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1208-1380573 B A S I C F I N A N C I A L S T A T E M E N T S Government of the United States Virgin Islands Year Ended September 30, 2010 With Report of Independent Auditors 1208-1380573 Government of the United States Virgin Islands Basic Financial Statements Year Ended September 30, 2010 Table of Contents Page Report of Independent Auditors .................................................................................................. 1 Management’s Discussion and Analysis (MD&A) ...................................................................... 6 Basic Financial Statements Government - wide Financial Statements: Statement of Net Assets (Deficit) .......................................................................................... 20 Statement of Activities .......................................................................................................... 22 Fund Financial Statements: Balance Sheet - Governmental Funds .................................................................................... 24 Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds .......................................................................................................... 25 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities - Governmental Funds .......................................................................................................... 26 Statement of Revenues and Expenditures - Budget and Actual - Budgetary Basis - General Fund .......................................................................................................... 27 Statement of Net Assets (Deficit) - Proprietary Funds ........................................................... 28 Statement of Revenues, Expenses, and Changes in Fund Net Assets (Deficit) - Proprietary Funds ............................................................................................................. 29 Statement of Cash Flows - Proprietary Funds ........................................................................ 30 Statement of Fiduciary Net Assets - Fiduciary Funds ............................................................ 31 Statement of Changes in Fiduciary Net Assets - Fiduciary Funds .......................................... 32 Notes to Basic Financial Statements ...................................................................................... 33 Required Supplementary Information Required Supplementary Information (other than MD&A): Schedule of Funding Progress ............................................................................................. 140 Schedule of Employer Contributions ................................................................................... 142 Other Report Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards .......................................................................................... 143 1208-1380573 1 Ernst & Young LLP 1000 Scotiabank Plaza 273 Ponce de León Avenue San Juan, PR 00917-1951 Tel: 787 759 8212 Fax: 787 753 0808 www.ey.com A member firm of Ernst & Young Global Limited Report of Independent Auditors The Honorable Governor of the Government of the United States Virgin Islands: We have audited the accompanying financial statements of the governmental activities, 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, 2010, 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, fund balance, 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); 1.9%, 0.8% and 2.2%, respectively, of the assets, net assets/fund balance and revenue/additions of the aggregate remaining fund information, and $2.4 billion of the $2.3 billion assets and 8.4% of the revenues of the governmental activities; 79.8% and 12.3%, respectively, of the assets, and revenue of the business-type activities, respectively. • The Virgin Islands Lottery (V.I. Lottery), a nonmajor enterprise fund, which represents 0.4%, and 3.3%, respectively, of the assets, and revenues of the aggregate remaining fund information, and 10.4%, 13.3%, and 25.2%, respectively, of the assets, net assets, and revenue of the business-type activities. The V.I. Lottery net deficit represents $1.2 million of the $1.4 billion net asset/fund balance of the aggregate remaining fund information. • The Tobacco Settlement Financing Corporation, a blended component unit, which represents 0.2%, 0.2%, and 0.4%, respectively, of the assets, net assets/fund balance, and revenue of the aggregate remaining fund information, and 1.0%, 0.8%, and 0.2%, respectively, of the assets, net deficit, and revenue of the governmental activities. • The Employees’ Retirement System of the Government of the Virgin Islands (GERS), a fiduciary component unit (pension trust fund), which represents 92.0%, 95.5%, and 37.3%, respectively, of the assets, net assets/fund balance, and revenue of the aggregate remaining fund information. 1208-1380573 2 • The Virgin Islands Housing Authority (VIHA), Virgin Islands Public Television System (VIPTS), Virgin Islands Economic Development Authority (VIEDA), Magens Bay Authority (MBA), Virgin Islands Government Hospital and Health Facilities Corporation (Roy L. Schneider Hospital and Juan F. Luis Hospital and Medical Center), the Virgin Islands Housing Finance Authority (VIHFA), and the Waste Management Authority (WMA), discretely presented component units, which collectively represent 29.0%, 32.0%, and 37.0%, respectively, of the assets, net assets, and revenue of the aggregate discretely presented component units. These financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinions, insofar as they relate to the amounts included for the activities, funds, and component units indicated above, are based on the reports of other auditors. Except as discussed in the following six paragraphs, we conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Government’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Government’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our opinions. The report of the other auditors on the 2010 financial statements of VIHFA, a discretely presented component unit, was qualified because the auditors were unable to obtain sufficient audit evidence to determine whether assets of $12.5 million transferred from Department of Planning and Natural Resources were fairly stated. The report of other auditors on the 2010 financial statements of VIPTS, a discretely presented component unit, was qualified because the auditors were unable to obtain sufficient audit evidence to determine whether capital assets of $12.9 million were fairly stated. 1208-1380573 3 The report of other auditors on the 2010 financial statements of GERS, a fiduciary component unit (pension trust fund), was qualified because GERS maintained investments in a limited partnership valued at $48.7 million whose fair value has been estimated in the absence of a readily determinable fair value. GERS’ estimate was based on information provided by the general partner of the limited partnership. The effect on the financial statements as a result of GERS’ inability to document its procedures for determining fair value of the investment was not determinable. The report of other auditors on the 2010 financial statements of the V.I. Lottery, a nonmajor enterprise fund, was qualified because the auditors were unable to obtain sufficient audit evidence to determine whether the amount due to the general fund of $4.5 million was fairly stated. The report of other auditors on the 2009 financial statements of WMA, a discretely presented component unit, was qualified because the auditors were unable to obtain sufficient audit evidence to determine whether capital assets amounting $4.7 million were fairly stated. The Government did not maintain the requisite documentation to support its accrued compensated absences liability, retroactively pay liability, and its landfill closure and post- closure liability of $60.1 million, $173.3 million, and $231.8 million, respectively. As a result, we were unable to obtain sufficient audit evidence to determine whether adjustments to these balances in the governmental activities were required. The basic financial statements do not include a liability for medical malpractice claims in the reciprocal insurance fund (a non-major enterprise fund) and, accordingly, the Government has not recorded an expense for the current period change in that liability. The Government’s records do not permit it, nor is it practical to extend our auditing procedures sufficiently to determine the extent by which the business-type activities, government insurance fund, and aggregate remaining fund information as of and for the year ended September 30, 2010 may have been affected by this condition. Because of the matters discussed in the preceding 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 financial position of the business-type activities and aggregate remaining fund information as of September 30, 2010. In addition, we do not express an opinion on the changes in financial position of the business-type activities, government insurance fund, and aggregate remaining fund information and, where applicable, cash flows for the year ended September 30, 2010. 1208-1380573 4 In our opinion, based on our audit and the reports of other auditors, except for the effect of the adjustments, if any, as might be determined to be necessary, had the other auditors been able to obtain sufficient audit evidence to determine whether (1) assets of $12.5 million in the financial statements of VIHFA, (2) capital assets of $12.9 million in the financial statements of VIPTS, (3) amount due to the general fund of $4.5 million in the V.I. Lottery financial statements, and (4) capital assets amounting to $4.7 million in the WMA financial statements were fairly stated as described above, and the effect of the adjustments, if any, as might be determined to be necessary, had we been able to obtain sufficient audit evidence to determine whether the accrued compensated absences liability, retroactively pay liability, and landfill closure and post-closure liability in the governmental activities were fairly stated as described in paragraph eight above, the financial statements referred to previously, present fairly, in all material respects, the respective financial position of the aggregate discretely presented component units and the governmental activities, respectively, of the Government of the United States Virgin Islands, as of September 30, 2010, and the respective changes in financial position for the year then ended in conformity with U.S. generally accepted accounting principles. Finally, in our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of each major fund of the Government of the United States Virgin Islands, as of September 30, 2010, and the respective changes in financial position of the general fund, PFA debt service fund, PFA capital projects fund, and WICO; and respective budgetary comparison for the general fund for the year then ended in conformity with U.S. generally accepted accounting principles. As described more fully in Note 17 to the financial statements, as of October 1, 2010, the component units’ beginning net assets was restated by $14.0 million. In accordance with Government Auditing Standards, we have also issued our report dated November 29, 2012, on our consideration of the Government’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. 1208-1380573 5 The management’s discussion and analysis, and the schedules of funding progress and employer contributions listed under required supplementary information in the table of contents are not a required part of the basic financial statements, but are supplementary information required by the Governmental Accounting Standards Board. We and the other auditors have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. ey November 29, 2012 Government of the United States Virgin Islands Management’s Discussion and Analysis Years Ended September 30, 2010 and 2009 1208-1380573 6 Introduction The following management’s discussion and analysis presents an overview of the financial position and activities of the Government of the United States Virgin Islands (the Government) as of and for the fiscal years ended September 30, 2010 and 2009. Government-wide Financial Statements The government-wide financial statements are designed to present an overall picture of the financial position of the Government. These statements consist of the statement of net assets (deficit) and the statement of activities, which are prepared using the economic resources measurement focus and the accrual basis of accounting. This means that current year’s revenue and expenses are included regardless of when cash is received or paid, producing a view of financial position and results of operations similar to that presented by most private-sector companies. The statement of net assets (deficit) combines and consolidates the Government’s current financial resources with capital assets and long-term obligations. Both of the above-mentioned financial statements have separate sections for three different types of the Government programs or activities. These three types of activities are as follows: Governmental Activities – The activities in this section are mostly supported by taxes and intergovernmental revenue (federal grants). Most services normally associated with the primary government (PG) fall into this category, including general government, public safety, health, public housing and welfare, education, transportation and communication, and culture and recreation. Business-Type Activities – These functions normally are intended to recover all or a significant portion of their costs through user fees and charges to external users of goods and services. These business-type activities of the Government include the operations of the (i) unemployment insurance program and (ii) the West Indian Company (WICO). Both of these programs operate with minimal assistance from the governmental activities of the Government. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1208-1380573 7 Discretely Presented Component Units – These are operations for which the Government has financial accountability even though they have certain independent qualities as well. For the most part, these entities operate similar to private sector businesses and the business-type activities described above. The Government’s discretely presented component units are presented in two categories, major and nonmajor. This separation is determined by the relative size of the entities’ assets, liabilities, revenues, and expenses in relation to the total of all component units. Fund Financial Statements Fund financial statements focus on the most significant (or major) funds of the Government. A fund is a separate accounting entity with a self-balancing set of accounts. The Government uses funds to keep track of sources of funding and spending related to specific activities. The Government uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. A major fund is a fund whose revenue, expenditures or expenses, assets, or liabilities (excluding extraordinary items) are at least 10% of the corresponding totals for all governmental or enterprise funds and at least 5% of the aggregate amount for all governmental and enterprise funds for the same item. The general fund is always considered a major fund. In addition to funds that meet the major fund criteria, any other governmental or enterprise fund that the Government believes is particularly important to the financial statements may be reported as a major fund. All of the funds of the Government are divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental Funds Governmental funds are accounted for using the modified accrual basis of accounting, which measures cash and other assets that can be readily converted to cash. The governmental funds statements provide a detailed short-term view of the PG’s general governmental operations and the basic services it provides. The reconciliation following the fund financial statements explains the differences between the governmental activities, reported in the government-wide financial statements, and the governmental funds’ financial statements. The General Fund, the PFA debt service fund and the PFA capital projects fund are reported as major governmental funds. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1208-1380573 8 The General Fund is the PG’s primary operating fund. It accounts for all financial resources of the PG, except those required to be accounted for in another fund. The PFA debt service fund accounts for the resources accumulated, and payments made, for principal and interest on long-term general obligation debt issued by the PFA on behalf of the Government. The PFA capital projects fund accounts for bond proceeds of debt issued by the PFA on behalf of the Government. The bond proceeds have been designated for certain necessary public safety and capital development projects which are accounted for in this fund. The governmental fund activities are reported in a separate balance sheet and statement of revenues, expenditures, and changes in fund balances. Additionally, the government presents a reconciliation of the statement of revenues, expenditures, and change in fund balances, to the statement of activities. Proprietary Funds Services provided to outside (nongovernmental) customers are reported in enterprise funds. Enterprise funds are accounted for using the economic resources measurement focus and the accrual basis of accounting. These are the same business-type activities reported in the government-wide financial statements. The WICO fund and the Unemployment Insurance Fund are major proprietary funds. The WICO fund accounts for the activities of WICO, which owns a port facility including a cruise ship pier, and manages a shopping mall complex on the island of St. Thomas. The Unemployment Insurance Fund is a federally mandated program to manage unemployment insurance. The proprietary fund activities are reported in a separate statement of net assets (deficit), statement of revenues, expenditures, and changes in fund net assets (deficit) and statement of cash flows. Fiduciary Funds The fiduciary activities are reported in a separate statement of fiduciary net assets and a statement of changes in fiduciary net assets. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1208-1380573 9 Financial Analysis of the Government as a Whole The PG experienced several financial challenges during the fiscal year ended September 30, 2010. The PG was unable to issue property tax assessments for fiscal year 2010, or the previous four fiscal years (2006-2009) due to a court injunction related to a class action lawsuit filed by commercial taxpayers. The PG and its component units continue to experience a downturn in the economy following the economic recession of 2008. The Government has initiated several actions to offset the negative impact of these financial challenges. The Government continues to promote environmentally safe industries into the United States Virgin Islands (USVI). The Government is participating in the American Recovery and Reinvestment Act, obtaining: 1) federal grants for energy, health, education and other construction projects, and 2) federal loss recovery for tax initiatives such as the Making Work Pay tax credit. To improve cash flow, the PG overhauled the property tax assessment and valuation system, proposed increases to locally assessed taxes, and enacted expenditure reduction initiatives. In fiscal year 2010, the Government issued the 2010 Series A and B Bonds amounting to $399.1 million to obtain working capital for various operating expenses and refinance a portion of the outstanding 2009 B1 and B2 loan notes. The Government issued the 2009 Series A Revenue Bonds amounting to $39.2 million to finance the cost of a wastewater treatment facility and renovations at the Cruzan VIRIL, Ltd. Rum distillery on the island of St. Croix. The 2009 Series A-1, A-2, B and C Revenue and Refunding Bonds amounting to $458.8 million were issued to refund the 1998 series A Bonds and fund certain capital projects. The Government borrowed, during fiscal year 2010, $13.1 million from the U.S. Treasury to fund the Unemployment Trust Fund, which became insolvent during 2009. Financial Analysis of the Primary Government Total assets of the PG as of September 30, 2010 and 2009, were approximately $1.9 billion and $1.8 billion, respectively, an increase of approximately $136.3 million. Total liabilities as of September 30, 2010 and 2009, were $3.0 billion and $2.6 billion, respectively, an increase of approximately $352.8 million. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1208-1380573 10 As of September 30, 2010, the PG net deficit of $953.2 million consisted of $637.8 million invested in capital assets, net of related debt; $230.6 million restricted by statute or other legal requirements that were not available to finance day-to-day operations of the Government; and an unrestricted net deficit of $1.8 billion. As of September 30, 2009, the PG net deficit of $737.0 million consisted of $209.0 million invested in capital assets, net of related debt; $195.0 million restricted by statute or other legal requirements that were not available to finance day-to-day operations of the Government; and an unrestricted net deficit of $1.14 billion. For the fiscal year ended September 30, 2010, the PG earned program and general revenue amounting to $1.3 billion and reported expenses of $1.6 billion, resulting in a decrease in net assets of $205.9 million. For the fiscal year ended September 30, 2009, the PG earned program and general revenue amounting to $1.0 billion and reported expenses of $1.6 billion, resulting in a decrease in net assets of $555.6 million. Overall, revenue increased by approximately $346.3 million in fiscal 2010, when compared to fiscal 2009, mainly due to an increase in tax revenue of $280.8 million, and an increase in operating and capital grant and contributions of approximately $110.5 million; offset by a reduction in other general revenue of $42.0 million. Expenses increased in fiscal 2010 when compared to fiscal 2009, by $7.2 million. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1208-1380573 11 A summary of net assets (deficit) and changes in net assets (deficit) for the primary government follows: 2010 2009 2010 2009 2010 2009 Current assets 1,069,987 $ 989,720 $ 5,846 $ 15,182 $ 1,075,833 $ 1,004,902 $ Capital assets, net 828,632 755,256 51,294 54,353 879,926 809,609 Other assets 47,345 28,175 919 208 48,264 28,383 Total assets 1,945,964 1,773,151 58,059 69,743 2,004,023 1,842,894 Long-term debt outstanding 2,476,792 1,823,034 56,933 33,492 2,533,725 1,856,526 Other liabilities 413,130 689,902 10,413 33,176 423,543 723,078 Total liabilities 2,889,922 2,512,936 67,346 66,668 2,957,268 2,579,604 Invested in capital assets, net of related debt 234,576 176,103 30,394 32,944 264,970 209,047 Restricted 230,067 194,983 2,402 277 232,469 195,260 Unrestricted (1,408,601) (1,110,871) (42,083) (30,146) (1,450,684) (1,141,017) Total net assets (deficit) (943,958) $ (739,785) $ (9,287) $ 3,075 $ (953,245) $ (736,710) $ Assets Liabilities Net Assets Net Assets (Deficit) – Primary Government September 30, 2010 and 2009 (In thousands) Governmental activities Business-type activities Total Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1208-1380573 12 2010 2009 2010 2009 2010 2009 Revenue: Program revenue: Charges for services 45,511 $ 51,216 $ 51,517 $ 48,861 $ 97,028 $ 100,077 $ Operating grants and contributions 295,577 200,146 25,257 12,415 320,834 212,561 Capital grants and contributions 29,541 27,325 – – 29,541 27,325 General revenue: Taxes 863,063 582,239 – – 863,063 582,239 Interest and other 36,525 54,448 108 490 36,633 54,938 Other general revenue 2,136 25,826 – – 2,136 25,826 Total revenue 1,272,353 941,200 76,882 61,766 1,349,235 1,002,966 Expenses: General government 661,014 706,559 – – 661,014 706,559 Public safety 71,526 67,045 – – 71,526 67,045 Health 160,679 154,599 – – 160,679 154,599 Public housing and welfare 139,689 124,498 – – 139,689 124,498 Education 277,003 287,779 – – 277,003 287,779 Transportation and communication 70,637 50,019 – – 70,637 50,019 Culture and recreation 9,470 10,784 – – 9,470 10,784 Interest on long-term debt 87,208 61,301 – – 87,208 61,301 Unemployment insurance – – 26,005 42,389 26,005 42,389 West Indian Company – – 11,476 9,855 11,476 9,855 Workmen’s compensation – – 13,835 8,876 13,835 8,876 V.I. Lottery – – 20,495 22,331 20,495 22,331 Other – – 16,733 12,566 16,733 12,566 Total expenses 1,477,226 1,462,584 88,544 96,017 1,565,770 1,558,601 Changes in net assets (deficit) before transfers (204,873) (521,384) (11,662) (34,251) (216,535) (555,635) Transfers 700 700 (700) (700) – – 700 700 (700) (700) – – Change in net deficit (204,173) (520,684) (12,362) (34,951) (216,535) (555,635) Net assets (deficit) at beginning of year, (739,785) (219,101) 3,075 38,026 (736,710) (181,075) as restated Net assets (deficit) at end of year (943,958) $ (739,785) $ (9,287) $ 3,075 $ (953,245) $ (736,710) $ Changes in Net Assets (Deficit) – Primary Government Governmental Activities Business-type Activities Total In Thousands Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1208-1380573 13 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 27 of the financial statements, follows: Original Amended Budget Budget Actual Variance Total revenues 669,887 $ 669,887 $ 590,979 $ (78,908) $ Total expenditures 811,803 838,280 939,540 (101,260) Deficiency of revenues over expenditures (141,916) (168,393) (348,561) (180,168) Other financing sources, net 174,613 168,393 192,485 24,092 Excess (Deficiency) of revenues and net other financing sources over expenditures 32,697 $ – $ (156,076) $ (156,076) $ Revenue and Expenditures – Budget and Actual – Budgetary Basis – General Fund Year Ended September 30, 2010 (In thousands) For fiscal 2010, the PG realized an unfavorable revenue variance of $78.9 million mainly due to a reduction in tax collections of $65.0 million. The PG realized a $180.2 million unfavorable expenditure variance due to increase in general government expenditures. The PG realized a $167.1 million variance in other financing sources due to the issuance of revenue bonds. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1208-1380573 14 Capital Assets Capital assets additions during fiscal 2010 amounted to $82.2 million for governmental activities and $714 thousand for business-type activities. Capital assets additions during fiscal 2009 amounted to $88.6 million for governmental activities and $5.2 million for business-type activities. The Government’s capital assets include land, land improvements, buildings, building improvements, machinery and equipment, infrastructure, and construction in progress as follows: 2010 2009 2010 2009 2010 2009 Land and improvements 195,347 $ 192,711 $ 5,495 $ 5,495 $ 200,842 $ 198,206 $ Building and improvements 397,335 396,392 66,104 65,026 463,439 461,418 Machinery and equipment 135,224 124,882 9,193 8,420 144,417 133,302 Infrastructure 253,240 222,353 – – 253,240 222,353 Construction in progress 168,330 111,594 275 1,640 168,605 113,234 Total capital assets 1,149,476 1,047,932 81,067 80,581 1,230,543 1,128,513 Less accumulated depreciation (320,844) (292,676) (29,773) (26,228) (350,617) (318,904) Total capital assets, net 828,632 $ 755,256 $ 51,294 $ 54,353 $ 879,926 $ 809,609 $ Capital Assets – Primary Government (In thousands) Governmental Activities Business-type Activities Total Note 10 provides detailed information regarding the capital assets of the primary government and the component units of the Government. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1208-1380573 15 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, 2010: Primary Government – Bonds Payable (In thousands) Bonds Payable Maturity Rates (%) Balance 2010 Series A & B Revenue Bonds 2029 4.00 - 5.25 399,050 $ 2009 Series A Revenue Bonds (Cruzan) 2039 3.00 - 6.00 39,190 2009 Series A-1, A-2, B & C Revenue and Refunding Bonds 2040 3.00 - 5.00 458,840 2009 Series A Revenue Bonds (Diageo) 2038 6.00 - 6.75 250,000 2006 Series A Revenue Bonds 2029 3.50 - 5.00 215,965 2006 Series A,B,C & D Tobacco Turbo and Capital Appreciation Bonds 2035 6.25 - 7.625 7,290 2004 Series A Revenue Bonds 2025 4.00 - 5.25 78,860 2003 Series A Revenue Bonds 2033 4.00 - 5.25 252,455 2001 Series A Tobacco Bonds 2031 5.00 16,845 1999 Series A Revenue Bonds 2020 4.20 - 6.50 87,695 Subtotal 1,806,190 Deferred costs on refundings (15,834) Bond premium 32,788 Bond discount (6,202) Bond accretion 2,438 Total 1,819,380 $ Note 11 provides detailed information regarding all bonds of the PG. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1208-1380573 16 In fiscal year 2010, the Government issued the: (1) 2010 Series A and B Revenue Bonds amounting to $399.1 million to provide working capital to the PG and to refinance a portion of the outstanding Series 2009 B1 and B2 Notes, (2) 2009 Series A Revenue Bonds (the Cruzan Bonds) amounting to $39.2 million to finance the costs of a wastewater treatment facility and renovations at the Cruzan VIRIL, Ltd. facility, and (3) 2009 Series A-1, A-2, B and C Revenue and Refunding Bonds amounting to $458.8 million to refund the 1998 Series A bonds and to fund certain capital projects. The current refunding resulted in savings of approximately $35.9 million and an economic gain of approximately $35.6 million. During fiscal year 2010, the Government also borrowed $13.1 million from the U.S. Treasury to fund deficits in the Virgin Islands Unemployment Trust Fund. In fiscal year 2009, the Government issued the: (1) 2009 Series Bonds amounting to $250.0 million to finance a rum production and maturation warehouse, (2) Series 2009 Notes amounting to $8.0 million to finance the purchase of police communication equipment, (3) Subordinated Lien Revenue Bond Anticipation Notes amounting to $100 million with an agent lender bank, and $50.0 million with a syndicate lender bank to provide working capital to the PG, and (4) the Tax Increment Revenue Bond Anticipation Note Purchase Agreement amounting to $15.7 million, (of which $10.0 million had been drawn as of September 30, 2010) to finance the development costs of a shopping complex on the island of St. Croix. During fiscal year 2009, the Government also borrowed $3.0 million from the U.S. Treasury to fund the Virgin Islands Unemployment Trust Fund which became insolvent in July 2009. The PG made bond principal payments on all outstanding general and special revenue bonds amounting to $412.1 million during fiscal year 2010 and $37.6 million during fiscal year 2009. The Government’s bonds, as of November 30, 2012, carry insured ratings of “BBB” and “BBB+” from Fitch Ratings and Standard & Poor’s, respectively. Ratings reflect only the respective views of the rating agencies and an explanation of the significance of each rating may be obtained from the respective rating agency. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1208-1380573 17 Other liabilities of the PG include: 2010 2009 Accrued compensated absences 60 $ 54 $ Retroactive union arbitration 232 232 Litigation 21 18 Post employment benefits 145 94 Landfill closure and post closure costs 173 171 Total other liabilities 631 $ 569 $ Primary Government – Other Liabilities September 30, 2010 and 2009 (In millions) Economic Condition and Outlook The PG continues its recovery efforts from the economic recession of 2008 through a combination of revenue initiatives and budgetary restraint on expenditures. Revenue Initiatives The PG has implemented several initiatives to create jobs and promote economic growth including: providing economic incentives to attract a major rum distiller (Diageo) and retain another rum distiller (Cruzan Rum), enactment of tax increment financing legislation, continued promotion of tourism through increased marketing activities, and participation in grant awards through the American Recovery and Reinvestment Act (ARRA). The PG has also implemented several tax initiatives including: ARRA reimbursement of losses resulting from the Making Work Pay income tax credit, implementation of gross receipts tax amnesties, and proposed increases of local taxes. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1208-1380573 18 In connection with a real property tax case instituted against the PG in the U.S. District Court of the Virgin Islands, the PG was enjoined from appraising and assessing any real property taxes until it modified its system of appraisal to comply with certain court mandates. The PG retained a consultant to modify its system of appraisal and to perform reassessment of properties. This project was completed in fiscal 2009. The U.S. District Court also required an over-haul of the tax review board responsible for hearing tax assessment reviews. The PG is taking steps to comply with the Court order. In fiscal 2010, the PG passed legislation authorizing the issuance of property taxes at the 1998 assessment level. In January 2011, the injunction was lifted and property tax bills were issued for 2007 and 2008 during 2011. The Government is currently in litigation challenging the computation of its corporate franchise tax. Of the four cases brought against the Government, one is currently before the Virgin Islands Territorial Court, and the remaining three cases are on appeal. Budgetary Control of Expenditures The PG faced the challenge of carryforward liabilities from prior fiscal years and increasing expenditures in fiscal 2010. Carryforward liabilities consist mainly of retroactive salary increases, which accumulated following Hurricanes Hugo, Marilyn and Bertha in the years of 1990 through 1998. At September 30, 2010 and 2009, unpaid retroactive salary liabilities amounted to $231.8 million, which is reported as a liability of the Government within other noncurrent liabilities. Increasing expenditures in fiscal year 2010 included estimated landfill closure and post-closure costs amounting to $2.4 million and other postemployment benefits amounting to $51.3 million. Other increasing general governmental expenditures include: health insurance premiums, pharmaceutical premiums, and salary expense. Expenditures are closely monitored and controlled through the budgetary process. Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1208-1380573 19 Deficit Reduction Measures In fiscal year 2010, the PG reported an unrestricted net deficit of $1.9 billion. In fiscal year 2009, the PG reported an unrestricted net deficit of $1.1 billion. The PG has implemented a number of deficit reducing measures including: (i) withholding of local gross receipts taxes on Government invoice payments, (ii) increasing local taxes such as property tax assessments on time-shares and gross receipts taxes; (iii) exerting greater control of expenditures through the budgetary process, and (iv) increase of the gross receipts tax rate for corporations. Contacting the Government’s Financial Management This financial report is designed to provide the Government’s citizens, taxpayers, customers, and creditors with a general overview of the Government’s finances. If you have questions about this report, or need additional financial information, contact the Government of the United States Virgin Islands, Department of Finance, No. 2314 Kronprindsens Gade, St. Thomas, VI 00802. Primary Government Governmental Business-type Component Activities Activities Total Units Assets Cash and cash equivalents 228,827 $ 6,655 $ 235,482 $ 71,808 $ Investments 502,088 3,235 505,323 4,673 Receivables, net 326,465 2,684 329,149 65,083 Internal balances 9,130 (9,130) – – Due from component units, net 2,568 – 2,568 186 Other receivable – – – 18,398 Due from primary government – – – 36,588 Due from federal government – – – 5,846 Inventories – – – 28,349 Other assets 5,083 826 5,909 12,833 Restricted: Cash and cash equivalents 909 2,402 3,311 69,995 Investments – – – 109,731 Other – – – 4,108 Capital assets, net 828,632 51,294 879,926 909,567 Deferred charges 42,262 93 42,355 72,200 Total assets 1,945,964 58,059 2,004,023 1,409,365 Liabilities Accounts payable and accrued liabilities 184,086 6,861 190,947 144,067 Tax refunds payable 68,716 – 68,716 – Unemployment insurance benefits – 2,970 2,970 – Customer deposits – – – 22,423 Due to primary government – – – 79,144 Due to component units 12,501 – 12,501 434 Due to federal government – – – 5,047 Interest payable 41,747 – 41,747 5,552 Unearned revenue 99,490 582 100,072 9,582 Other current liabilities 6,590 – 6,590 16,450 Noncurrent liabilities: Due within one year: Loans payable 3,921 659 4,580 9,576 Bonds payable 27,749 – 27,749 13,599 Other liabilities 49,263 8,651 57,914 727 Due in more than one year: Loans payable 22,251 38,375 60,626 50,279 Bonds payable 1,791,631 – 1,791,631 322,468 Other liabilities 581,977 9,248 591,225 50,305 Total liabilities 2,889,922 67,346 2,957,268 729,653 (Continued) Government of the United States Virgin Islands Statement of Net Assets (Deficit) September 30, 2010 (In thousands) 20 1208-1380573 . Primary Government Governmental Business-type Component Activities Activities Total Units Net assets (deficit) Invested in capital assets, net of related debt 234,576 $ 30,394 $ 264,970 $ 618,143 $ Restricted for: Unemployment insurance – 487 487 – Debt service 229,158 1,915 231,073 – Capital projects 909 – 909 – Other purposes – – – 125,852 Unrestricted (1,408,601) (42,083) (1,450,684) (64,283) Total net assets (deficit) (943,958) $ (9,287) $ (953,245) $ 679,712 $ See accompanying notes. Government of the United States Virgin Islands Statement of Net Assets (Deficit) (continued) September 30, 2010 (In thousands) 1208-1380573 21 . Net Revenue (Expense) and Program Revenues Changes in Net Assets Operating Capital Primary Government Charges for Grants and Grants and Governmental Business-type Component Expenses Services Contributions Contributions Activities Activities Total Units Functions: Primary government: Governmental activities: General government 661,014 $ 28,144 $ 146,716 $ 5,413 $ (480,741) $ – $ (480,741) $ – $ Public safety 71,526 320 80 – (71,126) – (71,126) – Health 160,679 193 30,766 – (129,720) – (129,720) – Public housing and welfare 139,689 9,234 60,328 – (70,127) – (70,127) – Education 277,003 5,312 28,071 – (243,620) – (243,620) – Transportation and communication 70,637 97 24,969 24,128 (21,443) – (21,443) – Culture and recreation 9,470 2,211 – – (7,259) – (7,259) – Interest on long-term debt 87,208 – 4,647 – (82,561) – (82,561) – Total governmental activities 1,477,226 45,511 295,577 29,541 (1,106,597) – (1,106,597) – Business-type activities: Unemployment insurance 26,005 2,092 25,257 – – 1,344 1,344 – West Indian Company 11,476 8,826 – – – (2,650) (2,650) – Workmen’s compensation 13,835 7,844 – – – (5,991) (5,991) – V.I. Lottery 20,495 19,375 – – – (1,120) (1,120) – Other 16,733 13,380 – – – (3,353) (3,353) – Total business-type activities 88,544 51,517 25,257 – – (11,770) (11,770) – Total primary government 1,565,770 $ 97,028 $ 320,834 $ 29,541 $ (1,106,597) (11,770) (1,118,367) – Component units: Virgin Islands Housing Authority 41,208 $ 6,165 $ 37,771 $ 9,408 $ – – – 12,136 Virgin Islands Port Authority 61,750 44,845 – 9,189 – – – (7,716) Virgin Islands Water and Power Authority: Electric system 282,665 253,796 – 3,214 – – – (25,655) Water system 22,126 34,660 – 5,955 – – – 18,489 V.I. Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 94,402 54,504 30,948 1,728 – – – (7,222) Juan F. Luis Hospital 77,938 38,216 – 2,235 – – – (37,487) University of the Virgin Islands 85,773 17,521 65,806 3,192 – – – 746 Other component units 75,608 8,676 58,957 12,679 – – – 4,704 Total component units 741,470 $ 458,383 $ 193,482 $ 47,600 $ – – – (42,005) Total primary government and component units (1,106,597) (11,770) (1,118,367) (42,005) (continued) Government of the United States Virgin Islands Statement of Activities Year Ended September 30, 2010 (In thousands) 22 1208-1380573 Net Revenue (Expense) and Changes in Net Assets Primary Government Governmental Business-type Component Activities Activities Total Units General revenues: Taxes 863,063 – 863,063 – Interest and other 36,525 108 36,633 41,649 Tobacco settlement rights 2,136 – 2,136 – Transfers – internal activities of primary government 700 (700) – – Total general revenue and transfers 902,424 (592) 901,832 41,649 Changes in net assets (deficit) (204,173) (12,362) (216,535) (356) Net assets (deficit), beginning of year, as restated (739,785) 3,075 (736,710) 680,068 Net assets (deficit), end of year (943,958) $ (9,287) $ (953,245) $ 679,712 $ See accompanying notes. Statement of Activities (continued) Government of the United States Virgin Islands Year Ended September 30, 2010 (In thousands) 23 1208-1380573 PFA PFA Debt Capital Other Total General Service Projects Governmental Governmental Cash and cash equivalents 119,356 $ 2,720 $ 19,825 $ 87,835 $ 229,736 $ Investments 46,423 275,113 168,874 11,678 502,088 Receivables: Taxes, net 278,534 46,167 – – 324,701 Accrued interest and other 35 – – 161 196 Due from: Other funds 14,146 – 325 14,845 29,316 Component units, net 2,568 – – – 2,568 Other assets – – – 34 34 Total assets 461,062 $ 324,000 $ 189,024 $ 114,553 $ 1,088,639 $ Liabilities and Fund Balances (Deficit) Accounts payable and accrued liabilities 155,012 $ 63 $ 725 $ 28,286 $ 184,086 $ Tax refunds payable 68,716 – – – 68,716 Due to: Other funds 13,308 – – 6,878 20,186 Component units 12,501 – – – 12,501 Deferred revenue 296,531 94,779 – 3,500 394,810 Other current liabilities 5,500 – 135 955 6,590 Total liabilities 551,568 94,842 860 39,619 686,889 Fund balances (deficit) reserved for: Encumbrances 65,359 – – – 65,359 Debt service – 229,158 – 74,934 304,092 Unreserved fund balance (deficit), reported in: General fund (155,865) – – – (155,865) Capital projects funds – – 188,164 – 188,164 Total fund balances (deficit) (90,506) 229,158 188,164 74,934 401,750 Total liabilities and fund balances (deficit) 461,062 $ 324,000 $ 189,024 $ 114,553 $ Amounts reported for governmental activities in the statement of net assets (deficit) are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. 828,632 Expenditures identified as related to a future period, recognized as a prepaid asset in the statement of net assets. 5,083 Deferred bond issue costs are not financial resources and, therefore, are not reported in the funds. 42,262 Other long-term assets, primarily taxes receivable, will not be available to pay for current period expenditures and, therefore, are deferred in the funds 296,854 Interest on long-term debt is not accrued in the funds, but rather is recognized as an expenditure when due. (41,747) Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds. (2,476,792) Net deficit of governmental activities at September 30, 2010 (943,958) $ See accompanying notes. (In thousands) Assets Government of the United States Virgin Islands Balance Sheet – Governmental Funds September 30, 2010 1208-1380573 24 . PFA PFA Debt Capital Other Total General Service Projects Governmental Governmental Revenues: Taxes 492,439 $ 172,153 $ 4,341 $ 22,262 $ 691,195 $ Federal grants and contributions 72,770 – 1,896 250,453 325,119 Charges for services 24,287 – – 21,224 45,511 Tobacco settlement rights – – – 2,258 2,258 Interest and other 1,483 6,980 916 27,146 36,525 Total revenues 590,979 179,133 7,153 323,343 1,100,608 Expenditures: Current: General government 434,464 – 107,686 71,402 613,552 Public safety 64,159 – – 5,689 69,848 Health 122,841 – – 36,590 159,431 Public housing and welfare 59,655 – – 79,778 139,433 Education 222,395 – – 49,205 271,600 Transportation and communication 27,031 – – 27,717 54,748 Culture and recreation 8,995 – – 121 9,116 Capital outlays 22,114 – 39,009 49,930 111,053 Debt service: Principal 200,000 410,075 3,264 2,015 615,354 Interest 6,958 69,145 769 917 77,789 Cost of issuance of bonds and loans – 15,980 – – 15,980 Total expenditures 1,168,612 495,200 150,728 323,364 2,137,904 Deficiency of revenues under expenditures (577,633) (316,067) (143,575) (21) (1,037,296) Other financing sources (uses): Bonds issued 350,000 426,069 121,011 – 897,080 Loans issued 106,400 675 3,325 – 110,400 Bond premiums – 18,333 – – 18,333 Bond discounts and issuance costs – (2,734) – – (2,734) Transfers from other funds 92,848 – 61 8,488 101,397 Transfers to other funds (6,763) (81,381) (54) (12,500) (100,698) Total other financing sources (uses), net 542,485 360,962 124,343 (4,012) 1,023,778 Net change in fund balances (35,148) 44,895 (19,232) (4,033) (13,518) Fund balance at beginning of year (55,358) 184,263 207,396 78,967 415,268 Fund balance at end of year (90,506) $ 229,158 $ 188,164 $ 74,934 $ 401,750 $ See accompanying notes. (In thousands) Government of the United States Virgin Islands Statement of Revenues, Expenditures, and Changes in Fund Balances − Governmental Funds Year Ended September 30, 2010 1208-1380573 25 . Net change in fund balances – total governmental funds (13,518) $ Government funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current year. 83,156 Tax revenue in the statement of activities, which do not provide current financial resources, are not reported as revenue in the funds. 188,086 The issuance of long-term debt provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of the governmental funds. This is the amount by which loan and bond proceeds of $1.007 billion exceeded debt repayments of $615.4 million. (392,125) 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. (61,849) Some expenses reported in the statement of revenues and expenditures related to a future period and are reported as prepaid assets in the statement of net assets. 5,083 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 year. 14,087 Bond premiums and discounts are reported as other financing sources and uses in the governmental funds when the bonds are issued, and are capitalized and amortized in the government-wide financial statements. This amount represents additional net interest expense reported in the statement of activities related to the amortization of premiums, discounts, and accreted interest on capital bonds during the current year. (17,671) Certain interest reported in the statement of activities does not require the use of current financial resources and therefore is not reported as expenditures in the governmental funds. This amount represents the decrease in interest payable reported in the statement of net assets less the portion of accrued interest. (9,422) Change in net assets of governmental activities (204,173) $ See accompanying notes. (In thousands) Government of the United States Virgin Islands Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities – Governmental Funds Year Ended September 30, 2010 1208-1380573 26 . Original Amended Budget Budget Actual Variance Revenues: Taxes 540,145 $ 540,145 $ 492,439 $ (47,706) $ Federal grants and contributions 102,200 102,200 72,770 (29,430) Charges for services 9,632 9,632 24,287 14,655 Interest and other 17,910 17,910 1,483 (16,427) Total revenues 669,887 669,887 590,979 (78,908) Expenditures: Current: General government 209,683 213,723 434,464 220,741 Public safety 151,063 151,201 64,159 (87,042) Health 90,072 93,636 122,841 29,205 Public housing and welfare 69,280 70,780 59,655 (11,125) Education 229,464 244,428 222,395 (22,033) Transportation and communication 40,996 40,996 27,031 (13,965) Culture and recreation 21,245 23,516 8,995 (14,521) Total expenditures 811,803 838,280 939,540 101,260 Deficiency of revenues over expenditures (141,916) (168,393) (348,561) (180,168) Other financing sources (uses): Loans issued 100,180 100,180 106,400 6,220 Intergovernmental 6,600 6,600 – (6,600) Transfers from other funds 83,995 83,995 92,848 8,853 Transfer to other funds (16,162) (22,382) (6,763) 15,619 Total other financing sources, net 174,613 168,393 192,485 24,092 Excess (deficiency) of revenues and net other financing sources over expenditures 32,697 $ – $ (156,076) $ (156,076) $ See accompanying notes. Year Ended September 30, 2010 (In thousands) Government of the United States Virgin Islands Statement of Revenues and Expenditures – Budget and Actual – Budgetary Basis – General Fund 1208-1380573 27 . Business-type Activities – Enterprise Funds West Indian Unemployment Other Company Insurance Enterprise Totals Assets Current assets: Cash and cash equivalents 2,682 $ 743 $ 3,230 $ 6,655 $ Investments at fair value – – 3,235 3,235 Receivables, net: Premiums receivable – 995 – 995 Other receivables 566 – 1,123 1,689 Due from other funds – – 739 739 Other assets 752 – 74 826 Total current assets 4,000 1,738 8,401 14,139 Noncurrent assets: Restricted cash and cash equivalents 1,915 487 – 2,402 Capital assets 39,994 – 11,300 51,294 Deferred expenses 93 – – 93 Total noncurrent assets 42,002 487 11,300 53,789 Total assets 46,002 2,225 19,701 67,928 Liabilities Current liabilities: Accounts payable and accrued liabilities 2,174 – 4,687 6,861 Due to other funds 2,600 – 7,269 9,869 Unemployment insurance benefits – 2,970 – 2,970 Unearned revenue – – 582 582 Workers compensation – – 8,651 8,651 Loan payable to U.S. Treasury – 16,125 – 16,125 Loans payable related to capital assets 659 – – 659 Total current liabilities 5,433 19,095 21,189 45,717 Noncurrent liabilities: Workers compensation – – 9,248 9,248 Loans payable related to capital assets 22,250 – – 22,250 Total noncurrent liabilities 22,250 – 9,248 31,498 Total liabilities 27,683 19,095 30,437 77,215 Net assets (deficit) Invested in capital assets, net of related debt 19,093 – 11,301 30,394 Restricted 1,915 487 – 2,402 Unrestricted (2,689) (17,357) (22,037) (42,083) Total net assets (deficit) 18,319 $ (16,870) $ (10,736) $ (9,287) $ See accompanying notes. Statement of Net Assets (Deficit) – Proprietary Funds September 30, 2010 (In thousands) Government of the United States Virgin Islands 1208-1380573 28 . Business-type Activities – Enterprise Funds West Indian Unemployment Other Company Insurance Enterprise Total Operating revenues: Charges for services 8,826 $ 2,093 $ 40,598 $ 51,517 $ Total operating revenues 8,826 2,093 40,598 51,517 Operating expenses: Cost of services 7,995 25,969 49,424 83,388 Depreciation and amortization 1,906 – 1,639 3,545 Total operating expenses 9,901 25,969 51,063 86,933 Operating loss (1,075) (23,876) (10,465) (35,416) Non-operating revenues (expenses): Federal unemployment assistance – 25,257 – 25,257 Interest income 55 32 21 108 Interest expense (1,575) (36) – (1,611) Total non-operating revenues (expenses), net (1,520) 25,253 21 23,754 Income (loss) before operating transfers (2,595) 1,377 (10,444) (11,662) Transfers to other funds (700) – – (700) Change in net assets (3,295) 1,377 (10,444) (12,362) Net assets at beginning of year 21,614 (18,247) (292) 3,075 Net assets (deficit) at end of year 18,319 $ (16,870) $ (10,736) $ (9,287) $ See accompanying notes. Year Ended September 30, 2010 (In thousands) Government of the United States Virgin Islands Statement of Revenues, Expenses, and Changes in Fund Net Assets (Deficit) − Proprietary Funds 1208-1380573 29 . Government of the United States Virgin Islands Statement of Cash Flows −Proprietary Funds Year Ended September 30, 2010 (In thousands) Business-type Activities – Enterprise Funds West Indian Unemployment Other Company Insurance Enterprise Total Cash flows from operating activities Receipts from customers and users 8,990 $ 1,638 $ 40,037 $ 50,665 $ Payments to beneficiaries, suppliers and employees (7,115) (39,818) (47,560) (94,493) Net cash provided by (used in) operating activities 1,875 (38,180) (7,523) (43,828) Cash flows from noncapital financing activities Federal grants – 25,257 – 25,257 Transfer to other funds (700) – – (700) Net cash provided by (used in) noncapital financing activities (700) 25,257 – 24,557 Cash flows from capital and related financing activities Proceeds from the sale of property and equipment 456 – – 456 Acquisition and construction of capital assets – – (951) (951) Issuance of long-term debt – 13,114 – 13,114 Principal paid on long-term debt (606) – – (606) Interest paid on long-term debt (1,575) (26) – (1,601) Net cash provided by (used in) capital and related financing activities (1,725) 13,088 (951) 10,412 Cash flows from investing activities Interest on investments 55 32 21 108 Sale of investments – – 1,981 1,981 Net cash provided by investing activities 55 32 2,002 2,089 Net decrease in cash and cash equivalents (495) 197 (6,472) (6,770) Cash and cash equivalents at beginning of year 5,092 1,033 9,702 15,827 Cash and cash equivalents at end of year 4,597 $ 1,230 $ 3,230 $ 9,057 $ Reconciliation of operating loss to net cash provided by (used in) operating activities Operating loss (1,075) $ (23,877) $ (10,465) $ (35,417) $ Adjustments to reconcile operating loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,906 – 1,639 3,545 Change in assets and liabilities: Receivables, net 163 (455) 71 (221) Due from other funds – – (441) (441) Inventories – – 22 22 Unearned revenue 115 – (192) (77) Other assets 60 – (29) 31 Accounts payable and accrued liabilities 706 (13,848) (591) (13,733) Unemployment insurance benefits – – – – Workers compensation – – 2,404 2,404 Due to other funds – – 59 59 Other liabilities payable – – – – Net cash provided by (used in) operating activities 1,875 $ (38,180) $ (7,523) $ (43,828) $ Reconciliation of cash and cash equivalents to the statement of net assets Cash and cash equivalents – current 2,682 $ 1,230 $ 3,230 $ 7,142 $ Cash and cash equivalents – restricted 1,915 – – 1,915 Total cash and cash equivalents at end of year 4,597 $ 1,230 $ 3,230 $ 9,057 $ See accompanying notes. 1208-1380573 30 Pension Trust Agency Fund Funds Assets Cash and cash equivalents: Unrestricted 128,769 $ 19,069 $ Restricted 16 – Investments 1,259,090 2,228 Receivables, net: Loans and advances 138,188 – Accrued interest 4,259 – Other 7,794 – Other assets 10,763 – Total assets 1,548,879 21,297 Liabilities Accounts payable and accrued liabilities – 19,069 Cash overdraft with bank 4,063 – Unsettled securities purchased 4,393 – Securities lending collateral 170,919 – Notes payable 9,963 – Other liabilities 7,253 2,228 Total liabilities 196,591 21,297 Net assets held in trust for employees’ pension benefits 1,352,288 $ – $ See accompanying notes. (In thousands) Government of the United States Virgin Islands Statement of Fiduciary Net Assets – Fiduciary Funds September 30, 2010 1208-1380573 31 . Pension Trust Fund Additions: Contributions: Employer 77,004 $ Plan members 40,108 Total contributions 117,112 Investment income: Net appreciation of fair value of investments 68,699 Net depreciation of fair value of real estate (3,492) Interest, dividends, and other, net 38,722 Real estate – net rental income 3,057 106,986 Less investment expense 5,480 Net investment income 101,506 Other income 2,653 Total additions 221,271 Deductions: Benefits paid 192,678 Refunds of contributions 2,007 Administrative and operational expenses 13,609 Total deductions 208,294 Change in net assets 12,977 Net assets, beginning of year 1,339,311 Net assets, end of year 1,352,288 $ See accompanying notes. (In thousands) Government of the United States Virgin Islands Statement of Changes in Fiduciary Net Assets - Fiduciary Funds Year Ended September 30, 2010 1208-1380573 32 . Government of the United States Virgin Islands Notes to Basic Financial Statements September 30, 2010 1208-1380573 33 1. Summary of Significant Accounting Policies The Government of the United States Virgin Islands (the Government) is an unincorporated organized territory of the United States of America (United States). The powers of the Government are derived from and set forth in the Revised Organic Act of 1954, as amended. The Government assumes responsibility for public safety, health, public housing and welfare, education, transportation and communication, and culture and recreation. The accompanying basic financial statements of the Government have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) as prescribed by the Governmental Accounting Standards Board (GASB). The accompanying basic financial statements have been prepared primarily from accounts maintained by the Department of Finance of the Government. Additional data has been derived from reports prepared by other departments, agencies, and public corporations based on independent or subsidiary accounting systems maintained by them. Financial Reporting Entity The Government follows the provisions of GASB Statement No. 14, The Financial Reporting Entity, as amended by GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units. These standards require that the Government’s financial reporting entity be defined according to specific criteria. According to the standard, for financial reporting purposes, the Government is a primary government (PG). The PG includes all Government departments, agencies, boards, and organizations that are not legally separate. In addition to the PG, the financial reporting entity includes blended and discretely presented component units. Component units include all legally separate organizations for which the Government’s elected officials are financially accountable and other organizations for which the nature and significance of their relationship with the Government are such that exclusion would cause the basic financial statements to be misleading or incomplete. The criteria used to define financial accountability include appointment of a voting majority of an organization’s governing body and (i) the ability of the PG to impose its will on that organization or (ii) the potential for the organization to provide specific financial benefits to or impose specific financial burdens on the PG. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 34 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) The financial statements of the following component units are included in the financial reporting entity either as blended or as discretely presented component units in accordance with GAAP: (a) Blended Component Units The following public benefit corporations, while legally separate from the Government, meet the criteria to be reported as part of the PG because they provide services entirely or almost entirely to the Government: Virgin Islands Public Finance Authority (PFA) PFA was created as a public corporation and autonomous governmental instrumentality by Act No. 5365, the Government Capital Improvement Act of 1988, with the purpose of aiding the Government in the performance of its fiscal duties and in effectively carrying out its governmental responsibility of raising capital for essential public projects. Under the enabling legislation, PFA has the power, among other matters, to borrow money and issue bonds and to lend the proceeds of its bonds to the Government or any governmental instrumentality. The powers of PFA are exercised by a board of directors consisting of the Governor (Chairperson), the Commissioner of Finance, the Director of the Office of Management and Budget, and two representatives of the private sector appointed by the Governor with the advice and consent of the USVI Legislature (the Legislature). PFA activities are blended within the PG because it is so intertwined with the Government that, in substance, they are the same. The PFA funds are reported as major funds, with the exception of PFA Special Revenue Fund, which is included in the other aggregate remaining fund information. PFA has a component unit, the West Indian Company (WICO), which is presented as an enterprise fund in the Government’s basic financial statements. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 35 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (a) Blended Component Units (continued) Tobacco Settlement Financing Corporation (TSFC) TSFC was created in September 2001 under Act No. 6428 as a separate and independent corporation of the Government to purchase the rights, title, and interest in tobacco settlement litigation awards and to issue revenue bonds supported by the tobacco settlement rights. The responsibility for the operations of TSFC is vested in a board of directors composed of three Government officials appointed by the Governor and two private citizens. The activities of TSFC are limited to activities conducted on behalf of the Government. The TSFC is reported in the other aggregate fund information. Complete audited financial statements of the PFA and TSFC blended component units can be obtained directly by contacting their respective administrative offices: Administrative Offices of Blended Component Units Virgin Islands Public Finance Authority 32-33 Kongens Gade St. Thomas, VI 00802 Tobacco Settlement Financing Corporation 32-33 Kongens Gade St. Thomas, VI 00802 (b) Discretely Presented Component Units The following component units, consistent with GASB Statements Nos. 14 and 39 are discretely presented in the basic financial statements because of the nature of the services they provide and the Government’s ability to impose its will. The component units are reported in a separate column to emphasize that they are legally separate from the PG and governed by separate boards. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 36 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely Presented Component Units (continued) Major Component Units Virgin Islands Housing Authority (VIHA) VIHA was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality by Act No. 903 on June 18, 1962, with the purpose of providing housing for low-income families. From June 1962 through August 2003, the powers of VIHA were exercised by a board of commissioners consisting of seven members. In August 2003, the U.S. Department of Housing and Urban Development (HUD) determined that because of the severity of compliance violations, VIHA was declared to be in substantial default of its annual contributions contract (ACC) dated July 12, 1996 with HUD. VIHA was placed in receivership and HUD assumed 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 (VIPA) VIPA was created as a body corporate and politic constituting a public corporation and autonomous government instrumentality by Act No. 2375 on December 23, 1968, with the purposes of owning, operating, and managing all types of air and marine terminals. The powers of VIPA are exercised by a board of governors consisting of the Commissioner of Economic Development and Agriculture (Chairperson), the Attorney General, the Commissioner of Public Works, the Director of the Small Business Development Agency, and five other persons appointed by the Governor with the advice and consent of the Legislature. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 37 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely Presented Component Units (continued) Major Component Units (continued) Virgin Islands Water and Power Authority (WAPA) WAPA was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality by Act No. 1248 on August 13, 1964, with the purpose of operating the water production and electric generation plants in the U.S. Virgin Islands. The powers of WAPA are exercised by a governing board consisting of nine members, all appointed by the Governor with the advice and consent of the Legislature, from which three are heads of cabinet-level executive departments or agencies and six other persons, who shall not be employees of the Government. WAPA is required by its bond resolutions to maintain separate audited financial statements for each system (the Electric and Water Systems). Virgin Islands Government Hospital and Health Facilities Corporation (VIGHHFC) VIGHHFC was created by Act No. 6012 on August 23, 1994 and became active on May 1, 1999, with the purpose of providing healthcare services and hospital facilities to the people of the U. S. Virgin Islands. The powers of VIGHHFC are exercised by a board of directors consisting of 15 members as follows: the Director of the Office of Management and Budget, the Commissioner of Finance, and 13 other members appointed by the Governor with the advice and consent of the Legislature. The VIGHHFC is composed of the Roy L. Schneider Hospital located on St. Thomas and the Juan F. Luis Hospital and Medical Center located on St. Croix. Both entities issue separate audited financial statements. The Roy L. Schneider Hospital’s financial statements include its component units: the Myra Keating Smith Community Health Center (Health Center) of St. John and the Charlotte Kimelman Cancer Institute (Cancer Institute) on St. Thomas. The Health Center and Cancer Institute are legally separated organizations for which the Roy L. Schneider Hospital is financially accountable. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 38 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely Presented Component Units (continued) Major Component Units (continued) University of the Virgin Islands (the University) The University was organized as an instrumentality of the Government under Act No. 852 on March 16, 1962, in accordance with Section 16(a) of the Revised Organic Act of 1954, as amended. The purpose of the University is the stimulation and utilization of the intellectual resources of the people of the U.S. Virgin Islands and the development of a center of higher education. The powers of the University are exercised by a board of trustees consisting of 17 members as follows: Chairman of the Board of Education, Commissioner of Education, and the President of the University, all serving as members ex-officio, 9 other members appointed by the Governor with the advice and consent of the Legislature, two other members elected by the board of trustees, one representative of the student body, one alumnus of the University, and another representative of the teaching faculty. The University was not organized as a self-sustaining entity and therefore receives substantial financial and other support from the Government. The University’s financial statements include its component units: The Foundation for the University of the Virgin Islands and The Reichhold Foundation. The Foundation for the University of the Virgin Islands is a not-for-profit corporation whose purpose is to assist and support the University in accomplishing its charitable and educational mission. The Reichhold Foundation is a not-for-profit corporation that supports the arts and provides financial assistance in operating the Reichhold Center for the Arts on St. Thomas. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 39 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely Presented Component Units (continued) Nonmajor Component Units Virgin Islands Economic Development Authority (EDA) EDA was created by Act No. 6390 on December 21, 2000 as a body corporate and politic constituting a public corporation and semiautonomous instrumentality of the Government. EDA was created as an umbrella authority to assume, integrate, and unify the functions of the Economic Development Commission, the Small Business Development 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. Magens Bay Authority (MBA) MBA was created as a corporate instrumentality by Act No. 2085 on December 20, 1967, with the purpose of acquiring, improving, and operating parks and beaches. The powers of MBA are exercised by a board of directors consisting of the Governor and six members initially appointed by the Governor. The board of directors is responsible for the appointment and reappointment of subsequent board members except that the Governor, with the advice and consent of the Legislature may, by appointment, fill any vacancy on the board of directors remaining unfilled for sixty days. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 40 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely Presented Component Units (continued) Nonmajor Component Units (continued) Virgin Islands Housing Finance Authority (VIHFA) VIHFA was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality of the Government by Act No. 4636 on October 20, 1981, with the purpose of stimulating low and moderate-income housing construction and home ownership through the issuance of revenue bonds to obtain funds to be used for low-interest mortgage loans to qualified purchasers of low and moderate- income housing. The powers of VIHFA are exercised by a board of directors consisting of the Commissioner of the Department of Housing, Parks, and Recreation (the Chairman), the Director of the Office of Management and Budget, and three persons not employed by the Government appointed by the Governor with advice and consent of the Legislature. Virgin Islands Public Television System (VIPTS) VIPTS was created as a body corporate and politic constituting a public corporation and autonomous instrumentality by Act No. 2364 on November 15, 1968, with the purpose of advancing the general welfare, education, cultural development, and awareness of public affairs of all the population of the U.S. Virgin Islands as well as to provide an effective supplement to the in-school education of children. The powers of VIPTS are exercised by a board of directors consisting of the Commissioner of Education, the Chairman of the Board of Education, three members appointed by the President of the Legislature, and four members, not more than two of whom should be employed by the Government and appointed by the Governor with the advice and consent of the Legislature. In addition, the Director of the Office of Management and Budget, the President of the University of the Virgin Islands, and the General Manager of VIPTS are ex-officio members of the board who are not entitled to vote. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 41 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely Presented Component Units (continued) Nonmajor Component Units (continued) Virgin Islands Waste Management Authority (VIWMA) VIWMA was established as a nonprofit, public, autonomous instrumentality of the Government by Act No. 6638 and approved by the Governor of the Virgin Islands on January 23, 2004. VIWMA provides environmentally sound management for the collection and disposal of solid waste in the territory, including operation and closure of landfills and wastewater collection, treatment and disposal. VIWMA is governed by a Board of Directors consisting of seven members appointed by the Governor of the Virgin Islands. Four of the members are from the private sector and are appointed with the advice and consent of the Legislature of the U.S. Virgin Islands. University of the Virgin Islands Research and Technology Park (RTPark) RTPark was established as a public, autonomous instrumentality of the Government by Act 6502 on February 21, 2002, as amended, by Act 6725, the Protected Cell Amendments Act of 2005. RTPark was organized for internet commerce and technology, providing an enabling environment for research, development, business incubation and technology- driven businesses. RTPark is governed by a Board of Directors consisting of seven members, including the Chairman of the Board of Trustees of the University, the President of the University, two trustees selected from among the Board of Trustees of the University, and three members selected by the Governor. Complete audited financial statements of the discretely presented component units can be obtained directly by contacting their administrative offices: Administrative Offices Virgin Islands Housing Authority 402 Estate Anna’s Retreat PO Box 7668 St. Thomas, VI 00801 Virgin Islands Port Authority PO Box 301707 St. Thomas, VI 00803 Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 42 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) Administrative Offices (continued) Virgin Islands Water and Power Authority PO Box 1450 St. Thomas, VI 00804 Virgin Islands Government Hospital and Health Facilities Corporation 9048 Sugar Estate St. Thomas, VI 00802 University of the Virgin Islands 2 John Brewer’s Bay St. Thomas, VI 00802 Virgin Islands Economic Development Authority 1050 Norre Gade #5 St. Thomas, VI 00802 Magens Bay Authority PO Box 10583 St. Thomas, VI 00802 Virgin Islands Housing Finance Authority 3202 Demarara Frenchtown Plaza, Suite 200 St. Thomas, VI 00802 Virgin Islands Public Television System PO Box 7879 St. Thomas, VI 00801 Virgin Islands Waste Management Authority #1 La Grande Princesse, Suite BL1 Christiansted, VI 00820 Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 43 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) Administrative Offices (continued) University of the Virgin Islands Research and Technology Park Corporation RR1 Box 10000 Kingshill, St. Croix, VI 00850-9781 All financial statements of the discretely presented component units have a fiscal year-end of September 30, 2010, except for WAPA and VIHA that have a year-end of June 30, 2010 and December 31, 2009, respectively. (c) Fiduciary Component Unit The following public benefit corporation is legally separate from the Government, meets the definition of a blended component unit, and is presented in the fund financial statements along with other fiduciary funds of the Government. Fiduciary funds are not reported in the government-wide financial statements. Employees’ Retirement System of the Government of the Virgin Islands (GERS) GERS was created as an independent and separate agency of the Government with the purpose of administering the Government’s, and component units’ cost-sharing, multiple- employer defined-benefit pension plan. GERS was established on October 1, 1959. The responsibility for the operation of GERS is vested in a board of trustees composed of seven members appointed by the Governor with the advice and consent of the Legislature. Employee and employer contributions to GERS are recognized as additions to net assets held in trust for employees’ pension benefits in the period in which employee services are performed, except for contributions pursuant to the Early Retirement Act of 1994, which are recorded as the cash is received. Benefits and refunds are recognized when due and payable in accordance with the terms of the plan, except for benefits pursuant to sections 8(a) and 8(b) of the Early Retirement Act of 1994, which are recorded when the subsidy provided by the Government is receivable and payable. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 44 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (c) Fiduciary Component Unit (continued) Complete audited financial statements of this component unit can be obtained directly by contacting their administrative office: Employees’ Retirement System of the Government of the Virgin Islands 3438 Kronprindsens Gade St. Thomas, Virgin Islands 00802 Government-wide and Fund Financial Statements The government-wide financial statements (that is, the statement of net assets (deficit) and the statement of activities) report information on all of the nonfiduciary activities of the PG and its component units. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenue, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. Likewise, the PG is reported separately from certain legally separate component units for which the PG is financially accountable. The statement of net assets (deficit) presents the reporting entities’ nonfiduciary assets and liabilities, with the difference reported as net assets or net deficit. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenue. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include (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 revenues are reported instead as general revenue. Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 45 1. Summary of Significant Accounting Policies (continued) Measurement Focus, Basis of Accounting, and Financial Statement Presentation (a) Government-wide Financial Statements The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenue is recorded when earned, and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenue in the year for which they are levied. Grants and similar items are recognized as revenue when as all eligibility requirements have been met. (b) Governmental Fund Financial Statements The governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenue is recognized as soon as it is both measurable and available. Revenue is considered to be available when it is collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the Government considers most revenue to be available if collected within 90 days of the end of the current fiscal year-end. Specifically, gross receipts taxes, property taxes, and income taxes are considered to be available if collected within 30, 60, and 90 days, respectively, after the end of the current fiscal year-end. Grant revenue is considered to be available if collected within the 12 months after the end of the current fiscal year-end. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures are recorded only when payment is due. Income taxes, gross receipts taxes, real property taxes, and grant funding are all considered to be susceptible to accrual and so have been recognized as revenue of the current fiscal period to the extent they are considered available. All other revenue items are considered to be measurable and available only when cash is received by the Government. (c) Proprietary Funds, Fiduciary Funds, and Discretely Presented Component Units Financial Statements The financial statements of the proprietary funds, fiduciary funds, and discretely presented component units are reported using the economic resources measurement focus and the accrual basis of accounting, similar to the government-wide financial statements described above. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 46 1. Summary of Significant Accounting Policies (continued) Measurement Focus, Basis of Accounting, and Financial Statement Presentation (continued) (c) Proprietary Funds, Fiduciary Funds, and Discretely Presented Component Units Financial Statements (continued) Each proprietary fund has the option under GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities that Use Proprietary Fund Accounting, to elect and apply all Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989, unless these conflict with a GASB pronouncement. The PG and most blended and discretely presented component units have elected not to apply FASB pronouncements issued after November 30, 1989 for its proprietary fund types. VIPA has elected to follow the FASB’s pronouncements issued after November 30, 1989. Proprietary funds distinguish operating revenue and expenses from nonoperating items. Operating revenue and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. Fund Accounting The Government reports its financial position and results of operations in funds, which are considered separate accounting entities and discrete presentations of those component units, which are not required to be blended. The operations of each fund are accounted for within a set of self-balancing accounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with legal, financial, and contractual provisions. GASB No. 34, Basic Financial Statements – and Management’s Discussions and Analysis – for State and Local Governments, establishes criteria (percentage of the assets, liabilities, revenue, or expenditures/expenses of either fund category or the governmental and enterprise funds combined) for the determination of major funds. Indirect costs are automatically allocated and reported in the program expense for each fund. Nonmajor funds are combined in a single column in the fund financial statements. The Government reports the following major funds: Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 47 1. Summary of Significant Accounting Policies (continued) Fund Accounting (continued) (a) Governmental Funds The Government reports the following major governmental funds: • 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 Fund – The PFA debt service fund accounts for the resources accumulated, and payments made, for principal and interest on long-term general obligation debt issued by PFA on behalf of the Government. • PFA Capital Projects Fund – The PFA capital projects fund accounts for bond proceeds of debt issued by the PFA on behalf of the Government. The bond proceeds have been designated for certain necessary public safety and capital development projects which are accounted for in this fund. (b) Proprietary Funds These funds account for those activities for which the intent of management is to recover, primarily through user charges, the cost of providing goods or services to the general public. The government reports the following major proprietary fund: • 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. • Unemployment Insurance – 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 the eligible unemployed recipients. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 48 1. Summary of Significant Accounting Policies (continued) Fund Accounting (continued) (c) Fiduciary Funds Fiduciary funds are used to account for assets held by the Government in a trustee capacity, or as an agent for individuals, private organizations, and other governmental units. The following are the Government’s fiduciary funds: • Pension Trust Fund – The pension trust fund accounts for the activities of GERS, which accumulates resources for pension benefit payments to qualified employees. • Agency Fund – The agency fund is custodial in nature (assets equal liabilities) and does not involve measurement of the results of operations. Cash and Cash Equivalents The Government follows the practice of pooling cash. The balance in the pooled cash accounts is available to meet current operating requirements and any excess is invested in various interest-bearing accounts and time deposits with eligible depository institutions. Cash equivalents of the proprietary funds and discretely presented component units consist of demand accounts, money market accounts, certificates of deposit with maturities of not more than 90 days from the date of acquisition, short-term U.S. government and its agencies’ obligations, and repurchase agreements with a U.S. commercial bank maturing within three months and collateralized by U.S. government obligations. Cash and cash equivalents of the discretely presented component units are maintained in separate bank accounts from those of the PG, in their own names. By law, banks, or trust companies designated as depository of public funds of the Government are to maintain corporate surety bond or pledge collateral satisfactory to the Commissioner of Finance to secure all governmental funds deposited. Investments The PG and its component units follow the provisions of GASB Statement No. 40, Deposit and Investment Risk Disclosures, an Amendment of GASB Statement No. 3. GASB Statement No. 40 establishes and modifies the following disclosure requirements related to investment risks: credit risk (including custodial credit risk and concentrations of credit risk), interest rate risk, and foreign currency risk. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 49 1. Summary of Significant Accounting Policies (continued) Investment Policies Investment policies of the PG, its blended component units, major funds, and major component units are as follows: • Primary Government Investment Policies – Title 33, Chapter 117 of the Virgin Islands Code (V.I. Code) authorizes the Government to invest in U.S. Government and its agencies’ obligations, mortgage-backed securities, repurchase agreements, commercial paper, local government obligations, and corporate debt and equity obligations. Investments are reported at fair value. • PFA Investment Policies – Under GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for Most External Investment Pools, investments of the PFA are reported at fair value. Various bond resolutions of the PFA restrict investments to direct obligations of the U.S. Government, territories, possessions and states, specific bank obligations, investment agreements or similar funding agreements, shares or other interests in mutual funds, trusts or investment companies, corporate commercial paper, and money market portfolios consisting of any of the foregoing. The PFA has retained investment managers and investments are held in trust by a commercial bank on behalf of the PFA. The PFA handles investments for two major governmental funds of the Government: the PFA debt service fund and the PFA capital projects fund. • Tobacco Settlement Financing Corporation Investment Policies – Various bond resolutions of this blended component unit restrict investments to direct obligations of the U.S. Government, territories, possessions and states, specific bank obligations, investment agreements or similar funding agreements, shares or other interests in mutual funds, trusts or investment companies, corporate commercial paper, and money market portfolios consisting of any of the foregoing. The PFA has retained investment managers and investments are held in trust by a commercial bank on behalf of the PFA. Investments are reported at fair value in the non-major governmental fund of the Government. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 50 1. Summary of Significant Accounting Policies (continued) Investment Policies (continued) • West Indian Company Limited Investment Policies – This blended business-type major fund of the Government maintains an investment policy that (1) limits investments in bonds to a maximum remaining maturity of 30 years (or estimated average life on mortgage-backed issues), (2) limits fixed income securities to a maximum of 40% and a minimum of 30% of the overall assets of the WICO portfolio, (3) limits corporate bond exposure to 45% of the fixed income portfolio, and (4) has no provision which limits or restricts investments in U.S. Government Treasury or Agency issues. WICO reports investments at fair value. • Pension Trust Fund Investment Policies – The board of trustees of GERS have enacted policies that limit investments in certain investment categories and provide requirements for the institutions with which investment transactions may be entered into. Under those policies, GERS may invest in U.S. Government and agencies obligations, bonds or notes of any state, territory or possession of the United States, municipal bonds and obligations, foreign bonds, bonds of domestic railroad corporations, public utility bonds, industrial corporate bonds or trust certificates, common and preferred shares of foreign and domestic corporations, mutual funds, mortgage or personal loans to GERS members or retirees, and mortgage and asset-backed securities. Investments in bonds are subject to rating restrictions of BBB and may not exceed 2% of the portfolio. Investments in stock of a single corporation may not exceed 1% of the market value of the fund, or exceed 1% of the outstanding stock of the corporation. The aggregate amount of investments in stock may not exceed 60% of the total investments of GERS. Investment in foreign stock should be limited to 10% of the market value of the total investments of GERS. Any investment of 20% or more of the aggregate value of the portfolio must be approved by two-thirds of the membership of the board of trustees. The investments are administered by several professional investment managers and are held in trust by a commercial bank on behalf of GERS. GERS is authorized to invest in life settlement policy contract investments provided the investment is in a group of life insurance policies, with a minimum number of 100 measured lives; the face value of any single policy investment does not exceed $5.0 million or 2% of the aggregate face value of policy investments, and; the aggregate face value on any individual life does not exceed the greater of $10.0 million or 1% of the aggregate face value of policies purchased as investments by GERS. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 51 1. Summary of Significant Accounting Policies (continued) Investment Policies (continued) Investments in equity securities in the GERS pension trust fund are reported at quoted market values. Shares of mutual funds are reported at the net asset value of shares held by GERS at year-end. Purchases and sales are recorded on a trade-date basis. Realized gains and losses on securities are determined by the average cost method. In December 4, 2009, GERS executed a loan agreement with Seaborne Virgin Islands, Inc., a seaplane service operating on the islands of St. Croix and St. Thomas. The agreement provided for a first lien term loan of $1.3 million at an initial interest rate of 8.25%, and a senior secured convertible loan of $2 million at an interest rate of 14.5%, secured by real and personal property of Seaborne Airlines, the unconditional guarantee of Coastal Airways, Inc., the parent company of Seaborne, and all of the issued and outstanding stock of Seaborne. As of September 30, 2010, the loan investment was $3.3 million. On December 8, 2009, GERS executed a loan agreement with Carambola Northwest, LLC, a condominium, hotel and golf resort on the island of St. Croix. The five year term loan was in the amount of $15 million at an interest rate of 10.5 percent, collateralized with all real property holdings of Carambola Northwest, LLC. As of September 30, 2010, the loan investment amounted to $10.9 million. In May 2011, Carambola went into default on principal payments on the loan and requested a restructuring of the terms of the loan. In October 2011, GERS modified the loan agreement to reduce the interest rate to 6.3 percent. GERS has invested in a shopping and pier complex on the island of St. Thomas. The property is reported at fair market value. GERS owns administrative facilities on the islands of St. Thomas and St. Croix, that are reported at historical cost, net of accumulated depreciation. • WAPA and VIPA Investment Policies – These major component units are authorized under bond resolutions and the V.I. Code to invest in open accounts, time deposits, certificates of deposit, repurchase agreements, obligations of the United States government, and obligations of any state within the United States, mutual funds, and corporate commercial paper. Investments are reported at fair value. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 52 1. Summary of Significant Accounting Policies (continued) Investment Policies (continued) • The University Investment Policies – The board of trustees of this major component unit is responsible for the management of the University’s investments which consist of U.S. Government securities and securities backed by the U.S. Government or its agencies and instrumentalities, common and preferred stocks, and mutual funds. As of September 30, 2010, the University’s policies do not address risks associated with investments. • VIGHHFC Investment Policies – The board of trustees of this major component unit have not developed a formal investment policy. At September 30, 2010, investments were comprised of certificates of deposit which were reported at fair value, and a 40% interest in a U.S. Virgin Islands corporation that provides radiology services. The investment in the U.S. Virgin Islands corporation is accounted for under the equity method. • VIHA Investment Policies – This major component unit is required by the U.S. Department of Housing and Urban Development (HUD) to invest excess funds in obligations of the United States, certificates of deposit, or any other federally insured investment. HUD requires that deposits be fully collateralized at all times, and may be held by an unaffiliated bank or trust company for the account of the VIHA. 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 the fiscal year end. Federal government receivables represent amounts owed to the Government for reimbursement of expenditures incurred pursuant to federally funded programs. Accounts receivable are reported net of estimated allowances for uncollectible amounts, which are determined, based upon past collection experience and current economic conditions. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 53 1. Summary of Significant Accounting Policies (continued) Receivables (continued) Subject to the provisions of the V.I. Code, and subject to rules and regulations prescribed by the board of trustees of GERS, members of GERS have the right to obtain loans from GERS to finance a home, automobile, or other personal needs. The maximum mortgage loan that could be granted to members who have been contributing to GERS for at least five years is $350,000. The interest rate on new first mortgages was 8% and on second mortgages, 9%, throughout the year. Members may also borrow up to $50,000 to buy land. Members who have contributed to GERS for at least five years can borrow up to $18,000 for the purchase of an automobile. Auto loans bear interest at rates that range between 8.75% and 9.50% with a maximum term of five years. Active members may also borrow up to 75% of their contributions paid into GERS to a maximum borrowing of $50,000 as a personal loan. The interest rate offered on personal loans was 8.00% to 8.50% for the year. Retired members may qualify for personal loans up to $10,000 at the same interest rates as active members; however, effective fiscal year 2009, retirees have the option of refinancing their personal loan provided the original amount is paid down by at least 50%. Member loans in GERS are valued at the outstanding loan principal balance less an allowance for estimated loan losses. The accounts receivable from non-governmental customers of the discretely presented component units are net of estimated uncollectible amounts. These receivables arise primarily from service charges to users. Accounts receivable from the PG and other component units that arise from service charges do not have significant allowances for uncollectible accounts. Restricted Assets Restricted assets in the PG and discretely presented component units are set aside primarily for the payment of bonds, notes, construction funds, unemployment benefits, and other specific purposes. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 54 1. Summary of Significant Accounting Policies (continued) 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 estimated useful lives of 40 and 20 years, respectively; (iii) $100,000 for land improvements with an estimated useful life of 20 years; 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 proprietary component units. The costs of routine maintenance and repairs that do not add value to the assets or materially extend asset lives are expensed as incurred. Capital assets utilized in the governmental funds are recorded as expenditures in the governmental fund financial statements. Depreciation expense is recorded in the government-wide financial statements, as well as the proprietary funds and component units’ financial statements. Capital assets of the PG, excluding land and construction in progress, are depreciated on the straight-line method over the asset’s estimated useful lives. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 55 1. Summary of Significant Accounting Policies (continued) Capital Assets (continued) 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 (iii) 3 to 20 years for vehicles and equipment. Tax Refunds Payable During the calendar year, the Government collects individual income taxes through withholdings and payments from taxpayers. At September 30, the Government estimates the amount owed to taxpayers for overpayments during the first nine months of the calendar year. These estimated amounts and the actual tax refunds claimed for prior years but not paid at year-end are recorded as tax refunds payable and as a reduction of tax revenue. Deferred and Unearned Revenue Deferred revenue at the governmental fund level arises when potential revenue neither meets measurable nor available criteria for revenue recognition in the current period. Deferred revenue also arises when resources are received before the Government has a legal claim to them. In subsequent periods, when the revenue recognition criteria are met, or when the Government has a legal claim to the resources, deferred revenue is reduced from the balance sheet and the revenue is recognized. Unearned revenue at the government-wide and proprietary fund levels arises only when the Government receives resources before it has a legal claim to them or revenue recognition criteria have not been met. Long-Term Liabilities The liabilities reported in the government-wide financial statements include the Government’s bonds, long-term notes, and other long-term liabilities including: compensated absences, retroactive union arbitration salaries, landfill closure and post closure, arbitrage liabilities, workers compensation loss claims, postemployment benefit costs and legal claims. Bond premiums and discounts, losses incurred on bond refundings, and debt issuance costs are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premiums or discounts and deferred refunding losses. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 56 1. Summary of Significant Accounting Policies (continued) Long-Term Liabilities (continued) In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Losses incurred on bond refundings are not recognized in the fund financial statements as the corresponding liability for the bonds is only recorded in the government-wide financial statements. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. Fund Balance 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: • 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. • 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. • 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. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 57 1. Summary of Significant Accounting Policies (continued) Net Assets (continued) When both restricted and unrestricted resources are available for use, generally it is the Government’s policy to use restricted resources first, then the unrestricted resources, as needed. Compensated Absences The vacation policy of the Government provides for the accumulation of four, six, or eight hours for each full biweekly pay period depending on the time of entry into government service. At the beginning of each calendar year, vacation leave is limited to 480 hours (60 days). However, the excess of 480 hours is considered by GERS for service credit towards the employees’ retirement. This vacation policy does not apply to professional educational personnel of the Virgin Islands Department of Education, who receive compensation during the school breaks. Upon retirement, an employee receives compensation for unused vacation leave at the employee’s base pay rate. Employees accumulate sick leave at a rate of four hours for each full biweekly pay period up to a maximum of 180 days. Separated employees do not receive payment for unused sick leave; therefore, a provision for accumulated sick leave is not required. Compensated absences accumulation policies for the blended component units and discretely presented component units vary from entity to entity, depending upon negotiated bargaining agreements and other factors agreed upon between the management of these entities and its employees. Interfund and Intra-entity Transactions The Government has the following types of transactions among funds: • Interfund Transfers – Legally required transfers are reported as interfund transfers in (out) when incurred. • 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. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 58 1. Summary of Significant Accounting Policies (continued) Interfund and Intra-entity Transactions (continued) Similarly, receivables and payables between the PG and its blended component units are reported as amounts due from (to) other funds. Transfers between the PG and discretely presented component units (and among those component units) are reported separately as revenue and expenses or expenditures. Amounts owed to and from discretely presented component units by the PG are reported separately from interfund payables and receivables as due from (to) component units, net of allowance for estimated uncollectible amounts. Risk Management With some exceptions, the Government does not carry general casualty or liability insurance coverage on its properties or the acts of its employees, relying instead on self-insurance and/or statutory liability limitations. However, as a result of an agreement with the Federal Emergency Management Agency (FEMA), with respect to properties and structures damaged by Hurricane Hugo and repaired with federal disaster assistance funds, the Government has obtained insurance for certain hospitals, schools, and other insurable public buildings that were repaired with such federal assistance. The Government purchases commercial insurance covering physical losses or damages against its property. The limit of liability for all risks, excluding earthquake, windstorm, and flood, is $1 million for each and every occurrence except for windstorm and flood losses, which has a $45 million limit. For physical losses arising from earthquake, the insurance policy has a limit of $100 million for each and every occurrence and in the annual aggregate. The Government does not maintain accounting records in support of individual claim liabilities or for claims incurred but not reported (IBNR). Accordingly, medical malpractice claims are accounted for on a cash basis. Therefore, the basic financial statements do not include a liability for medical malpractice claims outstanding, including related IBNR, as of September 30, 2010, as required by GAAP. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 59 1. Summary of Significant Accounting Policies (continued) Future Adoption of Accounting Requirements GASB has issued the following statements that the Government or its component units have not yet adopted: GASB Adoption Statement Required in Number Fiscal Year 54 Definitions 2011 57 OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans 2012 59 Financial Instruments Omnibus 2011 60 Accounting and Financial Reporting For Service Concession Arrangements 2013 61 The Financial Reporting Entity; Omnibus- An Amendment of GASB Statements No. 14 and 34 2013 62 Codification of Accounting and Financial Reporting Guidance Contained in pre-November 30, 1989 FASB and AICPA Pronouncements 2013 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position 2013 64 Derivative Instruments: Application of Hedge Accounting Termination Provisions-an Amendment of GASB Statement No. 53 2012 65 Items Previously Reported as Assets and Liabilities 2013 66 Technical Corrections–2012 an amendment of GASB Statement No. 25 2013 67 Financial Reporting of Pension Plans–an amendment of GASB Statement No. 27 2014 Fund Balance Reporting and Governmental Fund Type The impact of these statements has not yet been determined by the Government. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 60 2. 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 • University of the Virgin Islands • Virgin Islands Economic Development Authority • Magens Bay Authority • Virgin Islands Housing Finance Authority • Virgin Islands Public Television System • Virgin Islands Waste Management Authority • University of the Virgin Islands Research and Technology Park Corporation Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 61 1208-1380573 2. Component Units (continued) Condensed financial information as of September 30, 2010 of all discretely presented component units follows (expressed in thousands): Virgin Islands Government Virgin Islands Water Virgin Virgin and Power Authority Islands Islands Roy L. University Total Housing Port Electric Water Schneider Juan F. Luis of the Other Component Authority Authority System System Hospital Hospital Virgin Islands Entities Units Assets: Current assets 16,458 $ 27,228 $ 49,187 $ 9,163 $ 24,622 $ 13,687 $ 20,689 $ 40,296 $ 201,330 $ Due from primary government – 1,607 18,820 2,778 – – 1,276 12,107 36,588 Due from federal government – 276 – – – 1,112 2,843 1,615 5,846 Restricted assets 1,268 11,325 68,066 12,019 182 2,210 54,493 34,271 183,834 Capital assets, net 66,240 245,517 280,519 63,692 63,306 45,839 54,352 90,102 909,567 Deferred expenses and – other noncurrent assets 12 1,165 58,927 8,060 – – 4,036 – 72,200 Total assets 83,978 287,118 475,519 95,712 88,110 62,848 137,689 178,391 1,409,365 Liabilities: Current liabilities 6,910 14,832 87,639 8,455 20,471 29,245 8,634 12,740 188,926 Due to primary government – – – – 27,865 46,280 – 4,999 79,144 Due to federal government – – 5,047 – – – – – 5,047 Bonds payable – 34,782 233,901 23,828 – – 40,746 2,810 336,067 Loans payable – 1,301 54,461 – – – 1,734 2,359 59,855 Deferred revenue 2,853 – – – – 15 5,442 1,272 9,582 Other noncurrent liabilities 6,514 – 16,809 3,943 – 477 115 23,174 51,032 Total liabilities 16,277 50,915 397,857 36,226 48,336 76,017 56,671 47,354 729,653 Net assets (deficit): Invested in capital assets, net of related debt 59,822 210,735 131,945 43,172 63,306 45,361 23,467 40,335 618,143 Restricted 655 11,325 15,731 10,933 1,930 2,210 37,854 45,214 125,852 Unrestricted (deficit) 7,224 14,143 (70,012) 5,380 (25,462) (60,741) 19,696 45,489 (64,283) Total net assets 67,701 $ 236,203 $ 77,664 $ 59,485 $ 39,774 $ (13,170) $ 81,017 $ 131,038 $ 679,712 $ Hospital and Health Facilities Corporation net assets (deficit) Information on Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 62 2. Component Units (continued) Program revenue Operating Capital Total Charges for Grants and Grants and Component Expenses Services Contributions Contributions Units Virgin Islands Housing Authority 41,208 $ 6,165 $ 37,771 $ 9,408 $ 12,136 $ Virgin Islands Port Authority 61,750 44,845 – 9,189 (7,716) Virgin Islands Water and Power Authority: Electric System 282,665 253,796 – 3,214 (25,655) Water System 22,126 34,660 – 5,955 18,489 Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 94,402 54,504 30,948 1,728 (7,222) Juan F. Luis Hospital 77,938 38,216 – 2,235 (37,487) University of the Virgin Islands 85,773 17,521 65,806 3,192 746 Other component units 75,608 8,676 58,957 12,679 4,704 Total activities 741,470 $ 458,383 $ 193,482 $ 47,600 $ (42,005) General revenue: Interest and other 41,649 Changes in net assets (356) Net assets at beginning of year (as restated) 680,068 Net assets at end of year 679,712 $ Information on statements of activities The amount due from the PG at September 30, 2010, amounted to approximately $36.6 million. The amount due to the PG amounted to $79.1 million, consisting primarily of hospital liabilities of $74.1 million. The amount due from hospitals was subsequently forgiven by the Legislature on December 16, 2011, with the passage of Act 7327. Note 18 provides additional information on the subsequent forgiveness of amounts due to the PG. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 63 3. Stewardship, Compliance, and Accountability Budgetary Process and Control The V.I. Code requires the Governor to submit an annual balanced executive budget to be adopted by the Legislature for the ensuing fiscal year. The Governor is required by law to submit to the Legislature the annual balanced executive budget no later than May 30. The annual balanced executive budget is prepared on a GAAP basis, except for encumbrances, which are reported as expenditures for budget reporting purposes, by the Virgin Islands Office of Management and Budget (OMB) working in conjunction with other Government offices and agencies. If the annual executive budget has not been approved before the commencement of any fiscal year, then the appropriations for the preceding fiscal year, insofar as they may be applicable, are automatically deemed re-appropriated item by item. The annual balanced executive budget, which includes those funds of the Government subject to appropriation pursuant to law, is composed of all proposed expenditures and estimated revenue for the Government. The Legislature enacts the annual executive budget through passage of lump-sum appropriations for each department. The Legislature may add, change, or delete any items in the annual executive budget proposed by the Governor. Upon passage by the Legislature, the annual executive budget is submitted to the Governor, who may veto the budget partially or in its entirety and return it to the Legislature with his objections. A veto by the Governor can be overridden only by a two-thirds majority of all members of the Legislature. The Legislature is obligated by law to pass a final annual executive budget no later than September 30, the last day of the fiscal year. Supplemental budgetary appropriations bills that are signed into law may be created during the year without the identification of a specific revenue source to finance them. In August 1999, the Legislature enacted the Financial Accountability Act (Act No. 6289). The purpose of the Financial Accountability Act is to require by law that the budget of the Government be balanced each year, and the appropriations in each fiscal year not exceed a verifiable revenue source. 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. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 64 3. Stewardship, Compliance, and Accountability (continued) Budgetary Process and Control (continued) Budgetary control is exercised at the department level through an allotment process. Encumbrances and expenditures cannot exceed total allotment amounts. The Government’s department heads may make transfers of appropriations within the department. Appropriation transfers between departments and supplemental appropriations require executive and legislative branch approval. Unencumbered and unexpended appropriations, not designated, lapse at fiscal year-end. Also, encumbrances are established at fiscal year-end to pay certain expenditures for travel and utility costs payable against current year appropriation authority, but to be expended in the subsequent year. Budget/GAAP Reconciliation The following schedule presents a comparison of the general fund legally adopted budget with actual data on a budgetary basis. Because accounting principles applied for purposes of developing data on a budgetary basis differ significantly from those used to present financial statements in conformity with GAAP, a reconciliation of timing and entity difference in the excess (deficiency) of revenue and net other financing sources over expenditures for the year ended September 30, 2010 is presented below (expressed in thousands): Deficiency of revenues and net other financing sources over expenditures (156,076) $ Entity difference – excess of revenues and net other financing sources expenditures – activities with budgets not legally adopted 120,928 Deficiency of revenues and net other financing sources over expenditures – GAAP basis (net change in fund balance) (35,148) $ Controls over spending in special revenue funds and non-appropriated funds are maintained at the Department of Finance by use of budgets and available resources (revenues). The Government makes appropriations to authorize expenditures for various capital projects. Budgets for capital projects normally remain available until completion of the project unless modified or rescinded. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 65 4. Cash and Cash Equivalents Primary Government At September 30, 2010, the PG reported $236.4 million in unrestricted cash and cash equivalents, and $2.4 million in restricted cash and cash equivalents. Pension Trust Fund GERS considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. At September 30, 2010, GERS held $62.9 million in money market accounts, $27.6 million in interest-bearing bank accounts, and $38.3 million in operational accounts. Component Units At September 30, 2010, component units held $71.8 million in unrestricted cash and cash equivalents and $70.0 million in restricted cash and cash equivalents, of which $4.3 million was not insured, bonded or collateralized as required for public funds of the Government. 5. Investments Primary Government Investments Following is a summary of the investments of the PG, categorized by investment type and maturity as of September 30, 2010: Fair Less Than 1 to 5 Over 5 Value 1 Year Years Years Investments with contractual maturities Certificates of deposit 11,721 $ 11,721 $ – $ – $ Portfolio investments Commercial paper 63,487 63,487 – – U.S. Government agencies and notes 79,004 42,457 36,547 – Repurchase agreement 431 431 – – Total investments with contractual maturities 154,643 118,096 $ 36,547 $ – $ Investments without contractual maturities Money Market and Mutual Funds 350,680 Total Primary Government Investments 505,323 $ Primary Government Investments (in thousands) Maturity (in years) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 66 5. Investments (continued) Primary Government Investments (continued) Interest-Rate Risk – Interest-rate risk represents the exposure to fair value losses arising from increasing interest rates. The PG does not have a formal investment policy that limits investment maturities as a means of managing such exposure. As a means of keeping the interest-rate risk low, a substantial portion of investments held by the PG are short-term in nature. Credit Risk – The authorizing legislation of the PG does not limit investments by credit rating categories. Authorizing legislation does limit the investment choices of the PG to direct obligations or obligations guaranteed by the United States, obligations of states, territories, possessions and commonwealths of the United States, obligations of international banking institutions, repurchase agreements, investment contracts, certificates of deposit, guaranteed investment contracts, shares in mutual funds, investment companies, corporate commercial paper, money market portfolio investments, and investment pools. At September 30, 2010, the PG’s investments in money market funds were rated AAAm by Standard & Poor’s, and Aaa/AAA by Moody’s Investor Service; PG’s investment in commercial securities were rated A-1+, AA+ or higher by Standard & Poor’s, and Aa2 by Moody’s Investor Services; and the PG’s investment in U.S. government agencies were rated AAA by Standard & Poor’s and Aaa by Moody’s Investor Services. Concentration of Credit Risk – The PG places no limit on the amount that may be invested in one issuer. At September 30, 2010, more than 5% of the PG’s investments were invested in: Goldman Financial Square Money Market #524 (52.3%), Goldman Financial Securities Money Market #474 (11.9%), Ebbetts PLC & Ebbetts LLC, C.P. (7.9%), Federal National Mortgage Association (7.2%), and Federal Home Loan Mortgage Corporation (6.4%). Custodial Credit Risk – The PG does not have a custodial risk policy. This is the risk that the PG will not be able to recover the value of its investments that are in the possession of an outside party. At September 30, 2010, $505.3 million of investments were held in the name of The Bank of New York Trust Company, N.A, as trustee for PFA. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 67 5. Investments (continued) Pension Trust Fund Investments Following is a summary of pension trust fund investments as of September 30, 2010: Fair Less Than 1 to 5 6 to 10 More Than Value 1 Year Years Years 10 Years Investments with contractual maturities U.S. Government and agency obligations 14,563 $ – $ 11,172 $ 59 $ 3,332 $ U.S. Treasury notes 70,231 – 45,916 24,315 – U.S. Treasury bonds 26,297 – 4,004 – 22,293 Municipals 8,406 – 2,755 1,096 4,555 Corporate obligations 84,872 3,797 33,981 23,978 23,116 Foreign bonds 9,374 819 2,433 3,658 2,464 Government obligations - foreign 56,044 15,848 16,861 12,121 11,214 Mortgage and asset backed securities 59,736 – 628 1,190 57,918 329,523 20,464 $ 117,750 $ 66,417 $ 124,892 $ Investments without contractual maturities Equity Securities: Common stocks - U.S. 487,602 Common stocks - foreign 80,139 Real Estate Investments: Real estate investment trusts 4,588 Havensight Mall - U.S. Virgin Islands 66,600 GERS Complex - U.S. Virgin Islands 25,637 Investment loan 14,186 Limited partnership 48,710 Securities lending short-term collateral investment pool 170,919 Mutual funds 31,186 Total pension fund investments 1,259,090 $ Maturity (in years) Pension Trust Fund Investments (In thousands) Total investments with contractual maturities Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 68 5. Investments (continued) Pension Trust Fund Investments (continued) Interest Rate Risk – Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. GERS does not have a specific policy to manage interest rate risk, but requires investment managers to diversify by issue, maturity, sector, coupon, and geography. Investment managers retained by GERS follow specific investment guidelines and are evaluated against specific market benchmarks that represent their investment style. Any exemption from general guidelines requires approval from GERS’ board of trustees. Credit Risk – GERS investment policy is designed to minimize credit risk by restricting authorized investments to only those investments permitted by statute, subject to certain additional limitations. These additional limitations consist of prohibitions against investments in derivative securities, options, futures or short positions. GERS investment policy allows investments in mortgage pass-through securities. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 69 5. Investments (continued) Pension Trust Fund Investments (continued) The credit ratings of GERS debt and equity securities include: Standard & Fair Value Poor Moody's U.S. Government and agency obligations 349 $ A- A2 U.S. Government and agency obligations 8,794 AAA AAA U.S. Government and agency obligations 920 BBB- BAA3 U.S. Government and agency obligations 3,497 A- AA1 to AA2 U.S. Government and agency obligations 1,003 Not Rated Not Rated U.S. Treasury notes 70,231 AAA AAA U.S. Treasury bonds 26,297 AAA AAA Corporate obligations 84,872 BBB- to AAA BAA3 to AAA Foreign bonds 5,155 BBB- to AAA BA1 to AAA Foreign bonds 4,219 Not Rated Not Rated Government obligations - foreign 6,379 A+ AA2 Government obligations - foreign 46,432 AAA AAA Government obligations - foreign 3,233 Not Rated Not Rated Municipals 2,755 A1 A+ Municipals 585 AA1 AAA Municipals 510 AA3 AA- Municipals 1,317 BBB BAA3 Municipals 3,239 A1 A- Mortgage and asset backed securities 12,608 CCC to AA+ CAA3 to AA1 Mortgage and asset backed securities 38,822 AAA AAA Mortgage and asset backed securities 8,306 Not Rated Not Rated Common stocks- U.S. 487,602 Not Rated Not Rated Common stocks - foreign 80,139 Not Rated Not Rated Real estate investment trust 442 B- Not Rated Real estate investment trust 4,146 Not Rated Not Rated Real estate holdings - U.S. Virgin Islands 92,237 Not Rated Not Rated Investment loans 14,186 Not Rated Not Rated Limited partnership 48,710 Not Rated Not Rated Securities lending short-term collateral investment pool 170,919 Not Rated Not Rated Mutual funds 31,186 Not Rated Not Rated Total investments 1,259,090 $ Credit Ratings Pension Trust Fund Investment Credit Ratings (in thousands) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 70 5. Investments (continued) Pension Trust Fund Investments (continued) Custodial Credit Risk – The custodial credit risk for investments is the risk that, in the event of the failure of a depository financial institution or other counterparty, GERS will not be able to recover the value of an investment or collateral securities that are in the possession of an outside party. With the exception of underlying securities on-loan amounting to $3.4 million, secured by non-cash collateral, the entire investment portfolio of GERS was held with a single third-party custodian on behalf of GERS as of September 30, 2010. Cash collateral held for securities lending transactions is invested in a collective investment pool maintained by the securities lending agent. Foreign Currency Risk – Foreign currency risk is the risk of holding investments in foreign currencies and the risk that those foreign currencies may devalue. GERS has no general investment policy with respect to foreign currency risk. As of September 30, 2010, $146.0 million of GERS’ portfolio was held in foreign currencies, with $42.2 million held in Euro, $26.4 million held in pound sterling, $20.3 million held in Australian dollars, $13.7 million held in Japanese yen, $8.1 million held in Swiss francs, $6.0 million held in Swedish krona, $10.8 million held in Canadian dollars, $5.8 million held in Norwegian krone, $3.3 million held in Hong Kong dollars, and $9.4 million in other currencies. GERS entered into various forward currency exchange contracts to manage exposure to changes in foreign currency exchange rates, and to facilitate the settlement of foreign security transactions. Risks associated with foreign exchange contracts include the movement in the value of foreign currency relative to the U.S. dollar and the ability of the counterparty to perform in accordance with the terms of the contract. Changes in the market value of open and closed forward contracts are recorded with interest, dividends, and other income or losses reported at fair value. During the fiscal year ended September 30, 2010, GERS reported $46.1 million in forward currency purchases, $47.1 million in forward currency sales, and a foreign exchange gain of $208.0 thousand. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 71 5. Investments (continued) Pension Trust Fund Investments (continued) Securities Lending Transactions –The Government’s statutes permit GERS to participate in securities lending transactions, and GERS has, via a securities lending authorization agreement (the Agreement), authorized State Street Bank and Trust Company (the Custodian) to lend its securities to broker-dealers and banks pursuant to a form of loan agreement. Lent securities are collateralized with cash, securities issued or guaranteed by the U.S. government, or irrevocable bank letters of credit. GERS does not have the ability to pledge or sell collateral securities delivered absent a borrower default. No restrictions were imposed during 2010 as to the amount of loans the Custodian can make on behalf of GERS. Under the terms of the Agreement the Custodian must indemnify the Government for losses attributable to violations by the Custodian under the “standard of care” clause described in the Agreement. There were neither such violations during fiscal years 2009 or 2008, 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, 2010, approximately $183.8 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, 2010, such investment pool had a weighted average maturity of 39 days and an average expected maturity of 149 days. Because the loans were terminable on demand, their duration did not generally match the duration of the investments made with cash collateral. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 72 5. Investments (continued) Component Unit Investments Following is a summary of component unit investments and maturities as of September 30, 2010: Fair Less Than 1 to 5 6 to 10 Over 10 Value 1 Year Years Years Years Investments with contractual maturities Certificates of deposit 36,569 $ 28,855 $ 7,714 $ – $ – $ Mortgage backed securites 3,549 – – – 3,549 Corporate bonds 1,460 – 55 102 1,303 Guaranteed investment contracts 142 – – – 142 U.S. Government agencies and notes 39,669 21,986 16,786 – 897 Total investments with contractual maturities 81,389 50,841 $ 24,555 $ 102 $ 5,891 $ Investments without contractual maturities Common stock 2,003 Mutual funds 30,142 Other investments 870 Total component unit investments 114,404 $ Maturity (in years) Component Unit Investments (in thousands) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 73 5. Investments (continued) Component Unit Investments (continued) Interest Rate Risk – Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The component units of the Government have not established formal policies which limit investment maturities as a means of managing such exposure and have some exposure to interest rate risk. Credit Risk – The authorizing legislation of the component units does not limit investments by credit rating categories. Authorizing legislation limits the investment choices of the component units, as described in Note 1. The University of the Virgin Islands’ investments include corporate bonds amounting to $1.4 million with a rating of A-AAA by Standard & Poor’s. Custodial Credit Risk – The component units of the Government do not have custodial credit risk policies. This is the risk that the component unit will not be able to recover the value of its investments that are held in the possession of an outside party. At September 30, 2010, $1.2 million of investments held by VIPA were held in the name of HSBC Bank USA as a trustee on behalf of VIPA. 6. Receivables Primary Government Receivables Receivables for governmental funds at September 30, 2010 consist of the following (expressed in thousands): PFA Debt General Service Total Income taxes 176,861 $ – $ 176,861 $ Real property taxes 244,228 – 244,228 Gross receipts taxes – 129,573 129,573 Excise taxes 1,366 – 1,366 Tax receivables 422,455 129,573 552,028 Less allowance for doubtful accounts (143,921) (83,406) (227,327) Net tax receivables 278,534 $ 46,167 $ 324,701 Other receivables – tobacco settlement rights and other 1,764 Total receivables reported in 326,465 $ the statement of net assets (deficit) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 74 6. Receivables (continued) Primary Government Receivables (continued) The Naval Appropriations Act created a separate tax structure for the U.S. Virgin Islands that mirrors the Internal Revenue Code of 1986, as amended. Income taxes are due from every corporation, partnership, individual, association, estate, or trust that meets the filing requirements of the U.S. Internal Revenue Code. A U.S. taxpayer who is a permanent resident of the U.S. Virgin Islands satisfies his Virgin Islands income tax obligations by filing his return with and paying income taxes to the Government. Virgin Islands residents are taxed by the Virgin Islands on their world-wide income. A nonresident of the U.S. Virgin Islands pays income taxes on his U.S. Virgin Islands source income to the Government. The revenue is recognized in the general fund in the fiscal period for which the income tax return was filed. The revenue from income tax withholding and estimated payments are recognized in the general fund as collected, net of estimated tax refunds. Corporate income taxes are due by the 15th day of the third month following the close of the fiscal year and become delinquent if not paid on or before the due date. Partnership and trust income taxes are due by April 15 of the following year for which the income tax was levied. Trust income taxes must be paid by the tax filing date. Property taxes are assessed each calendar year on all taxable real property located in the U.S. Virgin Islands. The receivable is recognized, net of estimated uncollectable amounts, in the general fund in the fiscal period for which the tax was assessed. The revenue is recognized in the general fund in the fiscal period for which the property tax is levied, provided the tax is collected within 60 days subsequent to fiscal year-end, unless the facts justify a period greater than 60 days. Receivables recognized before that period are recorded as deferred revenues. The Office of the Tax Assessor is responsible for the assessment of all taxable real property. Noncommercial real property subject to taxation is reassessed once every five years and commercial real property subject to taxation is reassessed biannually. The Tax Assessor prepares an annual assessment roll and schedule of collections for each parcel of real property that is used by The Office of the Tax Collector, as the basis for issuing tax bills to all taxpayers in the U.S. Virgin Islands. Property taxes are to be levied by May 15 of each year in the name of the record owner on January 15 of the same year. The taxes are due on June 30 and become delinquent if not paid by August 31. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 75 6. Receivables (continued) Primary Government Receivables (continued) For businesses with gross receipts of $120,000 per annum or less, gross receipts taxes are levied on an annual basis, based on 4.0% of gross receipts in excess of $9,000 per month. Businesses with annual gross receipts greater than $120,000, but less than $225,000, are levied on a monthly basis, based on 4% of gross receipts in excess of $9,000 per month. Businesses with annual gross receipts of more than $225,000 are levied on a monthly basis, based on 4.0% of all gross receipts with no $9,000 per month exemption. Monthly gross receipts tax filings are due within 30 calendar days following the last day of the calendar month collected. Annual gross receipts tax filings are due within 30 calendar days following the last day of the calendar year. Effective May 2011, the gross receipts tax rate increased to 4.5%. Component Unit and Pension Trust Fund Receivables Component unit receivables at September 30, 2010, consist of the following (expressed in thousands): Utility service charges 24,673 $ Port fees 4,504 Students 2,235 Patients 25,143 Other 8,528 Total 65,083 $ Loans and advances receivable, net at September 30, 2010, consist of the following (expressed in thousands): Fiduciary Funds Component Pension Trust Units Mortgage loans 9,946 $ – $ Personal loans 128,360 – Other loans and advances 173 49 Subtotal 138,479 49 Less allowance for uncollectible accounts (291) (49) Loans and advances receivable, net 138,188 $ – $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 76 7. Deferred Revenue The components of deferred revenue for the general fund as of September 30, 2010 consist of the following (expressed in thousands): Property tax $ 160,256 Matching excise tax 40,560 Income tax Excise tax 94,808 907 $ 296,531 8. Interfund Transactions 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 $79.6 million transfer from the PFA debt service fund (a major governmental fund) representing gross receipt tax revenue in excess of bond service requirements, and a $12.5 million transfer from a non-major debt service fund representing property tax revenue no longer reserved for debt service requirements. Significant transfers made from the general fund include a transfer of $2.6 million to the emergency molasses fund (a non-major governmental fund) and a transfer of $2.0 million to the St. Croix capital improvement fund (a non-major governmental fund). Significant transfers from the PFA debt service fund include a transfer of $1.7 million to the PFA special revenue fund (a non-major governmental fund), representing interest earned from unexpended bond proceeds and a transfer of $79.6 million from the PFA debt service fund to the general fund related to transfer of gross receipts taxes. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 77 8. Interfund Transactions (continued) Interfund Transfers (continued) Interfund transfers for the year ended September 30, 2010 consisted of the following (expressed in thousands): PFA PFA West Debt Capital Nonmajor Indian Transfer to General Service Projects Governmental Company Total General – $ 79,594 $ 54 $ 12,500 $ 700 $ 92,848 $ PFA capital projects – 61 – – – 61 Nonmajor governmental 6,763 1,726 – – – 8,489 Total 6,763 $ 81,381 $ 54 $ 12,500 $ 700 $ 101,398 $ Transfer from General – $ – $ – $ 6,763 $ – $ 6,763 $ PFA debt service 79,594 – 61 1,726 – 81,381 PFA capital projects 54 – – – – 54 Nonmajor governmental 12,500 – – – – 12,500 700 – – – – 700 Total 92,848 $ – $ 61 $ 8,489 $ – $ 101,398 $ West Indian Company Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 78 8. Interfund Transactions (continued) Due From/To Other Funds The following table summarizes interfund receivables and payables at September 30, 2010 (expressed in thousands): PFA West Capital Nonmajor Indian Nonmajor Due from other funds General Projects Governmental Company Enterprise Total General – $ – $ 6,878 $ 2,600 $ 4,668 $ 14,146 $ PFA capital projects – – – – 325 325 Nonmajor governmental 12,569 – – – 2,276 14,845 Total Governmental Funds 12,569 – 6,878 2,600 7,269 29,316 Nonmajor enterprise 739 – – – – 739 Total Enterprise Funds 739 – – – – 739 Total 13,308 $ – $ 6,878 $ 2,600 $ 7,269 $ 30,055 $ Due to other funds General – $ – $ 12,569 $ – $ 739 $ 13,308 $ Nonmajor governmental 6,878 – – – – 6,878 Total Governmental Funds 6,878 – 12,569 – 739 20,186 2,600 – – – – 2,600 Nonmajor enterprise 4,668 325 2,276 – – 7,269 Total Enterprise Funds 7,268 325 2,276 – – 9,869 Total 14,146 $ 325 $ 14,845 $ – $ 739 $ 30,055 $ West Indian Company The due from (to) other funds includes the following amounts due from the general fund: $4.9 million due to the emergency molasses fund (a non-major governmental fund) for unpaid appropriations, $1.4 million due to the elected governor retirement fund, and $3.5 million due to the PFA special revenue fund for unpaid matching funds. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 79 8. Interfund Transactions (continued) Due From/To Other Funds (continued) Other balances composing the due from (to) other funds include $2.7 million owed from the bond proceeds fund (a non-major governmental fund) to the general fund. The V.I. Lottery owes $4.5 million to the general fund since the Virgin Islands Code requires the V.I. Lottery to transfer a minimum of 20% of the V.I. Lottery’s net income to the general funds annually. The due to other governmental funds includes $832.9 thousand due from the Virgin Islands Lottery to the pharmaceutical assistance to the aged fund and $1.1 million due from the Virgin Islands Lottery to the V.I. educational initiative fund consisting primarily of 15.0% of revenue derived from lottery games under contract between the Virgin Islands Lottery and private contractors be transferred to these funds. 9. Restricted Assets Primary Government Restricted assets of proprietary funds and business-type activities as of September 30, 2010 include cash and cash equivalents as follows (expressed in thousands): 87 Restricted Assets – Proprietary Funds and Business-type Activities Unemployment insurance funds 487 $ WICO debt service funds 1,915 Total restricted assets of proprietary funds and business-type activities 2,402 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 80 9. Restricted Assets (continued) Component Units Restricted assets of component units include cash and cash equivalents, investments, and receivables as follows (expressed in thousands): Restricted Assets – Component Units Cash and cash equivalents: Debt service and sinking fund requirements 22,486 $ Endowment funds 20,696 HUD project funds 1,268 Revolving loan funds 14,748 Construction funds 2,144 Renewal and replacement funds 1,098 Other 7,555 Total cash and cash equivalents 69,995 Investments: Debt service and sinking fund requirements 33,839 Construction funds 35,500 Endowment funds 16,418 Renewal and replacement funds 5,840 Revolving loan funds 7,935 Other 10,199 Total investments 109,731 Other: Pledged funds 4,108 Total restricted assets of component units 183,834 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 81 10. Capital Assets Primary Government The capital assets activity for the governmental activities for the year ended September 30, 2010, is summarized as follows (expressed in thousands): Beginning Ending Balance Additions Transfers Disposals Balance Capital assets not being depreciated: Land 187,406 $ 2,636 $ – $ – $ 190,042 $ Construction in progress 111,594 76,467 (19,731) – 168,330 299,000 79,103 (19,731) – 358,372 Other capital assets: Land improvements 5,305 – – – 5,305 Infrastructure 222,353 11,156 19,731 – 253,240 Building and Improvements 396,392 943 – – 397,335 Machinery and Equipment 124,882 10,342 – – 135,224 748,932 22,441 19,731 – 791,104 Less accumulated depreciation for: Land improvements (3,014) (204) – – (3,218) Infrastructure (49,300) (7,813) – – (57,113) Building and improvements (152,007) (10,811) – – (162,818) Machinery and equipment (88,355) (9,340) – – (97,695) (292,676) (28,168) – – (320,844) Other capital assets, net of accumulated depreciation 456,256 (5,727) 19,731 – 470,260 Capital assets, net 755,256 $ 73,376 $ – $ – $ 828,632 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 82 10. Capital Assets (continued) Primary Government (continued) Capital assets activity for the business-type activities for the year ended September 30, 2010, is summarized as follows (expressed in thousands): Beginning Ending Balance Additions Transfers Disposals Balance Capital assets not being depreciated: Land 5,147 $ – $ – $ – $ 5,147 $ Construction in progress 1,640 714 (2,079) – 275 6,787 714 (2,079) – 5,422 Other capital assets: Land improvements 348 – – – 348 Building and Improvements 65,028 452 2,079 (1,455) 66,104 M achinery and Equipment 8,417 827 – (51) 9,193 73,793 1,279 2,079 (1,506) 75,645 Less accumulated depreciation for: Land improvements (339) (1) – – (340) Building and improvements (19,910) (2,317) – – (22,227) M achinery and equipment (5,979) (1,273) – 46 (7,206) (26,228) (3,591) – 46 (29,773) Other capital assets, net of accumulated depreciation 47,565 (2,312) 2,079 (1,460) 45,872 Capital assets, net 54,352 $ (1,598) $ – $ (1,460) $ 51,294 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 83 10. Capital Assets (continued) Primary Government (continued) Depreciation expense was charged to functions/programs of the PG for the year ended September 30, 2010 as follows (expressed in thousands): Governmental activities: General government 10,893 $ Public safety 1,699 Health 6,079 Education 1,248 Public Housing and Welfare 255 Culture and recreation 7,249 Transportation and communication 745 Total depreciation expense – governmental activities 28,168 $ Business-type activities: WICO 1,906 $ Other enterprise funds 1,685 Total depreciation expense – business-type activities 3,591 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 84 10. Capital Assets (continued) Component Units The capital assets activity for the discretely presented component units for the year ended September 30, 2010 is summarized as follows (expressed in thousands): Beginning Ending Balance Additions Transfers Disposals Balance (As restated) Capital assets not being depreciated: Land 132,582 $ 6,434 $ 32 $ (15,212) $ 123,836 $ Construction in progress 106,065 58,032 (91,187) (2) 72,908 238,647 64,466 (91,155) (15,214) 196,744 Other capital assets: Building and improvements 1,377,310 28,579 78,667 (1,657) 1,482,899 Airport and marine terminal facilities 123,233 – 10,241 – 133,474 Personal property and equipment 117,005 6,493 2,247 (680) 125,065 Intangible assets 2,604 – – – 2,604 1,620,152 35,072 91,155 (2,337) 1,744,042 Less accumulated depreciation for: Building and improvements (805,701) (47,659) – 2,982 (850,378) Airport and marine terminal facilities (89,294) (5,630) – – (94,924) Personal property and equipment (77,970) (8,274) – 775 (85,469) Intangible assets (275) (173) – – (448) (973,240) (61,736) – 3,757 (1,031,219) Other capital assets, net of accumulated depreciation 646,912 (26,664) 91,155 1,420 712,823 Capital assets, net 885,559 $ 37,802 $ – $ (13,794) $ 909,567 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 85 10. Capital Assets (continued) Component Units (continued) Depreciation expense charged by each component unit for the year ended September 30, 2010 was as follows (expressed in thousands): Virgin Islands Housing Authority 3,512 $ Virgin Islands Port Authority 18,496 Virgin Islands Water and Power Authority: Electric System 21,562 Water System 3,814 Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 4,888 Juan F. Luis Hospital 3,794 University of the Virgin Islands 2,407 Other component units 3,263 Total depreciation expense– component units 61,736 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 86 11. Long-Term Liabilities The change in long-term bonds and loans for governmental activities was as follows for the year ended September 30, 2010 (expressed in thousands): Amounts Amounts Beginning Ending Due Within Due Balance Additions Reductions Balance One Year Thereafter Governmental activities: Bonds payable: 2010 Series A & B Revenue Bonds - $ 399,050 $ - $ 399,050 $ – $ 399,050 $ 2009 Series A Revenue Bonds (Cruzan) – 39,190 – 39,190 550 38,640 2009 Sereis A-1, A-2, B & C Revenue and Refunding Bonds – 458,840 – 458,840 8,460 450,380 2009 Series A Revenue Bonds (Diageo) 250,000 – – 250,000 – 250,000 2006 Series A Revenue Bonds 217,495 – (1,530) 215,965 1,580 214,385 2006 Series A Tobacco Bonds 7,290 – – 7,290 – 7,290 2004 Series A Revenue Bonds 82,310 – (3,450) 78,860 3,625 75,235 2003 Series A Revenue Bonds 255,815 – (3,360) 252,455 3,495 248,960 2001 Series A Tobacco Bonds 18,260 – (1,415) 16,845 1,165 15,680 1999 Series A Revenue Bonds 93,925 – (6,230) 87,695 6,580 81,115 1999 General Obligation Bonds, 600 – (600) – – – 1998 Series Revenue and Refunding Bonds 395,505 – (395,505) – – – Total bonds payable 1,321,200 897,080 (412,090) 1,806,190 25,455 1,780,735 Plus (less): Deferred costs on refundings (15,106) (1,582) 854 (15,834) (854) (14,980) Bonds premium 15,902 18,333 (1,447) 32,788 1,447 31,341 Bonds discount (7,106) (1,152) 2,056 (6,202) (737) (5,465) Bonds accretion 1,829 609 – 2,438 2,438 – Total bonds payable, net 1,316,719 913,288 (410,627) 1,819,380 27,749 1,791,631 Loans payable: Series 2009 A Tax Increment Notes 6,031 4,000 – 10,031 – 10,031 Series 2009 B Working Capital Notes 100,000 106,400 (200,000) 6,400 – 6,400 Series 2009 Note 8,000 – (708) 7,292 1,472 5,820 Series 2008 Note 5,006 – (2,557) 2,449 2,449 – Total loans payable 119,037 110,400 (203,265) 26,172 3,921 22,251 Total governmental bonds and loans 1,435,756 $ 1,023,688 $ (613,892) $ 1,845,552 $ 31,670 $ 1,813,882 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 87 11. Long-Term Liabilities (continued) The change in other long-term liabilities for governmental activities were as follows for the year ended September 30, 2010 (expressed in thousands): Amounts Amounts Beginning Ending Due Within Due Balance Additions Reductions Balance One Year Thereafter Other liabilities: Accrued compensated absences 54,325 $ 5,763 $ – $ 60,088 $ 11,576 $ 48,512 $ Retroactive union arbitration 231,835 – – 231,835 36,549 195,286 Accrued litigation 16,639 6,448 (2,283) 20,804 1,138 19,666 Landfill closure and postclosure costs 170,949 2,362 – 173,311 – 173,311 Post employment benefit and other 93,915 51,287 – 145,202 – 145,202 Total other liabilities 567,663 $ 65,860 $ (2,283) $ 631,240 $ 49,263 $ 581,977 $ Accrued litigation, retroactive union arbitration liabilities, compensated absences, and landfill closure and post-closure costs are generally expected to be liquidated with resources derived from the general fund. Changes in long-term liabilities for business-type and fiduciary activities were as follows for the year ended September 30, 2010 (expressed in thousands): Amounts Amounts Beginning Ending Due Within Due Balance Additions Reductions Balance One Year Thereafter Business-type activities: Workers compensation claims 15,495 $ 10,643 $ (8,238) $ 17,900 $ 8,652 $ 9,248 $ Loan payable - U.S. Treasury 3,010 13,115 – 16,125 – 16,125 Capital Lease - WICO 358 – (170) 188 188 – Note payable - WICO 23,157 – (436) 22,721 471 22,250 Total business-type activities 42,020 $ 23,758 $ (8,844) $ 56,934 $ 9,311 $ 47,623 $ Fiduciary activities: Note payable: Pension trust fund 7,313 $ 2,650 $ – $ 9,963 $ 9,963 $ – $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 88 11. Long-Term Liabilities (continued) Debt Margin Pursuant to 48 U.S.C. Section 1574(b)(i) of the Revised Organic Act, the Government may issue revenue bonds for public improvements or undertakings authorized by an act of the Legislature, without limitation as to principal amount. Such revenue bonds are payable solely from the revenue directly derived from and attributable to such public improvements or undertakings. Pursuant to 48 U.S.C. Section 1574(b)(ii), the Government is authorized to issue general obligation bonds for any public purpose provided that no such indebtedness is in excess of 10% of the aggregate assessed valuation of the taxable real property in the U.S. Virgin Islands. In addition, pursuant to 48 U.S.C. Section 1574(a) (Public Law 94-932), the U.S. Virgin Islands is authorized to cause to be issued bonds or other obligations in anticipation of the matching funds to be received from the federal government pursuant to 26 U.S.C. Section 7652(b)(3). There is no legal limit on the value of bonds that the Government may issue pursuant to 48 U.S.C. Section 1574(a). The Legislature of the U.S. Virgin Islands must authorize all bond issuances. PFA is authorized to issue bonds for the purpose of financing any project or for the purpose authorized by the Legislature. Given that PFA’s powers to issue bonds are derived from 48 U.S.C. Section 1574(b), the bonds issued by PFA are subject to the limitations of said 48 U.S.C. Section 1574(b). On August 23, 1999, the Legislature amended the V.I. Code to add a Mandatory Balanced Budget Provision. Such provisions, specifically Title 2 of the V.I. Code Section 256, provide that the amount of debt of the Government existing on October 1, 2000 shall be the debt limit of the Government, exclusive of bond principal and interest that may become due. The debt limit specified under Title 2 of the V.I. Code Section 256 does not include bonds authorized by law for which a specific source of revenue is identified and committed to retiring those bonds. As used in Title 2 of the V.I. Code Section 256, the term “debt” means the total accumulated unpaid obligations that are due and payable, including unpaid income tax refunds, amounts owed to vendors, and current year unpaid debt service obligations, if any. As used in the statute, the term “debt” does not include that portion of principal or interest on bonds that is not yet due and payable. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 89 11. Long-Term Liabilities (continued) Bonds Payable Bonds payable outstanding at September 30, 2010 are comprised of the following (thousands): On July 8, 2010, the Public Finance Authority (PFA) issued the 2010 Series A and B Revenue Bonds, the proceeds of which amounted to $399.1 million. The Government has pledged matching funds for the timely payment of the principal and interest on the 2010 Series A and B Revenue Bonds. The 2010 Series A Bonds, amounting to $305.0 million, bear interest at rates ranging from 4.0% to 5.0% mature from 2012 to 2029. The 2010 Series B Bonds, amounting to $94.1 million, bear interest at rates ranging from 4.2% to 5.2% and mature from 2020 to 2029. The bonds were issued to: (i) provide working capital to the PG to finance certain operating expenses and other obligations of the Government (the “Working Capital Cost), (ii) refinance a portion of the outstanding principal due on the Working Capital Credit Facility, (iii) fund the Series 2010A Senior Lien Debt Service Reserve Subaccount in an amount necessary to meet the Series 2010A Debt Service Reserve Requirement, and (iv) pay the costs of issuing the bonds. Final Interest Bonds Payable Maturity Rates (%) Balance 2010 Series A & B Revenue Bonds 2029 4.00 - 5.25 399,050 $ 2009 Series A Revenue Bonds (Cruzan) 2039 3.00 - 6.00 39,190 2009 Series A-1, A-2, B & C Revenue and Refunding Bonds 2040 3.00 - 5.00 458,840 2009 Series A Revenue Bonds (Diageo) 2038 6.00 - 6.75 250,000 2006 Series A Revenue Bonds 2029 3.50 - 5.00 215,965 2006 Series A, B, C & D Tobacco Turbo and Capital Appreciation Bonds 2035 6.25 - 7.625 7,290 2004 Series A Revenue Bonds 2025 4.00 - 5.25 78,860 2003 Series A Revenue Bonds 2033 4.00 - 5.25 252,455 2001 Series A Tobacco Bonds 2031 5.00 16,845 1999 Series A Revenue Bonds 2020 4.20 - 6.50 87,695 Subtotal 1,806,190 Plus (less): Deferred costs on refundings (15,834) Bonds premium 32,788 Bonds discount (6,202) Bonds accretion 2,438 Total 1,819,380 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 90 11. Long-Term Liabilities (continued) Bonds Payable (continued) The 2010 Series A Bonds maturing on October 1, in the years 2020, 2025, and 2029 are subject to mandatory sinking fund redemptions at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption. The 2010 Series B Bonds maturing on October 1, in the years 2025 and 2029 are subject to mandatory sinking fund redemptions at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption The matching funds pledged for the payment of the bonds consist of annual advance payments received from the U.S. Department of the Treasury of excise taxes imposed and collected under the Internal Revenue laws of the United States on rum products produced in the U.S. Virgin Islands and exported to the United States from the Virgin Islands. The amount required to be remitted to the Government by the U.S. Department of the Treasury is an amount no greater than the total amount of local revenue (primarily taxes) collected by the Government in each fiscal year. As a result, the term “matching fund revenue” is used to denote these payments. Amounts to be received by the Government from federal rum excise tax are deposited directly into Special Escrow Account held by the Special Escrow Agent in accordance with the Indenture of Trust for bond debt service payments. The amounts to be received are subject to adjustment for the amount of local revenue actually collected by the U.S. Department of the Treasury during such year. Prepayments of matching fund revenue are recorded as deferred revenue in the accompanying statement of net assets, and recognized as income in the period in which the revenue recognition criteria is met. The rate of federal rum excise tax is determined by Congress. As part of the Tax Relief Extension Act of 1999, Congress increased the federal rum excise tax rate from $10.50 to $13.25 per proof gallon. Since then, Congress has extended the higher rate six times. On December 17, 2009, PFA issued the 2009 Series A Revenue Bonds (the “Cruzan Bonds) amounting to $39.2 million. The Government has pledged matching funds generated from the sale of Cruzan rum products for the timely payment of the principal and interest of the Cruzan Bonds. The Cruzan Bonds bear interest at rates ranging from 3.0% to 6.0% and mature from 2010 to 2039. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 91 11. Long-Term Liabilities (continued) Bonds Payable (continued) The Series 2009A Bonds “Cruzan Bonds” were issued to: (i) to provide a loan to Cruzan VIRIL, Ltd. (Cruzan) to finance the costs of the development, acquisition, construction and installation of a wastewater treatment facility and to fund certain primary costs of the alteration, upgrade, expansion, and renovation of the Cruzan distillery on the island of St. Croix, (ii) fund debt service reserve accounts in an amount necessary to meet the requirements and (iii) pay the costs of issuing the bonds. The bonds maturing October 1, 2039 are subject to mandatory sinking fund redemptions beginning October 1, 2020, at a redemption price equal to 100% of the principal amount plus interest accrued to the date of redemption. In association with the issuance of the Cruzan Bonds, the Government entered into an agreement with Cruzan on October 6, 2009, to provide marketing support payments, production incentive payments, continuation of molasses subsidies and other tax incentives to retain Cruzan as part of the rum industry in the U.S. Virgin Islands. Marketing and incentive payments to Cruzan amounted to $40.2 million for the year ended September 30, 2010. On October 1, 2009, PFA issued the 2009 Series A-1, A-2, B and C Revenue and Refunding Bonds, the proceeds of which amounted to $458.8 million. The Government has pledged matching funds for the timely payment of principal and interest on the 2009 Series A-1, A-2, B and C Revenue and Refunding Bonds. The 2009 Series A-1 Bonds amounted to $86.4 million. The 2009 Series A-1 Bonds bear interest at rates ranging from 3.0% to 5.0% and mature from 2010 to 2039. The 2009 Series A-2 Bonds amounted to $8.7 million. The 2009 Series A-2 Bonds bear an interest rate of 3.0% and mature from 2010 to 2011. The Series A-1 and A-2 Bonds were issued to: (i) fund certain capital projects, (ii) fund debt service reserve accounts, and (iii) pay certain costs of issuing the bonds. The 2009 Series B Bonds amounted to $266.3 million, bear an interest rate of 5.0%, and mature from 2010 to 2025. The 2009 Series B Bonds were issued to: (i) current refund the 1998 Series A Bonds, (ii) fund debt service reserve accounts, and (iii) pay certain costs of issuing the bonds. The 2009 Series C Bonds amounted to $97.4 million, bear an interest rate of 5.0% and mature from 2010 to 2022. The 2009 Series C Bonds were issued to: (i) current refund the 1998 Series E Revenue and Refunding Bonds, (ii) fund debt service reserve accounts and (iii) pay certain costs of issuing the bonds. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 92 11. Long-Term Liabilities (continued) Bonds Payable (continued) The current refunding of the 1998 Series A and E Bonds, on October 28, 2009, was made in order to obtain lower interest rates. The economic gain obtained by this current refunding is the difference between the present value of old debt service requirements and the new debt service. This refunding resulted in a debt service saving of approximately $35.9 million and an economic gain of approximately $35.6 million. The 2009 Series A-1, B and C Bonds are subject to mandatory sinking fund installment redemptions beginning October 1, 2020 at a redemption price equal to 100% of the principal amount, plus interest accrued, to the date of redemption. On July 9, 2009, PFA issued the 2009 Diageo Matching Fund Bonds (2009 Series Bonds) amounting to $250.0 million. The Diageo Bonds bear interest at 6.0% to 6.75% and mature from 2013 to 2038. Interest is payable semiannually on April 1 and October 1, and principal is payable annually on October 1, beginning October 1, 2009. The proceeds of the bonds were issued to: (i) provide a grant to Diageo USVI, Inc. (Diageo USVI) to finance the cost of acquisition, design, development, construction, and quipping of a rum production and maturation warehouse facility to be located on the island of St. Croix (Diageo Project), (ii) to redeem the Subordinated Revenue Bond Anticipation Notes Series 2009A issued to finance preliminary costs of the Diageo construction project, (iii) to fund debt service reserve accounts, and (iv) pay capitalized interest, and (v) pay certain costs associated with the issuance of the bonds. The PG has pledged matching funds generated from the sale of Captain Morgan rum products (produced by Diageo USVI) for the timely payment of the principal and interest on the Diageo Bonds. The Diageo Bonds maturing on or after October 1, 2020 are subject to optional redemption on or after October 1, 2019, at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption. On September 28, 2006, PFA issued the 2006 Series Gross Receipts Revenue Bonds (2006 Series Bonds), the proceeds of which amounted to $219.5 million. The Government has pledged gross receipts tax revenues for the timely payment of the principal and interest on the 2006 Series Bonds. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 93 11. Long-Term Liabilities (continued) Bonds Payable (continued) The 2006 Series Bonds bear interest at 3.5% to 5.0% and mature from 2007 to 2029. The proceeds of the bonds were issued to: (i) advance refund a portion of the Series 1999A Revenue Bonds, (ii) pay the cost of a termination fee in connection with an outstanding swap option agreement, (iii) fund certain capital projects, (iv) fund debt service reserve accounts, (v) pay certain costs of issuing the Series 2006 Bonds, and (vi) fund a net payment reserve account for a new swap agreement in connection with the refunding. The 2006 Series Bonds maturing on or before October 1, 2016 are not subject to optional redemption. The advance refunding of the 2020 through 2029 maturities of the 1999 Series A Bonds was made in order to obtain lower interest rates. The economic gain obtained by this advance refunding is the difference between the present value of old debt service requirements and the new debt service. This refunding resulted in a debt service saving of approximately $40.8 million and an economic gain of approximately $25.6 million. The proceeds of the 2006 Series Bonds related to the refunding were placed in a trust account to provide for all future debt service payments on the 2020 through 2029 maturities of the 1999 Series A Bonds. Approximately $180.0 million in funds were deposited into the Escrow Fund accounts. At September 30, 2010, $162.9 million of defeased 1999 Bonds remained outstanding. On March 15, 2006, the Tobacco Settlement Financing Corporation (TSFC) issued the 2006 Tobacco Settlement Asset-Backed Bonds, Subordinated Series 2006 A, B, C & D Turbo and Capital Appreciation Bonds amounting to $48.1 million, with an issue value of $7.3 million (net of accretion of $40.8 million). The bonds are secured and payable from collections including all Tobacco Settlement Revenues to be received by TSFC, reserves, amounts held in other accounts established by the indenture and TSFC’s rights under the purchase agreement. The proceeds have been used for the purpose of (i) financing several capital hospitals and health development projects for the benefit of the Virgin Islands and its residents (ii) pay certain costs of issuance relating to the Series 2006 Bonds, and (iii) fund operating costs. Interest on the Series 2006 Tobacco Settlement Asset-Backed Bonds is not paid currently, but accretes from the date of delivery, compounded every May 15 and November 15, commencing May 15, 2006 through the final maturity date of May 15, 2035. Interest yields on the Bonds range from 6.25% to 7.625%. The series are subject to early redemption at accreted value beginning May 15, 2023, provided that the 2001 Tobacco Settlement Asset-Backed Series A Bonds have been paid in full. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 94 11. Long-Term Liabilities (continued) Bonds Payable (continued) On December 1, 2004, PFA issued the 2004 Series A Bonds, the proceeds of which amounted to $94.0 million. The Government has pledged the Matching Fund Revenues to the timely payment of principal and interest on the 2004 Series A Bonds. The bonds bear interest at 4.0% to 5.25% and mature from 2005 to 2025. The proceeds of the bonds were issued to: (i) finance the planning, development, constructing, renovating, and equipping of wastewater treatment facilities and collection systems on St. Thomas and St. Croix, (ii) finance the repairs, renovations, and construction of solid waste facilities in the Territory, (iii) finance the repair and construction of public roads in the Territory, (iv) provide start-up capital for the Virgin Islands Waste Management Authority, (v) fund the Series 2004A Senior Lien Debt Service Reserve Subaccount, and (vi) pay certain costs of issuing the Series 2004A Bonds. The Series 2004A Bonds are not subject to optional redemption prior to October 1, 2014. On December 17, 2003, PFA issued the Series 2003A Revenue Bonds, the proceeds of which amounted to approximately $268.0 million. The bonds were issued to: (i) repay the Government outstanding Revenue Bond Anticipation Notes, Series 2003, (ii) fund certain necessary public safety and other public sector capital development projects, (iii) fund debt service accounts for the bond issuance, and (iv) to pay certain costs of issuing the bonds. The Government has pledged gross receipts taxes for the timely payment of the principal and interest on the Series 2003A Revenue Bonds. Interest is payable semiannually on April 1 and October 1, and principal is payable annually on October 1. The Series 2003A Revenue Bonds are not subject to optional redemption prior to October 1, 2014. On November 20, 2001, TSFC issued the 2001 Tobacco Settlement Asset-Backed Series A Bonds amounting to $21.7 million of the aggregate principal. The proceeds were used for the purpose of (i) purchasing all rights, title, and interest in certain litigation awards under the master settlement agreement (MSA) entered into by participating cigarette manufacturers, (ii) issuance of Tobacco Settlement Asset-Backed Bonds to pay the purchase price for the rights, and (iii) to provide funds for hospital and healthcare projects in the U.S. Virgin Islands. Interest on the 2001 bonds is payable semiannually each May and November 15 for the term bonds amounting to $15.5 million and convertible capital appreciation bonds amounting to $8.2 million, with a nominal value of $6.2 million. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 95 11. Long-Term Liabilities (continued) Bonds Payable (continued) The convertible capital appreciation bonds accrete interest prior to November 15, 2007 and accrue interest subsequent to that date. Interest on the capital appreciation bonds will compound on May 15th and November 15th. 2001 Series A Tobacco Bonds payable at September 30, 2010 amounted to $16.8 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, 2010, resulted in early redemption of $315.0 thousand during fiscal year 2010. On November 16, 1999, PFA issued the 1999 Series A Revenue Bonds amounting to $299.9 million. These bonds were issued to (i) pay certain working capital obligations of the Government, (ii) repay the Government outstanding tax and revenue anticipation notes, (iii) fund the Series debt service accounts, and (iv) finance certain costs of issuing the bonds. On September 28, 2006, PFA advance refunded a portion of the 1999 Bonds with maturity dates of October 1, 2020 to October 1, 2029 totaling $162.9 million. The proceeds of the refunding were placed in a trust account to provide for all future debt service payments on the 2020 through 2029 maturities of the bonds. Approximately $180.0 million was deposited with the refunding bond escrow agent to fund the Escrow Fund accounts. At September 30, 2010, $87.7 million of the defeased 1999 Series A Revenue Bonds remain outstanding. The Government has pledged gross receipts taxes for the timely payment of the principal and interest on the 1999 Series A Bonds. Interest is payable semiannually on April 1 and October 1, and principal is payable annually on October 1. Gross receipts revenue amounted to $133.3 million for the year ended September 30, 2010. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 96 11. Long-Term Liabilities (continued) Bonds Payable (continued) Revenue Bonds Series 2006 Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Maturity Year: 2011 6,580 $ 5,356 $ 1,165 $ 832 $ 3,495 $ 12,609 $ 3,625 $ 3,999 $ 1,580 $ 10,429 $ 2012 6,950 4,948 1,265 778 3,635 12,448 3,805 3,814 2,705 10,330 2013 7,395 4,485 1,335 718 3,815 12,262 3,995 3,619 2,805 10,192 2014 7,865 4,057 1,405 653 4,010 12,066 4,195 3,414 2,905 10,049 2015 8,365 3,546 – 584 4,210 11,860 4,405 3,199 3,015 9,901 2016 – 2020 50,540 8,345 – 2,919 24,550 55,685 25,675 12,212 16,825 47,087 2021 – 2025 – – 3,630 2,193 31,660 48,415 33,160 4,530 84,735 35,336 2026 - 2030 – – – 2,011 40,450 39,411 – – 101,395 12,306 2031 - 2035 – – 8,045 402 136,630 14,079 – – – – Total 87,695 $ 30,737 $ 16,845 $ 11,090 $ 252,455 $ 218,835 $ 78,860 $ 34,787 $ 215,965 $ 145,630 $ Tobacco Bonds Revenue Bonds Revenue Bonds Series 2009 A (Diageo) Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Maturity Year: 2011 – $ – $ – $ 16,703 $ 1,460 $ 4,019 $ 2,000 $ 229 $ 3,500 $ 13,229 $ 2012 – – – 16,703 1,505 3,974 6,650 100 15,145 12,763 2013 – – – 16,703 1,550 3,928 – – 15,920 11,986 2014 – – 4,040 16,581 1,600 3,881 – – 16,740 11,170 2015 – – 4,290 16,331 1,650 3,830 – – 17,600 10,311 2016 – 2020 – – 26,290 76,817 9,230 18,166 – – 102,505 37,055 2021 – 2025 – – 36,730 66,380 11,525 15,872 – – 86,410 12,043 2026 – 2030 – – 51,150 51,952 14,705 12,693 – – 8,510 213 2031 – 2035 48,145 – 71,485 31,618 18,885 8,515 – – – – 2036 – 2040 – – 56,015 5,842 24,240 3,151 – – – – Less unamortized discount (40,855) – – – – – – – – – Total 7,290 $ – $ 250,000 $ 315,630 $ 86,350 $ 78,029 $ 8,650 $ 329 $ 266,330 $ 108,770 $ Revenue Bonds Revenue Bonds Revenue Bonds Revenue Bonds Series 2009 C Series 2009 A (Cruzan) Series 2010 A Series 2010 B Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Maturity Year: 2011 1,500 $ 4,838 $ 550 $ 2,244 $ – $ 10,800 $ – $ 3,437 $ 25,455 $ 88,724 $ 2012 6,350 4,642 565 2,227 – 15,188 – 4,833 48,575 $ 92,748 $ 2013 6,675 4,316 585 2,210 1,990 15,148 – 4,833 46,065 $ 90,400 $ 2014 7,015 3,974 605 2,186 2,065 15,067 – 4,833 52,445 $ 87,931 $ 2015 7,210 3,618 640 2,154 2,155 14,983 – 4,834 53,540 $ 85,151 $ 2016 – 2020 42,230 12,092 3,715 10,247 12,645 73,183 – 24,167 314,205 $ 377,975 $ 2021 – 2025 26,530 1,957 4,900 9,059 61,670 65,458 26,340 22,513 407,290 $ 283,756 $ 2026 – 2030 – – 6,625 7,343 224,475 30,074 67,710 9,243 515,020 $ 165,246 $ 2031 – 2035 – – 8,940 5,025 – – – – 292,130 $ 59,639 $ 2036 – 2040 – – 12,065 1,896 – – – – 92,320 $ 10,889 $ – – – – – – – – (40,855) – 97,510 $ 35,437 $ 39,190 $ 44,591 $ 305,000 $ 239,901 $ 94,050 $ 78,693 $ 1,806,190 $ 1,342,459 $ Less unamortized discount Series 2009 A-1 Tobacco Bonds Series 2001 A Series 2003 A Total Government Revenue Bonds Series 2004 A Revenue Bonds Revenue Bonds Series 2006 Activities Governmental Activities – Bonds Series 1999 A Revenue Bonds Revenue Bonds Series 2009 B Series 2009 A-2 Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 97 11. Long-Term Liabilities (continued) Conduit Debt In March 2007, the PFA issued private activity bonds, the Refinery Facilities Senior Secured Tax-Exempt Revenue Bonds (HOVENSA Refinery), the “Series 2007 Tax-Exempt Bonds”, amounting to $104.1 million, to finance modifications to diesel and gasoline desulfurization units for a refinery on the island of St. Croix. The bonds have an interest rate of 4.7% and are limited obligations of PFA, payable solely from, and secured by, a pledge and assignment of the amounts payable under a loan agreement between PFA and the refinery. The refinery is responsible for all debt service payments of the private activity bonds. The Government is not obligated for the repayment of the bonds. The bonds are not reported as liabilities in the Government’s basic financial statements. As of September 30, 2010, $104.1 million of the bonds remain outstanding. In April 2004, the PFA issued private activity bonds, the Refinery Facilities Senior Secured Tax- Exempt Revenue Bonds (HOVENSA Refinery), the “Series 2004 Tax-Exempt Bonds”, amounting to $50.6 million, to finance construction of a delayed coking unit for a refinery on the island of St. Croix. The bonds have an interest rate of 5.9% and are limited obligations of PFA, payable solely from, and secured by, a pledge and assignment of the amounts payable under a loan agreement between PFA and the refinery. The refinery is responsible for all debt service payments of the private activity bonds. The Government is not obligated for the repayment of the bonds. The bonds are not reported as liabilities in the Government’s basic financial statements. As of September 30, 2010, $50.6 million of the bonds remain outstanding. In December 2003, the PFA issued private activity bonds, the Refinery Facilities Senior Secured Tax-Exempt Revenue Bonds (HOVENSA Refinery), the “Series 2003 Tax-Exempt Bonds”, amounting to $74.2 million, to finance the costs of a Clean Fuels Program for a refinery on the island of St. Croix. The Clean Fuels Program consists of three major projects to comply with regulatory standards for low sulfur gasoline. The Clean Fuels Program is a federally mandated program effective January 2004. The bonds have an interest rate of 6.1% and are limited obligations of PFA, payable solely from, and secured by, a pledge and assignment of the amounts payable under a loan agreement between PFA and the refinery. The refinery is responsible for all debt service payments of the private activity bonds. The Government is not obligated for the repayment of the bonds. The bonds are not reported as liabilities in the Government’s basic financial statements. As of September 30, 2010, $74.2 million of the bonds remain outstanding. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 98 11. Long-Term Liabilities (continued) Conduit Debt (continued) In November 2002, the PFA and the PG issued private activity bonds, the Refinery Facilities Revenue Bonds (HOVENSA Coker Project), the “Series 2002 Tax-Exempt Bonds”, amounting to $63.8 million and $63.0 million, respectively ($126.8 million in total) to finance costs of construction of a coker plant for a refinery on the island of St. Croix. The bonds have an interest rate of 6.50% and are limited obligations of PFA and the PG, payable solely from and are secured by, a pledge and assignment of the amounts payable under a loan agreement between PFA, PG and the refinery. The refinery is responsible for all debt service payments of the private activity bonds. The Government is not obligated for the repayment of the bonds. The bonds are not reported as liabilities in the Government’s basic financial statements. As of September 30, 2010, $126.8 million of the bonds remain outstanding. Notes Payable On September 25, 2009, PFA entered into the Tax Increment Revenue Bond Anticipation Note Purchase Agreement (the Agreement) with a local bank. Under the terms of the Agreement, the bank will purchase up to $15.7 million in federally taxable Bond Anticipation Notes (the Series 2009A Notes). The purpose of the Series 2009A Notes is to provide a loan to the PG (the Series 2009A Tax Increment Revenue Loan Note) to finance the developmental costs of a shopping complex on the island of St. Croix. The Series 2009A Notes have a term of three years, maturing on October 1, 2012, with interest of 300 points above the J.P. Morgan Chase Prime Rate or 6.25%, whichever is higher. On October 1, 2012, the Series 2009A Notes will convert to a term loan with payments in eleven quarterly payments, with a final payment on October 1, 2015. Under the terms of the Agreement, PFA may issue Tax Increment Revenue Bonds to defease the debt prior to that date. As of September 30, 2010, PFA had sold $10.0 million in Series 2009A Notes. The proceeds were used to: (i) fund a capitalized interest account and (ii) fund the first phase of the development of the shopping center complex. The debt is a special limited obligation of the PG, secured by Tax Incremental Financing (TIF) revenues. TIF revenues consist of 100% of the incremental property taxes and 90% of the incremental gross receipts taxes, derived from the development project. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 99 11. Long-Term Liabilities (continued) Notes Payable (continued) Debt service requirements for the Series 2009A Notes at September 30, 2010 were as follows (expressed in thousands): Principal 128 $ 181 193 9,529 10,031 $ Year 2013 2015 2014 2016 On September 18, 2009, PFA issued the Subordinated Lien Revenue Bond Anticipation Notes (Series 2009B Notes) in two series: the Series 2009 B-1 Notes in the aggregate amount of $150 million with the agent lender First Bank of Puerto Rico and the Series B-2 Notes in the aggregate amount of $100 million with the agent lender Banco Popular de Puerto Rico. Both Series B-1 and B-2 accrue interest at a rate of 400 points above the 90-day LIBOR rate, not to exceed a maximum rate of 5.5%. Interest payments are due the first business day of the month, effective October 1, 2009. The purpose of the Notes is to provide working capital to the PG for operating expenses and to pay the costs of the issuances. The Series 2009B Notes are general obligations of the PG. The PG has also pledged a security interest in gross receipts tax collections. During fiscal years 2009 and 2010, the Government drew down $60.0 million and $63.8 million under the Series 2009 B-1 Notes, and $40.0 million and $42.6 million under the Series 2009 B-2 notes (a total of $100 million in fiscal year 2009 and $106.4 million in fiscal year 2010). On July 8, 2010, the Government repaid $200.0 million of the Series 2009 B Notes with the issuance of the Series 2010A and Series 2010B Revenue and Refunding Bonds. As of September 30, 2010, the PG had an outstanding balance of $3.8 million under the Series 2009 B-1 Notes, and $2.6 million under the Series 2009 B-2 Notes (a total of $6.4 million). The Series 2009B Notes have a stated maturity date of October 1, 2012. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 100 11. Long-Term Liabilities (continued) Notes Payable (continued) Debt service requirements for the Series 2009B Notes at September 30, 2010 were as follows (expressed in thousands): Principal 6,400 $ Year 2013 In August 2009, the current unemployment insurance taxes and reserve balances of the Unemployment Trust Fund (UTF) held by the U.S. Treasury became inadequate to cover territory expenditures for unemployment compensation (UC) benefits. UC benefits are an entitlement program and the PG is legally liable to pay benefits even if the UTF becomes insolvent. As of September 30, 2010, the PG had borrowed $16 million from the U.S. Treasury Federal Unemployment Account (FUA) to meet U.C. obligations. The American Recovery and Reinvestment Act of 2009 (P.L. 111-5 Section 2004) temporarily waives interest payments and the accrual of interest on FUA loans. On February 12, 2009, PFA issued the Subordinate Lien Revenue Bond Anticipation Notes (Series 2009 Notes), in the amount of $8.0 million. The Government has pledged gross receipts taxes for the timely payment of the Series 2009 Notes. The Series 2009 Notes initially had an interest rate of 4.8% and a due date of February 1, 2010. PFA elected a conversion of the Series 2009 Notes to term notes with principal and interest payable semi-annually on February 1 and August 1, at an interest rate of 5.4% and a maturity date of August 1, 2015. The proceeds of the Series 2009 Notes were issued: (i) to finance the purchase and installation of 911 emergency communication equipment for the Virgin Islands Police Department and (ii) to pay certain costs of issuing the Series 2009 Notes. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 101 11. Long-Term Liabilities (continued) Notes Payable (continued) Debt service requirements for the Series 2009 Notes at September 30, 2010 were as follows (expressed in thousands): Principal Interest 1,473 $ 374 $ 1,553 294 1,639 208 1,728 119 899 24 Total 7,292 $ 1,019 $ Year 2015 2011 2012 2013 2014 On August 12, 2008, PFA issued the Subordinate Lien Revenue Notes, Series 2008 (Virgin Islands Gross Receipts Taxes Loan Note) in the aggregate amount of $7.7 million (the Series 2008 Notes). The Series 2008 Notes accrue interest monthly at a rate of 4.8% for 36 months. The proceeds of the Series 2008 Notes were loaned to the PG under the same terms, for the purposes of (i) financing the acquisition of a fleet of vehicles for the Virgin Islands Police Department and (ii) paying certain costs of issuing the Series 2008 Notes. The PG has pledged gross receipts taxes for the payment of the Series 2008 Notes. Debt service requirements for the Series 2008 Notes at September 30, 2010 were as follows (expressed in thousands): Principal Interest 2,449 $ 59 $ Year 2011 Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 102 11. Long-Term Liabilities (continued) Notes Payable (continued) On June 1, 2008, WICO refinanced its outstanding notes payable and obtained an additional $2.3 million in financing for infrastructure improvements. The consolidated notes amounted to $23.6 million, to be repaid in 120 consecutive monthly installments of $154.9 thousands at a fixed interest rate of 6.2%, plus a final payment of the balance of principal, plus any unpaid interest, in 2018. The notes may be prepaid, in whole, or in part, at any time without penalty. WICO has pledged all leases and revenues to secure the notes, and may not declare dividends, or issue additional equity interests without lender approval. As of September 30, 2010, WICO was not in compliance with note covenants requiring 1) minimum operating revenue thresholds and 2) the maintenance of a restricted debt service reserve account equal to debt service requirements for the following year. On May 13, 2011, WICO obtained a waiver from the lender for its failure to comply with these covenants. Debt service requirements for the WICO loan at September 30, 2010 were as follows (expressed in thousands): Principal 2011 471 $ 2012 486 2013 525 2014 558 2015 594 2016 - 2020 20,087 Total 22,721 $ Year: Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 103 11. Long-Term Liabilities (continued) Fiduciary Funds – Notes Payable On October 2, 2006, GERS entered into a loan agreement with Banco Popular de Puerto Rico to provide working capital and to pay issuance and closing costs associated with the agreement. The line of credit is a revolving credit facility with a maximum principal amount of $25.0 million, which accrues interest at a fixed interest rate of 6.3% calculated on a 360-day basis and is due and payable quarterly, commencing on the first day of the fourth calendar month following the closing of the loan. The line of credit facility is available to GERS for a period up to three years, subject to annual renewals. At any time that an event of default occurs, the loan will bear interest at a rate equal to 3% above a variable interest rate based on the bank’s transfer rate. The bank retains a certificate of deposit in the amount of $20.0 million as security on the loan agreement. As of September 30, 2010, the outstanding balance under the line-of-credit agreement was $9.9 million. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 104 11. Long-Term Liabilities (continued) Component Units – Bonds Payable Bonds payable of discretely presented component units are those liabilities that are paid out of resources pledged by such entities. Bonds payable, outstanding at September 30, 2010, are as follows (expressed in thousands): Interest Bonds Payable Maturity Rates (%) Balance University of the Virgin Islands: General obligation bonds of 2004 2035 2.02 – 5.38 20,245 $ General obligation bonds of 1999 2029 4.75 – 5.95 20,960 Virgin Islands Water and Power Authority (Electric System) Revenue bonds of 2010 2033 5.0 85,335 Revenue bonds of 2007 2031 5.0 57,585 Revenue bonds of 2003 2023 4.00 – 5.00 62,490 Revenue bonds of 1998 2021 4.25 – 5.30 22,880 Virgin Islands Water and Power Authority (Water System) Revenue bonds of 1998 2017 4.90 – 5.50 24,545 Virgin Islands Port Authority Series A Revenue bonds of 2003 2023 5.00 – 5.25 18,005 Series B Revenue bonds of 2003 2015 3.73 – 5.43 8,000 Series C Revenue bonds of 2003 2023 4.40 8,654 Virgin Islands Housing Finance Authority: Revenue bonds of 1995 2025 5.50 – 6.50 1,100 Revenue bonds of 1998 2028 4.10 – 5.25 1,710 Subtotal 331,509 Plus unamortized premium 6,370 Less unamortized discount (612) Less deferred costs on debt refunding and reacquisition (1,200) Bonds payable, net 336,067 Less amount due within one year (13,599) Bonds payable, due in more than one year 322,468 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 105 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) Following is a schedule of changes in bonds payable, loans payable and other long-term liabilities for discretely presented component units for fiscal year ended September 30, 2010 (expressed in thousands): Amounts Amounts Beginning Ending Due Within Due Balance Additions Reductions Balance One Year Thereafter (As restated) Bonds payable: University of the Virgin Islands 41,414 $ 22 $ (690) $ 40,746 $ 725 $ 40,021 $ Virgin Islands Water and Power Authority: Electric System 193,305 87,622 (47,026) 233,901 8,020 225,881 Water System 25,944 – (2,116) 23,828 2,540 21,288 Virgin Islands Port Authority 36,639 – (1,857) 34,782 1,939 32,843 Virgin Islands Housing Finance Authority 3,030 – (220) 2,810 375 2,435 Total bonds payable, net 300,332 87,644 (51,909) 336,067 13,599 322,468 Loans payable: Virgin Islands Economic Development Authority 610 – (66) 544 71 473 Virgin Islands Water and Power Authority: Electric System 64,816 6,000 (16,355) 54,461 7,799 46,662 Virgin Islands Port Authority 1,474 2,695 (2,868) 1,301 1,301 – Virgin Islands Housing Finance Authority 2,098 – (282) 1,816 289 1,527 University of the Virgin Islands 1,843 – (110) 1,733 116 1,617 Total loans payable 70,841 8,695 (19,681) 59,855 9,576 50,279 Other long-term liabilities: University of the Virgin Islands 90 25 – 115 – 115 Virgin Islands Housing Authority 7,433 – (919) 6,514 487 6,027 Virgin Islands Water and Power Authority: Electric System 10,915 5,894 – 16,809 – 16,809 Water System 2,560 1,383 – 3,943 – 3,943 Juan F. Luis Hospital 894 – (417) 477 240 237 Waste Management Authority 2,865 – – 2,865 – 2,865 Virgin Islands Housing Finance Authority 20,087 – 222 20,309 – 20,309 Total other long-term liabilities 44,844 $ 7,302 $ (1,114) $ 51,032 $ 727 $ 50,305 $ Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 106 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) On June 1, 2004, the University of the Virgin Islands issued the General Obligation Improvement Bonds, (the 2004 Series A Bonds) 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. The Bonds were 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. On December 16, 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. As of September 30, 2005, the 1994 Series A Bonds were retired. On March 30, 2010, the Electric System of WAPA issued the $39.1 million 2010A Electric System Revenue Refunding Bonds; the $8.9 million 2010B Electric System Revenue Bonds; and the $37.3 million 2010C Electric System Revenue Refunding Bonds. The proceeds of the Series 2010A Bonds will be used to: (i) refund a portion of the Electric System Revenue Refunding Bonds, Series 1998, and (ii) pay certain costs of issuance of the Series 2010A Bonds. The proceeds of the Series 2010B and 2010C Bonds were used to: (i) finance certain capital expenditures temporarily funded through draws on a line of credit ($9.0 million), and (ii) to make certain deposits into the Debt Service Revenue Fund sufficient to satisfy the Debt Service Reserve Fund requirement. The proceeds of the three series were also used to pay certain costs of issuance of the 2010A, 2010B, and 2010C Revenue and Refunding Bonds. On June 28, 2007, the Electric System of WAPA issued the $57.6 million 2007A Electric System Subordinated Revenue Bonds, to pay certain costs of issuance of the bonds, to finance the costs of certain capital improvements, refinance capital improvements funded through draws on a Line of Credit and reinstall a $10.0 million Line of Credit. On June 15, 2003, the Electric System issued the Electric System Revenue Bonds, Series 2003, amounting to $69.9 million. The proceeds from the bonds were used to finance capital improvements, repay $18.0 million of then outstanding lines-of-credit, cover underwriters’ costs, and establish a debt service fund. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 107 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) On June 1, 1998, the Electric System of WAPA issued $110.9 million of 1998 Series A Electric System Revenue and Refunding Bonds. The proceeds from the bonds, and approximately $14.0 million in funds from the existing debt service and debt service funds, were used to repay outstanding line-of-credit balances, to provide for approximately $30.0 million in funds for the construction of certain capital projects, and to pay underwriters discount and issuance costs of approximately $1.7 million. The remaining proceeds were used to purchase direct obligations of the U.S. government which were placed in an irrevocable trust with an escrow agent to provide all future debt service on the remaining $69.0 million principal amount of the 1991 Series A Electric System Revenue Bonds. Under the terms of the Bond Resolution relating to the Electric System Revenue and Refunding Bonds, payment of the principal and interest is secured by an irrevocable lien on the Electric System’s net revenue, (exclusive of any funds that may be established pursuant to the Bond Resolution for certain specified purposes), including the investments and income, if any, thereof. Under the General Resolution, the Authority is required to maintain a Debt Service coverage ratio at least equal to 1.25 times the principal of and interest on all Outstanding Senior Bonds for the current and each future fiscal year (the Senior Coverage). Under the Electric System Subordinated Revenue Bond Resolution, adopted by the Authority on May 17, 2007, as amended and supplemented (the Subordinated Bond Resolution), the Authority must satisfy the Debt Service coverage ratio of the General Resolution for the Senior Bonds, must maintain a Subordinated Debt Service coverage ratio at least equal to 1.15 times the principal of and interest on all Outstanding Bonds (the Senior and Subordinate Coverage) and all Outstanding Subordinated Bonds for the current and each future fiscal year, and must maintain at least 1.0 times the Maximum Aggregate Debt Service for each such fiscal year (total debt coverage). The Electric System’s net electric revenue for the fiscal year ended June 30, 2010 yielded the following coverage ratios: Senior Coverage, 180%; Senior and Subordinate Coverage, 151%; Total Debt Coverage, 101%. The Series 2003 Bonds maturing on or after July 1, 2023 are subject to redemption prior to their stated maturity date, at the option of the Electric System, on or after July 1, 2013, as a whole or in part at any time, at a redemption price equal to the principal amount thereof plus accrued interest thereon to the date fixed for redemption. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 108 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) The Electric System Revenue Bonds are subject to mandatory redemption if (i) any significant part of the Electric System was damaged, destroyed, taken, or condemned, or (ii) any for-profit nongovernmental investor shall acquire an ownership interest in some or all of the assets of the Electric System. On June 1, 1998, the Water System of WAPA issued the 1998 Water System Revenue and Refunding Bonds amounting to $44.1 million. The proceeds from the bonds were used to repay the 1990 Series A Water System Revenue Bonds at a redemption price of 100% and to refund the 1992 Series B Water System Revenue Bonds, repay outstanding lines of credit balances, pay underwriters’ costs, provide funding for a Renewal and Replacement Reserve Fund, and to purchase obligations of the United States Government, which were placed in an irrevocable trust with an escrow agent to provide all future debt service on the remaining principal amount of the 1992 Series B Bonds. Payment of principal and interest of the 1998 Series Bonds is secured by an irrevocable lien on the Water System’s net revenues (exclusive of any funds that may be established pursuant to the Bond Resolution for certain other specified purposes) and funds established under the Bond Resolution, including investment securities. To provide additional security, the Water System has conveyed to the bond trustee, a subordinate lien and security interest in the Water System’s General Fund. The Water System is also required to make deposits in a debt service reserve fund in accordance with the Bond Resolution. The Bond Resolution contains certain restrictions and commitments, including the Water System’s covenant to establish and maintain reasonable rates, fees, rentals, and other charges to produce net water revenue, as defined, that will be at least 125% of aggregate annual principal and interest payments. The Water System’s net water revenue for the fiscal year ended June 30, 2010 was 109% of the aggregate debt service as defined in the Bond Resolution. The 1998 Series Bonds maturing on or after July 1, 2010 are subject to redemption prior to their stated maturity date, at the option of the Water System, as a whole or in part at any time, at a redemption price of 101% through June 30, 2010 and 100% thereafter. The Water System Revenue Bonds are subject to mandatory redemption if (i) any significant part of the water system shall be damaged, destroyed, taken, or condemned or (ii) any for-profit non- governmental investor shall acquire an ownership interest in some or all assets of the Water System. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 109 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) On January 16, 2003, VIPA issued the Marine Revenue Bonds Series 2003A (AMT) and 2003B (federally taxable) with principal amounts of approximately $18.0 million and $17.4 million, respectively. VIPA is using the proceeds of the bonds to finance the dredging, rehabilitation, and construction of berthing piers for cruise and seagoing vessels at Crown Bay in St. Thomas, and the construction of a mixed used commercial facility. On October 20, 2003, VIPA issued the Marine Revenue Bonds Series 2003C (non-AMT), with an authorized principal amount not to exceed approximately $10.8 million. VIPA used the proceeds of the bonds to finance the completion of several projects of rehabilitation and construction of berthing piers and dredging for cruise and seagoing vessels at Crown Bay on the island of St. Thomas, and the construction at Red Hook, Enighed Pond, Gallows Bay Dock, and dredging of the Charlotte Amalie Harbor. The bonds’ indentures contain certain account restrictions and funding covenants to cover interest, debt service, maintenance, and other costs as specified in the corresponding bond indentures. The bonds’ indentures also specify certain debt service coverage requirements determined from net available revenue (as defined) of the Authority’s Marine Division. The provisions of each of the bonds’ indentures require that rates and fees charged for the use of each facility should be sufficient to generate enough revenue to pay all operation and maintenance expenses, exclusive of depreciation and certain noncash charges, of the respective facilities, plus: (i) at least 125% of the principal and interest and redemption account sinking fund deposit requirement of each of the bonds becoming due during such year; (ii) the amount of the debt service reserve fund deposit requirement for such period; (iii) the deposit required to the Renewal and Replacement Fund; and (iv) the amount of the capital improvements appropriations for such period. VIPA did not comply with the requirement to issue the audited financial statements within 150 days after year-end. However, as per the Authority’s bond indenture, this noncompliance event does not constitute an event of default until the Trustee sends a notification of failure and such failure continues for 90 days. The Authority has not received a notification of failure from the Trustee. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 110 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) On March 1, 1995, VIHFA issued the 1995 Revenue Bonds Series A in the amount of $6.2 million, and on August 1, 1998 the 1998 Revenue Bonds Series A, in the amount of $3 million, for the purpose of building single-family housing. The indenture agreements for the bonds require the VIHFA to deposit with the trustee the full amount of the bond proceeds, to purchase Government National Mortgage Association (GNMA) certificates. The servicer is obligated to pay the principal and interest due on the GNMA certificates to the trustee in an amount equal to the scheduled principal and interest payments of the underlying mortgages. All mortgage loans issued by the VIHFA must be originated by the participants and secured by a first priority mortgage lien on the applicable single-family residences. Fixed maturities required to pay principal and interest on discretely presented component units’ bonds payable with fixed maturities at September 30, 2010 are as follows (expressed in thousands): Principal Interest Total 2011 14,034 $ 16,597 $ 30,631 $ 2012 12,106 16,042 28,148 2013 12,684 15,483 28,167 2014 13,253 14,897 28,150 2015 13,873 14,244 28,117 2016 – 2020 78,900 59,340 138,240 2021 – 2025 69,909 41,099 111,008 2026 – 2030 75,890 23,698 99,588 2031 – 2035 40,860 6,116 46,976 Total 331,509 207,516 $ 539,025 $ Plus unamortized premium 6,370 Less unamortized discount (612) Less deferred costs on debt refunding and reacquisition (1,200) Bonds payable, net 336,067 $ Year Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 111 12. General Tax Revenue For the year ended September 30, 2010, general tax revenue of the PG consisted of the following (expressed in thousands): PFA Debt PFA Capital Other General Service Projects Governmental Total Income taxes 316,121 $ – $ – $ – $ 316,121 $ Real property taxes 18,463 – – 17,083 35,546 Gross receipts taxes 6,985 121,743 4,341 250 133,319 Excise taxes rum products 101,853 50,410 – 3,798 156,061 Other taxes 49,017 – – 1,131 50,148 Tax revenue 492,439 $ 172,153 $ 4,341 $ 22,262 $ 691,195 Tax revenue not recognized on the modified accrual basis 171,868 Total tax revenue - government-wide 863,063 $ 13. Commitments and Contingencies Primary Government The current labor relations environment of the Government is defined by 13 distinct labor organizations subject to approximately 26 collective bargaining agreements. Fourteen bargaining units are without collective bargaining agreements. As specific disciplines are not grouped under a single pay plan, it is common to have clerical and nonprofessional workers in different departments throughout the Government, represented by different unions. Of the approximately 9,600 government workers, including employees of the executive branch of the Government, approximately 7,200 belong to unions. The present collective bargaining statute requires binding arbitration for certain classified employees in the event of an impasse during salary negotiations between the Government and any union. Under this process, each side chooses an arbitrator and a third impartial arbitrator is selected by the chosen arbitrators. The arbitration panel investigates and reviews the issues in dispute and renders a final and binding decision. For other classified employees, the Government must decide to go to impasse or to enjoin any strike. As of September 30, 2010, the Government has contractual liabilities for retroactive union arbitration salary increases estimated at $231.8 million accruing from fiscal years 1993 through 2010, as established by the Virgin Islands Retroactive Wage Commission. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 112 13. Commitments and Contingencies Primary Government Under Title 24, Section 374(h) of the V.I. Code, the PG may not make any payments of retroactive salaries until there is an appropriation of funds by the Legislature. The Legislature subsequently appropriated $45.0 million for an initial payment of $36.5 million of retroactive wages, and related payroll costs of $8.5 million, which was paid on October 14, 2010. Until additional appropriations are made by the Legislature, the retroactive salary liability is recorded as a liability in the governmental activities column in the government-wide statement of net assets (deficit). The Government receives financial assistance from the federal government in the form of loans, grants, and entitlements. Loans received are described in Note 11. Monetary and nonmonetary federal financial assistance amounted to approximately $282.1 million and $42.9 million, respectively, for the year ended September 30, 2010. Receipt of grants is generally conditioned upon compliance with terms and conditions of the grant agreements and applicable federal regulations, including the expenditure of resources for eligible purposes. Substantially all grants are subject to audit under OMB Circular A-133. Disallowances as a result of these audits may become liabilities of the Government. In February 2008, the federal government passed an Economic Stimulus Act providing taxpayer rebates ranging from $300 to $1,200 depending on taxpayer income and filing status. Under Section 101(c) of the Act, United States possessions with mirror code tax systems (Guam, U.S. Virgin Islands and the Commonwealth of the Northern Mariana Islands) were entitled to receive a loss reimbursement from the federal government for the economic hardship of providing rebates to taxpayers, and to ensure timely payment of the rebates. On April 28, 2008, the PG received a loss reimbursement amounting to $41.5 million. As of September 30, 2010, the PG had expended $36.5 million of the loss reimbursement. In February 2009, the federal government passed the American Recovery and Reinvestment Act (ARRA) to create jobs and stimulate the economy. Under Title I, Section 1001(b) of ARRA, eligible working taxpayers receive a Making Work Pay refundable tax credit of $400 to $800, depending on the taxpayer’s income and filing status for years 2009 and 2010. ARRA provides for mirror code tax system possessions (Guam, U.S. Virgin Islands and the Commonwealth of the Northern Mariana Islands) to receive quarterly loss reimbursements for the economic hardship of this tax provision. During 2009 and 2010, the PG received $23.4 and 21.1 million respectively in loss reimbursements. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 113 13. Commitments and Contingencies (continued) Primary Government (continued) Management of the Government believes that the future outcome of any changes in federal financial assistance programs will not have a material adverse effect on the basic financial statements. On September 23, 2002, the Government entered into a three-year compliance agreement with the U.S. Department of Education requiring that the Government develop integrated and systemic solutions to problems in managing its federally funded education programs. The compliance agreement focuses on the areas of program design and evaluation, financial management, human capital, and property management and procurement. The compliance agreement expired on September 23, 2005. The Government had not fully complied with all terms and conditions of the compliance agreement. The U.S. Department of Education subsequently implemented a special condition for the Government to designate a third-party fiduciary to administer U.S. Department of Education grants. On August 22, 2006, the PG entered into a contract with a third-party fiduciary to administer U.S. Department of Education grants, effective October 1, 2006. The terms and conditions of the original compliance agreement have been extended until the Government is in full compliance with the agreement. The Government is a defendant in numerous legal proceedings pertaining to matters incidental to the performance of routine governmental operations. Under Title 33, Section 3411(c) of the V.I. Code, no judgment shall be awarded against the Government in excess of $25,000 for tort claims filed under Government statutes. In cases involving several survivors, each award must be construed separately for purposes of applying the limitation upon recovery imposed by the Tort Claims Act. Under Title 27, Section 166(e) of the V.I. Code, the Government’s waiver of immunity is expanded to $250,000 for medical malpractice actions, including actions for wrongful death based on malpractice. Under certain circumstances, as provided in Title 33, Section 3414 of the V.I. Code, the Government may assume the payment of a judgment entered against an officer or employee who acted reasonably and within the scope of his employment. The Government may pay up to a maximum amount of $100,000 of the settlement. With respect to pending and threatened litigation, the Government has accrued a provision for legal claims and judgments of approximately $20.8 million for awarded and anticipated unfavorable judgments as of September 30, 2010. Management believes that any liability in excess of amounts recorded will not have a material effect on the basic financial statements. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 114 13. Commitments and Contingencies (continued) Primary Government (continued) Changes in the reported provision for legal claims since October 1, 2008 and October 1, 2009, resulted from the following activity (expressed in thousands): Beginning Balance at October 1, 2008 New Claims Claim Payments and Changes in Estimates Ending Balance at September 30, 2010 Provision for legal claims 14,132 $ 6,862 $ (4,355) $ 16,639 $ Beginning Balance at October 1, 2009 New Claims Claim Payments and Changes in Estimates Ending Balance at September 30, 2010 Provision for legal claims 16,639 $ 6,449 $ (2,284) $ 20,804 $ The breakdown of the provision for legal claims at September 30, 2010 is as follows (expressed in thousands): Current portion of provision for legal claims 1,138 $ Long-term portion of provision for legal claims 19,666 20,804 $ Governmental activities As of September 2002, the Government was a defendant in a lawsuit regarding the assessment of property taxes. Under the lawsuit, taxpayers asserted that properties should be assessed at actual value in accordance with the Organic Act of 1933. The U.S. District Court agreed with the plaintiffs and, in May 2003, imposed an injunction on the collection of real property taxes at values higher than the 1998 assessed value. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 115 13. Commitments and Contingencies (continued) Primary Government (continued) The Government complied with the Court order to develop a plan to implement the new valuation method. In February 2007, the 2005 property tax assessments, based on 1998 assessment levels, were issued. In August 2008, the 2006 property tax assessments, based at actual value in accordance with the Organic Act of 1933, were issued. In September 2008, the 2006 property tax bills were rescinded by court order. In May 2009, the Government received court approval to reissue the 2006 property tax assessments; however, that approval was rescinded in June 2009. The Government subsequently issued the 2006, 2007 and 2008 property tax assessments, based on 1998 assessment levels, in April 2010, February 2011, and August 2011 respectively. Federal laws and regulations, including the Clean Air Act, 42 U.S.C. § 7401 et seq. (CAA), and regulations promulgated thereunder, including the federal standards set forth in 40 C.F.R. Part 62, Subpart GGG (Federal Plan), and the National Emission Standards for Hazardous Air Pollutants for Municipal Landfill Maximum Achievable Control Technology, set forth in 40 C.F.R. Part 63, Subpart AAAA (Landfill MACT), and the Solid Waste Disposal Act, 42 U.S.C. § 6901 et seq. (RCRA), and regulations promulgated thereunder, including federal municipal solid waste landfill operating, closure, and post-closure criteria set forth in 40 C.F.R. Part 258, and three EPA administrative orders issued pursuant to RCRA § 7003(a), 42 U.S.C. § 6973(a), and Territorial laws and regulations, including V.I. Code Title 19, Chapter 56 (Solid and Hazardous Waste Management), Title 12, Chapter 9 (Air Pollution Control), and Title 12, Chapter 21 (Virgin Islands Coastal Zone Management), and regulations promulgated thereunder, require the Government to construct and operate certain environmental control systems and otherwise comply with certain requirements during operation of each of its landfill sites, properly close the site (including placement of a final landfill cover) when the landfill (or portion thereof) stops accepting waste, and perform certain post-closure maintenance and monitoring functions at the site for 30 years following closure. Compliance costs during the operational phase will be paid prior to closure. Although closure and post-closure costs will be paid only near or after the date that the landfill stops accepting waste, the Government reports a portion of these closure and post-closure care costs as an operating expense in each period based on landfill capacity used as of each balance sheet date. The $173.3 million reported as landfill compliance, closure, and post- closure care liability at September 30, 2010, represents the cumulative amount reported to date based on the use of the estimated capacity of each landfill. The Government will recognize the remaining estimated cost of closure and post-closure care as the remaining estimated capacities are filled. These amounts are based on what it would cost to perform all closure and post-closure care as of September 30, 2010. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 116 13. Commitments and Contingencies (continued) Primary Government (continued) The estimated used capacity and expected closure of each of the Government landfills is as follows: Estimated Estimated Landfill used capacity closure date Bovoni 66% 2020 Anguilla 100% Closed Susannaberg 100% Closed Actual cost to perform closure and post-closure may be higher due to inflation, changes in technology, or changes in regulations. The Government is required by state and federal laws and regulations to make annual contributions to a trust to finance closure and post-closure care. The Government began making annual contributions to a trust in fiscal year 2007 to finance closure and post-closure costs. The Government expects that future inflation costs will be paid from interest earnings on these annual contributions and other financing measures. However, if interest earnings and financing measures should be inadequate, or additional post-closure care requirements are determined (due to changes in technology or applicable laws or regulations, for example), these costs may need to be covered by charges to future landfill users. Since 1985, the Government has been subject to a consent decree issued by the Virgin Islands District Court, governing the operation of its wastewater treatment plants. The consent decree was amended in 1996 and further modified with the 2002 Stipulation to the Amended Consent Decree (the Stipulation) to establish deadlines for the construction of new secondary treatment facilities, including the replacement of the existing St. Croix and Airport Lagoon (Charlotte Amalie) wastewater treatment plants. The Stipulation requires that the new St. Croix wastewater treatment plants be completed by the end of 2006 and the new Charlotte Amalie wastewater treatment plants be completed by the end of 2007. However, the plants were completed by the end of 2007 and 2008, respectively. The cost of both facilities is estimated at approximately $50 million. The Stipulation also establishes certain interim deadlines and performance standards that must be met by the Government pending completion of the new facilities. In addition, the Stipulation establishes specified penalties for violation of any of the deadlines or performance standards set forth therein. As of the date of the basic financial statements, the Government is Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 117 13. Commitments and Contingencies (continued) Primary Government (continued) current on all of its outstanding obligations pursuant to the stipulation. In January 2004, the Government’s Legislature authorized the creation of the V.I. Waste Management Authority (WMA) for the purpose of meeting environmental requirements of waste treatment in the U.S. Virgin Islands. On December 2004, the PFA issued revenue bonds amounting to $94.0 million for the purpose of constructing and rehabilitating wastewater treatment plants noted above. On August 21, 2002, the Government and the United States Environmental Protection Agency (EPA) entered into a memorandum of understanding documenting the EPA’s agreement to support the renewal of the Territorial Pollutant Discharge Elimination System permit for its St. Croix distillery operations provided that the Government make certain funding available to (i) conduct treatability studies regarding the Virgin Islands Rum Industries, Ltd. effluent and the means to mitigate its potential environmental effects in the vicinity of the discharge, (ii) identify practicable, available, reliable, and cost-effective potential mitigation measures, and (iii) implement (or assist in the implementation of) such mitigation measures in the event such measures are determined by the V.I. Department of Planning and Natural Resources after consultation with EPA to be necessary and appropriate. Pursuant to the memorandum of understanding, the Government’s obligation to fund such activities is limited to $6 million in the aggregate, commencing on October 13, 2003. In June 2004, the Government entered into a three year contract with a locally licensed environmental consulting firm to facilitate the Government’s commitments with the memorandum of understanding with the EPA. As of September 2004, the PG became a defendant in a lawsuit regarding the assessment of franchise taxes. Under the lawsuit, taxpayers asserted that franchise taxes should be assessed in accordance with Title 13 Virgin Islands Code Section 531(a). The plaintiff taxpayers interpret the definition of “capital stocks used in conducting business in the Virgin Islands” in the V.I. Code as tax collected only on the par value of the stock, while the PG’s position is that the amount allocated should be over the par value and additional paid-in capital upon a subsequent reorganization. The PG also imposed a six-year statute of limitations on tax refund claims against the Government. Management believes that the ultimate liability of this case would not have a material adverse impact on the PG’s overall financial position as reported in the government-wide financial statements. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 118 13. Commitments and Contingencies (continued) Workers’ Compensation Liability The Government is exposed to risk of loss related to workers’ compensation claims. The Government is self-insured for this risk. Self-insured risk liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. Because actual claims liabilities depend upon such complex factors as inflation, changes in legal doctrines, and damage awards, the process used in computing claims liabilities does not necessarily result in an exact amount. Claims liabilities are reevaluated periodically to take into consideration recently settled claims, the frequency of claims, and other economic and social factors. Changes in the claims liability amount in fiscal year 2010, as recorded in the Government Insurance Fund was as follows (expressed in thousands): 2010 2009 Claims payable - October 1 15,495 $ 16,150 $ Incurred claims and changes in estimates 10,705 5,348 Payments for claims and adjustments expenses (8,301) (6,003) Claims payable - September 30 17,899 $ 15,495 $ The Government continues to carry commercial insurance for all other risks of loss. Settled claims resulting from these risks have not exceeded commercial insurance coverage in any of the past three fiscal years. Component Units In September 1989, WAPA electric facilities were damaged by Hurricane Hugo. WAPA reconstructed the facilities with proceeds from insurance and FEMA. Subsequent to the receipt of funds, FEMA de-obligated approximately $7.9 million in questioned costs. Approximately $2.6 million of these questioned costs related to an oil spill that was subsequently settled with FEMA. During 1998, WAPA submitted a second appeal for $4.4 million of the remaining questioned costs, and agreed to refund approximately $900 thousand of questioned costs to FEMA. During 1999, FEMA denied the second appeal and formally closed the disaster claim. WAPA has recorded a liability for $5.0 million related to the questioned costs. FEMA has not made a formal request for repayment of the funds. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 119 13. Commitments and Contingencies (continued) Component Units (continued) In September 2005, WAPA electric facilities were damaged by Tropical Storm Jeanne. Damages amounted to $1.3 million, and WAPA filed a claim for $438 thousand with FEMA which is reported as a receivable as of June 30, 2010. In October 2008, WAPA electric facilities on the island of St. Croix were damaged by Hurricane Omar. WAPA has expended $2.7 million for storm cleanup and system restoration as of June 2010. The territory was declared a federal disaster after the hurricane and is eligible for reimbursement of 75% or 80% of what was expended according to the category of the damage. The Authority has recorded a receivable from FEMA through the Office of Management and Budget – Public Assistance (OMB-PA) amounting to approximately $2.3 million. Five former employees have individually filed suits against the VIHA for wrongful discharge over the period 1997 through 2006. None of the cases are resolved and it is not possible to predict the eventual outcome, nor estimate the amount or range of potential loss in the event of an unfavorable outcome. A subcontractor has sued the VIHA for nonpayment for work done in 2000. It is not possible to predict the eventual outcome nor estimate the amount or range of potential loss in the event of an unfavorable outcome. In 2002, the Federal Aviation Administration (FAA) conducted an on-site wildlife evaluation of the Anguilla Landfill, which is located next to the St. Croix airport. The FAA determined that the landfill posed an environmental and navigational threat to the airport due to flocks of birds that reside in the landfill area. The FAA may require VIPA to repay $9.3 million in federal grants and has refused further discretionary grants for the airport until VIPA shows progress toward closing the landfill. The landfill is now under the jurisdiction of the WMA. VIPA negotiated a remediation plan with FAA to close the landfill by December 2009, and subsequently WMA received an extension on the closure date to January 31, 2012. In connection with the purchase of lands adjacent to the St. Croix airport, VIPA was awarded federal financial assistance in 2002 amounting to $8.0 million under a Real Property Acquisition Relocation Assistance Program. VIPA is in noncompliance with certain federal requirements of the assistance program. Noncompliance with requirements of federal financial assistance programs may result in a refund of the funds granted. VIPA management believes that noncompliance instances should not materially affect VIPA’s financial position. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 120 13. Commitments and Contingencies (continued) Component Units (continued) WAPA, VIPA, and other discretely presented component units are presently a defendant or codefendant in various lawsuits. The financial managers of the component units have advised the PG that any adverse outcome involving a material claim is expected to be substantially covered by insurance. Government property is exempt from lien, levy, or sale as a result of any judgment under the Virgin Islands Code. 14. Retirement Systems Plan Description GERS is the administrator of a cost-sharing, multiple-employer, defined-benefit pension plan established as of October 1, 1959 by the Government to provide retirement, death, and disability benefits to its employees. The following description of the plan is provided for general information purposes only. Refer to the actual text of the retirement law in the V.I. Code, Title 3, Chapter 27 for more complete information. Regular employees are eligible for a full-service retirement annuity when they have completed 30 years of credited service or have attained the age of 60 with at least 10 years of credited service. Members who are considered “safety employees,” as defined in the V.I. Code, are eligible for full retirement benefits when they have earned at least 20 years of government service or have reached the age of 55 with at least 10 years of credited service. Regular employees who have attained the age of 50 with at least 10 years of credited service can elect to retire early with a reduced benefit. Senators and members of the Legislature may receive a retirement annuity when they have attained the age of 50 and upon the completion of 6 years of credited service as a member of the Legislature. Funding Policy The monthly annuity benefit payment is determined by applying a stipulated benefit ratio to the member’s average compensation. Average compensation is determined by averaging the three highest years of salary the member earned within the last 10 years of service. The maximum annual salary that can be used in this computation is $65,000, except for senators and judges, whose annual salary is used. The board of trustees of GERS may set cost-of-living increases for annuitants and pensioners and determine when the annuity should be paid on the basis of the most recent actuarial valuation and the Consumer Price Index. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 121 14. Retirement Systems (continued) Funding Policy (continued) GERS is a blended component unit included in the financial reporting entity and is presented as a pension trust fund of the PG. GERS issues a publicly available financial report that includes financial statements and required supplementary information. That report may be obtained by writing to Employees’ Retirement System of the Government of the Virgin Islands, 3438 Kronprindsens Gade, Veterans Drive, St. Thomas, Virgin Islands 00802. Contributions to GERS are made by the Government and the members. Government and members contributions are not actuarially determined but are set by statute. The Government and members’ contributions together with the income of GERS should be sufficient to provide an adequate actuarially determined reserve for the benefits prescribed by the VI Code. The contributions required to fund GERS on an “actuarial reserve basis” are calculated periodically by the GERS actuarial consultant. The actuarial valuation as of September 30, 2006, indicates that the current combined statutory employer and employee contribution rates are not sufficient to meet the cost of the pension trust fund on an actuarial basis, as required by law. The Government’s required contribution for the year ended September 30, 2010 was 17.5% of the member’s annual salary. Since April 1, 1991, required member contributions are 8% of annual salary for regular employees, 9% for senators, 11% for judges, and 10% for safety (hazardous employees) and eligible employees under Act 5226. Prior to June 29, 2000, member contributions were refundable without interest upon withdrawal from employment before retirement. Effective July 1, 2009, legislation was passed that provided for annual interest on refunded contributions of 2% annually. The Government’s contractually required contributions, actual contributions made, and percentage contributed to the plan for the years ended September 30, 2010, 2009, and 2008 were as follows (expressed in thousands): Annual Percentage of Pension Employer APC Cost (APC) Contribution Contributed 2008 75,871 $ 75,871 $ 100.00% 2009 80,177 $ 80,177 $ 100.00% 2010 77,005 $ 77,005 $ 100.00% Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 122 14. Retirement Systems (continued) Funding Policy (continued) The comparability of trend information, shown as RSI, is affected by changes in actuarial assumptions, benefit provision, actuarial funding methods, accounting policies and other changes. Those changes usually affect trends in contribution requirements and in ratios that use the pension benefit obligations as a factor. The information presented in the required supplementary schedules was determined as part of the actuarial valuation at the dates indicated. Additional information as of the latest actuarial valuation follows: Valuation date September 30,2006 Actuarial cost method Entry age normal Amortization method Level dollar, closed group Remaining amortization period 20 years Asset valuation method Actuarial value, but not less than 80% nor greater than 120% of market Actuarial assumptions: Investment rate of return 8% per year compounded annually Projected salary increases 5.5% per year compounded annually, attributable to inflation Cost-of-living adjustments Retirement benefits increased by 1.5% of the original amount each year after age 0. Disability benefits are also increased by 1%. In August 1994, legislation providing an early retirement incentive was passed. The legislation was subsequently amended on October 13, 1994, December 30, 1994, and December 5, 1995. Among other matters, the legislation allows a member of GERS who has a combined aggregate number of years of credited service plus number of years of age, equal to at least 75 years as of the date of the legislation, to retire without reduction of annuity. Members, who have attained the age of 50 with at least 10 but less than 30 years of credited service, may add an additional 3 years to their age for this computation. Members with 30 years of service or who can retire without penalty under the V.I. Code shall have their average compensation increased by 4 percentage points. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 123 14. Retirement Systems (continued) Funding Policy (continued) For each employee electing to retire pursuant to Section 8(a) of the Early Retirement Act of 1994 (the Act), the Government contributes to GERS, on a quarterly basis, an amount equal to the employer and employee contributions that would have been made until the employee reached the age of 62 had the employee not elected to retire under this provision. For employees electing to retire under Section 8(b) of the Act, the Government contributes to GERS a sum equal to the additional contribution the employer and employee would have made had the employee received a salary four percent higher during the three years used to compute the employee’s average compensation figure, plus a sum of $5,000. Based on this calculation, the amount due to GERS was $26.9 million as of September 30, 2009, of which $26.8 million had been remitted to GERS. The actuaries of GERS have determined that the specific funding provided under the Act is inadequate to cover the costs of the program. GERS is seeking to recover any unfunded costs of the program under a newly enacted provision of the retirement law, which provides that the Government will compensate GERS for the costs of any special early retirement program. The University has two retirement plans in which all eligible employees are required to participate, the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) and GERS. The TIAA-CREF is a defined-contribution pension plan covering participating, full-time faculty members and other exempt employees, under which the contributions, including employees’ contributions, are used to purchase annuities. There are no unfunded past service costs, and vested benefits are equal to the annuities purchased under TIAA-CREF. As of September 30, 2010, 249 faculty members and other employees were TIAA-CREF participants. The number of active participants from the University participating in GERS as of September 30, 2010 was 249. Total contributions made by the University to TIAA- CREF and GERS participant accounts amounted to $2.2 million and $1.5 million, respectively. Postemployment Benefits In addition to the pension benefits described in Note 13, the Government provides other postemployment benefits (OPEB) of healthcare, prescription, dental and life insurance coverage. These benefits are provided in accordance with Title 3, Chapter 25, Subchapter VIII of the VI Code as part of a cost-sharing, multiple employer defined benefit OPEB plan, in which all component units of the PG participate and contribute. All employees who retire from government service after attaining age 55 with at least 30 years of service; except for policemen and firemen who can retire with at least 20 years of service, are eligible for these benefits. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 124 14. Retirement Systems (continued) Postemployment Benefits (continued) As of September 30, 2010, approximately 10,751 active employees, 5,915 service retirees, 1,581 spouses of service retirees covered for medical and dental benefits, 104 disability retirees and 158 deferred vested (i.e., non-retired employees who have already terminated employment with the PG, but who are eligible for medical and life insurance benefits when they subsequently reach the qualifying age) meet the eligibility requirements of OPEB. Healthcare, prescription and dental insurance is provided through negotiated contracts with private insurance companies. Participants in the plan may elect coverage for their spouses and dependent children. Participants are required to contribute 35% of medical, prescription and dental premiums. Retirees of UVI that participate in the 403(b) retirement plan may obtain coverage on a fully contributory basis. Life insurance is offered to retirees on a fully contributory basis. The contribution requirements of plan members and the PG are legislated within the Virgin Islands Code, and may be amended, by the Virgin Islands Legislature. The plan is a non-funded pay-as-you-go plan, and expenditures are paid as they become due. For the year ended September 30, 2010, the Legislature budgeted, and paid, $19.6 million for retiree health insurance payments. Other component unit participants paid $17.2 million for the year ended September 30, 2010. The PG’s postemployment benefit cost is calculated on the annual required contribution of the PG, an amount actuarially determined. The first actuarial valuation was prepared as of October 1, 2009, in accordance with provisions of GASB Statement 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. This standard was implemented prospectively. Prior to the implementation of GASB Statement 45, the PG did not report an OPEB obligation. In future years, the actuarial valuation will be prepared bi-annually. For the fiscal year ended September 30, 2010, a roll-forward of the initial actuarial report was prepared. The annual required contribution represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year, and amortize any unfunded actuarial liabilities over a period not to exceed an open 30-year period. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 125 14. Retirement Systems (continued) Postemployment Benefits (continued) The following table shows the components of the PG’s annual postemployment benefits cost for the fiscal year ended September 30, 2010, and the changes in the net estimated obligation for future payments of benefits: Annual OPEB Cost and Net Postemployment Benefit Obligation In thousands ARC 85,921 $ Interest on the net OPEB obligation 3,757 Adjustment to the ARC (3,732) Annual OPEB cost (expense) 85,946 Employer contribution (36,859) Change in the net OPEB obligation 49,087 $ Net OPEB obligation- beginning of year 93,915 $ Change in the net OPEB obligation 49,087 Net OPEB obligation- end of year 143,002 $ The following table shows the Government’s funded status of the OPEB: Actuarial Valuation Date October 1, 2009 Actuarial Accrued Liability (AAL) $1,069,562 Unfunded AAL $1,069,562 Funded Ration 0% Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 126 14. Retirement Systems (continued) Postemployment Benefits (continued) The Government’s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and Net OPEB Obligation on a funded and unfunded basis are as follows: Percentage of Annual Annual OPEB Net OPEB OPEB Cost Cost Contributed Obligation 2008 78,185 $ 40.36% 46,629 $ 2009 82,004 $ 42.34% 93,915 $ 2010 85,946 $ 42.89% 143,002 $ The PG’s obligation to provide health insurance to retirees is an unfunded plan. The actuarial valuation of the amount required to fund the plan involves estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Estimated annual required contributions are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members), and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the PG and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short term volatility in actuarial accrued liabilities, and the actuarial value of assets, consistent with the long-term perspective of the calculations. In the actuarial valuation dated October 1, 2009, liabilities at October 1, 2010 were rolled back to October 1, 2009, and actual benefit payments were used for the fiscal years ending September 30, 2010 and 2011. Covered health care and dental care expenses were assumed to increase in future years with an initial increase of 10.0% for medical and 7.5% for dental and an ultimate rate of 5.0% for both medical and dental care expenses. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 127 14. Retirement Systems (continued) Postemployment Benefits (continued) The entry age normal actuarial cost method with costs on a level percentage of payroll basis was used to determine the annual required cost of OPEB benefits to retirees. Amortization is over an open 30-year period as a level percentage of payroll. Payroll growth is assumed to be 3% per year for purposes of amortization. This method is consistent with the cost method used by GERS and typically produces the most level annual required contribution each subsequent year as a percentage of payroll. The normal cost was rolled back using the ultimate trend rate. A discount rate of 4.0% per annum was used, compounded annually. The valuation assumed that the annual unit cost per covered individual (i.e., retiree or spouse) for medical, prescription drugs and dental care for fiscal year 2010 was $6,155, $1,401 and $184 for retirees under age 65; and $1,591, $1,885 and $184 for retirees over age 65. The normal cost reflects the average age of the covered population and is based on claims experience for fiscal years 2008 and 2009, with a two-thirds weighting applied to the more recent year. Combined experience and a combined cost were used for the pre-65 and post-65 populations. A composite cost was determined for retirees and spouses by combining their claim experience. Dependent children claims were included in developing the composite retiree and spouse cost. Costs were trended forward to fiscal year 2010 and adjusted to reflect the fiscal 2010 plan design and the anticipated lag in claim payment. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 128 15. Liquidity Governmental Activities At September 30, 2010, the Government reported an unrestricted net deficit in governmental activities amounting to $1.4 billion. The net deficit resulted from: 1) the 2008 financial markets collapse and subsequent recession resulting in a reduction in income tax revenue and increase in unemployment, 2) the delay in the issuance of the 2007, 2008 and 2009 property taxes due to a class action lawsuit, and 3) the negative effect of Internal Revenue Service regulations redefining the requirements for residency, and sourcing of income, for the Territory. The revised Internal Revenue Service regulations negatively impacted economic growth in the Territory and reduced the participants in the Government’s economic development programs. Following is a summary of the Government’s unrestricted net deficit for governmental activities for fiscal years 2006 through 2010: Governmental Activities Unrestricted Net Deficit (In thousands, as restated) Governmental Decrease Fiscal Year Unrestricted Net Deficit (Increase) 2006 $ (306,467) $ 317,044 2007 (335,924) (29,457) 2008 (513,201) (177,277) 2009 (1,110,871) (597,670) 2010 (1,408,601) (297,730) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 129 15. Liquidity (continued) Governmental Activities (continued) The Government has initiated specific actions to improve its liquidity and future cash flows. The Government established the Office of Economic Opportunity to pursue grants through the American Recovery and Reinvestment Act of 2009, to generate jobs, to promote energy efficient appliances and automobiles, and to improve infrastructure. The Government has successfully attracted a rum producer (Captain Morgan) and retained an existing rum producer (Cruzan Rum) within the Territory. The Government has imposed budgetary restraints, including incentives for early retirement of government workers, salary reductions, personnel reductions and budgetary cut-backs for the entire government. The Government has also legislated increases in local taxes such as the gross receipts taxes and hotel taxes. The Government has met certain District Court requirements in connection with a taxpayer class-action lawsuit, allowing the release of 2007 and 2008 property tax assessments in fiscal year 2011. General Fund At September 30, 2010, the Government reported an unreserved fund deficit in the General Fund of $155.9 million. This deficit represents an increase in fund balance of $93.4 million from the 2009 fiscal year, mainly due to an increase in tax revenue and receipt of ARRA grants. Following is a summary of the General Fund’s unreserved fund balance for fiscal years 2006 through 2010: General Fund Unreserved Fund Balance (Deficit) (In thousands) General Fund - Unreserved Increase Fiscal Year Fund Balance (Deficit) (Decrease) 2006 $ 107,769 $ (22,903) 2007 171,352 63,583 2008 100,188 (71,164) 2009 (62,482) (162,670) 2010 (155,865) (93,383) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 130 16. Fund and Net Assets Deficit The following non-major funds have a fund or net assets deficit as of September 30, 2010 (in thousands): Governmental Funds Proprietary Funds Employment Security $ (255) Bureau Of Motor Vehciles $ (2,688) Rural5 Library Extension (585) Vi Housing Finance Authority (3,000) Fish and Game Non-Lapsing (183) Health Revolving (76,459) Federally Aided Education Program (15,393) Emergency Housing (492) Special Federal Grant To Education (659) Housing Construction Revolving (1,467) Air & Water Pollution Central (5,650) Housing Construction Revolving (1,537) Vi Planning Board Projects (3,007) Frederiksted Small Business (47) Highway Safety (3,938) Proprietary Fund Net Asset Deficits $ (85,690) Ving Fed/State Agreement (3,848) Vi Energy Office (2,419) Federal Programs/Dept Construction (2,707) Anti-Litter And Beautification (46,817) Interest Revenue (2,780) Pwd Fed Contributions Capital (7,557) Federal Aided (196) Commission On Aging (22) Land Bank (7,262) Sewer Waste Water Fund (11,977) Air Pollution Cont Agency (278) Indirect Cost (1,853) Indirect Cost Non-Lapsing (2,873) JTPA of 1983-1984 (8,773) Financial Services Fund (7,239) Technical Assist Grt Capital (64) V.I. Insurance Guaranty Non-Lapsing (1,301) Union Arbitration Award (28,352) Crisis Intervention Fund (227) Law Revision Commission (3) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 131 16. Fund and Net Assets Deficit (continued) Governmental Funds Health Information (18) State Fiscal Stabilization (6) Drug Education Training Program (123) Federal Health Program (525) Food Stamp Welfare (2,153) Elementary/Secondary Education (19) Law Library Non-Lapsing (184) Civil Defense Protection (1,386) Boating Safety (301) V.I. Law Enforcement (4,495) V.I. Law Enforcement Non-Lapsing (293) Forensic Science (66) Vocational Rehabilitation (1,478) V.I. Educational Initiative Fd/Non-Lapsing (896) Hurricane Hugo Insurance Claims (5,711) V.I. Army National Guard (2,266) Emergency Drought Relief (179) Outdoor Recreation Program (40) WAPA Water Credits (1,000) Pharmaceutical Insurance Non-Lapsing (19,830) NSF Forfeiture (4) SBDA Mangement Technical Assistance (8) Juvenile Detention Center (19) Road Fund (2,814) Road Fund Non-Lapsing (3,516) Internal Revenue Matching (987) Internal Revenue Matching (288,715) Internal Revenue Matching Non-Lapsing (34,091) Section 12 Bond Proceeds (32,227) Major Repair And Improvement (58) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 132 16. Fund and Net Assets Deficit (continued) Governmental Funds Water & Electric System Project (1,698) Caribbean Basin Initiative (58,082) Gr Bond Proceeds (4,573) Saint John Capital Improvement (19,801) Disaster Relief Fund (519) St Croix Capital Improvement (3,124) District Portable Water Fund (67) Federal Grants All Except Doe (305) Paternity & Child Support (11,124) Central Warehouse (170) Transportation Revolving (985) Data Processing Revolving (215) Public Transit (9,697) Home/Aged Revolving Non-Lapsing (365) Tourism Ad Revolving (9,250) Water Purchases Revolving Fund (77) Asset Recovery Fund (798) Transportation Trust Fund Non-Lapsing (39,629) Industrial Development (1,682) Vi Waste Water Corr Act Non-Lapsing (3,226) Total Fund Deficit $(735,017) Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 133 17. Restatements of Net Assets Component Units Beginning net assets of three discretely presented component units were restated to correct material errors identified in prior years as follows (expressed in thousands): As Previously As Reported Adjustments Restated Virgin Islands Port Authority 240,560 $ 1,560 $ 242,120 $ Economic Development Authority 2,724 11,864 14,588 Waste Management Authority 9,046 561 9,607 Other component units 413,753 – 413,753 Net Assets 666,083 $ 13,985 $ 680,068 $ Component Unit Beginning Net Assets 18. Subsequent Events Primary Government On October 9, 2010, the PFA authorized a $45.0 million letter of credit facility with Banco Popular de Puerto Rico, to fund the Insurance Guaranty Fund reserve account, which previously had consisted of certificates of deposit. The released certificates of deposit were subsequently utilized on October 14, 2010 for the payment of $36.5 million in retroactive wages and $8.5 million in related payroll costs. On November 4, 2010, PFA entered into the Subordinated Lien Revenue Bond Anticipation Notes (the Series 2010A Notes), which modified and amended the Series 2009B Notes, extending the maturity date to October 1, 2013, and a maximum amount of $131.4 million, with $78.8 million from the Agent Lender and $52.6 from the Syndicate Lender. The lenders transferred the balance of $6.4 million from the 2009B Notes to the Series 2010A Notes. As of September 30, 2011, PFA had drawn the maximum amount of $131.4 million. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 134 18. Subsequent Events (continued) Primary Government (continued) On January 20, 2011, a Third Circuit Court of Appeals vacated a decree issued in June 2009, which enjoined the Government from collecting property taxes at the 2008 assessment rate. The Court’s decision is effective for tax year 2010. Property tax assessments for 2007, 2008, and 2009 were issued in February 2011, July 2011, and February 2012, respectively, at the 1998 assessment rates. Property tax assessments for 2010 were issued in June 2012 at the 2008 assessment value. On April 29, 2011, PFA entered into the Subordinated Lien Revenue Bond Anticipation Notes, (the Series 2011A Notes) with Banco Popular de Puerto Rico, to purchase $32.2 million in Subordinated Revenue Bond Anticipation Notes. The Notes were issued to finance the costs of development, purchase of equipment and construction of broadband technology and infrastructure in the U.S. Virgin Islands. The Series 2011A Notes have an interest rate of 4.75% and mature on April 12, 2012. If the Series 2011A Notes are not defeased through long-term financing, the PG may convert the Notes to term notes. On June 9, 2011, the United States Department of Justice (USDOJ) filed a motion for the appointment of a receiver to manage and operate the Golden Grove Adult Correctional Facility (the Facility) in St. Croix. The case was first brought against the PG in 1986 when the USDOJ alleged unconstitutional conditions at the prison based on the Civil Rights Institutionalized Persons Act. The PG opposed the appointment of a receiver and filed a motion with the court to validate the motion. On September 4, 2012, the USDOJ and the PG reached a proposed agreement that would settle the legal battle for control of the Facility. The settlement agreement would allow the PG to continue to run the Facility, if it complies with USDOJ requirement to hire an independent monitor to oversee implementation of court orders that would bring prison conditions up to constitutional standards. On June 30, 2011, the Virgin Islands Office of Economic Opportunity (OEO), an agency designated to coordinate and manage American Recovery and Reinvestment (ARRA) grants for the Government, reported that the Government was awarded over $175.0 million in formula funds (the majority of which funded projects for the Office of the Governor, the V.I. Energy Office, the Department of Public Works, and Law Enforcement Planning Commission) and submitted over $130.0 million in competitive ARRA grant applications. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 135 18. Subsequent Events (continued) Primary Government (continued) On July 5, 2011, the Legislature passed the Virgin Islands Economic Stability Act of 2011. The Act provides an incentive payment of $10,000 to any member of GERS with thirty or more years of credited service, who elects to retire between June 30, 2011 and September 30, 2011. The Act also provides that any member of GERS, with thirty or more years of service, that does not elect to retire, shall pay an additional 3 percent GERS member contribution (based on gross salary) effective October 1, 2011. The Virgin Islands Economic Stability Act also mandates an 8 percent reduction in the salaries of all employees in the executive and legislative branches of the PG, and an 8 percent reduction in the salaries of all employees of autonomous and semi- autonomous agencies that receive any portion of their funding from the general fund. The 8 percent reduction is effective for the two year period from July 4, 2011 until July 3, 2013. The Act also required the judiciary branch to electively reduce salaries by a comparable amount, or reduce its operating budget in an alternate way to achieve the objective of the Act. The Act establishes a cap of $26,000 below which an employee salary may not be reduced. Eligible government employees that elect to retire on or before July 3, 2013, are permitted to have their retirement annuity calculated at the pre-8 percent reduction amount. On November 1, 2011, PFA entered into a Property Tax Revenue Anticipation Note Loan Agreement (the Retirement Incentive Program Notes). Under the terms of the Loan Agreement, a local bank will loan PFA $13 million to fund: (i) payments made to employees who elect to retire under the Virgin Islands Economic Stability Act and receive the incentive payment of $10,000, (ii) expenses incurred by the Office of the Lieutenant Governor related to processing, issuing and collecting property tax bills, and (iii) loan issuance costs. The Retirement Incentive Program Notes have a term of five years, with interest based on the current rate of a five-year US Treasury Note, at the time of closing, plus 400 basis points. After the five year term expires, the Retirement Incentive Program Notes will convert to a term loan not to exceed two years. On December 15, 2011, GERS restructured its $15 million loan agreement with Carambola Northwest, LLC, reducing the interest on the investment from 10.25 percent to 6.3 percent. Carambola had defaulted on principal payments in May 2011 and had requested a restructuring of the terms of the agreement. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 136 18. Subsequent Events (continued) Primary Government (continued) On January 18, 2012, HOVENSA, LLC, an oil refinery and major employer on the island of St. Croix, announced that it will cease operations in February 2012, due to significant operating losses. The refinery employed 1,200 people and had approximately 960 contractors. The company proposed a conversion of the facility to an oil storage terminal employing approximately 100 people, including contractors. On August 2012, the PG has requested HOVENSA to reopen the refinery using more fuel efficient technology, either under current ownership or new ownership. On January 25, 2012, HOVENSA, LLC published an offer to repurchased the outstanding tax exempt private activity bonds, issued through PFA, amounting to $355.7 million, at a purchase price of $1,000 per $1,000 in aggregate principal amount plus accrued but unpaid interest. The offer was accepted by the bond holders before the expiration date of February 17, 2012. On September 1, 2012, PFA issued the 2012 Series A Working Capital Bonds (2012 Series A Bonds), the proceeds of which amounted to $142.6 million. The Government has pledged matching fund excise tax revenues for the timely payment of the principal and interest on the 2012 Series A Bonds. The 2012 Series A Bonds bear interest at 4.00% to 5.00% and mature from 2022 to 2032. The proceeds of the bonds were issued to: (i) provide a loan to the PG to be used for working capital required to finance certain operating expenses and other PG obligations; (ii) to fund certain debt service reserve accounts of the 2012 Series A Bonds, and (iii) to pay certain costs of issuing the Series 2012 Series A Bonds. The 2012 Series A Bonds maturing on or after October 1, 2023 are subject to optional redemption on or after October 1, 2022. The Series 2012 Series A Bonds maturing on October 1, 2022 are subject to mandatory sinking fund redemptions beginning on October 1, 2014. The PG has covenanted, commencing October 1, 2012, to annually set aside 4% of the matching fund revenues transferred to the PG pursuant to the Cruzan and Diageo Agreements and Indentures, and to apply that amount first to the outstanding principal of the 2012 Series A Bonds, if any, and next, for the early optional redemption of outstanding bonds issued for working capital purposes, including the 2012 Series A Bonds. On November 9, 2012, PFA issued Series 2012A and Series 2012B Revenue Refunding Bonds amounting to $228.8 million, to pay working capital obligations amounting to $197.1 million, and to refinance broadband project obligations amounting to $31.7 million. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 137 18. Subsequent Events (continued) Primary Government (continued) On March 1, 2012, the Internal Revenue Service (IRS) notified PFA that it was conducting a random audit in connection with the $219.5 million Virgin Islands Public Finance Authority Revenue Bonds (Gross Receipts Taxes Loan Revenue Bonds), Series 2006, issued on September 28, 2006 (the 2006 Series Bonds). A portion of the 2006 Bonds partially refunded the Series 1999A Bonds, which were issued as long-term working capital bonds to address the Government’s cash flow needs. As of the date hereof, the audit is ongoing. The Authority is working with its counsel to address the audit. Component Units On October 9, 2010, PFA authorized a $45 million letter of credit facility with Banco Popular de Puerto Rico. The facility will be available to replace funds from the PG’s Insurance Guaranty Fund used for retroactive wage payments in October 2010. On October 31, 2010, WAPA concluded the storm clean-up and power restoration related to Hurricane Earl, which impacted the U.S. Virgin Islands in August 2010. The damage related to the storm was in excess of $2 million. WAPA has applied to FEMA for reimbursement. On December 22, 2010, WAPA Electric System refinanced General Obligation Notes with First Bank Puerto Rico amounting to $40 million. The General Obligation Notes were issued in November 2008 with a three year term. Under the terms of the refinancing, the new loan will expire in approximately six years. Net proceeds of approximately $15.2 million will be used to replenish self-insurance funds and to pay outstanding invoices to the HOVENSA oil refinery. On December 16, 2011, the Legislature passed Act 7327, which forgave all outstanding financial obligations owed to the primary Government by the Governor Roy L. Schneider Hospital and the Governor Juan F. Luis Hospital and Medical Center as of the date the Act was passed. At September 30, 2010, the primary Government reported net receivables of $6.4 million due from the two hospitals. On April 29, 2011, PFA entered into a Subordinated Revenue Bond Anticipation Note Purchase Agreement with Banco Popular de Puerto Rico, to purchase $32,235,000 in Subordinated Revenue Bond Anticipation Notes (the Series 2011A Notes). The purpose of the Series 2011A Notes is to provide a loan to the PG (the Series 2011A Gross Receipts Loan Notes - Broadband Project). The PG will use the proceeds to (i) finance the eligible costs in connection with Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 138 18. Subsequent Events (continued) Component Units (continued) upgrading the Virgin Islands’ broadband technology, including development and construction of the infrastructure and roadwork and acquisition of equipment, and (ii) paying certain costs of issuing the Series 2011A Notes. The Series 2011A Notes have a term of one year, maturing on April 29, 2012, with interest rates of 4.75% due quarterly. If long-term financing is not obtained before maturity, the PFA may convert the note to term notes, with principal and interest due monthly, at an interest rate of 6.25% and a maturity date of April 29, 2017. On July 21, 2011, the WAPA Governing Board of the Authority approved a proposed strategy with terms and conditions to allow the Authority to negotiate and enter into an agreement with Virgin Islands Next Generation Network (viNGN) for the Broadband Expansion Project. On September 30, 2011, the WAPA Governing Board held an emergency meeting to approve an extension of the $10 million working capital line of credit WAPA has with Banco Popular. In addition, the Board approved the extension of the $3 million fuel hedge line of credit with the bank until December 31, 2011. On September 30, 2011, WAPA entered into a Memorandum of Agreement (MoA) with viNGN, Inc, a Virgin Islands Corporation and wholly owned subsidiary of the Virgin Islands Public Finance Authority (PFA), an autonomous instrumentality of the Government of the United States Virgin Islands. The term of the MOA is twenty-five (25) years, following execution and upon expiration of the initial twenty-five years (25) be automatically renewed for two additional consecutive twenty-five (25) year terms unless either party provides a written notice of non-renewal to the other party not less than twelve (12) months but no sooner than twenty-four (24) months prior to the expiration of the original term or any additional term. On July 2011, the Governing Board of WAPA approved a proposed strategy with terms and conditions to allow WAPA to negotiate and enter into an agreement with Virgin Islands Next Generation Network (viNGN) for the Broadband Expansion Project. The total in-land match value was budgeted and confirmed at $15,247,966. Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1208-1380573 139 18. Subsequent Events (continued) Component Units (continued) In April 2012, WAPA issued $65.0 million in 2012A Electric System Revenue Refunding Bonds, $16,000,000, 2012B Electric System Subordinated Revenue Bonds, $19,000,000 and 2012C Electric System Subordinated Revenue Bonds $30,000,000. The proceeds of the Series 2012A Bonds were used to (1) refund the Authority’s Electric System Revenue Refunding Bonds, Series 1998 and (2) pay certain costs of issuance of the Series 2012A Bonds. The proceeds of the Series 2012B Bonds were used to refinance a portion of WAPA’s Electric System Term Loan, (1) make a deposit into the Subordinated Debt Service Reserve Fund sufficient to satisfy the Series 2012B Subordinated Debt Service Reserve Fund Requirement and (3) pay certain costs of issuance of the Series 2012B Bonds. The proceeds of the Series 2012C Bonds were used to (1) refinance all or a portion of the WAPA Electric System Working Capital Lines of Credit and Overdraft Credit Facility, (2) make a deposit into the Series 2012C Subordinated Debt Service Reserve Fund sufficient to satisfy the Subordinated Debt Service Reserve Fund Requirement, and (3) pay certain costs of issuance of the Series 2012C Bonds. To ensure it meets the criteria to continue the application of ASC No. 980, WAPA filed an emergency rate increase with the PSC on June 28, 2012, seeking a $16.2 million increase in base rates. On July 6, 2012, the WAPA PSC issued order No. 28/2012 approving an increasing rate of $8.6 million, to become effective with bills rendered after August 1, 2012. WAPA’s Governing Board further amended the fiscal year 2013 Operating Budget on September 5, 2012, which indicated that WAPA has determined that budgeted results for 2013 result in an increase to net assets (rates charged will recover costs). Should WAPA be unable to realize an increase in net assets in 2013, Management believes they will discontinue the application of ASC No. 980. There are proposed changes to the Retirement system that could affect WAPA’s employees going forward. The GERS is proposing increasing the Tier 1 regular employee and Tier 1 Class 3 hazardous duty employee contribution rate by 1 percent each year for three years beginning October 1, 2013. The Tiers are based on an employee’s hire date relative to when the GERS Reform Act of 2005 went into effect; those before October 1, 2005, are Tier 1 and those hired after that date are Tier 2 employees. ACT 7373 prohibits WAPA from back billing customers for the Water System or the Electric System except for faulty meters and billing errors after three months. 1208-1380573 Required Supplementary Information 1208-1380573 140 Required Supplementary Information (other than MD&A) Government of the United States Virgin Islands Schedule of Funding Progress September 30, 2010 Employees Retirement System of the Government of the U.S. Virgin Islands Actuarial valuation Date (a) Actuarial value of assets (b) Unfunded actuarial accrued liability (UAAL) (c) Actuarial accrued liability (a) + (b) (d) Funded Ratio (a)/(c) (e) Annual covered payroll UAAL as a percentage of covered payroll (b)/(e) Pension Plan 2008(*) $1,530,604,789 $1,310,218,726 $2,840,823,515 53.88% $433,549,406 302.21% 2009(**) 1,534,899,736 1,397,261,661 2,932,161,397 52.35% 458,154,309 304.98% 2010(***) 1,505,970,212 1,513,059,673 3,019,029,885 49.88% 440,026,457 343.86% (*) Estimated based on the financial information provided as of September 30, 2007, for the actuarial value of assets. For the unfunded actuarial accrued liability (UAAL) amount was projected from the last completed actuarial valuation as of October 1, 2006, assuming that actual experience during the October 1, 2006 to September 30, 2008, matched that assumed by the actuarial assumptions. (**) Estimated based on the financial information provided as of September 30, 2009, for the actuarial value of assets. For the unfunded actuarial accrued liability (UAAL) amount was projected from the last completed actuarial valuation as of October 1, 2006, assuming that actual experience during the October 1, 2006 to September 30, 2009, matched that assumed by the actuarial assumptions. (***) Estimated based on the financial information provided as of September 30, 2010, for the actuarial value of assets. For the unfunded actuarial accrued liability (UAAL) amount was projected from the last completed actuarial valuation as of October 1, 2006, assuming that actual experience during the October 1, 2006 to September 30, 2010, matched that assumed by the actuarial assumptions. Actuarial valuation -September 30, 2006 and thereafter: Actuarial accrued liability determined under the entry age normal method. 1208-1380573 141 Required Supplementary Information (other than MD&A) Government of the United States Virgin Islands Schedule of Funding Progress (continued) Postemployment Benefits Other Than Pensions Actuarial valuation Date (a) Actuarial value of assets (b) Unfunded actuarial accrued liability (UAAL) (c) Actuarial accrued liability (a) + (b) (d) Funded Ratio (a)/(c) (e) Annual covered payroll UAAL as a percentage of covered payroll (b)/(e) OPEB 2007 $ – $976,455,000 $976,455,000 0.00% N/A N/A 2009 $ – $1,069,562,000 $1,069,562,000 0.00% $418,467,000 255.59% 1208-1380573 142 Required Supplementary Information (other than MD&A) Employees’ Retirement System of the Government of U.S. Virgin Islands Schedule of Employer Contributions September 30, 2010 Annual required contributions Contributions made Percentage contributed Year ended September 30, 2010* $157,817,709 $77,004,630 48.79% 2009* 147,490,851 80,177,004 54.36% 2008* 138,488,871 75,871,146 54.79% 2007** 137,797,268 60,778,382 44.11% 2006** 161,059,471 65,061,430 49.64% 2005** 120,184,848 51,542,030 42.89% * Estimated based on Fiscal Year 2006 actuarial valuation. ** Estimated based on Fiscal Year 2003 actuarial valuation. 1208-1380573 Other Report 1208-1380573 143 Ernst & Young LLP 1000 Scotiabank Plaza 273 Ponce de León Avenue San Juan, PR 00917-1951 Tel: 787 759 8212 Fax: 787 753 0808 www.ey.com A member firm of Ernst & Young Global Limited Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards The Honorable Governor of the Government of the United States Virgin Islands: We have audited the 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, 2010, which collectively comprise the Government’s basic financial statements, and have issued our report thereon dated November 29, 2012. Our report was modified to include a reference to other auditors. In addition, the scope of our audit work was not sufficient to enable us to express, and we did not express, an opinion on the financial position, the changes in the financial position and cash flows, where applicable, of the business-type activities and aggregate remaining fund information as of and for the year ended September 30, 2010, because the basic financial statements do not include a liability for medical malpractice claims in the guaranty insurance fund (a non-major enterprise fund). 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 and the aggregate remaining fund information may have been affected by this condition. In addition, our auditors’ report for the aggregate discretely presented component units and the governmental activities, based on our audit and the reports of other auditors, was qualified for the following: • The effect of the adjustments, if any, as might be determined to be necessary, had the other auditors been able to obtain sufficient audit evidence to determine whether; (1) capital assets of $12.9 million in the financial statements of VIPTS, (2) assets of $12.5 million in the financial statements of VIHFA, (3) amounts due to the general fund of $4.5 million in the financial statements of the V.I. Lottery, (4) capital assets, grant revenue and expenditures of $6.1 million in the financial statements of WMA, and (5) investments in a limited partnership valued at $48.7 million in the GERS financial statements, were fairly stated, as described in paragraphs four through eight of the Report of Independent Auditors. 1208-1380573 144 • The effects of the adjustments as might have been determined to be necessary, had we been able to obtain sufficient audit evidence to determine whether the accrued compensated absences liability, the landfill closure and post-closure liability, and the retroactive union arbitration liability in the governmental activities were fairly stated, as described in paragraph nine of the Report of Independent Auditors. Except as described above, we conducted our audit in accordance with auditing standards generally accepted in the United States and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Other auditors audited the financial statements of the Virgin Islands Public Finance Authority (PFA), the West Indian Company (WICO), the Tobacco Settlement Financing Corporation (TSFC), Virgin Islands Housing Authority (VIHA), Virgin Islands Public Television System (VIPTS), Virgin Islands Lottery (V.I. Lottery), Virgin Islands Economic Development Authority (VIEDA), Magens Bay Authority (MBA), Virgin Islands Government Hospital and Health Facilities Corporation (Roy L. Schneider Hospital and Juan F. Luis Hospital and Medical Center), Employees’ Retirement System of the Government of the Virgin Islands (GERS), Waste Management Authority (WMA), and the Virgin Islands Housing Finance Authority (VIHFA), as described in our report on the Government’s financial statements. This report does not include the results of the other auditors’ testing of internal control over financial reporting or compliance and other matters that are reported on separately by those auditors. The financial statements of PFA, WICO, Juan Luis Hospital and Medical Center, and GERS were not audited in accordance with Government Auditing Standards. Internal Control over Financial Reporting Management of the Government is responsible for establishing and maintaining effective internal controls over financial reporting. In planning and performing our audit, we considered the Government’s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Government’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Government’s internal control over financial reporting. 1208-1380573 145 Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses and, therefore, there can be no assurance that all deficiencies, significant deficiencies, or material weaknesses have been identified. However, as described below, we identified certain deficiencies in internal control over financial reporting that we consider to be material weaknesses. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis. We consider findings 10-01 through 10-08 to be material weaknesses. Financial Statements Findings Finding Number 10-01 Topic Complete and accurate compilation of Schedule of Federal Expenditures Awards (SEFA) not provided timely. Category Internal Control / Compliance Criteria Pursuant Circular A-133 §___.310 Financial statements (b) Schedule of expenditures of Federal awards, the auditee shall prepare a schedule of expenditures of Federal awards for the period covered by the auditee’s financial statements. While not required, the auditee may choose to provide information requested by Federal awarding agencies and pass-through entities to make the schedule easier to use. For example, when a Federal program has multiple award years, the auditee may list the amount of Federal awards expended for each award year separately. At a minimum, the schedule shall: (1) List individual Federal programs by Federal agency. For Federal programs included in a cluster of programs, list individual Federal programs within a 1208-1380573 146 cluster of programs. For Research and Development (R&D), total Federal awards expended shall be shown either by individual award or by Federal agency and major subdivision within the Federal agency. For example, the National Institutes of Health is a major subdivision in the Department of Health and Human Services; (2) For Federal awards received as a subrecipient, the name of the pass-through entity and identifying number assigned by the pass-through entity shall be included; (3) Provide total Federal awards expended for each individual Federal program and the CFDA number or other identifying number when the CFDA information is not available; (4) Include notes that describe the significant accounting policies used in preparing the schedule; (5) To the extent practical, pass-through entities should identify in the schedule the total amount provided to subrecipients from each Federal program; (6) Include, in either the schedule or a note to the schedule, the value of the Federal awards expended in the form of non-cash assistance, the amount of insurance in effect during the year, and loans or loan guarantees outstanding at year end. While not required, it is preferable to present this information in the schedule. Condition The detail of Federal expenditures provided by the Government did not properly identify individual Federal programs by Federal agency and clusters were not identified as defined in the OMB Circular A-133. In addition, the detail did not properly identify all programs that were American Recovery and Reinvestment Act (ARRA) funded. The Government could not provide a reconciliation between the financial statements and the detail of Federal expenditures. After performing procedures to ascertain that all the Federal expenditures were included in the detail of federal expenditures provided, we identified that the report was understated by approximately $100.9 million. The SEFA was subsequently corrected to properly present all Federal expenditures for the period. Questioned Costs None. Underlying Cause The Government does not perform a reconciliation between Federal expenditures and the amount presented in the financial statements. Furthermore, personnel preparing the SEFA lack the knowledge regarding the federal requirements applicable to comply with Circular A-133. The use of more than one accounting system without an appropriate reconciliation results in differences. 1208-1380573 147 Effect The lack of appropriate procedures to ensure a complete compilation of the SEFA may cause material omissions of certain grant expenditures and also may cause delays in the audit process thus affecting future grant awards. Recommendation We recommend that the Government establishes policies and procedures to ensure that an accurate compilation of the SEFA is timely performed which includes all Federal awards expended during the period and properly identifies all ARRA funding and clusters. The SEFA should be provided to the external auditors with sufficient time to complete and issue the reporting package within the required period. Management’s Response The Government concurs with the auditor’s findings and recommendations. Finding Number 10-02 Topic Data Collection Form and Single Audit reporting package not submitted on time. Category Internal Control / Compliance Criteria OMB Circular, Subpart C, Section .320 (a) General establishes that the audit shall be completed and the data collection form described in paragraph (b) of this section and reporting package described in paragraph (c) of this section shall be submitted within the earlier of 30 days after receipt of the auditor’s report(s), or nine months after the end of the audit period, unless a longer period is agreed to in advance by the cognizant or oversight agency for audit. Unless restricted by law or regulation, the auditee shall make copies available for public inspection. (b) Data Collection. (1) The auditee shall submit a data collection form which states whether the audit was completed in accordance with this part and provides information about the auditee, its Federal programs, and the results of the audit. The form shall be approved by OMB, available from the Federal clearinghouse designated by OMB, and include data elements similar to those 1208-1380573 148 presented in this paragraph. A senior level representative of the auditee (e.g., State controller, director of finance, chief executive officer, or chief financial officer) shall sign a statement to be included as part of the form certifying that: the auditee complied with the requirements of this part, the form was prepared in accordance with this part (and the instructions accompanying the form), and the information included in the form, in its entirety, are accurate and complete. Condition The Data Collection Form (DCF) and the Single Audit reporting package were not submitted within nine months after the end of the audit period. Questioned Costs None. Underlying Cause Information needed to complete the Single Audit was not available for examination within the required period. Effects The lack of appropriate procedures to ensure a complete reporting package and data collection form submission may cause delays in the audit process thus affecting future grant awards. Recommendation The Government should improve the procedures to ensure that the OMB Circular A-133 reporting package, including a complete and accurate schedule of expenditures of federal awards, is available for examination by the external auditors with sufficient time to complete and issue the reporting package within the required period. Management’s Response The Government concurs with the auditor’s findings and recommendations. 1208-1380573 149 Finding Number: 10-03 Primary Agencies/Departments Affected: DOF, IRB, LGO Topic The Government’s lack of control over the income, excise, property and sales tax revenues processes led to significant audit adjustments being recorded in the financial statements. Due to the nature and magnitude of this control deficiency, such control deficiency is considered to be a material weakness. Category Internal Control Criteria A sound system of internal controls is essential in enabling the Government to prepare timely and accurate financial statements by helping ensure that all financial transactions are properly recorded, appropriately supported, and subjected to supervisory review. Condition Found Management’s calculation of its tax revenues processes were not properly performed, resulting in significant audit adjustments. The following items resulted in audit adjustments which could have been prevented had Management implemented sound internal controls over its tax revenue recognition processes: (a) Management used an inappropriate date on the report used to calculate the income tax receivable causing an understatements of revenues, and (b) the calculation for property tax receivables was not properly supported and thus significant audit adjustments were proposed in order to correctly present these accounts. Questioned Costs Not applicable. Underlying Cause The Government’s tax revenue process has grown in complexity. Additionally, supervisory review of the tax revenue process was not effective in all instances. Effect The lack of supervisory review led to significant adjustments in the Government’s financial statements. 1208-1380573 150 Recommendation The Government’s DOF should be more closely involved in the monitoring and review of the tax revenues processes. Management should consider performing these controls on a quarterly basis in order to detect and correct errors on a timely basis, while enhancing the Government’s knowledge over its financial condition. Management’s Response The Government concurs with the auditor’s findings and recommendations. Finding Number: 10-04 Primary Agencies/Departments Affected: DOF, P&P, DPW, PFA Topic The Government’s lack of control over its capital assets process led to significant adjustments in the financial statements. Category Internal Control Criteria A sound system of internal controls is essential in enabling the Government to prepare timely and accurate financial statements by helping ensure that all financial transactions are properly recorded, appropriately supported, and subjected to supervisory review. Condition Found During our review of construction in progress accounts, we noted a significant number of projects that had items capitalized that should have been expensed during the current period. Questioned Costs Not applicable. Underlying Cause There is a lack of timely coordination between the Department of Finance, the Department of Property and Procurement, and the Department of Public Works. 1208-1380573 151 Effect The lack of supervisory review and coordination between the mentioned agencies led to significant audit adjustments in the Government’s financial statements. Recommendation The Government should implement a formal procedure of quarterly reviews the status of construction in progress accounts and capital assets that may require impairment. Management’s Response The Government concurs with the auditor’s findings and recommendations. Finding Number: 10-05 Primary Agency/Department Affected: DOF Topic The Government’s lack of control over the accounts payable reconciliations process led to significant adjustments in the financial statements. Due to the nature and magnitude of this control deficiency, such control deficiency is considered to be a material weakness. Category Internal Control Criteria A fundamental element of a sound system of internal controls is an effective accounts payable reconciliations process. Such process is essential in enabling companies to prevent and detect errors on a timely basis. This effective process helps ensure that all accounts payable reconciliations are properly recorded, appropriately supported, and subjected to supervisory review. Condition Found Lack of controls over the accounts payable ERP module and accounts payable reconciliations has made it difficult for the Government to establish its accounts payable subledger. Management establishes its accounts payable subledger through a manually intensive process. This resulted in audit significant adjustments in the Government’s financial statements. 1208-1380573 152 Questioned Costs Not applicable. Underlying Cause The Government’s financial statements have grown in complexity. Additionally, supervisory review of the accounts payable reconciliation process was not effective in all instances. Effect The lack of supervisory review led to significant adjustments in the Government’s financial statements. This resulted in a material misstatement of the financial statements. Recommendation The Government’s management should be more closely involved in the monitoring and review of the financial statement close process. Management should consider performing this process on a quarterly basis in order to detect and correct errors on a timely basis, while enhancing the Government’s knowledge over its financial condition. In addition, Management should consider establishing procedures to reduce manual efforts by utilizing its ERP Accounts Payable module more effectively. Management’s Response The Government concurs with the auditor’s findings and recommendations. Finding Number: 10-06 Primary Agencies/Departments Affected: DOF, WMA Topic The Government’s lack of control over its liability estimation processes for its landfill closure and post-closure liability and accrued compensated absences and retro pay liability has impaired our ability to conclude on their reasonableness. This has resulted in a modification of our audit opinion for the last two years. For the last two years, we encountered calculation errors that were significant in the retro pay liability calculation by person. The calculation errors have not been remediated and led to errors in the first installment payment to employees as well as to a report modification similar to the other liability. Category Internal Control 1208-1380573 153 Criteria A fundamental element of a sound system of internal controls is an effective liability estimation/calculation process. Such process is essential in enabling organization to prevent and detect errors on a timely basis. This effective process helps ensure that all liability transactions are properly recorded, appropriately supported, and subjected to supervisory review. Condition Found The Government was not able to validate its estimate for its liability for landfill closure and post- closure, which resulted in a qualification of our opinion of governmental activities in the Government’s basic financial statements. In addition, the accrued compensated absences contained significant errors, which were not quantifiable by Management, and hence led to a qualification in our audit opinion of governmental activities. Questioned Costs Not applicable. Underlying Cause Supervisory review of the liability estimation processes was not in place. As a result, supporting documentation for estimates and calculation was not available or was not accurate to support Management’s assertions. Effect The Government was not able to support its estimate/calculation for these liabilities, which resulted in a qualification of our audit opinion of governmental activities in the Government’s basic financial statements. Recommendation The Government’s management should establish controls over the review of this estimation and calculation processes and effective procedures to document their support of assumptions used in estimating the liability and to support the accurate calculation of liabilities. The revised estimations should be ready and supportable for the 2011 annual audit. Management’s Response The Government concurs with the auditor’s findings and recommendations. 1208-1380573 154 Finding Number: 10-07 Primary Agency/Department Affected: DOF Topic Performance and review of the bank reconciliation process has not been timely performed. Category Internal Control Criteria Performance and review of bank reconciliations should be performed within a reasonable period after month-end. Condition Found During our audit, we noted that bank reconciliations were not being performed and reviewed within a reasonable period. Most bank reconciliations were completed, reviewed and approved after 365 days. Questioned Costs Not applicable. Underlying Cause The Government has numerous bank accounts and its process for performing bank reconciliations is, for the most part, performed manually. Effect The lack of timely performance and review of bank reconciliations led to adjustments not identified on a timely basis. This could also result in a misstatement due to error or fraud. In addition, this has prevented the Government from performing monthly closing procedures, which is necessary for timely financial reporting. Recommendation The Government should automate its bank reconciliation process and consolidate unnecessary bank accounts. This will allow for the Government’s personnel to be more efficient and effective in detecting errors and provide the Government more timely and accurate financial information. Management’s Response The Government concurs with the auditor’s findings and recommendations. 1208-1380573 155 Finding Number: 10-08 Primary Agency/Department Affected: DOF, DOH Topic The Government’s lack of control over its liability estimation process for medical malpractice claims led to an error in the financial statements, which could not be quantified by management. Category Internal Control Criteria A fundamental element of a sound system of internal controls is an effective liability estimation process. Such process is essential in enabling companies to prevent and detect errors on a timely basis. This effective process helps ensure that all liability estimation transactions are properly recorded, appropriately supported, and subjected to supervisory review. Condition Found The Government did not establish a liability for medical malpractice claims. Questioned Costs Not applicable. Underlying Cause The Government’s financial statements have grown in complexity. An evaluation of the malpractice liability was not performed for fiscal year 2010. Effect The Government was not able to quantify this liability, which resulted in a disclaimer in the audit opinion of the business-type activities and aggregate remaining fund information. Recommendation The Government’s management should establish controls over the review its claims data process which will allow them to provide the data necessary to their actuary for the estimation of this liability for fiscal year 2011. Management’s Response The Government concurs with the auditor’s findings and recommendations. 1208-1380573 156 Finding Number: 10-09 Primary Agency/Department Affected: DOF Topic The Government’s lack of control over transactions with its component units led to significant adjustments in the financial statements. Due to the nature and magnitude of this control deficiency, such control deficiency is considered to be a material weakness. Category Internal Control Criteria A sound system of internal controls is essential in enabling the Government to prepare timely and accurate financial statements by helping ensure that all financial transactions are properly recorded, appropriately supported, and subjected to supervisory review. Condition Found Lack of review of classification and reporting of transactions with component units led to significant errors, some which related to prior periods, in amounts due to and from component units in the financial statements of the Government. Questioned Costs Not applicable. Underlying Cause The Government does not have an effective process to review the classification and reporting of transactions between component units and the Government. Effect This control deficiency led to significant adjustments in the Government’s financial statements. This resulted in a material misstatement of the financial statements, some which related to prior periods. 1208-1380573 157 Recommendation The Government’s management should be more closely involved in the monitoring and review of the transactions with its component units, in order to detect and correct errors on a timely basis, while enhancing the Government’s knowledge over its financial condition. A formal process should be established for a quarterly review by the Department of Finance of transactions and amounts due to component units. In addition, the Government should establish a procedure of obtaining a reporting package from all of its component units to confirm the classification and reporting of transactions with its component units. This reporting package will standardize and simplify the process of reviewing transactions with component units. Management’s Response The Government concurs with the auditor’s findings and recommendations. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Government’s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed an instance of noncompliance or other matter that is required to be reported under Government Auditing Standards and which is described as finding 10-02. The Government’s responses to the findings identified in our audit are described above. We did not audit the Government’s responses and accordingly, we express no opinion on the responses. This report is intended solely for the information and use of the Honorable Governor of the United States Virgin Islands, management, others within the entity, Federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. ey November 29, 2012 1208-1380573 158