124,695 Interest — 50,155 —_— 1,365 51,520 Bond issuance costs —_ 13,033 = — 13,033 Total expenditures 574,881 183,758 32,151 207,332 998,122 Excess (deficiency) of revenue over (under) expenditures (51,134) (22,515) (29,543) 4,129 (99,063) Other financing sources (uses): Bonds issued —_— 126,520 141,500 —_— 268,020 Transfers from other funds 87,302 _ 1,015 15,314 103,631 Transfers to other funds (5,593) (85,562) (4,000) (8,081) (103,236) Premium on bonds issued — 2,830 _ 2,830 Total other financing sources (uses), net 81,709 43,788 138,515 7,233 271,245 Net change in fund balances 30,575 21,273 108,972 11,362 172,182 Fund balance, beginning of year (as restated) 97,140 92,326 43,062 59,002 291,530 Fund balance, end of year $ 127,715 113,599 152,034 70,364 463,712 See accompanying notes to basic financial statements. 21 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances to the Statement of Activities - Governmental Funds Year ended September 30, 2004 (In thousands) Net change in fund balances — total governmental funds $ 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 period. Tax revenue in the statement of activities, which do not provide current financial resources, are not reported as revenue in the funds. 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. These transactions have no effect on net assets. This is the amount by which bond and loan proceeds of $268,020 exceeded principal retirement of $124,695 in the current period. 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. 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 by which current year bond issue costs exceeded amortization expense in the current period. 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 the capitalization of premiums on bonds issued during the current year of $2,830 and the additional net interest expense of $1,575 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. Certain interest reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in the governmental funds. This amount represents the increase in interest payable reported in the statement of net assets less the portion of accrued interest. Change in net assets of governmental activities $ See accompanying notes to basic financial statements. 22 172,182 17,372 34,004 (143,325) (40,521) 12,210 (4,405) (6,106) 41,411 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Revenue and Expenditures — Budget and Actual — Budgetary Basis — General Fund Year ended September 30, 2004 (In thousands) Original Amended budget budget Actual Variance Revenue: Taxes $ 493,048 493,048 436,422 (56,626) Charges for services 10,259 10,259 15,055 4,796 Interest and other 23,542 23,542 26,910 3,368 Total revenue 526,849 526,849 478,387 (48,462) Expenditures: Current: General government 123,578 136,318 211,439 (75,121) Public safety 62,242 64,895 40,446 24,449 Health 84,539 87,812 65,030 22,782 Public housing and welfare 43,046 41,771 31,846 9,925 Education 190,192 197,675 145,723 51,952 Transportation and communication 43,924 48,928 27,402 21,526 Culture and recreation 18,761 19,146 9,121 10,025 Total expenditures 566,282 596,545 531,007 65,538 Excess of expenditures over revenue (39,433) (69,696) (52,620) 17,076 Other financing sources (uses): Transfers from other funds 78,043 78,043 87,302 9,259 Transfer to other funds (7,075) (7,075) (5,593) 1,482 Total other financing sources (uses), net 70,968 70,968 81,709 10,741 Excess of revenue and other financing sources over expenditures $ 31,535 1,272 29,089 27,817 See accompanying notes to basic financial statements. 23 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Net Assets — Proprietary Funds Assets: Current assets: Cash and cash equivalents Receivables, net: Premiums receivable Accrued interest and other Other receivables Due from other funds Inventories and other current assets Other assets Total current assets Noncurrent assets: Restricted cash and cash equivalents Capital assets Deferred expenses Total noncurrent assets Total assets Liabilities: Current liabilities: Accounts payable and accrued liabilities Due to other funds Unemployment insurance benefits Unearned revenue Loans payable related to capital assets Total current liabilities Noncurrent liabilities: Loans payable related to capital assets Total liabilities Net assets: Invested in capital assets, net of related debt Restricted Unrestricted (deficit) Total net assets See accompanying notes to basic financial statements. September 30, 2004 (In thousands) Business-type activities —- Enterprise funds West Unemployment Indian insurance Company Other Totals 244 5,450 2,310 8,004 1,136 — — 1,136 = 1,091 60 L151 — — 1,065 1,065 — — 300 300 — — 435 435 — 783 60 843 1,380 7,324 4,230 12,934 36,433 1,765 — 38,198 — 35,621 7,072 42,693 — 437 — 437 36,433 37,823 7,072 81,328 37,813 45,147 11,302 94,262 — 990 4,647 5,637 — 1,000 6,299 7,299 1,744 _— — 1,744 2,229 — — 2,229 — 813 — 813 3,973 2,803 10,946 17,722 = 20,563 — 20,563 3,973 23,366 10,946 38,285 — 14,246 7,072 21,318 33,840 7,535 — 41,375 —_ — (6,716) (6,716) 33,840 21,781 356 55,977 24 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Revenue, Expenses, and Changes in Fund Net Assets Proprietary Funds Year ended September 30, 2004 (In thousands) Business-type activities — Enterprise funds West Unemployment Indian insurance Company Other Total Operating revenue: Charges for services $ 3,771 12,381 25,143 41,295 Total operating revenue 3,771 12,381 25,143 41,295 Operating expenses: Cost of services 7,117 7,511 36,528 51,156 Depreciation and amortization — 1,435 569 2,004 Total operating expenses 7,117 8,946 37,097 $3,160 Operating income (loss) (3,346) 3,435 (11,954) (11,865) Nonoperating revenue (expenses): Interest income 2,118 95 535 2,748 Interest expense —_— (981) — (981) Total nonoperating revenue (expenses), net 2,118 (886) 535 1,767 Income (loss) before operating transfers (1,228) 2,549 (11,419) (10,098) Transfers from other funds _— — 2,500 2,500 Transfers to other funds —_ (2,000) (895) (2,895) Change in net assets (1,228) 549 (9,814) (10,493) Net assets, beginning of year (as restated) 35,068 21,232 10,170 66,470 Net assets, end of year $ 33,840 21,781 356 55,977 See accompanying notes to basic financial statements. GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Cash Flows Proprietary Funds Year ended September 30, 2004 (In thousands) Business-type activities — Enterprise funds West Unemployment Indian insurance Company Other Total Cash flows from operating activities: Receipts from customers and users $ 2,635 13,173 31,167 46,975 Payments to beneficiaries (9,036) —_ (6,748) (15,784) Payments to suppliers and employees — (8,065) (27,122) (35,187) Net cash provided by (used in) operating activities (6,401) 5,108 (2,703) (3,996) Cash flows from noncapital financing activities: Contribution from U.S. Government 2,229 — — 2,229 Transfer from other funds — —_— 2,500 2,500 Transfers to other funds —_ (2,000) — (2,000) Net cash provided by (used in) noncapital financing activities 2,229 (2,000) 2,500 2,729 Cash flows from capital and related financing activities: Acquisition and construction of capital assets — (1,205) (353) (1,558) Principal paid on long-term debt — (639) — (639) Proceeds from sale of asset — 2 — 2 Interest paid on long-term debt —_ (981) — (981) Net cash used in capital and related financing activities — (2,823) (353) (3,176) Cash flows from investing activities: Interest and dividends on investments 2,118 95 535 2,748 Net cash provided by investing activities 2,118 95 535 2,748 Net increase (decrease) in cash and cash equivalents (2,054) 380 (21) (1,695) Cash and cash equivalents — beginning of year (as restated) 38,731 6,835 2,331 47,897 Cash and cash equivalents — end of year $ 36,677 7,215 2,310 46,202 Reconciliation of operating income (loss) to net cash provided by (used in) operating activities: Operating income (loss) $ (3,346) 3,435 (11,954) (11,865) Adjustments to reconcile operating income (loss) to net cash provided by (used in) operating activities: Depreciation expense —_— 1,435 569 2,004 Change in assets and liabilities: Receivables, net (1,136) 575 6,024 5,463 Deferred charges — 114 — 114 Other assets — 103 (60) 43 Accounts payable and accrued expenses (1,919) (554) 2,718 245 Net cash provided by (used in) operating activities $ (6,401) 5,108 (2,703) (3,996) Reconciliation of cash and cash equivalents to the statement of net assets: Cash and cash equivalents — current $ 244 5,450 2,310 8,004 Cash and cash equivalents — restricted 36,433 1,765 — 38,198 Cash and cash equivalents at end of year on statement of cash flows $ 36,677 7,215 2,310 46,202 See accompanying notes to basic financial statements. 26 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Fiduciary Net Assets — Fiduciary Funds September 30, 2004 (In thousands) Assets: Cash and cash equivalents: Unrestricted Restricted Investments Receivables, net: Loans and advances Accrued interest Other Due from other funds Other assets Total assets Liabilities: Accounts payable and accrued liabilities Cash overdraft with the Department of Finance Cash overdraft with bank Unsettled securities purchased Securities lending collateral Notes payable Other liabilities Total liabilities Net assets held in trust for employees’ pension benefits See accompanying notes to basic financial statements. 27 Pension trust funds Agency funds 139,443 72 1,453,090 108,135 4,553 48,299 36 10,966 6,898 4,048 1,764,594 10,454 1,598 110,876 275,453 6,781 9,126 414,288 10,946 1,350,306 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Changes in Fiduciary Net Assets Year ended September 30, 2004 (In thousands) Pension trust funds Additions: Contributions: Employer $ 54,085 Plan members 30,801 Total contributions 84,886 Investment income: Net appreciation of fair value of investments 95,818 Interest, dividends, and other, net 40,202 Real estate — rental income 3,392 139,412 Less investment expense 7,443 Net investment income 131,969 Other income 300 Total additions 217,155 Deductions: Benefits paid 131,691 Refunds of contributions 2,838 Administrative and operational expenses 8,096 Total deductions 142,625 Change in net assets 74,530 Net assets, beginning of year 1,275,776 Net assets, end of year $ 1,350,306 See accompanying notes to basic financial statements. 28 (1) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 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. (a) 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. 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. (i) 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 The Virgin Islands Public Finance Authority (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 29 (Continued) (ii) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 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 Legislature. PFA activities are blended within the PG because it is so intertwined with the Government that, in substance, they are the same. PFA has a component unit, the West Indian Company (WICO), which is presented as an enterprise fund in the Government’s basic financial statements as further described in note 1(d). Tobacco Settlement Financing Corporation The Tobacco Settlement Financing Corporation (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. 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 2400 Honduras, 2nd Floor St. Thomas, VI 00802 Tobacco Settlement Financing Corporation 2400 Honduras, 2nd Floor St. Thomas, VI 00802 Discretely Presented Component Units The following component units, consistent with GASB Statements No. 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. 30 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 (iii) Major Component Units Virgin Islands Housing Authority The Virgin Islands Housing Authority (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-income families. Up until August 2003, the powers of VIHA were exercised by a board of commissioners consisting of seven members as follows: the Commissioner of Housing and Community Renewal and six other members appointed by the Governor. 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. The VIHA was placed in receivership and HUD assumed possession of all assets, projects, and programs. 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. Accordingly, VIHA continues to be reported as a major component unit of the Government even though the Government no longer appoints its commissioners. Virgin Islands Port Authority The Virgin Islands Port Authority (VIPA) was created as a body corporate and politic constituting a public corporation and autonomous government instrumentality by Act No. 2375 of 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. Virgin Islands Water and Power Authority The Virgin Islands Water and Power Authority (WAPA) was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality by Act No. 1248 of 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 The Virgin Islands Government Hospital and Health Facilities Corporation (VIGHHFC) was created by Act No. 6012 on August 23, 1994 and became active on May 1, 1999. Its purpose is 31 (Continued) (iv) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 to provide 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. University of the Virgin Islands The University of the Virgin Islands (the University) was organized as an instrumentality of the Government under Act No. 852 of March 16, 1962, in accordance with Section 6(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 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, The Reichhold Foundation, and the University of the Virgin Islands Research and Technology Park. 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. The University of the Virgin Islands Research and Technology Park is a nontaxable public corporation developed to promote economic growth, development, and diversification in the Virgin Islands. Nonmajor Component Units Virgin Islands Economic Development Authority The Virgin Islands Economic Development Authority (EDA) was created by Act No. 6390 of 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 Administration, 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. 32 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Magens’ Bay Authority Magens’ Bay Authority (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. Virgin Islands Housing Finance Authority The Virgin Islands Housing Finance Authority (VIHFA) was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality of the Government by Act No. 4636 of 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. 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 The Virgin Islands Public Television System (PTS) 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 and to provide an effective supplement to the in-school education of children. The powers of PTS 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 PTS are ex-officio members of the board who are not entitled to vote. 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 P. O. Box 7668 St. Thomas, VI 00801 33 (Continued) (v) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Virgin Islands Port Authority PO Box 301707 St. Thomas, VI 00803 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 00802 Virgin Islands Housing Finance Authority 210-3A Altona Frostco Center Building, Suite 101 St. Thomas, VI 00802 Virgin Islands Public Television System PO Box 7879 St. Thomas, VI 00801 All financial statements of the discretely presented component units have a fiscal year-end of September 30, 2004, except for WAPA and VIHA that have a year-end of June 30, 2004 and December 31, 2003, respectively. Fiduciary Component Units 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 The Employees’ Retirement System of the Government of the Virgin Islands (known as GERS) was created as an independent and separate agency of the Government with the 34 (Continued) (b) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 purpose of administering the Government employees’ defined-benefit pension plan established as of October 1, 1959. The responsibility for the proper 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 at 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. 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 GERS Building, 3rd Floor St. Thomas, VI 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 presents the reporting entities’ nonfiduciary assets and liabilities, with the difference reported as net assets. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenue. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenue includes (i) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and (ii) 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 revenue 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. 35 (Continued) (c) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Measurement Focus, Basis of Accounting, and Financial Statement Presentation 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 as soon as all eligibility requirements have been met. 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. 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. 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. 36 (Continued) (d) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 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. The nonmajor funds are combined in a single column in the fund financial statements. The Government reports the following major funds: Governmental Funds The Government reports the following major governmental funds: e 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. © PFA Debt Service — The PFA Debt Service 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. e 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. 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: © 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. ¢ 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. 37 (Continued) (e) (g) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 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: e Pension Trust Fund— The pension trust fund accounts for the activities of the Employees’ Retirement System of the Government of the Virgin Islands, which accumulates resources for pension benefit payments to qualified employees. e 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. Investments Title 33, Chapter 117 of the Virgin Islands Code (V.I. Code) authorizes the Government to invest in U.S. Government and agencies’ obligations, mortgage-backed securities, repurchase agreements, commercial paper, local government obligations, and corporate debt and equity obligations. Investments are reported at fair value. Investments in equity securities in the pension trust fund are carried at quoted market values. Realized gains and losses on securities are determined by the average cost method. Investments in real estate are carried at appraised value to the extent available. Investments without appraisals are carried at cost. 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 months subsequent to September 30. Federal government receivables represent amounts owed to the Government for reimbursement of expenditures incurred pursuant to federally funded programs. 38 (Continued) (h) @) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 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 retirement law and subject to rules and regulations prescribed by the board of trustees of GERS, participants of the Pension Trust Fund have the right of obtaining loans from the Pension Trust Fund to finance a home, automobile, or other personal needs. The maximum mortgage loan that could be granted to members who have been contributing to the Pension Trust Fund for at least five years is $250,000. 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 buy land. Members who have contributed to the Pension Trust Fund for at least five years can borrow up to $18,000 for the purchase of an automobile. The loans bear interest at 11% with a maximum term of four years. A member may also borrow up to 75% of their contributions to the Pension Trust Fund to a maximum borrowing of $20,000 as a personal loan. The interest rate offered on personal loans was 9% throughout the year. Member loans in the pension trust fund are valued at the outstanding loan principal balance less an allowance for estimated loan losses. The accounts receivable from nongovernmental 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. Inventories In governmental fund types, the costs of inventories are recorded as expenditures when purchased. The proprietary fund types and component units recognize an asset when the inventory is purchased and an expense when it is consumed. Inventories in proprietary fund types are primarily valued at the lower of cost or market using the first-in, first-out method. Restricted Assets Restricted assets in the PG and discretely presented component units are set aside primarily for the payment of bonds, notes, construction funds, 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: (i) $5,000 for personal property with a useful life of five years; (ii) $50,000 for buildings and building improvements with an estimated useful lives of 40 and 20 years, respectively; (iii) $100,000 39 (Continued) (k) () GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 for land improvements; and (iv) $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 various component units. The costs of routine maintenance and repairs that do not add value to the assets or materially extend asset lives are not capitalized. 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 are depreciated on the straight-line method over the assets’ estimated useful lives. There is no depreciation recorded for land and construction in progress. 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 (i) 7 to 50 years for buildings and building improvements; (ii) 20 to 40 years for airports and marine terminals; and (ili) 3 to 20 years for vehicles and equipment. The Government chose the option available under GASB No. 34 to defer the recording of wastewater treatment facilities as information for this network of infrastructure assets was not available. These assets were deemed to be nonmajor relative to total infrastructure assets and are not reported. 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, as when grant moneys are received prior to incurring the qualifying expenditures. In subsequent periods, when the revenue recognition criteria is met, or when the Government has a legal claim to the resources, the liability for deferred revenue is removed from the balance sheet and the revenue is recognized. 40 (Continued) (m) (n) (0) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 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. Long-term Debt The liabilities reported in the government-wide financial statements include the Government’s bonds, long-term notes, and other long-term liabilities including vacation, retroactive union arbitration salaries, legal claims, and noncurrent federal fund cost disallowances related to expenditures of federal grants. 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. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. In the fund financial statements, government 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 Equity In the fund financial statements, governmental funds report reservations of fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change. Net Assets Net assets are reported in three categories: e 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. e 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. e 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. 41 (Continued) (p) (q) (r) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 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 they are needed. Postemployment Benefits In addition to the pension benefits described in note 12, the Government provides postretirement healthcare benefits, in accordance with the V.I. Code to all employees who retire from the Government on or 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. Currently, 4,048 retirees meet those eligibility requirements. Healthcare benefits are provided through insurance companies whose premiums are paid by the retiree and the Government. The Government contributes three-fourths of the healthcare benefits’ premiums. The Government does not accrue a liability for postemployment benefit costs, which are recognized on a pay-as-you-go basis. During the year ended September 30, 2004, the cost of providing healthcare benefits amounted to approximately $19.5 million. 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 rate pay. As of September 30, 2004, the Government had accrued compensated absences amounting to $60.2 million, including related benefits, of which $39.2 million was included in current liabilities in the government-wide financial statements. 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. Interfund and Intra-entity Transactions The Government has the following types of transactions among funds: e Interfund Transfers — Legally required transfers are reported as interfund transfers in (out) when incurred. e 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, 42 (Continued) (s) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 receivables and payables between the PG and its blended component units are reported as amounts due to, and due from 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. 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. Also, the Government has an enterprise fund that provides workers’ compensation to both public and private employees. The Government does not maintain accounting records in support of individual claim liabilities or for claims incurred but not reported (IBNR). Accordingly, workers’ compensation claims are accounted for on a cash basis. As such, the basic financial statements do not include a liability for workers’ compensation claims outstanding, including related IBNR, as of September 30, 2004. Certain component units are exposed to various risks of loss related to their specialized operations, which are mitigated by purchasing commercial insurance. 43 (Continued) (2) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 (t) Future Adoption of Accounting Requirements GASB has issued the following statements that the Government or its component units have not yet adopted: GASB Adoption Statement required in number fiscal year 40 Deposit and Investment Risk Disclosures - An Amendment of GASB Statement No. 3 2005 42 Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries 2006 43 Financial Reporting for Postemployment Benefit Plans Other than Pension Plans 2007 44 Economic Condition Reporting: The Statistical Section — An amendment of NCGA Statement 1 2006 45 Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions 2008 46 Net Assets Restricted by Enabling Legislation — An amendment of GASB Statement No. 34 2006 47 Accounting for Termination Benefits 2006 The impact of these statements has not yet been determined. (u) Use of Estimates Management of the Government has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the basic financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Component Units The basic financial statements include the financial statements of the following discretely presented component units: Virgin Islands Housing Authority Virgin Islands Port Authority Virgin Islands Water and Power Authority Virgin Islands Government Hospital and Health Facilities Corporation 44 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 University of the Virgin Islands Economic Development Authority Magens’ Bay Authority Virgin Islands Housing Finance Authority Virgin Islands Public Television System Condensed financial information of all discretely presented component units follows (expressed in thousands): 45 (Continued) (panuruo)) OP vISEP9 96E'LE TLP9L 6Pl'L SE8'P9 S68°8E 91196 0S2'8SZ Z08°€9 $ Slasse au [RIO], 688°7E (Or 1‘Z) SpsoT (ogs‘L1) €S6 6L7'91 €1S'8 SOs'el (9€7'€) QqoIap) parsinseiuy) O6L'TL 8Lr'Z COO'LE _ _— pLo'L 98P'LI 6rI'L _ paroinsay SERBES BSO°LE €79'7Z 6LS'SZ Z88'9 Zr6'PI LIT‘OL 96S‘LEZ 8E0'L9 1929p poles JO 190 — Sjosse [e1Ideo Ul paysaauy iSJOSSE ION 0z8°L9P pSO'SE CEI'Ls 8Z1'0€ 7S7'0Z €8S'8E POr'9zZ 8P3'Or BITE! SONTTIQRY [BIOL 80L'8Z SEZ IZ Z€I 667 8s¢ _ _ _ p8r'9 SantTiqery] joLNsuOU 4910 188'01 106 06r'€ _ _ _ 009°s 068 _ atqeded suvoy 66£'982 s9e'9 6S0'prP _— - 606'PE Spseol IZ7‘LE — aiqehed spuog 069'S _ _— 06€ _ _ ooc's _- _ JUIWUIIAOS [RIOpay 01 ONG Z8E°6Z Cre'p — OEs‘Lt 609‘L _ _ _ _ yooumaod Areutsd 07 ang 092901 016% ZSP'6 606'TT $80'ZI plore 6SE'IS LEL'S oe) santTiqel] woLND :SONTQEIT vee tii OSO'EL pOo'ecl LL8‘LE L80°S8 SLPiLl O@7'7ZE 860°SOE 076'9L SI9SSE [RIO], LOT'IZ _- _ _ _ 169'T 9@S‘LI 0S6'l _ sosuodxe padajaq SZE'POL 9PL'Or vIS‘IP Or 1'97 798'9 766'8P OLL‘102 €97'L9Z 8E0°L9 you ‘syasse Jeitded 97S*LZI COO SZE'LE _ $S9'Z 88C'8 ese‘zs Z00'S1 00 Siasse palonsay p02'P _ ps7 _ 002 _— _ Sez SIs‘Z JWOUNIOAOS [eIapay WoIy and les‘€ 071 LEL'z _ _ _ _ plo — qusWWEeA0d Arewyid wos ong 18S‘061 I8‘SI pLL'os LETT OLE‘LI LOP‘sI 1L0‘OS pL66l L90°L $ syasse waLng S1OSSV sun saqiua spueys] uisatA = yeqidsoyy {evIdsopy WIdIsAS wayshs AWIOYINY AvIoyINY SJISSE JIU UO UONEW IOUT quauodwios IYO ay} jo sin] "4 une Japyauyas JIE M 31199314 yg suisnoy 1eI0,., Aysaaatuy “7 fou spuels] spueys] UONBIOdIOD sayyoeg AyWOYINY JamMog pue UIddTA UIs.tA yy 8aH pues jeyidsoy JUIWIUIIAOS Spuejs] UIZITA 1998 AA SPURTS] UIBITA pO0Z ‘O€ Joquiaydag SJUDUIA}LIS [LIOULUL DIS 0} SAION SANV'TSI NIOUIA SALVIS GALINN FHL 40 LNANNYAAOD (3) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Program revenue Operating Capital Total Information on statements Charges for grants and grants and component of activities Expenses services contributions —_ contributions units Virgin Islands Housing Authority $ 44,206 5,121 30,766 5,437 (2,882) Virgin Islands Port Authority 41,910 36,651 — 10,037 4,778 Virgin Islands Water and Power Authority: Electric System 146,378 144,745 — 820 (813) Water System 21,637 25,406 — 1,088 4,857 Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 66,171 40,235 21,778 4,541 383 Juan F. Luis Hospital 50,843 24,867 18,249 1,631 (6,096) University of the Virgin Islands 59,484 13,607 45,476 3,192 2,791 Other component units 12,028 2,695 6,370 1,711 (1,252) Total activities $ 442,657 293,327 122,639 28,457 1,766 General revenue: Interest and other 9,425 Changes in net assets 11,191 Net assets, beginning of year (as restated) 632,323 Net assets, end of year $ 643,514 Stewardship, Compliance, and Accountability (a) 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 executive budget no later than May 30. The annual executive budget is prepared essentially 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 reappropriated item by item. The annual 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-third 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 47 (Continued) (b) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 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. 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 comparisons 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 of revenue and other financing sources over expenditures and other financing uses for the year ended September 30, 2004 is presented below (expressed in thousands): Excess of revenue and other financing sources (uses) over expenditures — budget basis $ 29,089 Timing difference — change in encumbrances (3,494) Entity difference — excess of revenue and other financing sources over expenditures and other financing uses — activities with budgets not legally adopted 4,980 Excess of revenue and other financing sources over expenditures — GAAP basis $ 30,575 Controls over spending in special revenue funds and nonappropriated funds are maintained at the Department of Finance by use of budgets and available resources (revenue). 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. 48 (Continued) (4) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Cash and Investments By law, banks or trust companies designated as depository of public funds of the Government and its various agencies, authorities, and instrumentalities are to maintain corporate surety bond or pledge collateral satisfactory to the Commissioner of Finance to secure all governmental funds deposited. At September 30, 2004, the PG and the discretely presented component units carrying amounts of cash and cash equivalents were covered by federal deposit insurance, corporate surety bonds, or by collateral held by the Government. Legally authorized investments vary by fund, but generally include obligations of the United States or its States, Commonwealth of Puerto Rico, the Government of the U.S. Virgin Islands, or of any agency thereof, common and preferred stocks of any U.S. corporation, common and preferred stocks of any foreign corporation listed in any internationally recognized security exchange, certain bonds or other indebtedness issued by foreign governments or foreign corporations, certificates of deposit, collateralized repurchase agreements, and certain corporate bonds. Specific bond indentures also provide investment requirements. For the fiscal year ended September 30, 2004, the PG, discretely presented component units and fiduciary funds have classified their investments into three risk categories. Category 1 includes investments that were insured or registered or for which the securities were held by a government entity, or its agent, in the entity’s name and investments for which the entity has safekeeping responsibilities but no equity or ownership interest or control. Category 2 includes uninsured and unregistered investments for which the securities were held by the counterparty’s trust department or agent in a government entity’s name. Category 3 includes uninsured and unregistered investments for which the securities are held by the counterparty, or by its trust department or agent but not in a government entity’s name. The investments of the PG and the discretely presented component units by custodial credit risk categories at September 30, 2004 were as follows (expressed in thousands): Primary Government — Investments Category Reported 1 2 3 amount Commercial paper $ 93,572 — — 93,572 Certificates of deposit 41,072 — — 41,072 Federal Home Loan Bank 4,024 — — 4,024 $ 138,668 — — 138,668 Investments not categorized: Mutual funds 210,452 Total investments $ 349,120 49 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Discretely Presented Component Units — Investments Category Reported 1 2 3 amount U.S. government and agency securities $ 60,038 — — 60,038 Common stocks 1,785 — — 1,785 Corporate bonds 5,005 — — 5,005 Certificates of deposit 113 — 2,857 2,970 Money market funds 145 — — 145 Investment contracts 306 — — 306 Mortgage-backed securities — 4,851 — 4,851 Other investments — 2,353 — 2,353 $ 67,392 7,204 2,857 77,453 Investments not subject to classification: Mutual funds 43,729 Total investments 121,182 The investment balance consists of the following: Unrestricted $ 29,388 Restricted 91,794 Total investments $ 121,182 50 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Fiduciary Funds — Investments Category Reported 1 2 3 amount U.S. government and agency securities $ 7,098 — — 7,098 Corporate obligations 28,836 — — 28,836 Foreign bonds 88,646 — — 88,646 Common stocks — U.S. 573,248 — — 573,248 Certificates of deposit 4,048 — — 4,048 Common stocks — foreign 84,967 — — 84,967 Mortgage- and asset-backed securities 50,103 — — 50,103 $ 836,946 — — 836,946 Investments not categorized: Mutual funds 4,625 Investments held by broker — dealers under security loans: U.S. government and agency securities 126,804 Corporate obligations 3,286 Common stocks — U.S. 41,425 Common stocks -- foreign 30,420 Mortgage- and asset-backed securities 67,216 Securities lending short-term collateral investment pool 275,453 Real estate 70,963 Total investments 1,457,138 The investment balance consists of the following: Pension trust funds $ 1,453,090 Agency funds 4,048 Total investments $ 1,457,138 51 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 The pension trust fund’s investments in marketable securities are administered by several professional investment managers and are held in trust by a commercial bank in the name of GERS. The investments in marketable securities generated interest and dividend income of $25 million, which is reported in interest, dividends, and other, net in the accompanying statement of change in the fiduciary net assets. During the year ended September 30, 2004, GERS’ investments (including gains and losses on investments bought and sold, as well as held during the year) (depreciated) appreciated in value as follows (expressed in thousands): U.S. government and government-guaranteed obligations $ (366) Corporate bonds — U.S. (1,585) Corporate bonds — foreign 3,233 Common stocks — U.S. 79,378 Common stocks — foreign 11,322 Collaterized debt obligations 3,235 Mutual funds 601 Net appreciation of fair value of investments $ 95,818 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 US. 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 2004 as to the amount of loans the Custodian can make on behalf of the 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 the fiscal year 2004 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, 2004, approximately $273.1 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, 2004, such investment pool had a weighted average maturity of 40 days and an average expected maturity of 410 days. Because the loans were terminable at will, their duration did not generally match the duration of the investments made with cash collateral. 52 (Continued) (5) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Receivables Receivables at September 30, 2004 consist of the following (expressed in thousands): General PFA debt fund service fund Total Income taxes $ 113,528 — 113,528 Real property taxes 27,025 — 27,025 Gross receipts taxes — 38,253 38,253 Tax receivables $ 140,553 38,253 178,806 Other long-term receivables — tobacco settlement rights 826 Total receivables reported in the statement of net assets $ 179,632 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 levied each calendar year on all taxable real property located in the U.S. Virgin Islands. The revenue is recognized in the General Fund and in the fiscal period for which the property tax was levied, provided the tax is collected within 60 days subsequent to fiscal year-end, unless the facts justify a period greater than 60 days. 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 Department of Finance, as the basis for issuing tax bills to all taxpayers in the U.S. Virgin Islands. 53 (Continued) (6) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Property taxes are to be levied by May 15 of each year in the name of the record owner on January |5 of the same year. The taxes are due on September 30 and become delinquent if not paid by October 30. For businesses with gross receipts of $120,000 per annum or less, gross receipts taxes are levied on an annual basis, based on 4% of gross receipts in excess of $5,000. Businesses with annual gross receipts greater than $120,000 and up to $150,000 are levied on a monthly basis, based on 4% of gross receipts in excess of $5,000 per month. Businesses with annual gross receipts of more than $150,000, lose the $5,000 monthly exemption and are levied on a monthly basis of 4% of gross receipts. The gross receipts tax is due within 30 calendar days following the last day of the calendar month collected. Component unit receivables at September 30, 2004, consist of the following (expressed in thousands): Utility service charges $ 26,816 Port fees 3,862 Students 2,231 Patients 17,796 Other 3,505 Total $ 54,210 Loans and advances receivable at September 30, 2004, consist of the following (expressed in thousands): Fiduciary funds Component pension trust units Mortgage loans $ 21,455 — Personal loans 88,786 — Other loans and advances 894 1,672 Subtotal 111,135 1,672 Less allowance for uncollectible accounts (3,000) (50) Loans and advances, net $ 108,135 1,622 Interfund Transactions (a) Interfund Transfers 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 $79.2 million transfer from the PFA Debt Service representing tax revenue in excess of bond service requirements, and a $7.1 million transfer from the nonmajor governmental funds primarily representing $2.3 million of property tax revenue in excess of debt service requirements and $4.8 million of transfers from the special revenue fund. Transfers to nonmajor governmental funds consisted of $4 million from the General Fund to the Emergency Molasses Fund. Transfers from the PFA Debt Service to the nonmajor governmental funds amounting to approximately $6.3 54 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 million represents revenue in excess of bond service requirements that were transferred to PFA operating fund (nonmajor governmental fund). Interfund transfers for the year ended September 30, 2004 consisted of the following (expressed in thousands): PFA PFA Enterprise debt capital Nonmajor fund -— West Nonamajor General service projects governmental Indian enterprise Transfer to fund fund fund funds Company funds Total General fund $ _ 79,196 — 7,106 1,000 — 87,302 PFA capital projects fund —_ 40 _ 975 _— _ 1,015 Nonmajor governmental funds 5,593 6,326 1,500 _— 1,000 895 15,314 Nonmajor enterprise funds = _ 2,500 — = — 2,500 Total $ 5,593 85,562 4,000 8,081 2,000 895 106,131 Transfer from General fund $ _ _ _ 5,593 — — 5,593 PFA debt service fund 79,196 — 40 6,326 _ _ 85,562 PFA capital projects fund — - —- 1,500 _ 2,500 4,000 Nonmajor governmental funds 7,106 _ 975 > _— — 8,081 Major enterprise fund - WICO 1,000 _ _ 1,000 _ - 2,000 Nonmajor enterprise funds — — —_ 895 _— — 895 Total $ 87,302 _ 1,015 15,314 _ 2,500 106,131 55 (Continued) (b) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Due From/To Other Funds The following table summarizes interfund receivables and payables at September 30, 2004 (expressed in thousands): PFA PFA Enterprise debt capital Nonmajor fund — West Nonmajor General service projects governmental Indian enterprise Pension Due to fund fund fund funds Company funds trust fund Total General fund $ _ - - 3,178 1,000 4,668 — 8,846 PFA capital projects fund _ _ _ — _ 313 _ 313 Nonmajor governmental funds 7,318 2,000 158 — — 1,318 — 10,794 Total governmental funds 7,318 2,000 158 3,178 1,000 6,299 — 19,953 Propriety fund — nonmajor Enterprise fund 300 — _— _ _ _— _— 300 Fiduciary funds — pension Trust fund 36 _ — _— _ = _— 36 Total $ 7,654 2,000 158 3,178 1,000 6,299 _— 20,289 Due from General fund $ — _- _- 7,318 _ 300 36 7,654 PFA debt service fund — — — 2,000 — — — 2,000 PFA capital projects fund —- _— _ 158 _— — _ 158 Nonmajor governmental funds 3,178 — — — — 3,178 Total governmental funds 3,178 _ _— 9,476 = 300 36 12,996 Enterprise fund — West Indian Company 1,000 - — — — _ _ 1,000 Nonmajor enterprise funds 4,668 — 313 1,318 — _ _— 6,299 Total propriety funds 5,668 — 313 1,318 — — _— 7,299 Total $ 8,846 _ 313 10,794 = 300 36 20,289 The due from/to other funds include $3.5 million due from the General Fund to the Emergency Molasses Fund (nonmajor governmental fund) from unpaid appropriations. Other balances composing the due from/to other funds include $2.7 million from the bond proceeds fund (nonmajor governmental fund) to the General Fund and $2.0 million from the PFA Debt Service to PFA operating fund (nonmajor governmental fund). The due to the General Fund from the nonmajor enterprise fund amounting to $4,668 is mainly composed of the amount owed by the Virgin Islands Lottery to the General Fund amounting to $4,468, consisting primarily of 8% of the total lottery revenue that is required to be transferred to the General Fund. 56 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 (7) Restricted Assets (a) Primary Government Restricted assets of proprietary funds and business-type activities include cash and cash equivalents as follows (expressed in thousands): Restricted Assets —- Proprietary Funds and Business-type Activities Unemployment insurance funds $ 36,433 WICO debt service funds 1,765 Total restricted assets of proprietary funds and business-type activities $ 38,198 (b) Component Units Restricted assets of component units include cash and cash equivalents, investments, and receivables as follows (expressed in thousands): Restricted Assets - Component Units Debt service and sinking fund requirements $ 18,281 Construction funds 1,647 Endowment funds 10,601 HUD project funds 300 Revolving loan funds 3,244 Other 471 Total cash and cash equivalents 34,544 Investments: Debt service and sinking fund requirements 25,400 Construction funds 25,442 Endowment funds 26,723 Renewal and replacement funds 7,025 Revolving loan funds 7,204 Total investments 91,794 Other: Accrued interest receivable 1,188 Total restricted assets of component units $ 127,526 57 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 (8) Capital Assets (a) Primary Government The capital assets activity for the governmental activities for the year ended September 30, 2004, is summarized as follows (expressed in thousands): Beginning Ending balance Additions Reductions balance Capital assets, not being depreciated Land $ 184,525 414 — 184,939 Construction in progress 4,046 24,450 3,918 24,578 Total capital assets, not depreciated 188,571 24,864 3,918 209,517 Capital assets, being depreciated: Land improvements 3,584 — — 3,584 Infrastructure 121,413 4,836 — 126,249 Buildings and improvements 400,309 2,141 _ 402,450 Machinery and equipment 69,788 8,627 256 78,159 Total capital assets, being depreciated 595,094 15,604 256 610,442 Less accumulated depreciation for: Land improvements 1,494 165 — 1,659 Infrastructure 13,458 4,119 _— 17,577 Buildings and improvements 121,140 7,903 _— 129,043 Machinery and equipment 39,415 6,991 256 46,150 Total accumulated depreciation 175,507 19,178 256 194,429 Total capital assets, being depreciated, net 419,587 (3,574) — 416,013 Governmental activities capital assets, net $ 608,158 21,290 3,918 625,530 58 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Capital assets activity for the business-type activities for the year ended as of September 30, 2004, is summarized as follows (expressed in thousands): Beginning balance Ending (as adjusted) Additions Reductions balance Capital assets, not being depreciated Land and land improvements $ 5,357 — — 5,357 Construction in progress 722 87 — 809 Total capital assets, not depreciated 6,079 87 — 6,166 Capital assets, being depreciated: Buildings and improvements 46,490 1,088 3 47,575 Machinery and equipment 3,478 383 70 3,791 Total capital assets, being depreciated 49,968 1,471 73 51,366 Less accumulated depreciation for: Buildings and improvements 11,215 1,813 — 13,028 Machinery and equipment 1,690 191 70 1,811 Total accumulated depreciation 12,905 2,004 70 14,839 Total capital assets, being depreciated, net 37,063 (533) 3 36,527 Business-type activities capital assets, net $ 43,142 (446) 3 42,693 Depreciation and amortization expense was charged to functions/programs of the PG for the year ended September 30, 2004 as follows (expressed in thousands): Governmental activities: General government Public safety Health Education Transportation and communication Total depreciation expense — governmental activities Business-type activities: WICO (major enterprise fund) — depreciation and amortization Nonmajor enterprise fund — depreciation Total depreciation and amortization — business-type activities 59 3,953 1,571 3,373 5,744 4,537 19,178 1,435 569 2,004 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 The capital assets activity for the discretely presented component units for the year ended September 30, 2004 is summarized as follows (expressed in thousands): Capital assets, not being depreciated: Land Construction in progress Total capital assets, not depreciated Capital assets being depreciated: Buildings and improvements Airport and marine terminal facilities Personal property and equipment Total capital assets being depreciated Less accumulated depreciation: Buildings and improvements Airport and marine terminal facilities Personal property and equipment Total accumulated depreciation Total capital assets being depreciated, net Component unit capital assets, net Beginning Ending balance Additions Reductions balance $ 93,789 1,906 — 95,695 §2,114 78,207 56,848 73,473 145,903 80,113 56,848 169,168 1,122,835 54,286 539 1,176,582 96,914 5,751 — 102,665 90,303 8,511 4,394 94,420 1,310,052 68,548 4,933 1,373,667 (617,030) 37,974 7 (654,997) (60,807) 4,420 —_— (65,227) (56,022) 6,621 4,357 (58,286) (733,859) 49,015 4,364 (778,510) 576,193 19,533 569 595,157 $ 722,096 99,646 57,417 764,325 60 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Virgin Islands Housing Authority Virgin Islands Port Authority Virgin Islands Water and Power Authority: Electric system Water system Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital Juan F. Luis Hospital University of the Virgin Islands Other component units Total depreciation — component units 61 $ Depreciation expense charged to each component unit for the year ended September 30, 2004 was as follows (expressed in thousands): 9,375 13,802 10,323 5,407 3,947 2,723 2,930 508 49.015 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 (9) Long-Term Liabilities Long-term liabilities activities for the year ended September 30, 2004 were as thousands): follows (expressed in Amounts Amounts Beginning Ending due within due balance Additions Reductions balance one year thereafter Governmental activities: Bonds payable: 1998 Series Revenue and Refunding Bonds $ 486,970 — (13,225) 473,745 13,955 459,790 1999 Project Revenue Bonds 4,510 —_ (2,960) 1,550 1,550 — 1999 General Obligation Bonds, Series A 6,480 — (830) 5,650 885 4,765 1999 Series A Revenue Bonds 287,875 — (4,540) 283,335 4,765 278,570 2001 Series A Tobacco Bonds 22,645 — (335) 22,310 —_— 22,310 2002 Series Garvee Bonds 18,645 — (2,805) 15,840 2,900 12,940 2003 Series A Revenue Bonds _— 268,020 _— 268,020 _— 268,020 Subtotal bonds payable 827,125 268,020 (24,695) 1,070,450 24,055 1,046,395 Less: Deferred amount on refundings (3,080) _ 616 (2,464) (616) (1,848) Bonds premium 1,299 2,830 (310) 3,819 311 3,508 Bonds discount (10,001) _— 949 (9,052) (948) (8,104) Bonds accretion (1,418) _— 320 (1,098) (335) (763) Total bonds payable, net 813,925 270,850 (23,120) 1,061,655 22,467 1,039,188 Loans payable: Bond anticipation note 100,000 = (100,000) — —_ _— Total loans payable 100,000 — (100,000) — — — Other liabilities: Accrued compensated absences 52,358 7,852 — 60,210 39,213 20,997 Retroactive union arbitration 375,252 9,006 _— 384,258 — 384,258 Litigation 13,235 2,478 (538) 15,175 450 14,725 Landfill closure and postclosure costs — 28,821 _— 28,821 —_— 28,821 Accrued disallowed costs 13,112 —_— (7,098) 6,014 — 6,014 Total other liabilities 453,957 48,157 (7,636) 494,478 39,663 454,815 Total governmental activities $ 1,367,882 319,007 (130,756) 1,556,133 62,130 1,494,003 Business-type activities: Notes payable: WICO $ 22,015 — (639) 21,376 813 20,563 Fiduciary activities: Note payable Pension trust fund $ 10,000 — (3,219) 6,781 6,781 — 62 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Accrued compensated absences, retroactive union arbitration liabilities, accrued litigation, and the landfill closure and post-closure costs are generally expected to be liquidated with resources derived from the General Fund. Accrued disallowed costs are generally expected to be liquidated with resources derived from the General Fund. (a) 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. 63 (Continued) (b) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Bonds Payable Bonds payable outstanding at September 30, 2004 are comprised of the following (expressed in thousands): Primary Government — Bonds Payable Final Interest Bonds payable maturity rates (%) Balance 1998 Series A, C, D, and E Revenue and Refunding Bonds 2023 5.50-7.11 §$ 473,745 1999 Project Revenue Bonds 2005 6.25 1,550 1999 Series A General Obligation Bonds 2010 6.50 5,650 1999 Series A Revenue Bonds 2033 4.20 — 6.50 283,335 2001 Series A Tobacco Bonds 2031 5.00 22,310 2002 Series Garvee Bonds 2009 2.50 — 5.00 15,840 2003 Series A Revenue Bonds 2033 4.00 — 5.25 268,020 Subtotal 1,070,450 Less: Deferred amount on refundings (2,464) Bonds premium 3,819 Bonds discount (9,052) Bonds accretion (1,098) Total $ 1,061,655 On May 1, 1998, PFA issued the revenue and refunding bonds series 1998 A, B, C, D, and E amounting to $541.8 million, secured by general obligation notes issued by the Government. These bonds were issued for the purpose of, among other things, advance refunding of previously issued bonds in order to obtain lower interest rates. The proceeds of the 1998 Series A and B Bonds were placed in an irrevocable trust account to provide for all future debt service payments on the Highway Revenue Bonds Series 1989, Series 1991, Series 1992, Series 1993, and Series 1994 Bonds. At September 30, 2004, $194.6 million of the above-mentioned defeased bonds were outstanding. The proceeds of the Series 1992 Revenue Bonds were placed in an irrevocable trust to provide for all future debt service payments on the Series 1989 Revenue Bonds. At September 30, 2004, $165.9 million of defeased bonds were outstanding. All assets held by irrevocable trusts for refunding of prior outstanding debt and the corresponding liabilities are not included in the Government’s basic financial statements. The 1998 Series C Bonds and the 1998 Series D Bonds were issued to pay, on behalf of the Government, the full principal balance and interest due and payable on the Revenue Anticipation Note, issued in February 1998. The remaining balance of the 1998 Series D Bonds amounting to approximately $11.6 million was primarily provided to the Government for additional working 64 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 capital. The net proceeds of the 1998 Series E Bonds amounting to $104 million were primarily designated to fund the construction of certain capital projects amounting to $94 million. The remaining $10 million was deposited in a debt service reserve account. The U.S. Department of the Treasury makes certain transfers to the Government of substantially all excise taxes imposed and collected under the Internal Revenue laws of the United States in any fiscal year on certain products produced in the U.S. Virgin Islands (primarily rum) 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. The Government has pledged the matching fund revenue, as described above, to the timely payment of principal and interest on the 1998 Series A, B, C, D, and E Bonds. Thus, amounts to be received by the Government from federal excise taxes, mostly in rum, are deposited directly in a trust account until the 1998 Bonds are paid in accordance with the Indenture of Trust. Estimated prepayments of matching fund revenue are made to the Government prior to the beginning of each fiscal year, 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 the balance sheet of the governmental funds and reversed against revenue in the following year. The adjustments for actual collections made to the estimated prepayments are recorded in the year determined. In November 1999, the U.S. Congress approved an increase in the rate of federal excise taxes on rum transferred to the Government from $10.50 to $13.25 per proof gallon. The increase was retroactive to July 1999 and effective through December 31, 2003. In October 2004, Congress extended the $13.25 per proof gallon rate to December 31, 2005. Interest on the Revenue and Refunding Bonds Series 1998 A, B, C, D, and E and 1999 Bonds are payable semiannually on April 1 and October 1, and principal is payable annually on October 1. The Government is responsible for all principal and interest payments on the 1998 Series bonds. The principal due on October | and interest payments due on October 1 and April 1, are funded by the matching fund revenue and deposited into the debt service reserve accounts. On April 13, 1999, a loan agreement was made between and among the Government, the PFA, International Business Machine Corporation (IBM), Banco Popular de Puerto Rico, and U.S. Trust Company of New York (Y2K Loan). The purpose of this loan was to finance certain costs of compliance by the Government with Year 2000 computer system issues. The loan was evidenced by the Government’s issuance of General Obligation Bonds Series 1999 A amounting to $18 million. Principal and interest are payable semiannually on January 1 and July 1. On July 9, 2001, the Government paid the outstanding IBM portion of the bonds amounting to $7.4 million. The Bonds are secured by the full faith and credit and taxing power of the Government, including a pledge on annual real property tax revenue from its taxation of the Hovensa Oil Refinery (the Refinery), which revenue is deposited in the Hovensa Property Tax Fund, and a contingent pledge of all franchise taxes on foreign sales corporations collected by the Government 65 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 (Franchise Tax Revenue). Pursuant to the Hovensa Oil Contract, the Refinery agreed to pay $14 million annually of real property taxes on the Refinery properties. Foreign sales corporations qualified to do business in the Virgin Islands must pay a franchise tax of $1.50 for each thousand dollars of capital stock issued (Franchise Tax). On April 13, 1999, PFA also issued Project Revenue Bonds (the 1999 Project Revenue Bonds), amounting to $13.5 million on behalf of the Government, to finance a portion of the Government’s Year 2000 (Y2K) compliance efforts, including the costs related to transportation, installation, and related hardware, software, consulting services, and related expenses. The 1999 Project Revenue Bonds are secured by lease payments made by the Government to PFA pursuant to a municipal lease purchase agreement, dated April 13, 1999. Such lease payments shall be funded by appropriation from the real property taxes deposited in the Hovensa Property Tax Fund and all franchise taxes on a subordinated basis and subject to any superior rights of the Series 1999 A General Obligation Bonds. The 1999 Project Revenue Bonds mature on January 1, 2005 with interest payable semiannually on January 1 and July 1. 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) pay certain costs of issuing the bonds. The Government 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 $112.4 million for the year ended September 30, 2004. On November 20, 2001, TSFC issued Tobacco Settlement Asset-Backed Bonds amounting to $23.6 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. Interest on the 2001 bonds is payable semiannually on each May and November 15, beginning with May 2002 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. Bonds payable at September 30, 2004, amounted to $22.3 million with accumulated accretion of $1.1 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, 2004, resulted in early redemption of $335 thousand during fiscal year 2004. 66 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 On October 1, 2002, PFA issued the Series 2002 Revenue Bonds (Garvee Bonds), the proceeds of which amounted to $20.8 million. The Garvee Bonds are special, limited obligations, secured solely by the pledge and assignment of the Government’s security interest in Federal Highway Reimbursement Revenues. The bonds were issued to (i) fund construction costs related to renovation and construction of two sea docks, (ii) fund the Debt Service Reserve Accounts, and (iii) pay certain costs of issuing the bonds. The Series 2002 Bonds are not subject to redemption prior to maturity. Interest and principal on the Series 2002 Revenue Bonds are payable semiannually on March 1 and September 1. As of September 30, 2004, the outstanding 2002 Revenue Bonds amounted to $15.8 million. On February 28, 2003, PFA entered into a swaption contract that provided PFA with an up-front payment of $8.3 million. PFA has outstanding $243,985,000 Series of 1999A Bonds with maturities from 2011 to 2029. The 1999A Bonds are callable by PFA on October 1, 2010 at 101%. Having been advised by its underwriters and financial advisor that there were no net present value savings available to it by issuing conventional advance refunding bonds, PFA sold a LIBOR-based swaption to Lehman Brothers Special Financing, Inc. on the 2024 and 2029 maturities, totaling $162,870,000. Lehman purchased the swaption for $8.3 million and it is exercisable on July 1, 2010 only. The objective of PFA was to monetize the economics of the Series of 1999A Bonds call option and lock in the favorable interest rates prevailing on February 28, 2003 without currently issuing refunding bonds. The swaption was the most efficient mechanism available to PFA to effect savings from the Series 1999A Bonds at that time. As a synthetic refunding of its 1999 Series A Bonds, this payment represents the risk-adjusted, present-value savings of the refunding as of October 1, 2010, without issuing refunding funds at February 2003. The swaption gave the counterparty the option to make PFA enter into a pay-fixed, receive-variable interest rate swap. If the option is exercised, PFA would then expect to issue variable-rate refunding bonds. The $8.3 million payment was based on a notional amount of $174.9 million. The counterparty has the option to exercise the agreement on October 1, 2010—PFA’s 1999 bonds’ first call date. If the swap is exercised, it will also commence October 1, 2010. The fixed swap rate (5.2%) was set at a rate that, when added to an assumption for remarketing and liquidity costs, will approximate the coupons of the refunded bonds. The swap’s variable payment would be 64% of the London Interbank Offered Rate (LIBOR). The up-front payment of $8.3 million was received by PFA on behalf of the PG. The Government has deferred the recognition of revenue from the $8.3 million received in advance, and is amortizing it into income through October 1, 2010, which is the exercise date of the swaption. The up-front payment was restricted to capital expenditures. In 2004, PFA authorized the use of $2 million of the up-front payment for a Micro Loan Financing Program, which is managed by the Economic Development Authority. As of September 30, 2004, the PFA had expended $104 thousand on capital projects and $78 thousand on micro-loans. As of September 30, 2004, the swap had a negative fair value of approximately $21.8 million in favor of the counterparty estimated using the zero-coupon method. This method calculated the future net settlement payments required by the swap, assuming that the current forward rates implied by the yield curve correctly anticipated future spot interest rates. These payments were then discounted 67 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 using the spot rates implied by the current yield curve for the hypothetical zero-coupon bonds due on the date of each future net settlement on the swap. If the option is exercised and refunding bonds are not issued, the 1999 bonds would not be refunded and PFA would make net swap payments as required by the terms of the contract — that is, making a fixed payment to the counterparty for the term of the swap at 5.27% and receiving a variable payment of 64% of LIBOR. If the option is exercised and the variable rate bonds issued, the actual savings ultimately recognized by the transaction will be affected by the relationship between the interest rate terms of the to-be issued variable-rate bonds versus the variable payment on the swap (64 % of LIBOR). If the option is not exercised, PFA is not obligated to repay the up-front payment. On December 17, 2003, PFA issued the Series 2003A Revenue Bonds, the proceeds of which amounted to approximately $268 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 | and October 1, and principal is payable annually on October 1, beginning October 1, 2005. The Series 2003A Revenue Bonds are not subject to optional redemption prior to October 1, 2014. 68 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Debt service requirements at September 30, 2004 were as follows (expressed in thousands): Governmental! Activities - Bonds Revenue Bonds Revenue Bonds Revenue Bonds Revenue Bonds Revenue Bonds Series 1998 A Series 1998 C Series 1998 D Series 1998 E Series 1998 Total Principal, _ Interest Principal Interest Principal Interest Principal Interest Principal Interest Year: 2005 $ _ 15,821 9,990 2,801 3,965 1,220 — 6,261 13,955 26,103 2006 _ 15,825 10,555 2,236 4,210 974 _ 6,261 14,765 25,292 2007 _— 15,821 11,150 1,640 4,470 714 —_ 6,261 15,620 24,436 2008 _ 15,821 11,780 1,009 4,750 437 _— 6,261 16,530 23,528 2009 _ 15,821 12,455 343 4,915 147 _— 6,261 17,370 22,572 2010 — 2014 73,175 69,891 _— - _— _ 30,095 27,178 103,270 97,069 2015 - 2019 96,095 50,199 _— _ _ _ 39,665 17,098 135,760 67,297 2020 - 2024 81,700 26,444 _— _ _— — 36,670 4,366 118,370 30,810 2025 - 2029 __ 38,105 3,215 — — _— — = = 38,105 3,215 Total $ 289,075 228,854 55,930 8,029 22,310 3,492 106,430 79,947 473,745 320,322 General Obligation Project Revenue Bonds Bonds Revenue Bonds Tobacco Bonds Garvee Bonds Series 1999 A Series 1999 Series 1999 A Series A 2001 Series 2002 Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Year: 2005 $ 885 353 1,550 48 4,765 17,470 —_— 705 2,900 748 2006 945 295 _ _ 5,005 17,210 _ 705 3,000 646 2007 1,005 232 _ _ 5,285 16,921 _ 705 3,155 497 2008 1,075 166 _— _ 5,585 16,615 910 705 3,310 339 2009 1,140 95 _ _— 5,900 16,292 1,030 705 3,475 173 2010 ~ 2014 600 19 _ _ 35,020 75,693 6,270 3,525 —_ _— 2015 - 2019 _— _ —_ _ 47,510 62,751 ~ 3,525 —_ — 2020 — 2024 _— _ _ _ 64,815 44,865 6,055 2,465 _ _— 2025 - 2029 _ _— _ _— 88,385 20,664 —_ 2,011 — _ 2030 — 2034 _— _— — — 21,065 645 8,045 603 _— _ Total $ 5,650 1,160 1,550 48 283,335 289,126 22,310 15,654 15,840 2,403 Revenue Bonds Total governmental Series 2003 A activities Principal Interest Principal Interest Year: 2005 $ - 13,301 24,055 58,728 2006 2,875 13,244 26,590 57,392 2007 2,990 13,126 28,055 55,917 2008 3,110 13,004 30,520 54,357 2009 3,230 12,877 32,145 52,714 2010 - 2014 18,315 62,130 163,475 238,436 2015 - 2019 23,335 56,937 206,605 190,510 2020 - 2024 30,115 49,995 219,355 128,135 2025 — 2029 38,520 41,386 165,010 67,276 2030 - 2034 145,530 21,133 174,640 22,381 $ _ 268,020 297,133 1,070,450 925,846 (c) Conduit Debt In February 2004, the PFA issued private activity bonds amounting to $50.6 million to finance costs of construction of a coker plant for a refinery on the island of St. Croix. The bonds are limited obligations of PFA and will be payable solely from and secured by a pledge and assignment of the amounts payable under the 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 69 (Continued) (d) (e) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 repayment of the bonds. The bonds are not reported as liabilities in the Government’s basic financial statements. Notes Payable On September 4, 2003, the PG issued $100 million Bond Anticipation Notes (BANs) in anticipation of the issuance of the 2003 Series A Revenue Bonds. Interest accrued quarterly at a rate of 3.25%. The proceeds of the BANs were used for the purpose of (i) funding vendor payments and tax refunds, (ii) funding capitalized interest, and (iii) paying the cost of issuance of the BANs. On December 17, 2003, the 2003 Series A Series Bonds were issued, and the BANs were repaid. On November 20, 2002, WICO consolidated and refinanced the 1993 and 2000 loans, and obtained an additional $2 million in financing for infrastructure improvements. The consolidated loan amounts to $22.5 million, to be repaid in 239 monthly installments of $142 thousand, and a final payment of outstanding principal balance plus any unpaid interest accrued to the date of the final payment. The consolidated loan has a fixed interest rate of 4.5% for the first four years of the loan. After the first four years, WICO will have the option to adjust the interest rate to one of the following: (i) prime rate plus 75 basis points, (ii) one-year LIBOR rate plus 200 basis points, or (iii) three-year treasury note rate plus 125 basis points. The revenue of WICO and lease agreements are pledged for the payment of principal and interest on the loan. WICO paid approximately $981 thousand in interest expense during fiscal year 2004. Debt service requirements for the WICO loan at September 30, 2004 were as follows (expressed in thousands): Year: 2005 $ 768 2006 804 2007 840 2008 879 2009 920 2010 — 2014 5,271 2015 — 2019 6,598 2020 — 2023 5,296 Total $ 21,376 Fiduciary Funds — Notes Payable On December 30, 2002, the pension trust fund entered into a line-of-credit agreement with a bank to provide working capital. The pension trust fund obtained a line-of-credit of $10 million, which accrues interest at a fixed interest rate of 4.8% calculated on a 360-day basis and is due and payable quarterly in arrears commencing on the first day of the fourth calendar month following the closing of the loan. The terms of the line-of-credit require the pension trust fund to repay the line-of-credit in a period of 30 consecutive days during each 12-month period. The bank retains a certificate of deposit in the amount of $10 million as security on the note payable. As of September 30, 2004, the outstanding balance on the line-of-credit agreement was $6.8 million. 70 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Component Units ~ Bonds Payable Bonds payable of discretely presented component units are those liabilities that are paid out of resources pledged by such entities. These revenue bonds do not constitute a liability or debt of the PG. Bonds payable outstanding at September 30, 2004 are as follows (expressed in thousands): Final Interest Bonds payable maturity rates (%) Balance University of the Virgin Islands: General obligation bonds of 2004 2035 2.02 — 5.38 21,150 General obligation bonds of 1999 2029 6.50 — 7.75 23,500 Virgin Islands Water and Power Authority (Electric System) Revenue bonds of 2003 2023 4.00 — 5.00 69,960 Revenue bonds of 1998 2022 4.25 — 5.30 92,350 Virgin Islands Water and Power Authority (Water System) Revenue bonds of 1999 2017 4.90 — 5.50 37,450 Virgin Islands Port Authority Revenue bonds of 2003 2023 3.73 — 5.43 33,440 Revenue bonds of 1998 2005 3.45 — 4.50 496 Revenue draw down bonds of 2003 2023 4.40 2,972 Virgin Islands Housing Finance Authority: Revenue bonds of 1995 2025 5.50 — 6.50 3,715 Revenue bonds of 1998 2028 4.10 —5.25 2,650 Subtotal 287,683 Plus unamortized premium 5,648 Less unamortized discount (876) Less deferred amount on debt refunding and reacquisition costs (6,056) Bonds payable, net 286,399 Less amount due within one year (8,476) Bonds payable, due in more than one year 277,923 71 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Following is a schedule of changes in long-term debt for discretely presented component units for fiscal year 2004 (expressed in thousands): Amounts Amounts Beginning Ending due within due balance Additions Reductions balance one year thereafter Bonds payable: University of the Virgin Islands $ 23,533 21,150 (624) 44,059 290 43,769 Virgin Islands Water and Power Authority: Electric System 167,673 —_— (3,828) 163,845 4,355 159,490 Water System 36,415 _— (1,506) 34,909 1,900 33,009 Virgin Islands Port Authority 35,738 3,038 (1,555) 37,221 1,806 35,415 Virgin Islands Housing Finance Authority 6,485 _— (120) 6,365 125 6,240 Total bonds payable, net 269,844 24,188 (7,633) 286,399 8,476 277,923 Loans payable: Virgin Islands Economic Development Authority 947 _— (46) 901 55 846 Virgin Islands Water and Power Authority: Electric System _— 5,600 _ 5,600 5,600 —_ Virgin Islands Port Authority 913 1,200 (1,223) 890 890 _ University of the Virgin Islands 3,540 — (50) 3,490 1,753 1,737 Total loans payable 5,400 6,800 (1,319) 10,881 8,298 2,583 Other Jong-term liabilities: University of the Virgin Islands 132 _ _ 132 _— 132 Virgin Islands Housing Authority 5,538 946 _— 6,484 _— 6,484 Virgin Islands Economic Development Authority 8,106 407 — 8,513 _ 8,513 Juan F. Luis Hospital 561 _ (263) 298 _ 298 Roy L. Schneider Hospital 474 508 (424) 558 — 558 Virgin Islands Housing Finance Authority 12,433 290 = 12,723 = 12,723 Total other long-term liabilities $ 27,244 2,151 (687) 28,708 —_ 28,708 On December 1, 1999, the University issued the 1999 Series A Bonds. The University issued these bonds to finance a portion of the construction, furnishing, and equipping of various facilities of the University, to refund the 1994 Series A bonds issued by the University, to fund a debt service reserve fund for the 1999 Series A Bonds, and to pay certain costs issued under and secured by an indenture of trust dated. The 1999 Series A Bonds maturing on or after December 1, 2010 are subject to redemption prior to maturity at the option of the University, as a whole or in part of any date, on and after December 1, 2009, at redemption prices ranging between 100% and 102% of their principal amount plus accrued interest to the date fixed for redemption. At September 30, 2004, $14.1 million of the 1994 Series A Bonds are considered defeased and outstanding. In fiscal year 2004, the University of the Virgin Islands General Obligation Improvement Bonds, 2004 Series A (the 2004 Series A Bonds) were issued in the amount of $21.2 million under and secured by the Indenture of Trust dated as of December 1, 1999 and a First Supplemental Indenture of Trust dated as of June 1, 2004, between the University and the trustees. These Bonds will be used to finance the costs of construction, furnishings, and equipping of various facilities of the University, to fund the debt service reserve fund and to pay the cost of issuance. In June 2003, the Virgin Islands Water and Power Authority (Electric System) issued the Electric System Revenue Bonds, Series 2003, amounting to $69.9 million. The proceeds from the bonds were 72 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 used to finance capital improvements, repay $18 million of then outstanding lines-of-credit, cover underwriters’ costs, and establish a debt service fund. In June 1998, the Electric System issued $110.9 million of 1998 Series A Electric System Revenue and Refunding Bonds. The proceeds from the bonds, and approximately $14 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 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 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. The Bond Resolution contains certain restrictions and commitments, including the Electric System’s covenant to establish and maintain reasonable rates, fees, rentals, and other charges to produce net electric revenue, as defined, that will be at least 125% of aggregate annual principal and interest. The Electric System’s net electric revenue for the fiscal year ended June 30, 2004 was 199% of the aggregate debt service as defined in the Bond Resolution. The Series 2003 Bonds maturing on or after July 1, 2013 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 1998 Series Electric System Revenue and Refunding Bonds are subject to redemption on or after July 1, 2008, as a whole or in part at any time, at a redemption price of 101% in 2008, 100.5% in 2009, and 100% thereafter. 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. In December 1998, the Virgin Islands Water and Power Authority (Water System) 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. At June 30, 2004, $37.4 million of the original principal amount of the defeased 1992 Series B Bonds remained outstanding. 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 73 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 employment before retirement. Subsequent to September 30, 2000, legislation was passed that provided for 4% annual interest on refunded contributions. The Government’s contractually required contributions, actual contributions made, and percentage contributed to the plan for the years ended September 30, 2004, 2003, and 2002, are as follows (expressed in thousands): Contractually required Contributions Percentage contributions made contributed 2002 $ 50,595 50,595 100% 2003 51,588 51,588 100 2004 54,085 54,085 100 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 three 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 four percentage points. 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 4% 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 was $24.8 million as of September 30, 2004. As of September 30, 2004, GERS has received $17.6 million of such amount. 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 employer 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) 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, 2004, 213 faculty members and other employees were TIAA-CREF participants. The number of active participants from the University 83 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 participating in GERS as of September 30, 2004 was 269. Total contributions made by the University to TIAA-CREF and GERS participant accounts amounted to $1.7 million and $1.1 million, respectively. (13) Liquidity At September 30, 2004, the Government had a net deficit in the governmental activities amounting to $328.2 million, mostly attributable to approximately $268 million in long-term debt that was issued to provide resources for working capital and other noncapital related purposes. The Government has initiated specific actions to improve its future cash flows through the issuance of long-term debt, engaging a consulting firm to assist it in its efforts to develop a series of detailed revenue enhancement and expenditure reduction initiatives and the enactment of certain laws directed toward improving the Government’s financial situation. In October 1999, the Government and the U.S. Department of Interior (DOD entered into a memorandum of understanding (the MOU) whereby the Government agreed to use its best efforts to undertake certain deficit reduction initiatives. As a condition to certain new and additional federal financial and technical assistance included in or being proposed by federal appropriations or other legislation, certain financial performance and accountability standards were agreed upon by the Government, which the DOI believes are necessary for the Government to achieve long-term economic recovery. Pursuant to the MOU, the release of such new and additional federal funds to the Government is subject to compliance with such performance and verifiable objectives agreed upon in such agreement. The accountability and financial performance standards agreed upon in the MOU include: (i) preparation of five-year financial recovery plan to be provided to DOI within 90 days of the date of the MOU; (ii) a fiscal year 2000 budget mandating substantial reductions in departmental budgets and overall General Fund fiscal year 2000 expenditures not to exceed $432.1 million; (iii) absent extraordinary circumstances to maintain balanced budgets after fiscal year 2003 with any generated surpluses applied to the reduction of the accumulated deficit and unfunded obligations; (iv) annual preparation of financial reports; and (v) efforts to reduce the outstanding debt of the Government. On October 29, 1999, the DOI and the Goverment entered into an amendment of the MOU, which amended the Government’s requirement to seek change in the Virgin Islands public labor relations law to comply with federal labor law. Pursuant to such amendment, the Government, in collaboration with union representatives, is encouraged to pursue reform initiatives through collective bargaining to bring fiscal solvency to the Government. In addition to the financial performance standards set forth in the MOU, the MOU further provides for the DOI and the Government to enter into a program of preservation and enhancement of the natural, cultural, and historic resources of the U.S. Virgin Islands to stimulate local economic growth through sustainable tourism. The Government is discussing with DOI certain events of noncompliance, remedial actions necessary to comply with the provisions of the MOU, and its effect on the Government’s financial condition and results of operations. In April 2000, the Economic Recovery Task Force submitted the five-year operating and strategic financial plan to the Governor for action. The plan provides over 200 recommendations that propose to reduce and eventually eliminate the structural budget deficit by restructuring and reforming Government operations and forging a partnership with the private sector intended to result in sustained growth. In January 2003, the U.S. Department of Interior issued an audit report concluding that all criteria of the (the proposed MOU) were partially or substantially achieved except: (i) implementation of collective bargaining reforms to assist the fiscal solvency of the Government and (ii) completion of comprehensive 84 (Continued) (14) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financia] Statements September 30, 2004 annual reports within 120 days of year-end and single audits within nine months of year-end. As part of the MOU, the Government has committed to maintaining balanced budgets after the fiscal year ended September 30, 2003, with any surpluses applied to liquidating outstanding debt. The U.S. Department of Interior acknowledged that it had not achieved its objective of providing funding for the V.I. Conservation Fund and committed to providing funds for capital improvements, technical assistance, and other assistance once the Government has achieved substantial compliance. The DOI and the Government are currently negotiating a proposed memorandum of understanding (the proposed MOU) regarding the fiscal and economic recovery of the Government to supersede the existing MOU. The proposed MOU is expected to provide standards of financial performance and accountability to guide the Government in developing and implementing its fiscal and economic recovery program and in achieving a balanced budget. The proposed MOU is expected to set forth the goals and commitments of the DOI with respect to additional federal financial and technical assistance that may be required to achieve the fiscal and economic objectives under the proposed MOU. Restatements of Net Assets and Fund Balances (a) Adoption of New Accounting Standard Effective October 1, 2003, the PG and its component units adopted the provisions of GASB Statement No. 39, Determining Whether Organizations Are Component Units. In adopting this statement, UVI included the Reichhold Foundation for the Arts and the Virgin Islands Research and Technology Park into its audited financial statements. The beginning net assets of UVI increased by $3.2 million due to the inclusion of these entities. Beginning net assets of the component units have been restated as follows (expressed in thousands): Beginning net assets, as previously reported $ 629,102 Restatement — UVI 3,221 Beginning net assets as restated $ 632,323 85 (Continued) (b) (c) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 Reclassification of the PFA Capital Projects Fund as a Major Fund The following table illustrates the change to fund balances at the beginning of the year, as previously reported, in the statement of revenue, expenditures, and changes in fund balances — governmental funds. The change is due to the reclassification of the PFA capital projects fund as a major fund. Previously, the PFA capital projects fund was reported in other governmental funds as a nonmajor governmental fund. Other governmental PFA capital funds projects fund Beginning fund balance, as previously reported $ 102,064 — PFA capital projects fund (43,062) 43,062 Beginning fund balance, as restated $ 59,002 43,062 Inclusion of VI Lottery Financial Information The following table summarizes the change in net assets at the beginning of the year in the statement of activities and statement of revenue, expenses, and changes in fund net assets — proprietary funds from the amounts previously reported. The change resulted from the inclusion of the VI Lottery (nonmajor enterprise fund) financial information as of and for the fiscal year ended September 30, 2004. Previously, this financial information had not been included because it was not available. The beginning net assets of the business type-activities and the other enterprise funds have been restated as follows (expressed in thousands): Other Business-type enterprise activities funds Beginning net assets, as previously reported $ 69,608 13,308 Inclusion of VI Lottery financial information (3,138) (3,138) Beginning net assets, as restated $ 66,470 10,170 (15) Subsequent Events (a) Primary Government In October 2004, the excise tax on rum of 13.5 cents per gallon, which was scheduled to expire on December 31, 2003, was extended to December 31, 2005. In October 2004, the President of the United States signed the American Jobs Creation Act, which changes the residency requirements and source of income requirements for U.S. territories and possessions, including the U.S. Virgin Islands. The PG retained an independent consultant to evaluate the effect of this legislation on the territorial economy and tax structure. The independent consultant’s report was issued in February 2005 and concludes that the American Jobs Creation Act 86 (Continued) (b) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2004 is detrimental to the economy of the U.S. Virgin Islands. In April 2005, the U.S. Department of the Treasury issued draft regulations for residency and source of income requirements for U.S. territories and possessions. In July 2005, the U.S. Department of the Treasury accepted testimony regarding the draft regulations. The PG provided testimony regarding the effect of the proposed regulations on the economy of the U.S. Virgin Islands. In December 2004, the PFA issued the Series 2004A Internal Revenue Matching Fund Bonds in the amount of $94 million. The proceeds of the bonds will be used to finance the construction of two wastewater treatment plants to be built on the islands of St. Thomas and St. Croix, the rehabilitation of other wastewater facilities, and provide start-up capital for the newly created Virgin Islands’ WMA. The Government has pledged rum excise tax matching funds for the repayment of the bonds. In July 2005, the PFA issued $7.5 million in revenue notes to finance the acquisition of a fleet of police vehicles for the PG and to pay the costs of issuance of the notes. In September 2005, the U.S. Department of Education extended indefinitely the three-year compliance agreement entered into with the PG in 2002 to address problems in administering federal education grants; and imposed the requirement that the PG designate a third-party fiduciary to administer U.S. Department of Education grants. Component Units In March 2005, UVI’s board of trustees approved a resolution authorizing the issuance of a one-time payout of 100% of merit earned for fiscal years 2001 — 2004 and the balance of the merit accumulation through fiscal year 2000. The payout amount of $2.7 million was disbursed in April 2005. As authorized with the passage of Act No. 6638 by the Government’s Legislature in January of 2004, WMA was created in June 2005 as a separate and independent corporation of the Government for the purpose of meeting environmental requirements of waste treatment in the U.S. Virgin Islands. The responsibility for the operations of WMA is vested in a board of seven directors composed of three Government officials including the Commissioner of the Department of Public Works, and four private citizens appointed by the Governor. The activities of WMA are limited to activities conducted on behalf of the Government. In December 2004, PFA issued revenue bonds amounting to $94 million for the purpose of constructing and rehabilitating wastewater treatment plants, as authorized by Act No. 6663. The bond proceeds will be administered by WMA. 87