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The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee. Government of the United States Virgin Islands Management’s Discussion and Analysis, Financial Statements (with Independent Auditor’s Report Thereon) and Required Supplementary Information Year Ended September 30, 2017 Government of the United States Virgin Islands Management’s Discussion and Analysis, Financial Statements (with Independent Auditor’s Report Thereon) and Required Supplementary Information Year Ended September 30, 2017 Government of the United States Virgin Islands Contents 2 Independent Auditor’s Report 3-8 Management’s Discussion and Analysis 9-19 Basic Financial Statements Government-wide Financial Statements: Statement of Net Position 20-21 Statement of Activities 22-23 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 Net Position – Proprietary Funds 27 Statement of Revenues, Expenses, and Changes in Net Position – Proprietary Funds 28 Statement of Cash Flows – Proprietary Funds 29-30 Statement of Fiduciary Net Position 31 Statement of Changes in Fiduciary Net Position 32 Notes to Basic Financial Statements 33-127 Required Supplementary Information Schedule of Funding Progress 128 Schedule of Net Pension Liability 129 Schedule of Contributions 130 Schedule of Revenues and Expenditures – Budget and Actual Budgetary Basis – General Fund 131 Notes to Schedule of Revenues and Expenditures – Budget and Actual Budgetary Basis – General Fund 132-133 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 3 Tel: 301-354-2500 Fax: 301-354-2501 www.bdo.com 12505 Park Potomac Ave, Suite 700 Potomac, MD 20854 Independent Auditor’s Report To the Honorable Governor of the Government of the United States Virgin Islands Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the Government of the United States Virgin Islands (the Government), as of and for the year ended September 30, 2017, and the related notes to the financial statements, which collectively comprise the Government’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements. Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the following funds and/or component units: • The Virgin Islands Housing Authority (VIHA), Virgin Islands Economic Development Authority (VIEDA), Virgin Islands Waste Management Authority (VIWMA), Magens Bay Authority (MBA), Virgin Islands Government Hospital and Health Facilities Corporation (Roy L. Schneider Hospital and Governor Juan F. Luis Hospital and Medical Center), and the Virgin Islands Housing Finance Authority (VIHFA), discretely-presented component units, which collectively represent 30.2%, (45.5%), and 37.7%, respectively, of the assets, net position (deficit), and revenues of the Aggregate Discretely-Presented Component Units. • The Virgin Islands Lottery (V.I. Lottery), a nonmajor enterprise fund, which represents 1.1% and 5.6%, respectively, of the assets and revenues of the Aggregate Remaining Fund Information, and 6.9% and 26.6%, respectively, of the assets and revenues of the Business- Type Activities. • The Employees’ Retirement System of the Government of the Virgin Islands (GERS), a fiduciary component unit (pension trust fund), which represents 84.6%, 93.6%, and 63.1%, respectively, of the assets, net position/fund balance, and revenues/additions of the Aggregate Remaining Fund Information. 4 • The West Indian Company Limited (WICO) and Virgin Islands Next Generation Network (viNGN), as owned by the Government through the Virgin Islands Public Finance Authority, which represent 100% of the assets, net position, and revenues of the respective major enterprise funds, and 73.5%, 51.8%, and 19.3%, respectively, of the assets, net position, and revenues of the Business-Type Activities. • The Tobacco Settlement Financing Corporation (TSFC), a blended component unit which represents 1.2% and 0.4%, respectively, of the assets and revenues of the Aggregate Remaining Fund Information, and 0.5% and 0.1%, respectively, of the assets and revenues of the Governmental Activities. Those financial statements were audited by other auditors whose reports 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 solely on the reports of other auditors. 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 from material misstatement. The financial statements of the Virgin Islands Government Hospital and Health Facilities Corporation (Governor Juan F. Luis Hospital and Medical Center) were not audited in accordance with Government Auditing Standards. Because of the matters described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the Business-Type Activities, Unemployment Insurance-Enterprise Fund, and the Aggregate Remaining Fund Information. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Except for the matters described in the Basis for Disclaimer of Opinion on the Business-Type Activities, Unemployment Insurance-Enterprise Fund, and the Aggregate Remaining Fund Information paragraphs, we believe that the audit evidence we and other auditors have obtained is sufficient and appropriate to provide a basis for our audit opinions. 5 Summary of Opinions Opinion Unit Type of Opinion Governmental Activities Qualified Business-Type Activities Disclaimer General Fund Qualified Debt Service Fund Unmodified Capital Projects Fund Unmodified Federal Grants Fund Qualified West Indian Company-Enterprise Fund Unmodified Unemployment Insurance-Enterprise Fund Disclaimer viNGN-Enterprise Fund Unmodified Aggregate Remaining Fund Information Disclaimer Aggregate Discretely Presented Component Units Qualified Basis for Qualified Opinion on Governmental Activities The Government did not maintain the requisite documentation to support its accrued retroactive liability as of and for the year ended September 30, 2017. As such, we are unable to determine whether adjustments were required in the Governmental Activities. The Government’s notes to the basic financial statements do not include the necessary information under Governmental Accounting Standards Board, Statement No. 77, Tax Abatement Disclosures. In our opinion, disclosure of this information is required by accounting principles generally accepted in the United States of America. Basis for Qualified Opinion on Governmental Activities, General Fund, and Federal Grants Fund The Government did not maintain the requisite documentation to support its determination as to the sufficiency of the design and operation of key controls surrounding the environment in which Medicaid claims are processed. As such, we were unable to determine whether adjustments were required in the General Fund and in the Governmental Activities. The Government did not maintain the requisite documentation to support its due from federal government and federal grants and contributions revenues in the amount of $12.3 million as of the year ended September 30, 2017. As a result, we were unable to obtain sufficient audit evidence to determine whether adjustments were required in the Federal Grants Fund and in the Governmental Activities. 6 Basis for Qualified Opinion on Aggregate Discretely Presented Component Units The financial statements of the University of the Virgin Islands Research and Technology Park Corporation (RTPark), have not been audited, and we were not engaged to audit RTPark’s financial statements as part of our audit of the Government’s basic financial statements. RTPark’s financial activities are included in the Government’s basic financial statements as discretely- presented component units and represent 0.8%, 5.8%, and 1.1% of the assets, net position, and revenues, respectively, of the Aggregate Discretely Presented Component Units. The reports of other auditors on the 2017 financial statements of MBA, a discretely presented component unit, was qualified because MBA does not report net pension liability, pension expense as actuarially determined, and related deferred inflows and outflows of resources, if any, in accordance with accounting principles generally accepted in the United States of America. Qualified Opinion In our opinion, based on our audit and the reports of other auditors, except for the effects of the matters described in the Basis for Qualified Opinion paragraphs above, the financial statements referred to above present fairly, in all material respects, the financial position of the Governmental Activities, General Fund, Federal Grants Fund and the Aggregate Discretely Presented Component Units of the Government of the United States Virgin Islands as of September 30, 2017, and the respective changes in financial position thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Basis for Disclaimer of Opinion on Business-Type Activities and on Aggregate Remaining Fund Information 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 and Aggregate Remaining Fund Information as of and for the year ended September 30, 2017, may have been affected by this condition. The report of other auditors on the 2017 financial statements of GERS, a fiduciary component unit (pension trust fund), was qualified because of a lack of updated values for certain investment properties. The values are based in part on the future income generation capacity of the properties and these values have not been updated to incorporate the impact of the September 2017 hurricanes. Basis for Disclaimer of Opinion on Unemployment Insurance-Enterprise Fund and on Business-Type Activities The Government’s records were not available or contained incomplete information. As such, the records do not permit it, nor is it practical to extend our auditing procedures sufficiently to determine the extent by which the Unemployment Insurance-Enterprise Fund and Business-Type Activities as of and for the year ended September 30, 2017, may have been affected by this condition. 7 Disclaimer of Opinion Because of the significance of the matters discussed in the Basis for Disclaimer Opinion paragraphs above, we and other auditors have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financial statements of the Business- Type Activities, the Unemployment Insurance-Enterprise Fund, and on the Aggregate Remaining Fund Information of the Government of the United States Virgin Islands. Accordingly, we do not express an opinion on these financial statements. Unmodified Opinions 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, other than the General Fund, Federal Grants Fund, and Unemployment Insurance- Enterprise Fund of the Government of the United States Virgin Islands as of September 30, 2017, and the respective changes in financial position and, where applicable cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter The accompanying financial statements have been prepared assuming the Government will continue as a going concern. As discussed in Note 16 to the financial statements, the Government reported an unrestricted net deficit in Governmental Activities and in the General Fund. Management’s evaluation of the events and conditions and management’s plans regarding those matters are also described in Note 16. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion, based on our audit and the reports of other auditors, is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that management’s discussion and analysis and the schedules of funding progress, net pension liability, contributions, and revenue and expenditures – budget and actual budgetary basis – General Fund on pages 9 through 19 and 128 through 133, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We and other auditors have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 8 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated September 30, 2019, 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 solely 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 effectiveness of the Government’s internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Government’s internal control over financial reporting and compliance. September 30, 2019 Management’s Discussion and Analysis Government of the United States Virgin Islands Management’s Discussion and Analysis 9 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, 2017 and 2016. 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 position 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 revenues and expenses are included regardless of when cash is received or paid, producing a view of financial position and changes in financial position similar to that presented by most private-sector companies. The statement of net position 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 revenues (federal grants). Most services normally associated with the primary government 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) the West Indian Company (WICO); (ii) the unemployment insurance program; and (iii) viNGN, Inc. dba Virgin Islands Next Generation Network (viNGN). These programs operate with minimal assistance from the governmental activities of the Government. Discretely Presented Component Units – These are operations for which the Government has financial accountability even though they have certain independent qualities as well. For the most part, these entities operate similar to private sector businesses and the business-type activities described above. The Government’s discretely presented component units are presented in two categories, major and nonmajor. This separation is determined by the relative size of the entities’ assets, liabilities, revenue, and expenses in relation to the total of all component units. Fund Financial Statements Fund financial statements focus on the most significant (or major) funds of the Government. A fund is a separate accounting entity with a self-balancing set of accounts. The Government uses funds to keep track of sources of funding and spending related to specific activities. The Government uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Government of the United States Virgin Islands Management’s Discussion and Analysis 10 A major fund is a fund whose revenues, 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 general governmental operations and the basic services provided. 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, the PFA capital projects fund and the Federal grants fund are reported as major governmental funds. The General Fund is the Government’s primary operating fund. It accounts for all financial resources of the Government, 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 Virgin Islands Public Finance Authority on behalf of the Government. The PFA capital projects fund accounts for bond proceeds of debt issued by the Virgin Islands Public Finance Authority 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 Federal grants fund accounts for proceeds and federal payments that are legally restricted for expenditures for federally specified purposes. 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. Government of the United States Virgin Islands Management’s Discussion and Analysis 11 The West Indian Company (WICO), the Unemployment Insurance Fund, and viNGN 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 viNGN fund accounts for the activities of viNGN, which designs, develops and manages a middle mile wholesale fiber optic network in order to make available reliable high-speed internet connections to retail internet service providers. The proprietary fund activities are reported in a separate statement of net position, statement of revenues, expenses, and changes in net position and statement of cash flows. Fiduciary Funds The fiduciary activities are reported in a separate statement of fiduciary net position and a statement of changes in fiduciary net position. Financial Analysis of the Government as a Whole The Government faces the challenge of maintaining fiscal sustainability, promoting economic growth and rebuilding infrastructure following two Category 5 hurricanes in September 2017. To promote fiscal sustainability, the Government retained an international firm to develop short and long-range cash management strategies, identify federal recovery grants, implement a recovery website and assist with federal reporting of recovery grants. The Government has also retained the services of another international firm to lead the reconstruction effort in the Virgin Islands and provide oversight of FEMA Hazard Mitigation and HUD Community Disaster grants. In the first progress report following the hurricanes, the estimated federal recovery funding for the Virgin Islands amounted to $8.0 billion. This funding will be received over a five-year period. The Government has initiated outreach programs to promote environmentally safe industries and to attract investors. During fiscal year 2017, the Government began negotiations with Limetree Bay Refining, an affiliate of Limetree Bay Terminals, LLC (Limetree) to restart oil refining on the island of St. Croix. These negotiations resulted in a December 2018 agreement with Limetree to invest $1.3 billion in the St. Croix facility, along with the purchase of land and housing units near the oil terminal and a closing payment to the Government of $70.0 million. On October 6, 2016, PFA issued the Series 2016A Subordinate Lien Revenue Notes (Series 2016A-1 and Series 2016A-2 Notes) in the amount of $10.0 million to: (i) acquire first responder vehicles and related equipment; (ii) contract for professional services to improve public safety in the Territory; and (iii) to pay certain costs of issuance. As of September 30, 2017, the Government had drawn $8.1 million of the Series 2016A-1 Notes and $1.3 million of the Series 2016A-2 Notes. Government of the United States Virgin Islands Management’s Discussion and Analysis 12 The Series 2016 Notes are to be repaid monthly over a 60-month period at an interest rate of 375 basis points above the LIBOR rate of 4.62%. The Government has pledged gross receipts taxes for the timely payment of the Notes. On November 16, 2016, PFA issued the Series 2014E-4 Subordinate Lien Revenue Anticipation Note (Series 2014E-4 Note) amounting to $20.0 million. The Government has pledged gross receipts taxes for the timely payment of the Series 2014 E-4 Note. The Series 2014E-4 Note bears interest at 6.0% and was issued to: (i) finance certain operating expenses of the Government; and (ii) fund certain costs of issuing the Series 2014E-4 Note. On January 2, 2018, PFA entered into the Series 2014E Fourth Omnibus Agreement converting the Series 2014E-4 Note into a term loan (the Series 2014 E Gross Receipts Taxes Loan Note) is to be repaid in twelve (12) monthly installments beginning January 10, 2018 with principal payments of $1.7 million plus interest at prime plus 2.5%. Financial Analysis of the Primary Government Total assets and deferred outflows of resources of the Government as of September 30, 2017 and 2016, were approximately $2.8 billion for both years. Total liabilities and deferred inflows were approximately $7.2 billion and $6.5 billion, respectively, over the same period. As of September 30, 2017, the Government’s net position was a deficit of $4.5 billion consisting of $146.6 million investment in capital assets, net of related debt; $268.2 million restricted by statute or other legal requirements that were not available to finance day-to-day operations; and an unrestricted net deficit of $4.9 billion. As of September 30, 2016, the Government’s net deficit of $3.7 billion consisting of $349.0 million invested in capital assets, net of related debt; $265.0 million restricted by statute or other legal requirements that were not available to finance day-to-day operations; and an unrestricted net deficit of $4.4 billion. For the fiscal year ended September 30, 2017, the primary government earned program and general revenue amounting to $1.3 billion and reported expenses of $2.0 billion, including hurricane losses of $227.3 million resulting in an increase in net deficit of approximately $747.4 million. For the fiscal year ended September 30, 2016, the primary government earned program and general revenue amounting to $1.6 billion and reported expenses of $1.6 billion, resulting in a decrease in net deficit of approximately $2.9 million. Overall, revenue decreased in fiscal 2017 by approximately $339.0 million, when compared to fiscal 2016, mainly due to the one-time payment received in 2016 from the operating agreement with Limetree amounting to $283.8 million and decreases in tax revenues in fiscal 2017 of $53.0 million. Overall expenses increased in fiscal 2017 by $411.3 million when compared to fiscal 2016, mainly due to hurricane impairment losses to assets of $227.3 million, increases in general government expenses of $194.8 million, and increases in public health expense of $52.6 million. The increase in general government expenses was mainly due to increases in other post-employee benefits of $120.2 million, pension expense of $30.4 million, and depreciation of $17.4 million. The increases in expense were offset by decreases in education expense of $27.6 million, decreases in unemployment insurance expense of $5.8 million, decreases in public housing and welfare expense of $10.5 million, decreases in public safety expense of $5.3 million, decreases in transportation expense of $4.9 million and a decrease in interest on long-term debt expense of $4.0 million. Government of the United States Virgin Islands Management’s Discussion and Analysis 13 A summary of net position and changes in net position for the primary government follows (expressed in thousands): Governmental Activities Business-Type Activities Total September 30, 2017 2016 2017 2016 2017 2016 Assets and Deferred Outflows Current assets $ 956,041 $ 1,003,546 $ 41,990 $ 34,282 $ 998,031 $ 1,037,828 Internal balances 46,447 45,744 (46,447) (45,744) - - Capital assets 643,215 849,253 132,927 128,821 776,142 978,074 Other assets 4,573 4,607 975 1,101 5,548 5,708 Deferred outflows of resources 985,758 780,352 - - 985,758 780,352 Total assets and deferred outflows 2,636,034 2,683,502 129,445 118,460 2,765,479 2,801,962 Liabilities and Deferred Inflows Long-term liabilities 6,298,084 5,772,152 79,523 69,148 6,377,607 5,841,300 Other liabilities 775,523 606,879 89,937 88,620 865,460 695,499 Deferred inflows of resources 6,027 1,387 - - 6,027 1,387 Total liabilities and deferred inflows 7,079,634 6,380,418 169,460 157,768 7,249,094 6,538,186 Net Position Net investment in capital assets 93,180 292,722 53,457 56,407 146,637 349,129 Restricted 260,321 257,932 7,862 7,018 268,183 264,950 Unrestricted deficit (4,797,101) (4,247,570) (101,334) (102,733) (4,898,435) (4,350,303) Total net deficit $ (4,443,600) $ (3,696,916) $ (40,015) $ (39,308) $ (4,483,615) $ (3,736,224) Government of the United States Virgin Islands Management’s Discussion and Analysis 14 Governmental Activities Business-Type Activities Total September 30, 2017 2016 2017 2016 2017 2016 Revenues Program revenue: Charges for services $ 25,296 $ 25,426 $ 62,471 $ 61,030 $ 87,767 $ 86,456 Operating grants and contributions 256,390 251,213 236 222 256,626 251,435 Capital grants and contributions 20,405 19,218 - - 20,405 19,218 General revenue: Taxes 845,242 898,199 - - 845,242 898,199 Interest and other 60,661 74,047 5,110 8,531 65,771 82,578 Payment in lieu of taxes 8,975 283,780 - - 8,975 283,780 Contribution - 1,100 - - - 1,100 Tobacco settlement rights 1,201 2,213 - - 1,201 2,213 Total revenues 1,218,170 1,555,196 67,817 69,783 1,285,987 1,624,979 Expenses General government 879,538 684,735 - - 879,538 684,735 Public safety 89,537 94,806 - - 89,537 94,806 Health 136,435 83,852 - - 136,435 83,852 Public housing and welfare 216,628 227,133 - - 216,628 227,133 Education 246,621 274,187 - - 246,621 274,187 Transportation and communication 57,608 62,478 - - 57,608 62,478 Culture and recreation 12,423 11,253 - - 12,423 11,253 Interest on long-term debt 104,542 108,497 - - 104,542 108,497 Unemployment insurance - - 1,278 7,063 1,278 7,063 West Indian Company - - 11,625 11,951 11,625 11,951 viNGN - - 8,382 8,902 8,382 8,902 Other - - 41,477 47,220 41,477 47,200 Total expenses 1,743,332 1,546,941 62,762 75,136 1,806,094 1,622,077 Changes in net position (deficit) before transfers and special item (525,162) 8,255 5,055 (5,353) (520,107) 2,902 Transfers (300) (1,300) 300 1,300 - - Impairment loss on capital assets (221,222) - (6,062) - (227,284) - Changes in net position (deficit) (746,684) 6,955 (707) (4,053) (747,391) 2,902 Net deficit, beginning of year (3,696,916) (3,703,871) (39,308) (35,255) (3,736,224) (3,739,126) Net deficit, end of year $ (4,443,600) $ (3,696,916) $ (40,015) $ (39,308) $ (4,483,615) $ (3,736,224) Government of the United States Virgin Islands Management’s Discussion and Analysis 15 The Virgin Islands Office of Management and Budget 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 the Required Supplementary Information accompanying the basic financial statements. A summary of the budgetary report for the General Fund of the Government, included on page 131 of the financial statements, follows (expressed in thousands): September 30, 2017 Original Budget Amended Budget Actual Variance Total revenues $ 850,142 $ 850,142 $ 600,836 $ (249,306) Total expenditures 982,868 973,868 856,029 117,839 (Deficiency) excess of revenues over expenditures (132,726) (123,726) (255,193) (131,467) Other financing sources (uses), net 171,331 171,331 125,694 (45,637) Excess (deficiency) of revenues and net other financing sources over expenditures $ 38,605 $ 47,605 $ (129,499) $ (177,104) For fiscal year 2017, the General Fund realized an unfavorable budgetary variance of $177.1 million mainly due to a deficiency of revenues over expenditures of $131.5 million offset by a decrease in other financing sources of $45.6 million. Other financing sources increased mainly due to the issuance of the Series 2014 E Notes amounting to $20.0 million and transfers from other funds of $42.5 million. The General Fund realized an unfavorable revenue variance of $249.3 million mainly due to tax revenues which were under budget by $113.6 million, charges for services which were less than budgeted amounts by $66.7 million, and interest and other revenues which were less than budget by $79.6 million during the fiscal year. The General Fund realized a favorable expenditures variance of $117.8 million due to spending efficiencies in government spending as compared from budgeted amounts. Capital Assets Capital assets additions during fiscal year 2017 amounted to $71.8 million for governmental activities and $20.1 million for business-type activities. On September 6, 2017 and September 19, 2017, the U.S. Virgin Islands experienced two Category 5 hurricanes, with significant loss to infrastructure, buildings and equipment. Capital assets impaired by the hurricanes amounted to losses of $221.2 million for governmental activities and $6.1 million for business-type activities. Capital assets additions during fiscal year 2016 amounted to $92.6 million for governmental activities and $6.2 million for business-type activities. Government of the United States Virgin Islands Management’s Discussion and Analysis 16 The Government’s capital assets include land, land improvements, buildings, building improvements, machinery and equipment, infrastructure, construction in progress, and intangibles, as follows (expressed in thousands): Governmental Activities Business-Type Activities Total September 30, 2017 2016 2017 2016 2017 2016 Land and improvements $ 235,664 $ 235,383 $ 5,526 $ 5,526 $ 241,190 $ 240,909 Building and improvements 405,244 541,578 88,341 79,506 493,585 621,084 Machinery and equipment 201,049 197,441 75,544 79,135 276,593 276,576 Infrastructure 140,786 337,595 - - 140,786 337,595 Intangible assets - - 30,774 20,974 30,774 20,974 Construction in progress 76,003 55,645 4,844 8,191 80,847 63,836 Total capital assets 1,058,746 1,367,642 205,029 193,332 1,263,775 1,560,974 Less accumulated depreciation (415,531) (518,389) (72,102) (64,511) (487,633) (582,900) Total capital assets, net $ 643,215 $ 849,253 $ 132,927 $ 128,821 $ 776,142 $ 978,074 Note 10 provides detailed information regarding the capital assets of the primary government and the component units of the Government. Debt Administration (General Obligation and Revenue Bonds) 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, 2017, (expressed in thousands): Bond Issue Maturity Rates (%) Balance 2015 Series Federal Highway Bonds 2033 3.00-5.00 $ 82,080 2014 Series D Revenue Bonds 2033 6.03 5,425 2014 Series C Revenue and Refunding Bonds 2044 4.50-5.00 237,500 2014 Series A Revenue Bonds 2034 5.00 46,600 2013 Series B Revenue Refunding Bonds 2024 3.00 – 5.00 41,045 2013 Series A Revenue Refunding Bonds 2024 5.00 – 5.25 31,470 2012 Series C Revenue Bonds 2042 3.00 – 5.00 29,950 2012 Series A & B Revenue & Refunding Bonds 2032 2.25 – 5.25 181,720 2012 Series A Revenue Bonds 2032 4.00 – 5.00 140,165 2010 Series A & B Revenue Bonds 2029 4.00 – 5.25 388,175 2009 Series A Revenue Bonds (Cruzan) 2039 3.00 – 6.00 34,870 2009 Series A1, A2, B & C Revenue and Refunding Bonds 2039 3.00 – 5.00 287,555 2009 Series A Revenue Bonds (Diageo) 2037 6.00 – 6.75 232,205 2006 Series A Revenue Bonds 2029 3 50 – 5.00 196,590 2006 Series A, B, C & D Tobacco Turbo and Capital Appreciation Bonds 2035 6.25 – 7.63 7,290 2001 Series A Tobacco Bonds 2031 4.62 – 5.13 6,180 Total bonds outstanding 1,948,820 Plus (less): Bonds premium 51,698 Bonds discount (2,475) Bonds accretion 8,013 Net bonds outstanding $ 2,006,056 Government of the United States Virgin Islands Management’s Discussion and Analysis 17 Note 11 provides detailed information regarding all bonds of the primary government. The Government made bond principal payments on outstanding general and special revenue bonds amounting to $75.2 million during fiscal year 2017 and $73.0 million during fiscal year 2016. On December 2, 2016, Fitch Ratings downgraded the Territory’s gross receipts tax bonds to BB from BBB. The rating agency pointed to the Government’s use of bond issuances to fund operating needs as the reason for the downgrade. On January 20, 2017, Fitch further downgraded the gross receipts bonds to BB- from BB. On December 9, 2016, Standard & Poor’s Global Ratings (S&P) downgraded the Territory’s gross receipts tax bonds to BBB- from B. S&P cited the weak economic conditions in the Territory, declining debt coverage, and the potential that additional debt will further dilute the coverage. In August 2017, Fitch Ratings downgraded the Government’s Matching Fund Revenue and Gross Receipts Tax debt to B from BB-. The Government ceased providing necessary information to S&P in August 2017 to evaluate the Government’s liquidity, and in October 2017, S&P withdrew its credit ratings. In January 2018, Moody’s Investor services downgraded the Matching Fund Revenue Bonds as follows: Senior Lien Bonds from Caa1 to Caa2; Subordinate Lien Bonds from Caa2 to Caa3, and Subordinate Indenture Bonds (Diageo and Cruzan) from Caa2 to Caa3. Other Liabilities of the Primary Government Other long-term outstanding liabilities of the Government include the following (expressed in thousands): September 30, 2017 2016 Governmental activities: Accrued compensated absences $ 36,151 $ 33,524 Retroactive union arbitration 195,286 195,286 Litigation 16,145 13,783 Post-employment benefits 477,438 357,224 Landfill closure and post closure costs 97,923 90,958 Business-type activities: Workers compensation 40,462 38,459 Total other liabilities $ 863,405 $ 729,234 Government of the United States Virgin Islands Management’s Discussion and Analysis 18 Net Pension Liabilities The Government has implemented the provisions of Governmental Accounting Standards Board Statement (GASB) No. 68, Accounting and Financial Reporting for Pensions—an amendment of GASB Statement No. 27, as amended by GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date—an amendment of GASB Statement No. 68 and GASB Statement No. 82, Pension Issues—an amendment of GASB Statements No. 67, No. 68, and No. 73. Following is a description of the pension plan and accounting for pension expense, liabilities, and deferred outflows/inflows of resources. Following is the net pension liability reported in fiscal years 2017 and 2016 (expressed in thousands): September 30, 2017 2016 Net pension liability $ 3,535,517 $ 3,065,617 Economic Condition and Outlook The Government promotes fiscal sustainability through economic development, compliance initiatives, and budgetary restraints on expenditures. The Government is also working with non- governmental organizations and Federal partners as part of its recovery efforts the following the 2017 hurricanes. Revenue and Compliance Initiatives - The Government has implemented several initiatives to create jobs, stimulate economic growth and promote fiscal sustainability including: continued promotion of tourism through national advertising, increases in local tax rates, compliance initiatives to ensure voluntary tax filing requirements are met, and outreach to national and foreign investors. The Government continues to promote its high-tech broadband capabilities, educated workforce and tax incentive programs to management, technology, and tourism-related industries. Budgetary Control of Expenditures - The Government has experienced an increase in carry-forward liabilities from prior fiscal years mainly due to landfill closure costs, post- employment benefits for retirees, and net pension liabilities in connection with the Government’s defined benefit pension plan. The Government also has carry-forward liabilities due to unpaid retroactive salary increases that accumulated following Hurricanes Hugo, Marilyn, and Bertha in the years of 1990 through 1998. At September 30, 2017 and 2016, long-term liabilities for pension and other post- employment benefits to retired government employees amounted to $4.0 billion and $3.4 billion, respectively. The Government’s defined benefit pension plan was 16.54% and 19.58% funded as of the measurement dates of September 30, 2016 and September 30, 2015, respectively. Based on actuarial projections, the plan may not be able to meet its responsibilities by fiscal year 2023. A Pension Reform Joint Task Force has provided recommendations to the Legislature to (i) increase the retirement age of Government workers; (ii) restructure plan benefits; and (iii) to no longer allow retirees to both work and collect benefits from the Government. Government of the United States Virgin Islands Management’s Discussion and Analysis 19 The retirement system increased the contribution rates of participating employers by 3% and the contribution rates of participants by 1% phased in over the three fiscal years 2015, 2016 and 2017. Deficit Reduction Measures - In fiscal years 2017 and 2016, the Government reported an unrestricted net deficit of $4.9 billion and $4.4 billion, respectively. The Government 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, gross receipts taxes, and hotel taxes; (iii) passage of “sin taxes” on sales of sugary drinks and alcoholic beverages; (iv) exerting greater control of expenditures through the budgetary process; and (iv) increasing collection efforts for amounts due to the Government from taxpayers. Recovery Grants and Contributions – In the aftermath of the 2017 hurricanes, the Government has partnered with non-profit organizations and the Federal Government to secure long-term funding of approximately $8.0 billion needed to rebuild a sustainable U.S. Virgin Islands. 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. Basic Financial Statements Assets Cash and cash equivalents 130,838 $ 21,237 $ 152,075 $ 89,114 $ Investments, at fair value 605,730 1,655 607,385 28,484 Receivables, net 202,294 11,236 213,530 51,654 Internal balances 46,447 (46,447) - - Due from federal government 12,284 - 12,284 14,760 Due from component units 4,895 - 4,895 5,000 Due from primary government - - – 49,619 Inventories - - – 24,006 Prepayments and other assets - - – 30,038 Restricted: Cash and cash equivalents - 7,862 7,862 95,856 Investments - - - 107,991 Other - - - 20,850 Capital assets, net 643,215 132,927 776,142 1,119,961 Notes receivable - - - 11,837 Other assets 4,573 975 5,548 72,606 Total assets 1,650,276 129,445 1,779,721 1,721,776 Deferred Outflows of Resources Deferred amounts related to pension 978,364 - 978,364 309,741 Deferred charges on bond refunding 7,394 - 7,394 5,089 Total deferred outflows of resources 985,758 – 985,758 314,830 Total assets and deferred outflows of resources 2,636,034 $ 129,445 $ 2,765,479 $ 2,036,606 $ See accompanying notes to financial statements. Government of the United States Virgin Islands Statement of Net Position (in thousands) September 30, 2017 Primary Government Governmental Activities Business-type Activities Total Component Units 20 Liabilities Accounts payable and accrued liabilities 264,638 $ 5,686 $ 270,324 $ 294,662 $ Tax refunds payable 96,133 - 96,133 - Unemployment insurance benefits – 3,257 3,257 - Customer deposits – - – 29,907 Due to primary government – - – 4,145 Due to component units 23,148 - 23,148 12,013 Due to federal government – - – 4,142 Interest payable 49,088 - 49,088 6,754 Unearned revenues 223,925 10,395 234,320 25,343 Other current liabilities: Line of credit – - - 29,628 Loans and notes payable 22,749 67,580 90,329 4,516 Bonds payable 84,588 - 84,588 19,146 Other liabilities 11,254 3,019 14,273 25,176 Noncurrent liabilities: Loans and notes payable 29,410 42,080 71,490 84,164 Bonds payable 1,921,468 - 1,921,468 295,040 Net pension liability 3,535,517 - 3,535,517 1,050,979 Other liabilities 811,689 37,443 849,132 244,489 Total liabilities 7,073,607 169,460 7,243,067 2,130,104 Deferred Inflows of Resources Deferred amounts related to pension 6,027 - 6,027 63,262 Total liabilities and deferred inflows of resources 7,079,634 $ 169,460 $ 7,249,094 $ 2,193,366 $ Net Position (Deficit) Net investment in capital assets 93,180 $ 53,457 $ 146,637 $ 714,323 $ Restricted: Unemployment insurance – 5,328 5,328 – Debt service 260,064 - 260,064 – Capital projects 257 - 257 – Other purposes – 2,534 2,534 201,578 Unrestricted deficit (4,797,101) (101,334) (4,898,435) (1,072,661) Total net deficit (4,443,600) $ (40,015) $ (4,483,615) $ (156,760) $ See accompanying notes to financial statements. Government of the United States Virgin Islands (in thousands) September 30, 2017 Primary Government Statement of Net Position Governmental Activities Business-type Activities Total Component Units 21 Component Total Units Functions: Primary government: Governmental activities: General government 879,538 $ 21,991 $ 31,451 $ 11,684 $ (814,412) $ - $ (814,412) $ - $ Public safety 89,537 384 2,267 - (86,886) - (86,886) - Health 136,435 632 21,287 - (114,516) - (114,516) - Public housing and welfare 216,628 339 142,305 - (73,984) - (73,984) - Education 246,621 520 47,436 - (198,665) - (198,665) - Transportation and communication 57,608 507 11,644 8,721 (36,736) - (36,736) - Culture and recreation 12,423 923 - - (11,500) - (11,500) - Interest on long-term debt 104,542 - - - (104,542) - (104,542) - Total governmental activities 1,743,332 25,296 256,390 20,405 (1,441,241) - (1,441,241) Business-type activities: West Indian Company 11,625 8,818 - - - (2,807) (2,807) - Unemployment insurance 1,278 15,100 236 - - 14,058 14,058 - viNGN 8,382 4,101 - - - (4,281) (4,281) - Other 41,477 34,452 - - - (7,025) (7,025) - Total business-type activities 62,762 62,471 236 - (55) (55) - Total primary government 1,806,094 $ 87,767 $ 256,626 $ 20,405 $ (1,441,241) $ (55) $ (1,441,296) $ – $ Component units: Virgin Islands Housing Authority 57,039 $ 4,847 $ 40,865 $ 5,252 $ - $ - $ - $ (6,075) $ Virgin Islands Port Authority 79,892 54,345 - 9,944 - - - (15,603) Virgin Islands Water and Power Authority: Electric System 289,883 244,230 - 4,873 - - - (40,780) Water System 30,676 31,207 - 2,826 - - - 3,357 Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 92,044 54,765 21,887 - - - - (15,392) Juan F. Luis Hospital 86,170 52,044 24,054 - - - - (10,072) University of the Virgin Islands 86,065 42,274 24,125 4,992 - - - (14,674) Other component units 81,058 14,333 47,573 2,789 - - - (16,363) Total component units 802,827 $ 498,045 $ 158,504 $ 30,676 $ - $ - $ - $ (115,602) $ Total primary government and component units (1,441,241) $ (55) $ (1,441,296) $ (115,602) $ See accompanying notes to financial statements. Contributions Charges for Services Government of the United States Virgin Islands (in thousands) Year Ended September 30, 2017 Program Revenues Statement of Activities Business-type Activities Governmental Activities Net Revenue (Expense) and Changes in Net Position Primary Government Capital Grants and Contributions Expenses Operating Grants and 22 Component Units General revenue: Taxes 845,242 $ - $ 845,242 $ - $ Payment in lieu of taxes 8,975 - 8,975 - Interest and other 60,661 5,110 65,771 10,970 Tobacco settlement rights 1,201 - 1,201 - Special item - impairment loss on capital assets, net (221,222) (6,062) (227,284) (64,265) Transfers – internal activities of primary government (300) 300 - - Total general revenue and other items 694,557 (652) 693,905 (53,295) Changes in net position (deficit) (746,684) (707) (747,391) (168,897) Net position (deficit), beginning of year, as restated (3,696,916) (39,308) (3,736,224) 12,137 Net deficit, end of year (4,443,600) $ (40,015) $ (4,483,615) $ (156,760) $ See accompanying notes to financial statements. Primary Government Year Ended September 30, 2017 Government of the United States Virgin Islands (in thousands) Net Revenue (Expense) and Changes in Net Position Statement of Activities Total Business-type Activities Governmental Activities 23 Assets Cash and cash equivalents - $ 11,818 $ 22,106 $ - $ 96,914 $ 130,838 $ Investments, at fair value 145,966 348,398 106,128 - 5,238 605,730 Receivables: Taxes, net 175,761 25,695 - - - 201,456 Other 38 - - - 122 160 Due from federal government - - - 12,284 - 12,284 Due from: Other funds 31,050 - 37,129 - 25,408 93,587 Component units, net 4,145 - - - 750 4,895 Total assets 356,960 $ 385,911 $ 165,363 $ 12,284 $ 128,432 $ 1,048,950 $ Liabilities Accounts payable and accrued liabilities 198,418 $ - $ 24 $ 49,554 $ 16,642 $ 264,638 $ Tax refunds payable 96,133 - - - - 96,133 Unearned revenues 111,896 108,529 - - 3,500 223,925 Due to: Other funds 23,640 - - - 23,500 47,140 Component units 20,885 - 2,259 - 4 23,148 Total liabilities 450,972 108,529 2,283 49,554 43,646 654,984 Deferred Inflow of Resources Unavailable revenues 113,829 17,318 - - - 131,147 Total liabilities and deferred inflow of resources 564,801 125,847 2,283 49,554 43,646 786,131 Fund balances (deficit) Restricted - 260,064 163,080 34,981 - 458,125 Committed 16,667 - - - 22,144 38,811 Assigned 552 - - - 118,963 119,515 Unassigned (225,060) - - (72,251) (56,321) (353,632) Total fund balances (deficit) (207,841) 260,064 163,080 (37,270) 84,786 262,819 Total liabilities, deferred inflow of resources and fund balances (deficit) 356,960 $ 385,911 $ 165,363 $ 12,284 $ 128,432 $ Amounts reported for governmental activities in the statement of net position are different because: Capital assets used in governmental activities are not financial resources and therefore, are not reported in the funds. 643,215 Expenditures identified as related to a future period are recognized as a prepaid asset in the statement of net position. 4,573 Deferred costs of refunding bonds are not financial resources and are therefore, not reported in the funds. 7,394 Other long-term assets, primarily taxes receivable, will not be available to pay for current period expenditures and therefore, are deferred in the funds. 131,825 Deferred outflows and inflows of resources of pension liabilities are not current financial resources and therefore, are not included in the funds. 972,337 Interest on long-term debt is not accrued in the funds, but rather is recognized as an expenditure when due. (49,088) Long-term pension liabilities are not due and payable in the current period and therefore, are not reported in the funds. (3,535,517) Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore, are not reported in the funds. (2,881,158) Net deficit of governmental activities (4,443,600) $ See accompanying notes to financial statements. Other Governmental Government of the United States Virgin Islands September 30, 2017 Balance Sheet - Governmental Funds General PFA Debt Service PFA Capital Projects Federal Grants (in thousands) Total Governmental 24 PFA PFA Debt Capital Federal General Service Projects Grants Revenues Taxes 562,602 $ 269,226 $ 1,421 $ - $ 17,074 $ 850,323 $ Payment in lieu of taxes 8,975 - - - - 8,975 Federal grants and contributions 10,523 7,572 - 242,309 16,391 276,795 Charges for services 12,067 - - - 13,229 25,296 Tobacco settlement rights - - - - 2,141 2,141 Interest and other 25,964 3,824 564 - 30,309 60,661 Total revenues 620,131 280,622 1,985 242,309 79,144 1,224,191 Expenditures Current: General government 523,812 104 3,523 49,929 40,631 617,999 Public safety 57,169 - - 1,494 500 59,163 Health 24,534 - - 21,455 457 46,446 Public housing and welfare 58,495 - - 138,633 4,423 201,551 Education 170,305 - - 42,902 3,221 216,428 Transportation and communication 17,425 - - 5,525 14,145 37,095 Culture and recreation 6,790 - - - 66 6,856 Capital outlays 6,297 - 33,373 16,564 15,576 71,810 Debt service: Principal 1,862 77,588 1,347 - 1,665 82,462 Interest 1,158 103,304 73 - 392 104,927 Loan issuance costs 433 651 - - - 1,084 Total expenditures 868,280 181,647 38,316 276,502 81,076 1,445,821 Excess (deficiency) of revenue over expenditures (248,149) 98,975 (36,331) (34,193) (1,932) (221,630) Other financing sources (uses) Loans issued 20,000 55 9,430 - - 29,485 Transfers from other funds 96,848 722 - - 4,671 102,241 Transfers to other funds (3,454) (97,363) (624) - (1,100) (102,541) Total other financing sources (uses), net 113,394 (96,586) 8,806 - 3,571 29,185 Net change in fund balances (134,755) 2,389 (27,525) (34,193) 1,639 (192,445) Fund balances (deficit), beginning of year (73,086) 257,675 190,605 (3,077) 83,147 455,264 Fund balances (deficit), end of year (207,841) $ 260,064 $ 163,080 $ (37,270) $ 84,786 $ 262,819 $ See accompanying notes to financial statements. Government of the United States Virgin Islands (in thousands) Year Ended September 30, 2017 Statement of Revenues, Expenditures, and Changes in Fund Balances − Governmental Funds Other Governmental Total Governmental 25 Year Ended September 30, 2017 Net change in fund balances – total governmental funds (192,445) $ Governmental 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, impairment loss, and disposals in the current year. (206,038) Tax revenue in the statement of activities, which do not provide current financial resources, are not reported as revenue in the funds. (6,021) The issuance of long-term debt provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of the governmental funds. This is the amount by which debt repayments of $82.5 million exceed the loan proceeds of $29.5 million. 52,977 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 position of the previous year increased expenses reported in the statement of activities that do not require the use of current financial resources. (132,168) Some expenses reported as prepaid assets in the statement of net position in the current year are recognized as expenses in the following year in the statement of activities. (34) Bond premiums and discounts are reported as other financing sources and uses in the governmental funds when the bonds are issued, and are capitalized and amortized in the government-wide financial statements. This amount represents additional net interest expense reported in the statement of activities related to the amortization of premiums, discounts, deferred refunding, and accreted interest on capital appreciation bonds during the current year. 4,057 Certain interest reported in the statement of activities does not require the use of current financial resources and therefore is not reported as expenditures in the governmental funds. This amount represents the increase in interest payable reported in the statement of net position. 1,255 Certain pension expense reported in the statement of activities does not require the use of current financial resources and therefore is not reported as expenditures in the governmental funds. This amount represents the increase in pension liabilities for the allocable share of pension expense reported in statement of net position. (268,267) Change in net position of governmental activities (746,684) $ See accompanying notes to financial statements. 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 (in thousands) 26 West Indian Company viNGN Total Assets Current assets: Cash and cash equivalents 2,761 $ 2,565 $ 3,687 $ 12,224 $ 21,237 $ Investments, at fair value - - - 1,655 1,655 Receivables, net: Premiums receivable - 8,287 - - 8,287 Other receivables 2,056 - 520 373 2,949 Due from other funds - - - 300 300 Other assets 531 - 372 72 975 Total current assets 5,348 10,852 4,579 14,624 35,403 Noncurrent assets: Restricted cash and cash equivalents 2,534 5,328 - - 7,862 Capital assets 48,209 - 68,832 15,886 132,927 Total noncurrent assets 50,743 5,328 68,832 15,886 140,789 Total assets 56,091 $ 16,180 $ 73,411 $ 30,510 $ 176,192 $ Liabilities Current liabilities: Accounts payable and accrued liabilities 582 $ - $ 674 $ 4,430 $ 5,686 $ Due to other funds 7,350 - 36,805 2,592 46,747 Unemployment insurance benefits - 3,257 - - 3,257 Workers compensation - - - 3,019 3,019 Loan payable to U.S. Treasury - 66,994 - - 66,994 Unearned revenue - - - 10,395 10,395 Notes payable related to capital assets 586 - - - 586 Total current liabilities 8,518 70,251 37,479 20,436 136,684 Noncurrent liabilities: Workers compensation - - - 37,443 37,443 Notes payable related to capital assets 42,080 - - - 42,080 Total noncurrent liabilities 42,080 - - 37,443 79,523 Total liabilities 50,598 $ 70,251 $ 37,479 $ 57,879 $ 216,207 $ Net Position (Deficit) Net investment in capital assets 5,543 $ - $ 32,028 $ 15,886 $ 53,457 $ Restricted 2,534 5,328 - - 7,862 Unrestricted (deficit) (2,584) (59,399) 3,904 (43,255) (101,334) Total net position (deficit) 5,493 $ (54,071) $ 35,932 $ (27,369) $ (40,015) $ See accompanying notes to financial statements. September 30, 2017 Business-type Activities Government of the United States Virgin Islands Statement of Net Position – Proprietary Funds (in thousands) Unemployment Insurance Other Enterprise 27 West Indian Company viNGN Total Operating revenues Charges for services 8,818 $ 15,100 $ 4,101 $ 34,452 $ 62,471 $ Operating expenses Cost of services 6,396 1,278 3,305 39,606 50,585 Amortization - - 800 131 931 Depreciation 2,962 - 4,277 1,740 8,979 Total operating expenses 9,358 1,278 8,382 41,477 60,495 Operating (loss) income (540) 13,822 (4,281) (7,025) 1,976 Non-operating revenues (expenses) Federal grants - 236 - - 236 Interest and other income 157 89 10 4,854 5,110 Interest expense (2,267) - - - (2,267) Total non-operating (expenses) revenues, net (2,110) 325 10 4,854 3,079 (Loss) income before operating transfers and special item (2,650) 14,147 (4,271) (2,171) 5,055 Transfers from other funds - - - 1,000 1,000 Transfers to other funds (700) - - - (700) Impairment loss on capital assets (1,910) - (3,949) (203) (6,062) Change in net position (5,260) 14,147 (8,220) (1,374) (707) Net position (deficit), beginning of year 10,753 (68,218) 44,152 (25,995) (39,308) Net position (deficit), end of year 5,493 $ (54,071) $ 35,932 $ (27,369) $ (40,015) $ See accompanying notes to financial statements. Year Ended September 30, 2017 Business-type Activities (in thousands) Statement of Revenues, Expenses, and Changes in Net Position − Proprietary Funds Government of the United States Virgin Islands Unemployment Insurance Enterprise Other 28 West Indian Unemployment Company viNGN Total Cash flows from operating activities Receipts from customers and users 8,761 $ 12,955 $ 4,154 $ 44,454 $ 70,324 $ Payments to beneficiaries, suppliers, and employees (7,944) (7,736) (2,971) (37,411) (56,062) Net cash provided by operating activities 817 5,219 1,183 7,043 14,262 Cash flows from noncapital financing activities Other income - 89 - 4,854 4,943 Transfer from other funds - - - 1,000 1,000 Federal grants - 236 - - 236 Issuance of debt - 1,493 154 - 1,647 Principal paid on debt issuances, including interest - (3,664) - - (3,664) Net cash (used in) provided by noncapital financing activities - (1,846) 154 5,854 4,162 Cash flows from capital and related financing activities Acquisition and construction of capital assets (8,475) - (976) (10,644) (20,095) Disposal of capital assets - - - 16 16 Issuance of debt 11,008 - - - 11,008 Principal paid on debt issuances, including interest (3,630) - - - (3,630) Net cash used in capital and related financing activities (1,097) - (976) (10,628) (12,701) Cash flows from investing activities Interest on investments 7 - 12 - 19 Purchase of investments - - - (5) (5) Net cash provided by (used in) investing activities 7 - 12 (5) 14 Net (decrease) increase in cash and cash equivalents (273) 3,373 373 2,264 5,737 Cash and cash equivalents, beginning of year 5,568 4,520 3,314 9,960 23,362 Cash and cash equivalents, end of year 5,295 $ 7,893 $ 3,687 $ 12,224 $ 29,099 $ Reconciliation of operating (loss) income to net cash provided by operating activities Operating (loss) income (540) $ 13,822 $ (4,281) $ (7,025) $ 1,976 $ Adjustments to reconcile operating (loss) income to net cash provided by operating activities: Depreciation and amortization 2,962 - 5,077 1,871 9,910 Other income 148 - - - 148 Provision for doubtful accounts 32 - - - 32 Loan origination costs 840 - - - 840 Change in assets and liabilities: Receivables, net (208) (2,145) 53 303 (1,997) Unearned revenue - - - 9,699 9,699 Customer deposits 4 - - - 4 Other assets 103 - (56) 80 127 Accounts payable and accrued liabilities (2,524) - 390 264 (1,870) Unemployment insurance benefits - (6,458) - - (6,458) Workers compensation - - - 2,003 2,003 Due to other funds - - - (152) (152) Net cash provided by operating activities 817 $ 5,219 $ 1,183 $ 7,043 $ 14,262 $ See accompanying notes to financial statements. Year Ended September 30, 2017 Business-type Activities (in thousands) Statement of Cash Flows − Proprietary Funds Government of the United States Virgin Islands Insurance Other Enterprise 29 West Indian Unemployment Company viNGN Total Reconciliation of cash and cash equivalents to the statement of net position Cash and cash equivalents – current 2,761 $ 2,565 $ 3,687 $ 12,224 $ 21,237 $ Cash and cash equivalents – restricted 2,534 5,328 - - 7,862 Total cash and cash equivalents, end of year 5,295 $ 7,893 $ 3,687 $ 12,224 $ 29,099 $ Noncash capital activities Impairment loss on capital assets 1,910 $ – $ 3,949 $ 203 $ 6,062 $ See accompanying notes to financial statements. Year Ended September 30, 2017 Insurance Enterprise Government of the United States Virgin Islands Statement of Cash Flows − Proprietary Funds (in thousands) Business-type Activities Other 30 Pension September 30, 2017 Trust Assets Cash and cash equivalents: Unrestricted 132,635 $ 3,440 $ Restricted 19 - Investments, at fair value: Certificate of deposits - 2,169 Cash collateral received under securities lending transactions 19,478 - U.S. Government and agency obligations 14,095 - Corporate obligations 27,432 - Common stock - U.S. 108,900 - Mortgage and asset backed securities 29,923 - Commingled and mutual funds 294,727 - Unsettled securities sold 246 - Investment loans 27,930 - Real estate investment trust 3,007 - Limited partnerships 16,804 - Real estate 79,749 - Receivables, net: Loans and advances 99,783 - Accrued interest 1,745 - Other assets 48,420 - Total assets 904,893 $ 5,609 $ Liabilities Accounts payable and accrued liabilities - $ 5,609 $ Benefits in process of payment 611 - Unsettled securities purchased 686 - Securities lending collateral 19,478 - Other liabilities 38,648 - Total liabilities 59,423 5,609 Net position restricted for pension benefits 845,470 $ - $ See accompanying notes to financial statements. Government of the United States Virgin Islands (in thousands) Statement of Fiduciary Net Position Agency 31 Pension Year Ended September 30, 2017 Trust Additions Contributions: Employer 84,802 $ Plan members 47,925 Total contributions 132,727 Investment income: Net appreciation of fair value of investments 55,811 Interest, dividends, and other, net 14,444 Real estate – net rental loss (307) Total investment income 69,948 Less investment expense 2,546 Investment income, net 67,402 Other income 2,641 Total additions 202,770 Deductions Benefits paid 251,845 Refunds of contributions 7,620 Administrative and operational expenses 14,997 Total deductions 274,462 Change in net position (71,692) Net position restricted for pension benefits, beginning of year 917,162 Net position restricted for pension benefits, end of year 845,470 $ See accompanying notes to financial statements. Government of the United States Virgin Islands (in thousands) Statement of Changes in Fiduciary Net Position 32 Government of the United States Virgin Islands Notes to Basic Financial Statements 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. 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 accounting principles generally accepted in the United States of America (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 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 organizations for which the nature and significance of their relationship with the PG are such that exclusion would cause the reporting entity’s financial statements to be misleading. The criteria used to define financial accountability include: (i) if an organization is fiscally dependent on, and there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the PG, (ii) a government board appointed by a higher level of government, or (iii) a jointly appointed board. 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. Government of the United States Virgin Islands Notes to Basic Financial Statements 34 The powers of PFA are exercised by a board of directors consisting of the Governor (Chairperson), the Commissioner of Finance, the Director of the Office of Management and Budget, and two representatives of the private sector appointed by the Governor with the advice and consent of the Legislature (the Legislature). PFA activities are blended within the PG and are reported as major funds, except for the PFA Special Revenue Fund and Lonesome Dove Petroleum, Co. (Lonesome Dove), which are included in the other aggregate remaining governmental fund information. PFA’s blended component units, the West Indian Company (WICO) and Virgin Islands Next Generation Network (viNGN) are presented as major proprietary funds while King’s Alley Management, Inc. is included in other nonmajor proprietary funds in the Government’s basic financial statements. Tobacco Settlement Financing Corporation (TSFC) TSFC was created in September 2001 under Act No. 6428 as a separate and independent corporation of the Government to purchase the rights, title, and interest in tobacco settlement litigation awards and to issue revenue bonds supported by the tobacco settlement rights. The responsibility for the operations of TSFC is vested in a board of directors composed of three Government officials appointed by the Governor and two private citizens. The activities of TSFC are limited to activities conducted on behalf of the Government. The TSFC is reported in the other governmental funds. 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 5033 Kongens Gade, Government Hill St. Thomas, VI 00802 Tobacco Settlement Financing Corporation 5033 Kongens Gade, Government Hill St. Thomas, VI 00802 (b) Discretely Presented Component Units The following component units, as required by GAAP 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 35 Major Component Units Virgin Islands Housing Authority (VIHA) VIHA was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality by Act No. 903 on June 18, 1962, with the purpose of providing housing for low and moderate-income families residing in the U.S. Virgin Islands. From June 1962 through August 2003, the powers of VIHA were exercised by a board of commissioners consisting of seven members. In August 2003, the U.S. Department of Housing and Urban Development (HUD) determined that because of the severity of compliance violations, VIHA was declared to be in substantial default of its annual contributions contract (ACC) dated July 12, 1996 with HUD. VIHA was placed in receivership and HUD assumed control of all assets, projects, and programs. On May 30, 2014, the HUD receivership ended, and management of VIHA was returned to the board of trustees appointed by the PG. An executive director is appointed by VIHA’s Board to manage the day-to-day operations. 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 air and marine terminals. The powers of VIPA are exercised by a board of governors consisting of the Commissioner of Economic Development and Agriculture (Chairperson), the Attorney General, the Commissioner of Public Works, the Director of the Small Business Development Agency, and five other persons appointed by the Governor with the advice and consent of the Legislature. Virgin Islands Water and Power Authority (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 are nominated by the Legislature. WAPA is required by its bond resolutions to maintain separate audited financial statements for each system (the Electric and Water Systems). Virgin Islands Government Hospital and Health Facilities Corporation (VIGHHFC) VIGHHFC was created by Act No. 6012 on August 23, 1994 and became active on May 1, 1999, with the purpose of providing healthcare services and hospital facilities to the people of the U. S. Virgin Islands. The powers of VIGHHFC are exercised by a board of directors consisting of 15 members as follows: the Director of the Office of Management and Budget, the Commissioner of Finance, and 13 other members appointed by the Governor with the advice and consent of the Legislature. The VIGHHFC is composed of the Roy L. Schneider Hospital located in St. Thomas and the Juan F. Luis Hospital and Medical Center located in St. Croix. Both entities issue separate audited financial statements. Government of the United States Virgin Islands Notes to Basic Financial Statements 36 The Roy L. Schneider Hospital’s financial statements include its component units: the Myra Keating Smith Community Health Center (Health Center) of St. John and the Charlotte Kimelman Cancer Institute (Cancer Institute) on St. Thomas. The Health Center and Cancer Institute are legally separated organizations for which the Roy L. Schneider Hospital is financially accountable. The Juan F. Luis Hospital and Medical Center’s financial statements include its component unit: the Virgin Islands Cardiac Center at the Governor Juan F. Luis Hospital and Medical Center Foundation, Inc. (VICC Foundation). VICC Foundation is a legally separate nonprofit corporation for which the Juan F. Luis Hospital and Medical Center is financially accountable. 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 blended component units: The Foundation for the University of the Virgin Islands and The Reichhold Center Foundation. The Foundation for the University of the Virgin Islands is a nonprofit corporation whose purpose is to assist and support the University in accomplishing its charitable and educational mission. The Reichhold Center Foundation is a nonprofit corporation that supports the arts and provides financial assistance in operating the Reichhold Center for the Arts on the St. Thomas campus of the University. Other Component Units (Nonmajor) Virgin Islands Economic Development Authority (EDA) EDA was created by Act No. 6390 on December 21, 2000, as a body corporate and politic constituting a public corporation and semiautonomous instrumentality of the Government. EDA was created as an umbrella authority to assume, integrate, and unify the functions of the Economic Development Commission, the Small Business Development Agency, the Government Development Bank, and the Virgin Islands Industrial Development Park Corporation. The powers of EDA are exercised by a board of directors consisting of the members of the Virgin Islands Economic Development Commission, the Director of the Virgin Islands’ Bureau of Internal Revenue, and five members not employed by the Government, but appointed by the Governor with the advice and consent of the Legislature. Magens Bay Authority (MBA) MBA was created as a corporate instrumentality by Act No. 2085 on December 20, 1967, with the purpose of acquiring, improving, and operating parks and beaches. The powers of MBA are exercised by a board of directors consisting of the Governor and six members initially appointed by the Governor. Government of the United States Virgin Islands Notes to Basic Financial Statements 37 The board of directors is responsible for the appointment and reappointment of subsequent board members except that the Governor, with the advice and consent of the Legislature may, by appointment, fill any vacancy on the board of directors remaining unfilled for sixty days. Virgin Islands Housing Finance Authority (VIHFA) VIHFA was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality of the Government by Act No. 4636 on October 20, 1981, with the purpose of stimulating low and moderate-income housing construction and home ownership through the issuance of revenue bonds to obtain funds to be used for low-interest mortgage loans to qualified purchasers of low and moderate-income housing. On October 31, 2008, VIHFA established the Virgin Islands Housing Management, Inc. (VIHM), a wholly-owned nonprofit subsidiary that manages VIHFA’s rental properties. The financial statements of VIHM are separately issued, and not blended into the PG. The powers of VIHFA are exercised by a board of directors consisting of the Commissioner of the Department of Housing, Parks, and Recreation (the Chairman), the Director of the Office of Management and Budget, and three persons not employed by the Government appointed by the Governor with advice and consent of the Legislature. Virgin Islands Public Broadcasting System (VIPBS) VIPBS 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 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 VIPBS 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 VIPBS are ex-officio members of the board who are not entitled to vote. Virgin Islands Waste Management Authority (VIWMA) VIWMA was established as a nonprofit, public, autonomous instrumentality of the Government by Act No. 6638 and approved by the Governor of the Virgin Islands on January 23, 2004. VIWMA provides environmentally sound management for the collection and disposal of solid waste in the Territory, including operation and closure of landfills and wastewater collection, treatment, and disposal. VIWMA is governed by a Board of Directors consisting of seven members. University of the Virgin Islands Research and Technology Park Corporation (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. Government of the United States Virgin Islands Notes to Basic Financial Statements 38 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 9900 Oswald Harris Court St. Thomas, VI 00801 Virgin Islands Port Authority P.O. Box 1707 St. Thomas, VI 00803 Virgin Islands Water and Power Authority P.O. 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 8000 Nisky Shopping Center, Suite 620 St. Thomas, VI 00802 Magens Bay Authority P.O. Box 10583 St. Thomas, VI 00801 Virgin Islands Housing Finance Authority 3202 Demarara Frenchtown Plaza, Suite 200 St. Thomas, VI 00802 Virgin Islands Public Broadcasting System P.O. Box 7879 St. Thomas, VI 00801 Virgin Islands Waste Management Authority 1 A&B Demarara St. Thomas, VI, 00802 Government of the United States Virgin Islands Notes to Basic Financial Statements 39 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, 2017, except for WAPA and VIHA which have a fiscal year-end of June 30, 2017 and December 31, 2016, 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 the component units’ cost-sharing, multi-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 position 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. Complete audited financial statements of this component unit can be obtained directly by contacting its 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 position and the statement of activities) report information on all the non-fiduciary activities of the PG and its component units. 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 position presents the reporting entities’ non-fiduciary assets and liabilities, with the difference reported as net position. Government of the United States Virgin Islands Notes to Basic Financial Statements 40 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 function or segment. Taxes and other items are not included among program revenues and are appropriately 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. 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 in conformity with GAAP as prescribed by the GASB. Revenues are 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 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 when it is both measurable and available. Revenues are deemed available when they become susceptible to accrual and are collected 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, real property taxes, and income taxes are deemed available if collected within 30, 60, and 90 days, respectively, after the end of the current fiscal year-end. Grant revenue is deemed 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 and pension 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 have been recognized as revenue of the current fiscal period to the extent they are considered available. All other revenue items are deemed measurable and available only when cash is received by the Government. Government of the United States Virgin Islands Notes to Basic Financial Statements 41 (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 also used in the government-wide financial statements described above. Proprietary funds distinguish operating revenue and expenses from non-operating 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. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Fund Accounting The Government reports its financial position and results of operations in funds, which are considered separate accounting entities. 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. Generally accepted governmental accounting principles establish 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. Non-major funds are combined in a single column in the fund financial statements. The Government reports the following major funds: (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. • Federal Grants Fund - The federal grants fund accounts for proceeds and payments that are restricted to expenditures for specified purposes. Government of the United States Virgin Islands Notes to Basic Financial Statements 42 (b) Proprietary Funds These funds account for those activities for which the intent of management is to recover, primarily through user charges, the cost of providing goods or services to the general public. The Government reports the following major proprietary funds: • The West Indian Company Limited – WICO, a blended 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 Fund – The unemployment insurance fund accounts for the collection of unemployment premiums from employers in the U.S. Virgin Islands, and the payment of unemployment benefits to eligible unemployed recipients. • Virgin Islands Next Generation Network (viNGN) – viNGN, a blended component unit of PFA, accounts for the management of a middle mile wholesale fiber optic network providing reliable high-speed internet access to retail internet service providers and public infrastructure stewards. (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, an independent and separate agency of the Government, responsible for the proper operation of the Government’s defined benefit pension plan. • Agency Fund – The agency fund is custodial in nature 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. 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 depositories of public funds of the Government are to maintain corporate surety bonds or pledge collateral satisfactory to the Commissioner of Finance to secure all governmental funds deposited. The Government maintains an irrevocable stand-by letter of credit in the amount of $200.0 million with the Federal Home Loan Bank of New York to serve as pledged collateral for public fund depositories held at Banco Popular de Puerto Rico. Government of the United States Virgin Islands Notes to Basic Financial Statements 43 For the purpose of the statement of cash flows, cash and cash equivalents are defined to be cash on hand, demand deposits, restricted cash and investments, and highly liquid investments with a maturity of three months or less from the date of purchase. For financial statement presentation purposes, cash and cash equivalents are shown as cash and investments and restricted cash and investments. Investments The PG and its component units follow the provisions of GAAP which 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. 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. As of September 30, 2017, the General Fund, the Virgin Islands Lottery, a nonmajor enterprise fund, and an agency fund had invested in certificates of deposit with two local banks. Investments are reported at fair value at September 30, 2017. • PFA Investment Policies – 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. TSFC has retained investment managers and investments are held in trust by a commercial bank on behalf of the TSFC. Investments are reported at fair value in the non-major governmental fund of the Government. • West Indian Company Investment Policies – This blended business-type major fund of the Government maintains an investment policy that (i) limits investments in bonds to a maximum remaining maturity of 30 years (or estimated average life on mortgage-backed issues), (ii) limits fixed income securities to a maximum of 40% and a minimum of 30% of the overall assets of the WICO portfolio, (iii) limits corporate bond exposure to 45% of the fixed income portfolio, and (iv) has no provision which limits or restricts investments in U.S. Government Treasury or Agency issues. WICO reports investments at fair value. Government of the United States Virgin Islands Notes to Basic Financial Statements 44 • 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 and may be held by an unaffiliated bank or trust company for the account of the VIHA. • 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, non-negotiable certificates of deposit, repurchase agreements, obligations of the U.S. government, and obligations of any state within the United States, mutual funds, and corporate commercial paper. Investments are reported at fair value. • VIGHHFC Investment Policies – The board of trustees of this major component unit has not developed a formal investment policy. • University Investment Policies – The board of trustees of this major component unit is responsible for the management of the University’s investments and establishes an investment policy, which is carried out by the Vice President for Administration and Finance. The University and the Reichhold Foundation have a formal investment policy approved by their corresponding board of trustees, which contains a requisite section on addressing risks. In fiscal year 2014, the Board passed a resolution to transfer the University’s investments to the Foundation’s investment portfolio for management and investment purposes. • Pension Trust Fund Investment Policies – The board of trustees of GERS has enacted policies that limit investments in certain investment categories and provide requirements for the institutions with which investment transactions may be entered into. Under those policies, GERS may invest in U.S. Government and agencies obligations, bonds or notes of any state, territory or possession of the United States, municipal bonds and obligations, foreign bonds, bonds of domestic railroad corporations, public utility bonds, industrial corporate bonds or trust certificates, common and preferred shares of foreign and domestic corporations, mutual funds, mortgage or personal loans to GERS members or retirees, and mortgage and asset- backed securities. Investments in bonds are subject to rating restrictions of BBB and may not exceed 2% of the portfolio. Investments in stock of a single corporation may not exceed 1% of the market value of the fund, or exceed 1% of the outstanding stock of the corporation. The aggregate amount of investments in stock may not exceed 60% of the market value of total investments of GERS. Investment in foreign stock should be limited to 10% of the market value of the total investments of GERS. Any investment of 20% or more of the aggregate value of the portfolio must be approved by two-thirds of the membership of the board of trustees. The investments are administered by several professional investment managers and are held in trust by a commercial bank on behalf of GERS. 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. Government of the United States Virgin Islands Notes to Basic Financial Statements 45 GERS is authorized to provide loans to businesses approved by the Board of Trustees as alternative investments. On December 8, 2009, GERS executed a loan agreement with Carambola Northwest, LLC (Carambola), a condominium, hotel and golf resort on the island of St. Croix. The five-year term loan in the amount of $15.0 million was collateralized with all real property holdings of Carambola, with an interest rate of 10.5% per annum. Carambola subsequently went into default on the loan agreement. On May 11, 2013, GERS exercised its rights under the loan agreement and executed a preliminary Disposition Agreement with Carambola assuming management and ownership of the resort complex. As of September 30, 2017, the complex had an appraised value of $15.0 million. On July 18, 2012, GERS executed a loan agreement with Attilanus. Under the terms of the agreement, a credit facility of $10.0 million was made available to meet on-going premium costs and other expenses of the Company. The terms of the credit facility require interest payments at a rate of 15% per annum, and principal payments reduce the future amount available. The entire loan principal and accrued and unpaid interest was to be repaid at the termination of the credit facility on July 10, 2017. The loan was not paid on the termination date and as of September 30, 2017, the outstanding balance of the credit facility was $10.0 million. GERS received interest payments during the year ended September 30, 2017, of $474,000. On September 24, 2013, GERS entered into a loan agreement with KAZI Foods of the Virgin Islands, Inc. in the amount of $6.0 million at an interest rate of 6.25%, and a maturity date of October 23, 2023. At September 30, 2017, the outstanding principal balance on the loan is $4.3 million. On June 30, 2014, GERS entered into a construction loan agreement with V.I. Finest Foods, LLC in the amount of up to $8.2 million at an interest rate of 6.4%, with an interest-only period of 17 months and a fully amortizing period of 103 months. The loan was subsequently modified on May 24, 2016, to provide an increase in the principal amount of the loan to $11.0 million and an extended maturity date of March 31, 2025. As of September 30, 2017, the outstanding balance of the loan is $11.2 million. GERS has also invested in Havensight Mall, a shopping and pier complex on the island of St. Thomas with a fair market value of $41.0 million. GERS has also invested in the limited partnership Mesirow with a fair market value of $16.8 million at September 30, 2017. GERS owns administrative facilities on the islands of St. Thomas and St. Croix. Portions of the facilities are leased to government agencies and commercial tenants, and portions of the facilities are utilized for GERS operations. The investment in real estate is reported at its appraised value, which approximates fair value, in the amount of $23.7 million as of September 30, 2017. Receivables Taxes receivable represent amounts owed by taxpayers for individual and corporate income taxes, gross receipts taxes, excise taxes, hotel occupancy taxes, and real property taxes. 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 46 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 allowances for uncollectible accounts because in the opinion of management, all accounts are collectible. 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. Transfers between the PG and its blended component units are reported as interfund transfers, except for transfers within the same fund type. • Intra-entity Transactions – These are transactions between the PG and its discretely presented component units, and among the component units. 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. Restricted Assets Restricted assets in the PG and discretely presented component units are set aside primarily for the payment of bonds, notes, construction funds, unemployment benefits, and other specific purposes. Capital Assets Capital assets, which include land, land improvements, buildings, building improvements, machinery and equipment, construction in progress, intangibles 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; (iv) $200,000 for intangibles with estimated useful lives between 2 and 15 years; and (v) $200,000 for infrastructure with an estimated useful life of 30 years. All costs of acquiring land are 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 acquisition value at the time of donation. Government of the United States Virgin Islands Notes to Basic Financial Statements 47 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 assets’ estimated useful lives. The estimated useful lives of capital assets reported by the component units are (i) 4 to 50 years for buildings and building improvements; (ii) 20 to 40 years for airports and marine terminals; (iii) 40 to 100 years for water transmission and distribution mains; and (iv) 3 to 25 years for vehicles and equipment. The PG and its component units review the carrying value of their capital assets to determine if circumstances exist indicating impairment. If facts or circumstances support the possibility of impairment, management follows the guidance in GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. If impairment is indicated, an adjustment is made to the carrying value of the capital assets. Deferred Outflows/Inflows of Resources In addition to assets, the statement of net position reports a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents consumption of the net position that applies to future period(s) and is not recognized as an outflow of resources (expense/expenditure) until the future date occurs. The Government has two items for financial reporting in these categories, as follows: • Deferred amounts related to pension represent unrecognized items not yet charged to pension expense and contributions from the employer after the measurement date but before the end of the employer’s reporting period. • Deferred charges on refunding reported in the government-wide statement of net position. A deferred charge on refunding results from the difference in the carrying value of refunded debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. In addition to liabilities, the statement of net position reports a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period(s) and will not be recognized as an inflow of resources (revenue) until that time. Government of the United States Virgin Islands Notes to Basic Financial Statements 48 The Government has two items for financial reporting in this category, as follows: • Deferred amounts related to pension consist of the unamortized portion of the net difference between projected and actual earnings on pension plan investments, changes in assumptions, and other differences between expected and actual experience. • Modified accrual basis of accounting - Unavailable revenues qualify for reporting in this category. The item, unavailable revenues, is reported only in the governmental funds’ balance sheet. The governmental funds report unavailable revenues from three sources: property taxes, gross receipts taxes, and income taxes. These amounts are deferred and recognized as an inflow of resources in the period that the amounts become available. Tax Refunds Payable During the calendar year, the Government collects individual income taxes through withholdings and payments from taxpayers. As of September 30th, 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. 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. Long-term Liabilities The liabilities reported in the government-wide financial statements include the Government’s bonds, long-term notes, pension liabilities and other long-term liabilities including: accrued compensated absences, retroactive union arbitration, litigation, landfill closure and post closure costs, postemployment benefits, and workers compensation claims. Government of the United States Virgin Islands Notes to Basic Financial Statements 49 Bond premiums, discounts, and amounts deferred on capital appreciation bonds are amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premiums and discounts. Issuance costs are reported as expenses in the year incurred. 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. Issuance costs are reported as debt service expenditures. Net Position Net position is reported in three categories: • Net Investment in Capital Assets – This consists 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 are 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 for capital projects. • Restricted Net Position – Constraints placed on the use of assets are either externally imposed by creditors, grantors, contributors, and the like, or imposed by law through constitutional provisions or enabling legislation. • Unrestricted Net Position – These consist of assets which do not meet the definition of the two preceding categories. Unrestricted assets often are designated to indicate that management does not consider them to be available for general operations. Unrestricted assets often have constraints on resources that are imposed by management, but can be removed or modified. When both restricted and unrestricted resources are available for use, generally it is the Government’s policy to use restricted resources first, then the unrestricted resources, as needed. Fund Balance GAAP provides a hierarchy of classifications based primarily on the extent to which the Government is bound to honor constraints on the specific purposes for which amounts in funds may be spent. Following are the fund classifications: • Restricted Fund Balance – Fund balances constrained by externally imposed constraints such as constitutional provisions, laws and regulations, debt covenants, and grantors. The Government’s policy is to consider restricted amounts to have been spent first when expenditures are incurred for which both restricted and unassigned fund balances are available. Government of the United States Virgin Islands Notes to Basic Financial Statements 50 • Committed Fund Balance – Fund balances subject to constraints imposed by the Government’s highest level of decision-making authority including legislation enacted by the Legislature of the Virgin Islands and resolutions or ordinances enacted by Government elected regulatory boards and authorities. Committed fund balances may be modified or rescinded by enacted legislation, or amendment of resolutions or ordinances. • Assigned Fund Balance – Fund balances subject to budgetary constraints of the Legislature, the Office of Management and Budget, or authorizing boards of the Government, that are not restricted or committed. Budgetary authority of the Office of Management and Budget is provided by Title 2, Sections 22, 23, 26 and 27 VIC, and Executive Order No. 371-1997. The Government’s policy is to expend assigned or committed amounts, before unassigned amounts, when an expenditure is incurred. • Unassigned Fund Balance – Unassigned fund balance is the residual classification for the General Fund. This classification represents fund balance that has not been assigned to other funds and that has not been restricted, committed, or assigned to specific purposes within the General Fund. The residual deficit of the Federal Grants Fund is also reported as unassigned fund balance. Risk Management With some exceptions, the Government does not carry general liability insurance coverage on its properties or the acts of its employees, relying instead on self-insurance and/or statutory liability limitations. The Government purchases commercial insurance for physical losses or damages against its property. The limit of liability for all risks, excluding earthquake, windstorm, and flood, is $1.0 million for each occurrence except for windstorm and flood losses, which has a $45.0 million limit. For physical losses arising from earthquake, the insurance policy has a limit of $100.0 million for each occurrence and in the annual aggregate. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, deferred outflows of resources, liabilities, and deferred inflows of resources and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Government of the United States Virgin Islands Notes to Basic Financial Statements 51 Adoption of Accounting Pronouncements GASB has issued the following statements that the Government and its component units have adopted for the current year. The adoption of these statements did not have an impact on the Government and its component units’ financial statements. GASB Statement Number Adoption in Current Fiscal Year 74 Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans 2017 78 Pensions Provided Through Certain Multiple-Employer Defined Benefit Pension Plans 2017 80 Blending Requirements for Certain Component Units-An Amendment of GASB Statement No. 14 2017 GASB has issued the following statements that the Government or its component units have not yet adopted. The Government and its component units are currently evaluating the impact of these statements. GASB Statement Number Adoption in Future Fiscal Year 75 Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions 2018 81 Irrevocable Split-Interest Agreements 2018 83 Certain Asset Retirement Obligations 2019 84 Fiduciary Activities 2020 85 Omnibus 2017 2018 86 Certain Debt Extinguishment Issues 2018 87 Leases 2021 88 Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements 2019 89 Accounting for Interest Cost Incurred Before the End of a Construction Period 2021 90 Majority Equity Interests – An Amendment of GASB Statements No. 14 and No. 61 2020 91 Conduct Debt Obligations 2022 Government of the United States Virgin Islands Notes to Basic Financial Statements 52 2. Component Units The basic financial statements include the financial statements of the following discretely presented component units: Major 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 Other Component Units (Nonmajor) • Virgin Islands Economic Development Authority • Magens Bay Authority • Virgin Islands Housing Finance Authority • Virgin Islands Public Broadcasting System • Virgin Islands Waste Management Authority • University of the Virgin Islands Research and Technology Park Corporation (unaudited) Government of the United States Virgin Islands Notes to Basic Financial Statements 53 Condensed financial information as of September 30, 2017, of all discretely presented component units follows (expressed in thousands): Virgin Islands Water and Power Authority Hospital and Health Facilities Corporation Virgin Islands Housing Authority Virgin Islands Port Authority Electric System Water System Roy L. Schneider Hospital Juan F. Luis Hospital University of the Virgin Islands Other Component Units* Total Component Units Assets and deferred outflows Current assets $ 30,755 $ 37,349 $ 66,177 $ 9,318 $ 11,304 $ 20,407 $ 10,100 $ 30,983 $ 216,393 Due from primary government - - 34,349 6,865 - 2,029 455 5,921 49,619 Due from federal government 443 2,216 - - 7,237 - 3,529 1,335 14,760 Restricted assets 909 30,763 67,671 9,702 436 101 61,170 53,945 224,697 Capital assets, net 65,385 207,151 494,508 64,829 35,943 20,429 65,295 166,421 1,119,961 Other noncurrent assets 6,441 600 34,924 - 304 - 13,471 40,606 96,346 Deferred outflows of resources 20,811 49,175 82,045 16,804 46,317 37,198 30,172 32,308 314,830 Total assets and deferred outflows of resources 124,744 327,254 779,674 107,518 101,541 80,164 184,192 331,519 2,036,606 Liabilities and deferred inflows Current liabilities 3,640 23,283 227,522 19,335 49,556 56,146 14,480 35,698 429,660 Due to primary government - - - - 4,145 - - - 4,145 Due to federal government - - 4,142 - - - - - 4,142 Bonds payable - long-term - 42,283 252,757 - - - - - 295,040 Notes payable - long-term - - - - - - 79,647 4,517 84,164 Due to component units - - - - - 12,013 - - 12,013 Pension liabilities 76,858 156,158 274,794 56,283 162,362 121,331 91,925 111,268 1,050,979 Other noncurrent liabilities 13,156 1,376 203,877 9,957 - 164 4,839 11,120 244,489 Unearned revenue - long-term - - - - - - - 5,472 5,472 Deferred inflows of resources 3,399 1,206 25,322 5,186 13,628 7,986 3,913 2,622 63,262 Total liabilities and deferred inflows of resources 97,053 224,306 988,414 90,761 229,691 197,640 194,804 170,697 2,193,366 Net assets (deficit): Invested in capital assets, net of related debt 62,945 188,121 186,761 61,739 35,943 19,978 9,539 149,297 714,323 Restricted 7,259 31,341 28,005 9,026 436 101 58,311 67,099 201,578 Deficit (42,513) (116,514) (423,506) (54,008) (164,529) (137,555) (78,462) (55,574) (1,072,661) Total net position (deficit) $ 27,691 $ 102,948 $ (208,740) $ 16,757 $ (128,150) $ (117,476) $ (10,612) $ 160,822 $ (156,760) *University of the Virgin Islands Research and Technology Park Corporation (unaudited) Government of the United States Virgin Islands Notes to Basic Financial Statements 54 Program revenue Operating Capital Total Charges for Grants and Grants and Component Information on Statement of Activities Expenses Services Contributions Contributions Units Virgin Islands Housing Authority $ 57,039 $ 4,847 $ 40,865 $ 5,252 $ (6,075 ) Virgin Islands Port Authority 79,892 54,345 - 9,944 (15,603 ) Virgin Islands Water and Power Authority: Electric System 289,883 244,230 - 4,873 (40,780 ) Water System 30,676 31,207 - 2,826 3,357 Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 92,044 54,765 21,887 - (15,392 ) Juan F. Luis Hospital 86,170 52,044 24,054 - (10,072 ) University of the Virgin Islands 86,065 42,274 24,125 4,992 (14,674 ) Other component units* 81,058 14,333 47,573 2,789 (16,363 ) Total activities $ 802,827 $ 498,045 $ 158,504 $ 30,676 $ (115,602 ) General revenue: Interest and other 10,970 Impairment loss on capital assets, net (64,265 ) Changes in net position (168,897 ) Net position, beginning of year (as restated) 12,137 Net deficit, end of year $ (156,760 ) *University of the Virgin Islands Research and Technology Park Corporation (unaudited) Beginning net position of other discretely presented component units was restated to correct accrual of compensated absences in the amount of $45,000. The summary of due to/from primary government and component units as of September 30, 2017, is as follows (expressed in thousands): Due from PG/ Due to PG/ Component Units Component Units Governmental funds: General fund $ 4,145 $ 20,885 PFA capital projects - 2,259 Other governmental fund 750 4 Discretely presented component units: WAPA – Electric System 34,349 - WAPA – Water System 6,865 - Hospital and Health Facilities Corporation 2,029 16,158 University of the Virgin Islands 455 - Other component units* 10,921 - $ 59,514 $ 39,306 *University of the Virgin Islands Research and Technology Park Corporation (unaudited) The due from/to component units, net of $20.2 million reported in the government-wide statement of net position was due to the difference in fiscal year ends for WAPA (June 30) and VIHA (December 31). Government of the United States Virgin Islands Notes to Basic Financial Statements 55 3. Natural Disasters – Hurricanes Irma and Maria On September 6 and 19, 2017, the United States Virgin Islands were struck by two Category 5 hurricanes. The extent and severity of the storms was unprecedented and resulted in catastrophic damage to the Territory. The PG suffered losses to office buildings and educational facilities, roads, infrastructure, and various machineries and equipment. The PG had purchased commercial insurance to cover its risk of loss from destruction of assets and under these policies, realized insurance recoveries subsequent to fiscal year 2017. See Note 18. On or about September 7 and 20, 2017, the President of the United States declared the United States Virgin Islands a disaster area and eligible for Federal Emergency Management Agency (FEMA) recovery assistance. As such, to further aid with storm related losses caused by the hurricanes, reimbursement of expenditures will be secured through federal assistance and other contributions, as described in Note 18. In addition to incurring significant storm related expenses, recurring operating revenues of the PG have been reduced. To meet the continuing liquidity needs of the PG, various financing sources will be relied upon. See Notes 16 and 18. 4. Cash and Cash Equivalents Primary Government At September 30, 2017, the PG reported $152.1 million in unrestricted cash and cash equivalents and $7.9 million in restricted cash and cash equivalents. All of the PG’s bank balances were fully collateralized. Pension Trust Fund GERS considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. At September 30, 2017, GERS held $132.6 million in cash and cash equivalents consisting of: $97.7 million in money market accounts and $34.9 million in operational accounts. Component Units At September 30, 2017, discretely presented component units held $89.1 million in unrestricted cash and cash equivalents and $95.9 million in restricted cash and cash equivalents. Government of the United States Virgin Islands Notes to Basic Financial Statements 56 5. Investments Fair Value Measurements The Government categorizes the fair market measurements of its investments within the fair value hierarchy established by GAAP. GASB Statement No. 72, Fair Value Measurement and Application, provides the framework for measuring fair value by establishing a three-level fair value hierarchy that describes inputs that are used to measure assets and liabilities as follows: Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets that a government can access at the measurement date. Level 2: Inputs are other than quotes prices included within Level 1 that are observable for an asset or liability, that are either directly or indirectly observable. Level 3: Inputs are significant unobservable inputs. The fair value hierarchy gives the highest priority to Level 1 and the lowest priority to Level 3 inputs. If a price for an identical asset is not observable, a government may evaluate fair market value using another valuation technique that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. If the fair value of an asset is measured using inputs from more than one level of the fair market value hierarchy, the measurement is based on the lowest level input that is significant to the entire measurement. The following section describes the valuation technique methodologies the Government is using to measure assets at fair value: Level 1: Investments classified within Level 1 are valued based on quotes obtained from active public exchanges or reported on the national market and are stated at the last reported sales price on the day of valuation. Fair value of exchange-traded contracts is based upon exchange settlement prices. Level 2: Investments classified within Level 2 are valued by pricing vendors using outside data. In determining the fair value of the investments, the pricing vendors use a market approach and pricing spreads based on the credit risk of the issuer, maturity, current yield, and other terms and conditions of each security. The commercial paper, letter of credit, and debt securities are classified as Level 2 instruments as their fair value is based on quoted values stated by the bank’s mark-to-market estimate using a stated fixed rate. The interest rate is observable at commonly quoted indexes for the full term of the instruments. Level 3: Investments in limited partnerships and private debt/direct lending are classified within Level 3 of the fair value hierarchy. Given the absence of market quotations, fair value is estimated using the information provided by the investment managers or general partners. The values are based on estimates that require varying degrees of judgment and, for the fund of funds investments, are primarily based on financial data supplied by the investment managers of the underlying funds. Government of the United States Virgin Islands Notes to Basic Financial Statements 57 Individual holdings within alternative investments may include instruments in both nonmarketable and market-traded securities. Nonmarketable securities may include equity in private companies, real estate, thinly traded securities, and other investment vehicles. While these financial instruments contain varying degrees of risk, the Government’s exposure with respect to each such investment is limited to carrying amount (fair value as described above). Assets using net asset value per share as fair value are not required to be categorized using the fair value hierarchy levels. Primary Government Following are the investments of the PG categorized within the three-level fair value hierarchy: (in thousands) September 30, 2017 Level 1 Level 2 Level 3 Money market funds $ 494,517 $ 494,517 $ - $ - Investments with contractual maturities: Certificates of deposit 14,068 14,068 - - U.S. government and agency obligations 51,041 51,041 - - U.S. Treasury notes 7,452 7,452 - - Portfolio investments: Commercial paper 39,623 - 39,623 - Letter of credit 661 - 661 - Subtotal 607,362 $ 567,078 $ 40,284 $ - Investments, at cost: Others 23 Total $ 607,385 Government of the United States Virgin Islands Notes to Basic Financial Statements 58 Following is a summary of the investments of the PG categorized by investment type and weighted average maturity, as of September 30, 2017, (expressed in thousands): Maturity (in years) Fair Value Less Than 1 Year 1 to 5 Years Over 5 Years Investments with contractual maturities Certificates of deposit $ 14,068 $ 14,068 $ - $ - U.S. government and agency obligations 51,041 27,189 23,852 - U.S. Treasury notes 7,452 7,452 - - Portfolio investments Commercial paper 39,623 39,140 - 483 Letter of credit and others 684 684 - - Total investments with contractual maturities 112,868 $ 88,533 $ 23,852 $ 483 Investments without contractual maturities Money market funds 494,517 Total $ 607,385 Interest Rate Risk – Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The PG does not have a formal investment policy that limits investment maturities as a means of managing such exposure. As a means of keeping the interest rate risk low, virtually all investments held by the PG are short-term in nature. 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, 2017, the PG’s investments in money market funds were rated AAAm by Standard & Poor’s, and Aaa-mf and Aaa- by Moody’s Investor Service. The PG’s investments in commercial paper were rated A-1 by Standard & Poor’s and P-1 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, 2017, more than 5.0% of the PG’s investments were invested in: Goldman Financial Square Money Market #524 (50.33%), Federated Government Obligation #5 (21.10%); Invesco Treasury #1931 (8.41%); and Chesham FNC, LLC, CPDs (6.44%). Custodial Credit Risk – The PG and GERS does not have a custodial risk policy. The custodial credit risk for investments is the risk that, in the event of the failure of a depository financial institution or other counterparty, the PG and GERS will not be able to recover the value of an investment or collateral securities that are in the possession of an outside party. At September 30, 2017, $595.7 million of investments were held in the name of the Bank of New York Trust Company, N.A, as trustee for the Government. Government of the United States Virgin Islands Notes to Basic Financial Statements 59 Pension Trust Fund Following are the investments of the Pension Trust Fund categorized within the three-level fair value hierarchy: (in thousands) September 30, 2017 Level 1 Level 2 Level 3 Equity securities: Consumer goods $ 24,146 $ 24,146 $ - $ - Energy 3,713 3,713 - - Financial 23,440 23,440 - - Health care 11,070 11,070 - - Industrial 16,895 16,895 - - Information technology 22,974 22,974 - - Materials 2,975 2,975 - - Real estate/construction 3,007 3,007 - - Telecommunication services 2,139 2,139 - - Utilities 1,548 1,548 - - Debt securities: Government agency obligations 13,002 - 13,002 - Municipal obligations 1,093 - 1,093 - Corporate bond 27,432 - 27,432 - Asset-backed securities 6,687 - 6,687 - Collateralized mortgage obligations 822 - 822 - Commercial mortgaged-backed securities 5,688 - 5,688 - Residential mortgaged-backed securities 16,726 - 16,726 - Limited partnerships: Private equity fund of funds 16,804 - - 16,804 Private debt-direct lending/other investments 127,713 - - 127,713 Real estate/other real assets 79,749 - - 79,749 Subtotal 407,623 $ 111,907 $ 71,450 $ 224,266 Investments, at cost: Money market funds 97,740 Investments measured at net asset value (NAV): Commingled equity funds 174,929 Commingled bond funds 119,798 Securities lending collateral fund 19,478 Total $ 819,568 Government of the United States Virgin Islands Notes to Basic Financial Statements 60 Pension trust funds investments which are measured at NAV per share, or equivalent are presented in the table below (expressed in thousands): Fair Value Unfunded Commitments Redemption Frequency Redemption Notice Period Investments measured at net asset value (NAV): Commingled equity funds $ 174,929 $ - Daily, Semi- monthly None Commingled bond funds 119,798 - Daily 1 – 15 days Securities lending collateral fund 19,478 - Daily 2 – 10 days Total $ 314,205 $ - Commingled equity and bond funds - This type includes nine commingled funds that invest in publicly traded domestic & global stocks, and domestic & global fixed income securities. The fair values of the investments in this type have been determined using the NAV per share (or its equivalent) of the investments. Of the total commingled funds, $251.1 million of the assets can be liquidated on a daily basis and $43.6 million can be liquidated on a semi-monthly basis with 8-15 days’ notice. All of the underlying securities within the commingled funds carry a recurring fair value measurement level of 1 or 2. There are no unfunded commitments for the commingled funds at September 30, 2017. Securities lending collateral - GERS’ custodian is the agent in lending the GERS’ securities for collateral and investments which are in a commingled fund. Government of the United States Virgin Islands Notes to Basic Financial Statements 61 Following is a summary of the investments of the pension trust fund, categorized by investment type and weighted average maturity, as of September 30, 2017, (expressed in thousands): Maturity (in years) Fair Value Less Than 1 Year 1 to 5 Years 6 to 10 Years More than 10 Years No Stated Maturity Investments with contractual maturities U.S. government and agency obligations $ 592 $ - $ 592 $ - $ - $ - U.S. Treasury notes 5,824 - 4,540 1,284 - - U.S. Treasury bonds 6,586 - 2,013 - 4,573 - Municipals 1,093 60 - 1,033 - - Commingled mutual funds 294,727 - - - - 294,727 Corporate obligations 27,432 44 13,212 7,493 6,683 - Mortgage and asset backed securities 29,923 - 6,134 1,947 21,842 - Investment loan 27,930 10,000 3,619 14,311 - - Total investments with contractual maturities 394,107 $ 10,104 $ 30,110 $ 26,068 $ 33,098 $ 294,727 Investments without contractual maturities Equity securities: Common stocks - U.S. 108,900 Money market funds 97,740 Real estate investments: Real estate investment trusts 3,007 Havensight Mall - U.S. Virgin Islands 41,000 Renaissance Carambola Beach Resort 15,000 GERS Complex - U.S. Virgin Islands 23,749 Limited partnerships 16,804 Debt lending/other 99,783 Securities lending short-term collateral investment pool 19,478 Total $ 819,568 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 62 The credit ratings of GERS’ debt securities at September 30, 2017, include (expressed in thousands): Standard & Poor’s Global Ratings Moody’s Investor Services Fair Value Credit Ratings Fair Value Credit Ratings Corporate obligations $ 492 AAA $ 492 Aaa Corporate obligations 145 AA+ 145 Aa1 Corporate obligations 344 AA- - - Corporate obligations 890 A - - Corporate obligations - - 1,345 A1 Corporate obligations - - 826 A2 Corporate obligations - - 2,714 A3 Corporate obligations - - 7,209 Baa1 Corporate obligations - - 5,744 Baa2 Corporate obligations - - 8,913 Baa3 Corporate obligations 4,145 A- - - Corporate obligations 7,113 BBB+ - - Corporate obligations 8,611 BBB - - Corporate obligations 5,648 BBB- - - Corporate obligations 44 Not Available 44 Not Available Investment loans 27,930 Not Rated 27,931 Not Rated Mortgage and asset backed securities 6,002 AAA - - Mortgage and asset backed securities 390 A- - - Mortgage and asset backed securities 23,531 Not Available - - Mortgage and asset backed securities - - 8,245 Aaa Mortgage and asset backed securities - - 350 A1 Mortgage and asset backed securities - - 20,196 Not Available Mortgage and asset backed securities - - 1,131 Not Rated Commingled and mutual funds 294,727 Not Rated 294,727 Not Available Total $ 380,012 $ 380,012 Concentration of Credit Risk – Concentration of credit risk is the risk of loss attributed to the magnitude of GERS’ investments in a single issuer of securities. GERS’ investment policy establishes limitations on portfolio composition by investment type to limit its exposure to concentration of credit risk. There are no investments in any one issuer that represent 5% or more of total investments. 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. The entire investment portfolio of GERS was held with a single third-party custodian as of September 30, 2017. At September 30, 2017, GERS had no underlying securities on loan secured by noncash collateral. 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. 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. Government of the United States Virgin Islands Notes to Basic Financial Statements 63 During the fiscal year ended September 30, 2017, GERS did not engage in any forward currency exchange contracts. 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 a 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 2017 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 no such violations during fiscal year 2017, or losses resulting from the default of the borrowers or the Custodian. Loans are generally terminable on demand. The collateral received shall, (i) 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 loaned securities; (ii) in the case of loaned securities which are not denominated in U.S. dollars or whose primary trading market is not located in the United States, have a market value of 105% of the market value of the loaned securities; or (iii) have a higher value as may be applicable in the jurisdiction in which the loaned securities are customarily traded. Such collateral should be kept, at a minimum, at 100% of the market value of the security for all borrowers throughout the outstanding period of the loans. At September 30, 2017, approximately $27.9 million of U.S. government and agency securities, fixed income, and equity corporate securities were on loan. The cash collateral received with a corresponding liability of an equal amount is recorded in the statement of fiduciary net position. 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, 2017, such investment pool had a weighted average maturity of 39 days and an average expected maturity of 78 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 64 Component Units Following are the investments of the discretely presented component units categorized within the fair value hierarchy: (in thousands) September 30, 2017 Level 1 Level 2 Level 3 Investments, at fair value: U.S. Government agencies and notes $ 45,098 $ 45,098 $ - $ - Common stocks 10,757 10,757 - - Corporate bonds 4,109 - 4,109 - Mutual funds 578 578 - - Derivative instruments 4,266 - 4,266 - Subtotal 64,808 $ 56,433 $ 8,375 $ - Investments, at cost: Certificate of deposits 19,558 Investments measured at net asset value (NAV): Alternative investments 52,109 Total $ 136,475 Following is a summary of the investments of the discretely presented component units, categorized by investment type and weighted average maturity, as of September 30, 2017, (expressed in thousands): Maturity (in years) Fair Value Less Than 1 Year 1 to 5 Years 6 to 10 Years More than 10 Years Investments with contractual maturities Certificates of deposit $ 19,558 $ 12,907 $ 6,651 $ - $ - U.S. Government agencies and notes 45,098 45,098 - - - Total investments with contractual maturities 64,656 $ 58,005 $ 6,651 $ - $ - Investments without contractual maturities Common stock 10,757 Mutual funds 578 Corporate bonds 4,109 Other investments 56,375 Total $ 136,475 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 and Concentration of Credit Risk – The authorizing legislation of the component units does not limit investments by credit rating categories. Authorizing legislation limits the investments choices of the component units, as described in Note 1. There are no investments in any one issuer that represent 5% or more of total investments. Government of the United States Virgin Islands Notes to Basic Financial Statements 65 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, the component units will not be able to recover the value of an investment or collateral securities that are in the possession of an outside party. The component units of the Government do not have custodial credit risk policies. 6. Receivables Primary Government Receivables for governmental funds at September 30, 2017, consist of the following (expressed in thousands): General PFA Debt Service Other Governmental Total Income taxes $ 252,562 $ - $ - $ 252,562 Real property taxes 121,616 - - 121,616 Hotel occupancy taxes 5,010 - - 5,010 Excise taxes 35,255 - - 35,255 Gross receipts taxes - 212,400 - 212,400 Gross taxes receivables 414,443 212,400 - 626,843 Less allowance for doubtful accounts (238,682) (186,705 - (425,387) Taxes receivables, net 175,761 25,695 - 201,456 Other $ 38 $ - $ 122 160 Tobacco settlement rights 678 Total $ 202,294 (a) Tax Receivables The Naval Appropriations Act created a separate tax structure for the U.S. Virgin Islands that mirrors the Internal Revenue Code (IRC) 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/her Virgin Islands income tax obligations by filing his/her return with and paying income taxes to the Government. Bona fide residents of the Virgin Islands are taxed by the Virgin Islands on their world-wide income. A nonresident of the U.S. Virgin Islands pays income taxes on his/her 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. Subchapter S and C corporate income tax returns are due by the 15th day of the fourth month following the close of the calendar year and become delinquent if not paid on or before the due date. Partnership income taxes are due by April 15 of the following year 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. Government of the United States Virgin Islands Notes to Basic Financial Statements 66 For the tax year ended December 31, 2017, the income tax filing date for individuals, businesses and trust tax filings (and certain other tax filings) were extended to June 29, 2018 through disaster relief provisions of the Internal Revenue Service (IRS) following Hurricanes Irma and Maria. 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 is 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 after fiscal year-end, unless the facts justify a period greater than 60 days. Receivables collected after that period, are recorded as unavailable property tax revenue. 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. For businesses with gross receipts of $225,000 per annum or less, gross receipts taxes are levied on an annual basis based on the amount of gross receipts exceeding $9,000 per month. Businesses with annual gross receipts of more than $225,000 are levied on a monthly basis with no $9,000 per month exemption. The gross receipts tax rate is 5.0% of sales and service revenue. 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. (b) Other Receivables In addition to tax receivables, the PG receives tobacco settlement right payments in connection with a Master Settlement Agreement with certain participating cigarette manufacturers. Under the terms of the agreement, the U.S. Virgin Islands receives .0173593% of annual payments made under the agreement. As of September 30, 2017, the PG reported a receivable of $678,000 for tobacco settlement right payments as included in the accompanying statement of net position. On November 14, 2011, the PG entered into a loan agreement on behalf of GERS in the amount of $13.0 million, at an interest rate of 4.91% and a maturity date of December 15, 2016. The loan was secured by pledged property tax receipts for years prior to and including 2005. The loan was not paid by the due date of December 15, 2016, and was converted to a two-year term loan to be paid with pledged property tax revenues and pledged gross receipts tax revenues. At September 30, 2017, the outstanding balance of the loan was $2.4 million included in GERS investment loan balance. Government of the United States Virgin Islands Notes to Basic Financial Statements 67 Component Units Receivables for the discretely presented component units at September 30, 2017, consist of the following (expressed in thousands): Utility service charges $ 20,763 Patients 18,386 Students 3,775 Port fees 3,225 Other* 5,505 Total $ 51,654 *University of the Virgin Islands Research and Technology Park Corporation (unaudited) Pension Trust Fund Loans and advances to members of GERS at September 30, 2017, consist of the following (expressed in thousands): Personal loans $ 93,710 Mortgage loans 7,014 Automobile loans 29 100,753 Less allowance for losses (970) Total $ 99,783 7. Unavailable Revenues The components of unavailable revenues of the general fund and PFA debt service fund as of September 30, 2017, consist of the following (expressed in thousands): General PFA Debt Service Total Property taxes $ 25,913 $ - $ 25,913 Income taxes 87,916 - 87,916 Gross receipts taxes - 17,318 17,318 Total $ 113,829 $ 17,318 $ 131,147 Government of the United States Virgin Islands Notes to Basic Financial Statements 68 8. Interfund Transfers Interfund transfers for the year ended September 30, 2017, consist of the following (expressed in thousands): Transfers from/to General PFA Debt Service PFA Capital Projects Other Governmental West Indian Company Total General $ - $ 95,048 $ - $ 1,100 $ 700 $ 96,848 PFA Debt Service 98 - 624 - - 722 Other governmental 2,356 2,315 - - - 4,671 Other business-type 1,000 - - - - 1,000 Total $ 3,454 $ 97,363 $ 624 $ 1,100 $ 700 $ 103,241 Interfund transfers constitute the transfer of resources from the fund that receives the resources to the fund that utilizes them. The most significant transfer to the general fund from other governmental funds included a $95.0 million transfer from the PFA debt service fund (a major governmental fund) representing gross receipt tax revenues available after bond debt service requirements. Significant transfers made from the general fund include a transfer of $1.0 million to the Bureau of Motor Vehicles Fund (a non-major business-type fund); $1.0 million to the St. Croix Capital Improvement Fund (a non-major governmental fund); and a transfer of $1.1 million to the Crisis Intervention Fund (a non-major governmental fund). Due From/To Other Funds Due from/to other funds General PFA Capital Projects Other Governmental Other Business Type Total General $ - $ - $ 23,340 $ 300 $ 23,640 Other governmental 23,500 - - - 23,500 Total Governmental Funds 23,500 - 23,340 300 47,140 West Indian Company 7,350 - - - 7,350 viNGN - 36,805 - - 36,805 Other enterprise 200 324 2,068 - 2,592 Total Proprietary Funds 7,550 37,129 2,068 - 47,047 Total $ 31,050 $ 37,129 $ 25,408 $ 300 $ 93,887 The due from/to other funds includes the following amounts the general fund owes to other funds: $4.9 million due to the Emergency Molasses Fund (a non-major governmental fund) for unpaid appropriations; $3.5 million due to the PFA special revenue fund for unpaid matching funds; and $1.4 million due to the Elected Governor Retirement Fund. Government of the United States Virgin Islands Notes to Basic Financial Statements 69 The amount due from other funds by the general fund is mainly composed of $20.3 million due from the District Street Lighting Fund (a non-major governmental fund) and $2.7 million from the Bond Proceeds Fund (a non-major governmental fund). The amount due to other governmental funds by the general fund includes $12.0 million due to the St. Croix Capital Improvement Fund from the general fund for capital improvement projects; $832,000 due from the Virgin Islands Lottery to the Pharmaceutical Assistance to the Aged Fund; and $916,000 due from the Virgin Islands Lottery to the Virgin Islands Educational Initiative Fund consisting primarily of 15% of revenue derived from lottery games under contract between the Virgin Islands Lottery and private contractors be transferred to these funds. The due to PFA Capital Projects funds includes $36.8 million due from the Virgin Islands Next Generation Network (viNGN), a major business-type fund in connection with start-up costs of the broadband project. 9. Restricted Assets Primary Government Restricted assets of proprietary funds and business-type activities as of September 30, 2017, include cash and cash equivalents as follows (expressed in thousands): Unemployment insurance funds $ 5,328 WICO debt service funds 2,534 Total $ 7,862 These funds were restricted to repay loans payable to the U.S. Treasury and WICO’s loan for capital asset purchases. Government of the United States Virgin Islands Notes to Basic Financial Statements 70 Component Units Restricted assets of discretely presented component units as of September 30, 2017, include cash and cash equivalents, investments, and receivables as follows (expressed in thousands): Cash and cash equivalents: Debt service and sinking fund requirements $ 44,536 Endowment funds 182 HUD project funds 909 Revolving loan funds 25,412 Construction funds 16,714 Renewal and replacement funds 1,269 Other 6,834 Total 95,856 Investments: Debt service and sinking fund requirements 18,042 Construction funds 21,856 Endowment funds 56,217 Renewal and replacement funds 4,649 Revolving loan funds 6,676 Other 551 Total 107,991 Other: Pledged funds 20,850 Total $ 224,697 Government of the United States Virgin Islands Notes to Basic Financial Statements 71 10. Capital Assets Primary Government Capital assets activity for governmental activities for the year ended September 30, 2017, is summarized as follows (expressed in thousands): Beginning Balance Additions Transfers/ Adjustment Impairment/ Disposals Ending Balance Capital assets not being depreciated: Land $ 227,558 $ - $ - $ - $ 227,558 Construction in progress 55,645 52,383 (26,797) (5,228) 76,003 Total capital assets not being depreciated 283,203 52,383 (26,797) (5,228) 303,561 Capital assets being amortized and depreciated: Land improvements 7,825 - 281 - 8,106 Infrastructure 337,595 2,475 1,888 (201,172) 140,786 Buildings and improvements 541,578 1,565 23,358 (161,257) 405,244 Machinery and equipment 197,441 15,387 1,270 (13,049) 201,049 Total capital assets being amortized and depreciated 1,084,439 19,427 26,797 (375,478) 755,185 Less accumulated amortization and depreciation for: Land improvements (4,639) (231 ) - - (4,870) Infrastructure (105,653) (5,313 ) - 73,004 (37,962) Buildings and improvements (244,278) (32,417 ) - 80,044 (196,651) Machinery and equipment (163,819) (18,508 ) - 6,279 (176,048) Total accumulated amortization and depreciation (518,389) (56,469 ) - 159,327 (415,531) Total capital assets being amortized and depreciated, net 566,050 (37,042 ) 26,797 (216,151) 339,654 Governmental activities capital assets, net $ 849,253 $ 15,341 $ - $ (221,379) $ 643,215 Depreciation and amortization expense is charged to functions of the PG for the year ended September 30, 2017, as follows (expressed in thousands): Governmental Activities: General government $ 30,175 Public safety 1,496 Health 2,266 Education 6,089 Public housing and welfare 1,247 Culture and recreation 2,130 Transportation and communication 13,066 Total $ 56,469 Government of the United States Virgin Islands Notes to Basic Financial Statements 72 Capital assets activity for business-type activities for the year ended September 30, 2017, is summarized as follows (expressed in thousands): Beginning Balance Additions Transfers/ Adjustment Impairment/ Disposals Ending Balance Capital assets not being depreciated: Land $ 5,178 $ - $ - $ - $ 5,178 Construction in progress 8,191 8,871 (12,218) - 4,844 Total capital assets not being depreciated 13,369 8,871 (12,218) - 10,022 Capital assets being amortized and depreciated: Land improvements 348 - - - 348 Buildings and improvements 79,506 142 11,294 (2,601) 88,341 Machinery and equipment 79,135 1,282 924 (5,797) 75,544 Intangible assets 20,974 9,800 - - 30,774 Total capital assets being amortized and depreciated 179,963 11,224 12,218 (8,398) 195,007 Less accumulated amortization and depreciation for: Land improvements (342) (1 ) - - (343) Buildings and improvements (38,904) (3,321 ) - 302 (41,923) Machinery and equipment (22,501) (5,657 ) - 2,017 (26,141) Intangible assets (2,764) (931 ) - - (3,695) Total accumulated amortization and depreciation (64,511) (9,910 ) - 2,319 (72,102) Total capital assets being amortized and depreciated, net 115,452 1,314 12,218 (6,079) 126,905 Business-type activities capital assets, net $ 128,821 $ 10,185 $ - $ (6,079) $ 132,927 Depreciation and amortization expense is charged for the year ended September 30, 2017, as follows (expressed in thousands): Business-type Activities: WICO – depreciation $ 2,962 viNGN - depreciation 5,077 Other enterprise funds 1,871 Total $ 9,910 Government of the United States Virgin Islands Notes to Basic Financial Statements 73 Component Units Capital assets activity for discretely presented component units for the year ended September 30, 2017, is summarized as follows (expressed in thousands): Beginning Balance Additions Transfers Impairment/ Disposals Ending Balance* Capital assets not being depreciated: Land $ 108,339 $ 3,555 $ - $ (670) $ 111,224 Construction in progress 92,799 68,995 (35,673) (543) 125,578 Total capital assets not being depreciated 201,138 72,550 (35,673) (1,213) 236,802 Capital assets being depreciated: Buildings and improvements 1,806,657 163,610 24,670 (96,099) 1,898,838 Airport and marine terminal facilities 170,962 - 3,774 (334) 174,402 Personal property and equipment 166,604 4,348 5,006 (35,548) 140,410 Intangible assets 2,919 - - - 2,919 Total capital assets being amortized and depreciated 2,147,142 167,958 33,450 (131,981) 2,216,569 Less accumulated amortization and depreciation for: Buildings and improvements (1,084,952) (50,058 ) 1,645 31,733 (1,101,632) Airport and marine terminal facilities (131,087) (6,694 ) - 81 (137,700) Personal property and equipment (112,260) (8,903 ) - 29,301 (91,862) Intangible assets (2,021) (195 ) - - (2,216) Total accumulated amortization and depreciation (1,330,320) (65,850 ) 1,645 61,115 (1,333,410) Total capital assets being amortized and depreciated, net 816,822 102,108 35,095 (70,866) 883,159 Component unit capital assets, net $ 1,017,960 $ 174,658 $ (578) $ (72,079) $ 1,119,961 *University of the Virgin Islands Research and Technology Park Corporation (unaudited) *Title to Virgin Islands Waste Management Authority’s capital assets has not been formally transferred over from the PG. Depreciation expense charged by each component unit for the year ended September 30, 2017, is as follows (expressed in thousands): Virgin Islands Housing Authority $ 7,505 Virgin Islands Port Authority 21,049 Virgin Islands Water and Power Authority: Electric System 16,177 Water System 1,386 Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 4,045 Juan F. Luis Hospital 4,970 University of the Virgin Islands 2,979 Other component units* 7,739 Total $ 65,850 *University of the Virgin Islands Research and Technology Park Corporation (unaudited) Government of the United States Virgin Islands Notes to Basic Financial Statements 74 Hurricanes Irma and Maria As indicated earlier, the PG and its component units were impacted by Hurricanes Irma and Maria and certain assets sustained physical damage, were destroyed, and other assets required considerable effort to restore their service utility. The organizations evaluated their respective capital assets in accordance with GASB Statement No. 42 and realized their respective losses from impairment, net of insurance recoveries. The PG recognized a loss from impairment amounting to $221.2 million for governmental activities and $6.1 million for business type activities. The discretely presented component units have recognized impairment losses, net of insurance recoveries, for the year ended September 30, 2017, as follows (expressed in thousands): Virgin Islands Port Authority $ 28,884 Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 11,994 Juan F. Luis Hospital 12,358 University of the Virgin Islands 10,373 Other component units* 656 Total $ 64,265 *University of the Virgin Islands Research and Technology Park Corporation (unaudited) The amount of the impairment losses for damaged capital assets is based on calculations using a combination of the restoration cost approach and a physical verification approach. Under the restoration cost approach, the amount of impairment is derived from the estimated costs to restore the utility of the capital asset. The estimated restoration cost can be converted to historical cost either by restating the estimated restoration cost using an appropriate cost index or by applying a ratio of the estimated restoration cost over estimated replacement cost to the carrying value of the capital asset. The organizations also conducted physical inspections of assets to determine and estimate the extent of the damages. As a result, assets fully depreciated prior to the hurricanes would have an impairment loss of $0, regardless of the damage. Actual repairs to damaged capital assets are expected to far exceed the calculated impairment losses. Any insurance recoveries received have been used to offset the impairment losses, in accordance with the guidelines of GASB Statement No. 42. The impairment losses, net of insurance recoveries received during the year, are reported as a special item in the accompanying financial statements. Government of the United States Virgin Islands Notes to Basic Financial Statements 75 11. Long-Term Liabilities Primary Government The change in long-term bonds and loans for governmental activities is as follows for the year ended September 30, 2017, (expressed in thousands): Beginning Balance Additions Reductions Ending Balance Due Within One Year Due Thereafter Matching (Excise Tax) Bonds 2013 Series B Revenue and Refunding Bonds $ 46,295 $ - $ 5,250 $ 41,045 $ - $ 41,045 2013 Series A Revenue and Refunding Bonds 33,790 - 2,320 31,470 7,555 23,915 2012 Series A Revenue Bonds 141,015 - 850 140,165 900 139,265 2010 Series A & B Revenue Bonds 390,570 - 2,395 388,175 2,520 385,655 2009 Series A Revenue Bonds (Cruzan) 35,575 - 705 34,870 740 34,130 2009 Series A1, A2, B & C Revenue and Refunding Bonds 316,815 - 29,260 287,555 30,730 256,825 2009 Series A Revenue Bonds (Diageo) 237,095 - 4,890 232,205 5,235 226,970 Total 1,201,155 - 45,670 1,155,485 47,680 1,107,805 Gross Receipts Tax Bonds 2014 Series D Revenue Bonds 5,600 - 175 5,425 190 5,235 2014 Series C Revenue and Refunding Bonds 242,495 - 4,995 237,500 5,240 232,260 2014 Series A Revenue Bonds 48,160 - 1,560 46,600 1,635 44,965 2012 Series A & B Revenue and Refunding Bonds 194,500 - 12,780 181,720 13,180 168,540 2012 Series C Revenue Bonds 31,725 - 1,775 29,950 1,820 28,130 2006 Series A Revenue Bonds 199,830 - 3,240 196,590 3,360 193,230 Total 722,310 - 24,525 697,785 25,425 672,360 Tobacco Settlement Bonds 2006 Series A, B, C & D Tobacco Turbo and Capital Appreciation Bonds 7,290 - - 7,290 - 7,290 2001 Series A Tobacco Bonds 7,845 - 1,665 6,180 - 6,180 Total 15,135 - 1,665 13,470 - 13,470 Federal Highway Bonds 2015 Bonds 85,415 - 3,335 82,080 3,470 78,610 Total 2,024,015 - 75,195 1,948,820 76,575 1,872,245 Plus (less): Bonds premium 57,799 - 6,101 51,698 - 51,698 Bonds discount (2,692) - (217) (2,475) - (2,475) Bonds accretion 7,053 960 - 8,013 8,013 - Total bonds payable, net 2,086,175 960 81,079 2,006,056 84,588 1,921,468 Government of the United States Virgin Islands Notes to Basic Financial Statements 76 Beginning Balance Additions Reductions Ending Balance Due Within One Year Due Thereafter Loans Series 2016A Note - 9,485 762 8,723 2,136 6,587 Series 2014E Note - 20,000 - 20,000 15,000 5,000 Series 2014B Note 10,000 - 2,000 8,000 2,000 6,000 Series 2013A Note 2,200 - 1,347 853 853 - Series 2012A Note 12,744 - 1,296 11,448 268 11,180 Series 2011B Note 4,997 - 1,862 3,135 2,492 643 Total loans payable 29,941 29,485 7,267 52,159 22,749 29,410 Total governmental activities bonds and loans payable $ 2,116,116 $ 30,445 $ 88,346 $ 2,058,215 $ 107,337 $ 1,950,878 The change in other long-term liabilities for governmental activities is as follows for the year ended September 30, 2017, (expressed in thousands): Beginning Balance Additions Reductions Ending Balance Due Within One Year Due Thereafter Accrued compensated absences $ 33,524 $ 2,627 $ - $ 36,151 $ 10,923 $ 25,228 Retroactive union arbitration 195,286 - - 195,286 - 195,286 Litigation 13,783 3,027 665 16,145 331 15,814 Landfill closure and post closure costs 90,958 6,965 - 97,923 - 97,923 Post-employment benefits 357,224 120,214 - 477,438 - 477,438 Total $ 690,775 $ 132,833 $ 665 $ 822,943 $ 11,254 $ 811,689 Accrued compensated absences, retroactive union arbitration, litigation, landfill closure and post- closure costs, and post-employment benefits to retirees such as health insurance, are generally expected to be liquidated with resources derived from the general fund. At September 30, 2017, the PG reported a net pension liability of $3.5 billion for its proportionate share of the net defined benefit pension liability administered by GERS. The net pension liability is valued as of September 30, 2016, determined by an actuarial valuation as of that date. The change in pension liabilities for governmental activities is as follows for the year ended September 30, 2017, (expressed in thousands): Beginning Balance Additions Reductions Ending Balance Due Within One Year Due Thereafter Net pension liability $ 3,065,617 $ 527,078 $ 57,178 $ 3,535,517 $ - $ 3,535,517 Government of the United States Virgin Islands Notes to Basic Financial Statements 77 The changes in long-term liabilities for business-type activities are as follows for the year ended September 30, 2017, (expressed in thousands): Beginning Balance Additions Reductions Ending Balance Due Within One Year Due Thereafter Workers compensation claims $ 38,459 $ 5,760 $ 3,757 $ 40,462 $ 3,019 $ 37,443 Loan payable – U.S. Treasury 69,165 1,493 3,664 66,994 66,994 - Note payable – WICO 32,181 11,008 523 42,666 586 42,080 Total $ 139,805 $ 18,261 $ 7,944 $ 150,122 $ 70,599 $ 79,523 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 more than 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 issue 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 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 78 (a) Bonds Payable Bonds payable outstanding at September 30, 2017, are comprised of the following (expressed in thousands): Maturity Interest Rate (%) Balance Matching (Excise) Tax Bonds 2013 Series B Revenue and Refunding Bonds 2018 - 2024 3.00 - 5.00 $ 41,045 2013 Series A Revenue and Refunding Bonds 2018 - 2024 5.00 - 5.25 31,470 2012 Series A Revenue Bonds 2022 - 2032 4.00 - 5.00 140,165 2010 Series A & B Revenue Bonds 2012 - 2029 4.00 - 5.25 388,175 2009 Series A Revenue Bonds (Cruzan) 2010 - 2039 3.00 - 6.00 34,870 2009 Series A1, A2, B & C Revenue and Refunding Bonds 2010 - 2039 3.00 - 5.00 287,555 2009 Series A Revenue Bonds (Diageo) 2013 - 2037 6.00 - 6.75 232,205 Total 1,155,485 Gross Receipts Tax Bonds 2014 Series D Revenue Bonds 2015 - 2033 6.03 5,425 2014 Series C Revenue and Refunding Bonds 2015 - 2044 4.50 – 5.00 237,500 2014 Series A Revenue Bonds 2015 - 2034 5.00 46,600 2012 Series A & B Revenue and Refunding Bonds 2017 - 2032 2.25 - 5.25 181,720 2012 Series C Revenue Bonds 2017 - 2042 3.00 - 5.00 29,950 2006 Series A Revenue Bonds 2007 - 2029 3.50 - 5.00 196,590 Total 697,785 Tobacco Settlement Bonds 2006 Series A, B, C & D Tobacco Turbo and Capital Appreciation Bonds 2035 6.25 – 7.63 7,290 2001 Series A Tobacco Bonds 2031 4.62 – 5.13 6,180 Total 13,470 Federal Highway Bonds 2015 Bonds 2016 - 2033 3.00 – 5.00 82,080 Total bonds payable 1,948,820 Plus (Less): Bonds premium 51,698 Bonds discount (2,475) Bonds accretion 8,013 Total bonds payable, net $ 2,006,056 Government of the United States Virgin Islands Notes to Basic Financial Statements 79 Matching (Excise) Tax Bonds 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. All amounts to be received by the Government from federal rum excise tax are deposited directly into trust accounts in accordance with the Indenture of Trust for bond debt service payments. Estimated prepayments of matching fund revenues are made to the Government prior to the beginning of each fiscal year, subject to adjustment for local revenue actually collected by the U.S. Department of the Treasury during such year. Such adjustments are made to the estimated prepayments for a subsequent fiscal year. Prepayments of matching fund revenue are recorded as deferred revenue in the accompanying statement of net position and recognized as income in the subsequent fiscal year. The principal and interest on the matching tax bonds will end in various periods through year 2037. In fiscal year 2017, pledged matching rum excise tax revenues represented 48.8% of total rum excise revenues and pledged gross receipts tax revenues represented 40.8% of total gross receipt tax revenues. Payments of bond principal and interest from matching rum excise tax revenues amounted to $45.7 million and $62.1 million, respectively. Payment of bond principal and interest from pledged gross receipts taxes amounted to $31.8 million and $35.4 million, respectively. The rate of federal rum excise tax is determined by Congress. In November 1999, Congress increased the federal rum excise tax rate from $10.50 to $13.25 per proof gallon. Since then, Congress has extended the higher rate nine times. On February 9, 2018, Congress extended the rate to December 31, 2021 with the enactment of the Bipartisan Budget Act of 2018. 2013 Series B Revenue and Refunding Bonds On October 17, 2013, PFA issued the 2013 Series B Revenue and Refunding Bonds (the 2013 Series B Bonds), the proceeds of which amounted to $51.4 million. The Government has pledged matching funds, described above, for the timely payment of the principal and interest. The 2013 Series B Bonds bear interest at rates ranging from 3.00% to 5.00% and mature on October 1, 2018 through October 1, 2024. The bonds were issued to: (i) refund a portion of the 2004 Series A Bonds amounting to $48.3 million; (ii) fund the debt service requirements of the bond issuance; and (iii) pay the costs of issuing the bonds. The 2013 Series B Bonds maturing on October 1, in the years 2018 and 2024 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. Government of the United States Virgin Islands Notes to Basic Financial Statements 80 2013 Series A Revenue and Refunding Bonds On September 19, 2013, PFA issued the 2013 Series A Revenue and Refunding Bonds (the 2013 Series A Bonds), the proceeds of which amounted to $36.0 million. The Government has pledged matching funds, described above, for the timely payment of the principal and interest. The 2013 Series A Bonds bear interest at rates ranging from 5.00% to 5.25%, and mature on October 1, 2018 through October 1, 2024. The bonds were issued to: (i) provide a partial advance refunding of the 2004 Series A Bonds amounting to $14.7 million, provide a partial advance refunding of the 2009 Series A-1 Bonds amounting to $1.6 million, and provide a partial advance refunding of the 2009 Series B Bonds amounting to $16.7 million; (ii) fund the debt service requirements of the bond issuance; and (iii) pay the costs of issuing the bonds. The advance refunding resulted in a net present value economic gain of $4.2 million. The 2013 Series A Bonds maturing on October 1, in the years 2018 and 2024 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 beginning October 1, 2015. 2012 Series A Revenue Bonds On September 7, 2012, PFA issued the 2012 Series A Revenue Bonds (the 2012 Series A Bonds), the proceeds of which amounted to $142.6 million. The Government has pledged matching funds, described above, for the timely payment of the principal and interest. The 2012 Series A Bonds bear interest at rates ranging from 4.00% to 5.00% and mature from 2022 through 2032. The bonds were issued to: (i) provide working capital to the PG to finance various operating expenses; (ii) fund the debt service requirements of the bond issuance; and (iii) pay the costs of issuing the bonds. The 2012 Series A Bonds maturing on October 1, in the years 2022, 2027, and 2032 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. 2010 Series A & B Revenue Bonds On July 8, 2010, PFA issued the 2010 Series A & 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. The 2010 Series A Bonds, amounting to $305.0 million, bear interest at rates ranging from 4.00% to 5.00% mature from 2012 through 2029. The 2010 Series B Bonds, amounting to $94.1 million, bear interest at rates ranging from 4.25% to 5.25% and mature from 2020 through 2029. The bonds were issued to: (i) to finance various operating expenses of the PG; (ii) refinance a portion of the outstanding Series 2009 B1 and B2 Notes; (iii) fund the debt service requirements of the bond issuance, and (iv) to pay the costs of issuing the bonds. 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. Government of the United States Virgin Islands Notes to Basic Financial Statements 81 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. 2009 Series A Revenue Bonds (Cruzan) 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. The Cruzan Bonds bear interest at rates ranging from 3.00% to 6.00% and mature from 2010 through 2039. The proceeds of the Cruzan Bonds were used to: (i) finance the costs of a wastewater treatment facility and renovations at the Cruzan VIRIL, Ltd. (Cruzan) rum distillery on the island of St. Croix; (ii) fund debt service reserve accounts; and (iii) pay the costs of issuing the bonds. The bonds maturing October 1, 2039, are subject to mandatory sinking fund redemptions beginning October 1, 2020, at a redemption price equal to 100% of the principal amount plus interest accrued to the date of redemption. In association with the issuance of the Cruzan Bonds, PFA entered into an agreement with Cruzan VIRIL, Ltd. (Cruzan) on October 6, 2009. Provisions of the agreement call for payments of excess matching funds, after debt service, debt service reserve, and sinking fund redemption payments, to the Government and Cruzan of 60%-80%, and 54%-60% respectively. Excess matching fund payments to Cruzan amounted to $35.5 million for the year ended September 30, 2017. 2009 Series A1, A2, B & C Revenue and Refunding Bonds On October 1, 2009, PFA issued the 2009 Series A1, A2, B & 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. The 2009 Series A1 Bonds amounted to $86.4 million. The 2009 Series A1 Bonds bear interest at rates ranging from 3.00% to 5.00% and mature from 2010 through 2039. The Series A1 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 A2 Bonds amounted to $8.7 million. The 2009 Series A2 Bonds bear an interest rate of 3.00% and mature from 2010 through 2011. The Series A2 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 5.00%, and mature from 2010 through 2025. The 2009 Series B Bonds were issued to: (i) 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 $97.5 million, bear an interest rate of 5.00% and mature from 2010 through 2022. The 2009 Series C Bonds were issued to: (i) 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 82 The 2009 Series A1, B & C Bonds are subject to optional sinking fund installment redemptions beginning October 1, 2019 at a redemption price equal to 100% of the principal amount, plus interest accrued, to the date of redemption. 2009 Series A Revenue Bonds (Diageo) On July 9, 2009, PFA issued the 2009 Series A Bonds (the Diageo Bonds) amounting to $250.0 million. The Diageo Bonds mature from 2013 through 2037 at interest rates ranging from 6.00% to 6.75%. The proceeds of the bonds were issued to: (i) provide a grant to Diageo USVI, Inc. (the producer of Captain Morgan rum products) to construct a rum distillery and warehouse on the island of St. Croix; (ii) to redeem the Subordinated Revenue Bond Anticipation Notes Series 2009A issued to finance preliminary costs of the Diageo construction project; (iii) to fund debt service reserve accounts; and (iv) to finance capitalized interest and costs associated with the issuance of the bonds. The PG has pledged matching funds generated from the sale of Captain Morgan rum products for the timely payment of the principal and interest. 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. In association with the issuance of the Diageo Bonds, the Government entered into an agreement with Diageo USVI, Inc. on June 17, 2008. Provisions of the agreement call for payments of excess matching funds, after debt service, debt service reserve, and sinking fund redemption payments to Diageo of 49.5% - 57% to provide marketing support payments, production incentive payments, continuation of molasses subsidies and other tax incentives to attract Diageo USVI, Inc. as part of the rum industry in the U.S. Virgin Islands. Marketing and incentive payments to Diageo USVI, Inc. amounted to $47.3 million for the year ended September 30, 2017. As of September 30, 2017, an additional $13.5 million was due to Diageo USVI, Inc. as part of a negotiated settlement of prior year adjustments based on production. Gross Receipts Tax Bonds 2014 Series D Revenue Bonds On December 3, 2014, PFA issued the 2014 Series D Revenue Bonds (the 2014 Series D Bonds), the proceeds of which amounted to $5.8 million. The Government has pledged gross receipts taxes for the timely payment of the principal and interest, subject to the annual moderate-income housing fund deposit as well as prior liens or pledges. The 2014 Series D Bonds bear interest at the rate of 6.03% and mature from 2015 through 2033. The bonds were issued to: (i) fund certain capital projects; (ii) fund the debt service requirements of the bond issuance; and (iii) pay the costs of issuing the bonds. The 2014 Series D Bonds are subject to optional redemption prior to maturity in whole or in part, in a minimum amount of $100,000 at a redemption price equal to the make-whole redemption price which is the greater of 100% of the principal amount to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest assuming a 360-day year consisting of twelve 30-day months at the Treasury Rate on the date of redemption as published in the Federal Reserve Statistical Release H.15 (519). Government of the United States Virgin Islands Notes to Basic Financial Statements 83 2014 Series C Revenue and Refunding Bonds On November 14, 2014, PFA issued the 2014 Series C Revenue and Refunding Bonds (the 2014 Series C Bonds), the proceeds of which amounted to $247.0 million. The Government has pledged gross receipts taxes for the timely payment of the principal and interest. The 2014 Series C Bonds bear interest at rates ranging from 4.50% to 5.00%, and mature from 2015 through 2044. The bonds were issued to: (i) refund the 2003 Series A Bonds amounting to $233.3 million; (ii) finance certain capital projects amounting to $25.5 million; (iii) fund the debt service requirements of the bond issuance; and (iv) pay the costs of issuing the bonds. The current refunding of the Series 2003A Bonds resulted in a net present value economic gain of $9.6 million. The proceeds of the 2014 Series C Bonds related to the refunding were placed in a trust to provide for all future debt service payments on the 2016 through 2034 maturities of the Series 2003A Bonds. Approximately, $235.2 million of the bond proceeds were deposited in the escrow fund account. On December 1, 2014, the 2003A Bonds were defeased through the exercise of call redemptions. The 2014 Series C Bonds maturing on October 1, in the years 2030 and 2039 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. 2014 Series A Revenue Bonds On September 5, 2014, PFA issued the 2014 Series A Revenue Bonds (the 2014 Series A Bonds), the proceeds of which amounted to $49.6 million. The Government has pledged gross receipts taxes for the timely payment of the principal and interest. The 2014 Series A Bonds bear interest at 5.00%, and mature from 2015 through 2034. The bonds were issued to: (i) provide working capital to the Government to finance various operating expenses; (ii) fund the debt service requirements of the bond issuance; and (iii) pay the costs of issuing the bonds. The 2014 Series A Bonds maturing on October 1, 2029 and 2034 are subject to optional redemption on or after October 1, 2024 at a redemption price equal to 100% of the principal amount plus interest accrued to the redemption date. 2012 Series A & B Revenue and Refunding Bonds On November 20, 2012, PFA issued the 2012 Series A & B Revenue and Refunding Bonds, the proceeds of which amounted to $228.8 million. The Government has pledged gross receipts taxes, for the timely payment of the principal and interest. The 2012 Series A Bonds, amounting to $197.0 million, bear interest at rates ranging from 2.25% to 5.00% and mature from 2017 through 2032. The 2012 Series B Bonds, amounting to $31.7 million, bear interest at the rate of 5.25% and mature in 2027.The Series 2012A Bonds were issued to: (i) refund the 1999 Series A Bonds; (ii) repay the Series 2010 A1 and 2010 A2 Notes; (iii) fund the debt service requirements of the bond issuance; and (iv) pay the costs of issuing the bonds. The 2012 Series A Bonds maturing on October 1, in the years 2017, 2022, and 2032 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 refunding of the Series 1999A Bonds resulted in an economic gain of net present value savings of $7.7 million. Government of the United States Virgin Islands Notes to Basic Financial Statements 84 The Series 2012 B Bonds were issued to: (i) refinance the Series 2011 A Note; (ii) fund the debt service requirements of the bond issuance; and (iii) pay the costs of issuing the bonds. The 2012 Series B Bonds maturing on October 1, 2027, 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. 2012 Series C Revenue Bonds On December 19, 2012, PFA issued the 2012 Series C Revenue Bonds (the 2012 Series C Bonds), the proceeds of which amounted to $35.2 million. The Government has pledged gross receipts taxes, for the timely payment of the principal and interest. The 2012 Series C Bonds, bear interest at rates ranging from 3.00% to 5.00% and mature from 2017 through 2042. The Series 2012 C Bonds were issued to: (i) finance certain operating expenses and other obligations of the Government; (ii) fund the debt service requirements of the bond issuance; and (iii) pay the costs of issuing the bonds. The 2012 Series C Bonds maturing on October 1, in the years 2017, 2030 and 2042 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. 2006 Series A Revenue Bonds On September 28, 2006, PFA issued the 2006 Series A Revenue Bonds (the 2006 Series A 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. The 2006 Series Bonds bear interest at 3.50% to 5.00% and mature from 2007 through 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 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. Tobacco Settlement Bonds 2006 Series A, B, C & D Tobacco Turbo and Capital Appreciation Bonds 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. Government of the United States Virgin Islands Notes to Basic Financial Statements 85 The proceeds have been used for (i) financing several capital hospital and health development projects for the benefit of the Virgin Islands and its residents; (ii) pay certain costs of issuance relating to the Series 2006 Bonds; and (iii) fund operating costs. 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 7.63%. The series is 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. 2001 Series A Tobacco Bonds On November 20, 2001, TSFC issued the 2001 Tobacco Settlement Asset-Backed Series A Bonds amounting to $23.7 million of the aggregate principal. The proceeds were used for the purpose of (i) purchasing all rights, title, and interest in certain litigation awards under the master settlement agreement (MSA) entered into by participating cigarette manufacturers; (ii) issuance of Tobacco Settlement Asset-Backed Bonds to pay the purchase price for the rights; and (iii) to provide funds for hospital and healthcare projects in the U.S. Virgin Islands. Interest on the 2001 bonds is payable semiannually every May 15 and November 15 for the term bonds amounting to $15.5 million and convertible capital appreciation bonds amounting to $8.2 million, with a nominal value of $6.2 million. The convertible capital appreciation bonds accrete interest prior to November 15, 2007, and accrue interest after that date. Interest on the capital appreciation bonds will compound on May 15 and November 15. The 2001 Series A Tobacco Bonds payable at September 30, 2017, amounted to $6.2 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, 2017, resulted in turbo redemptions of $1.67 million on May 15, 2017. Federal Highway Bonds On December 15, 2015, PFA issued the Series 2015 Grant Anticipation Revenue Bonds (the 2015 Bonds) in the amount of $89.9 million. The limited special obligation bonds are secured by a lien and security interest on Federal Highway Administration (FHA) grant revenues. The 2015 Bonds were issued to: (i) finance the costs of certain highway projects; (ii) establish debt service reserves; and (iii) to finance the costs of issuing the 2015 Bonds. The Government and FHA entered a Memorandum of Understanding on December 9, 2015, to document the procedures, rules, and responsibilities of the Government to supervise the capital projects and to manage debt service payments. The 2015 Bonds mature from 2016 through 2033, at interest rates ranging from 3.00% to 5.00%. Interest is payable on March 1 and September 1 annually, and principal is payable on September 1 annually. The 2015 Bonds maturing on October 1, in the years 2025 through 2033 are eligible for early redemption at a price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption. Government of the United States Virgin Islands Notes to Basic Financial Statements 86 Advance Refunding/Defeasances On June 15, 1992, PFA issued the Series 1992 Revenue Bonds. The proceeds of the Series 1992 Revenue Bonds were placed in an irrevocable trust to provide for all future debt service payments on the Series 1989 Revenue Bonds. At September 30, 2017, $4.2 million of the 1989 defeased bonds were outstanding. Assets held by irrevocable trusts for refunding of prior outstanding debt and the corresponding liabilities are not included in the Government’s basic financial statements. Government of the United States Virgin Islands Notes to Basic Financial Statements 87 Future debt service requirements for bonds for which matching funds have been pledged are as follows (expressed in thousands): Governmental Activities – Matching Fund Bonds 2009 Series A Revenue Bonds (Diageo) 2009 Series A1 & A2 Revenue Bonds 2009 Series B Revenue Bonds 2009 Series C Revenue Bonds 2009 Series A Revenue Bonds (Cruzan) Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Maturity Year: 2018 $ 5,235 $ 15,387 $ 1,840 $ 3,640 $ 20,450 $ 7,462 $ 8,440 $ 2,438 $ 740 $ 2,051 2019 5,600 15,022 1,915 3,563 21,500 6,413 8,860 2,005 780 2,013 2020 5,990 14,631 2,000 3,481 22,600 5,311 9,145 1,555 820 1,973 2021 6,405 14,216 2,090 3,388 23,760 4,152 8,415 1,116 865 1,926 2022 6,845 13,777 2,195 3,286 24,975 2,934 10,345 647 920 1,872 2023-2027 41,930 61,174 12,685 14,712 46,185 5,170 7,770 194 5,530 8,434 2028-2032 58,440 44,669 16,255 11,146 - - - - 7,470 6,498 2033-2037 81,815 21,282 20,865 6,529 - - - - 10,075 3,885 2038-2042 19,945 673 15,265 1,170 - - - - 7,670 709 Total $ 232,205 $ 200,831 $ 75,110 $ 50,915 $ 159,470 $ 31,442 $ 52,975 $ 7,955 $ 34,870 $ 29,361 Governmental Activities – Matching Fund Bonds 2010 Series A Revenue Bonds 2010 Series B Revenue Bonds 2012 Series A Revenue Bonds 2013 Series A Revenue Bond 2013 Series B Revenue Bonds Total Matching Excise Tax Bonds Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Maturity Year: 2018 $ 2,520 $ 14,643 $ - $ 4,833 $ 900 $ 6,927 $ 7,555 $ 1,415 $ - $ 2,052 $ 47,680 $ 60,848 2019 2,660 14,514 - 4,833 950 6,890 7,905 1,028 - 2,052 50,170 58,333 2020 2,800 14,377 - 4,834 1,000 6,851 2,335 770 6,035 1,901 52,725 55,684 2021 2,955 14,233 1,050 4,811 1,100 6,809 2,460 645 6,335 1,592 55,435 52,888 2022 3,115 14,082 - 4,789 1,150 6,764 2,590 515 6,655 1,267 58,790 49,933 2023-2026 133,360 55,969 50,270 18,713 7,050 32,923 8,625 687 22,020 1,688 335,425 199,664 2027-2031 146,715 11,248 42,730 3,444 85,080 27,134 - - - - 356,690 104,139 2032-2036 - - - - 42,935 1,073 - - - - 155,690 32,769 2037-2041 - - - - - - - - - - 42,880 2,552 Total $ 294,125 $ 139,066 $ 94,050 $ 46,257 $ 140,165 $ 95,371 $ 31,470 $ 5,060 $ 41,045 $ 10,552 $ 1,155,485 $ 616,810 Government of the United States Virgin Islands Notes to Basic Financial Statements 88 Future debt service requirements for bonds for which gross receipts taxes have been pledged are as follows (expressed in thousands): Governmental Activities – Gross Receipts Tax Bonds 2006 Series A Revenue Bonds 2012 Series A Revenue Bonds 2012 Series B Revenue Bonds 2012 Series C Revenue Bonds Principal Interest Principal Interest Principal Interest Principal Interest Maturity Year: 2018 $ 3,360 $ 9,424 $ 11,415 $ 7,090 $ 1,765 $ 1,295 $ 1,820 $ 1,434 2019 3,485 9,252 11,835 6,725 1,855 1,200 1,600 1,367 2020 3,615 9,075 12,380 6,241 1,955 1,100 1,685 1,284 2021 15,865 8,667 800 5,977 2,065 994 1,770 1,198 2022 16,295 7,942 1,140 5,939 2,175 883 1,860 1,107 2023-2027 90,945 26,638 32,380 26,389 12,755 2,527 3,815 4,684 2028-2032 63,025 4,395 69,005 13,722 2,980 78 3,215 3,993 2033-2037 - - 17,215 430 - - 5,490 2,887 2038-2042 - - - - - - 7,060 1,326 2043-2047 - - - - - - 1,635 41 Total $ 196,590 $ 75,393 $ 156,170 $ 72,513 $ 25,550 $ 8,077 $ 29,950 $ 19,321 Governmental Activities – Gross Receipts Tax Bonds 2014 Series A Revenue Bonds 2014 Series C Revenue Bonds 2014 Series D Revenue Bonds Total Gross Receipts Tax Bonds Principal Interest Principal Interest Principal Interest Principal Interest Maturity Year: 2018 $ 1,635 $ 2,289 $ 5,240 $ 11,685 $ 190 $ 321 $ 25,425 $ 33,538 2019 1,720 2,205 5,510 11,416 200 310 26,205 32,475 2020 1,810 2,117 5,790 11,134 215 297 27,450 31,248 2021 1,900 2,024 6,065 10,838 225 284 28,690 29,982 2022 2,000 1,927 6,385 10,526 240 270 30,095 28,594 2023-2027 11,640 7,987 34,650 47,500 1,445 1,106 187,630 116,831 2028-2032 14,955 4,679 85,995 36,082 1,955 597 241,130 63,546 2033-2037 10,940 839 71,955 7,687 955 58 106,555 11,901 2038-2042 - - 7,205 2,832 - - 14,265 4,158 2043-2047 - - 8,705 675 - - 10,340 716 Total $ 46,600 $ 24,067 $ 237,500 $ 150,375 $ 5,425 $ 3,243 $ 697,785 $ 352,989 Government of the United States Virgin Islands Notes to Basic Financial Statements 89 Future debt service requirements for bonds for which tobacco settlement revenues have been pledged are as follows (expressed in thousands): Maturity Year Principal Interest 2018 $ - $ 392 2019 - 392 2020 - 392 2021 - 392 2022 - 393 2023-2027 - 1,961 2028-2032 6,180 1,569 2033-2037 7,290 - Plus future accretion 8,013 - Total $ 21,483 $ 5,491 Future debt service requirements for bonds for which Federal Highway grant revenues have been pledged are as follows (expressed in thousands): Maturity Year Principal Interest 2018 $ 3,470 $ 4,104 2019 3,645 3,931 2020 3,825 3,748 2021 4,015 3,557 2022 4,220 3,356 2023-2027 24,465 13,399 2028-2032 31,225 6,640 2033-2037 7,215 361 Total $ 82,080 $ 39,096 (b) Loans Payable Series 2016A Note On October 6, 2016, PFA entered into a loan agreement for the issuance of the Series 2016A Subordinate Lien Revenue Notes (Series 2016A-1 and Series 2016A-2 Notes) in an aggregate principal amount of $10.0 million. The Government has pledged gross receipts taxes for the timely payment of this Series 2016A Notes. The Series 2016-A Notes are to be repaid monthly over a 60 month period at an interest rate of 375 basis points above the LIBOR rate of 4.62%. The Series 2016A Notes were issued to (i) acquire first responder vehicles and related equipment; (ii) contract for consulting services to improve public safety in the Territory; and (iii) pay certain costs incurred for the issuance of the notes. As of September 30, 2017, the Government had drawn $8.1 million of the Series 2016A-1 Notes and $1.3 million of the Series 2016A-2 Notes. Government of the United States Virgin Islands Notes to Basic Financial Statements 90 Future debt service requirements for the Series 2016A Notes are as follows (expressed in thousands): Year Principal Interest 2018 $ 2,136 $ 375 2019 2,136 272 2020 2,136 119 2021 2,137 43 2022 178 1 Total $ 8,723 $ 810 Series 2014E Note On November 16, 2016, PFA issued the Series 2014E-4 Subordinate Lien Revenue Anticipation Note (Series 2014E-4 Note) amounting to $20.0 million. The Government has pledged gross receipts taxes for the timely payment of the Series 2014E-4 Note. The Series 2014E-4 Note bears interest at 6.0% and was issued to: (i) finance certain operating expenses of the Government; and (ii) fund certain costs of issuing the Series 2014E-4 Note. Future debt service requirements for the Series 2014E-4 Note are as follows (expressed in thousands): Year Principal 2018 $ 15,000 2019 5,000 Total $ 20,000 On January 2, 2018, PFA entered into the Series 2014E Fourth Omnibus Agreement converting the Series 2014E-4 Note into a term loan (the Series 2014E Gross Receipts Taxes Loan Note) to be repaid in twelve (12) monthly installments beginning January 10, 2018, with principal payments of $1.7 million plus interest at prime plus 2.5%. Series 2014B Note On September 12, 2014, PFA issued the Series 2014B Gross Receipts Taxes Subordinate Loan Note (Series 2014B Note) amounting to $14.0 million. The Government has pledged gross receipts taxes for the timely payment of the Series 2014B Note. The Series 2014B Note bears interest at the 90- day LIBOR rate with 375 basis points. As of September 30, 2017, this rate was 5.07%. The Series 2014B Note will be repaid in equal principal payments of $167,000 over an eighty-four (84) month period. The Series 2014B Note was issued to: (i) to finance certain operating expenses of the PG; and (ii) to fund certain costs of issuing the Series 2014B Note. Government of the United States Virgin Islands Notes to Basic Financial Statements 91 Future debt service requirements for the Series 2014B Note are as follows (expressed in thousands): Year Principal Interest 2018 $ 2,000 $ 289 2019 2,000 207 2020 2,000 126 2021 2,000 44 Total $ 8,000 $ 666 Series 2013A Note On May 14, 2013, PFA issued the Series 2013A Subordinate Lien Revenue Note (Series 2013A Note) amounting to $6.7 million. The Government has pledged gross receipts taxes for the timely payment of the Series 2013A Note. Three draws have been made on the Series 2013A Note: $2.7 million was drawn on May 16, 2013 (the Series 2013A-1 drawing), $2.8 million was drawn on September 12, 2014 (the Series 2013A-2 drawing), and $1.3 million was drawn on July 18, 2016 (the Series 2013A-3 drawing). The Series 2013A Note bears interest at the 90-day LIBOR rate plus 375 basis points to be paid in thirty-six (36) monthly payments. As of September 30, 2017, this rate was 5.07%. The Series 2013A-1 and A-2 drawings were issued to: (i) finance the acquisition of a fleet of police vehicles for the PG, and (ii) to fund certain costs of issuing the Series 2013A Note. Future debt service requirements for the Series 2013A Notes amount to $853,000 and are due by September 30, 2018. Series 2012A Note On October 1, 2012, PFA issued the Series 2012A Tax Increment Revenue Term Loan Note (the Series 2012A Notes) in the amount of $13.7 million. The Series 2012A Notes were issued as part of a Term Loan Note Conversion of the Series 2009A Notes which were issued 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 2012A Notes are a term loan with twenty quarterly payments (five years) based on a twenty-five (25) year amortization schedule, with a final payment on October 1, 2018. The Notes bear interest of 300 points above the J.P. Morgan Chase Prime Rate, or 6.25%, whichever is higher. Future debt service requirements for the Series 2012A Notes are as follows (expressed in thousands): Year Principal Interest 2018 $ 268 $ 801 2019 11,180 199 Total $ 11,448 $ 1,000 Government of the United States Virgin Islands Notes to Basic Financial Statements 92 Series 2011B Note On November 14, 2011, PFA issued the 2011 Property Tax Revenue Anticipation Note (the Series 2011B Note) in the amount of $13.0 million. The proceeds were used to pay incentive payments to government employees who elected to retire early under Act No. 7261 the “Economic Stability Act”, as amended by Acts No. 7270 and 7307. The Series 2011B Note is a general obligation of the PG, secured by a first priority lien on real property taxes levied for tax years up to and including tax year 2005. Also, the PG has pledged a third subordinate lien on the gross receipts taxes, along with all fines, interest, penalties and other charges related to gross receipts taxes. Interest on the Series 2011B Note accrues monthly at the rate of 4.91% until the Series 2011B Note reached maturity on December 15, 2016. On that date, the Series 2011B Note converted to a two-year term loan with monthly payments of $216,448 and a fixed rate of 5.27%. Future debt service requirements for the Series 2011B Note are as follows (expressed in thousands): Year Principal Interest 2018 $ 2,492 $ 106 2019 643 6 Total $ 3,135 $ 112 (c) Loan Payable – U.S. Treasury In August 2009, the Territory reserve balance of the Unemployment Trust Fund (UTF) became inadequate to cover expenditures for unemployment compensation (UC) benefits. UC benefits are an entitlement program administered through the U.S. Treasury and the PG is legally liable to pay benefits even if the UTF becomes insolvent. As of September 30, 2017, the PG owed $67.0 million to the U.S. Treasury. The loan was subject to interest at federal rates of 2.2256% through December 31, 2016 and 2.2124% after January 1, 2017. During 2017, the PG paid $1.5 million in interest to the U.S. Treasury on the UTF loans and had additional borrowing of $1.5 million. (d) Note Payable - WICO On October 18, 2013, WICO entered into a loan agreement with Banco Popular de Puerto Rico to refinance an existing loan in the amount of $28.5 million at an interest rate of 6.18% with payments based on a twenty-five (25) year amortization schedule with a final maturity in six (6) years. On July 27, 2017, WICO refinanced this loan as part of a consolidated loan with Banco Popular de Puerto Rico. On November 12, 2014, WICO finalized an interim financing agreement with Banco Popular de Puerto Rico in the amount of $3.8 million to finance a pier construction project. The loan had an interest rate of 6.75% with payments based on a twenty-five (25) year amortization schedule, and a final maturity in six (6) years. The loan was refinanced on July 27, 2017, as part of a consolidated loan with Banco Popular de Puerto Rico. Government of the United States Virgin Islands Notes to Basic Financial Statements 93 On March 29, 2016, WICO secured a non-revolving line of credit with Banco Popular de Puerto Rico in the amount of $11.6 million to finance the refurbishment and development of a cruise ship pier. The non-revolving line of credit required interest-only payments for a term of one year at an interest rate of 5.25%, based on an amortization schedule of twenty-five (25) years. WICO extended the maturity date of the line of credit to July 31, 2017, and on July 27, 2017, refinanced the line of credit as part of a consolidated loan with Banco Popular de Puerto Rico. The consolidated loan entered into on July 27, 2017, was in the amount of $42.7 million with a fixed interest rate of 5.25%, and an amortization period of twenty-five (25) years with final maturity in five years. Should WICO remain in compliance with the terms of the consolidated loan, then the loan may be refinanced on maturity for a new term not to exceed twenty (20) years. WICO may prepay the consolidated loan, however there is a prepayment penalty of 2% of the outstanding principal of the consolidated loan. Security and collateral for the consolidated loan include a first-priority security interest in WICO’s assets and a pledge of WICO revenues. WICO must also maintain insurance on its facilities at full replacement cost value, and business interruption insurance equal to one year’s net revenues. WICO is required to pay all payments in lieu of taxes (PILOT) to the general fund of the Government and must maintain a Debt Service Reserve Fund with Banco Popular de Puerto Rico in the amount of $3.0 million. WICO received approval for the costs of issuance of the consolidated loan to be paid from the Debt Service Reserve Fund. The Fund must be replenished within one year of the closing date. At September 30, 2017, the amount held in the Debt Service Reserve Fund was $1.8 million. WICO is also required to maintain a Debt Service Coverage Ratio Reserve with an amount equal to the shortfall, if any, between WICO’s earnings before interest, taxes, depreciation, and amortization (EBITDA) and WICO’s required annual debt service coverage ratio, so that net revenues are not less than 1.25 times annual debt service payments. WICO is also required to maintain a Fixed Coverage Ratio of 1.10 times EBITDA divided by the current portion of long-term debt plus interest expense, PILOT, maintenance and capital expenditures. At the date of the consolidated loan, WICO held $213,000 in the Debt Service Coverage Ratio Reserve Fund. WICO may not declare dividends during the term of the consolidated loan and no additional equity interests may be granted without the lender’s approval. At September 30, 2017, the outstanding balance of the consolidated loan was $42.7 million. Future debt service requirements for the WICO loan are as follows (expressed in thousands). Year Principal Interest 2018 $ 586 $ 2,485 2019 820 2,250 2020 859 2,211 2021 912 2,158 2022 39,489 1,754 Total $ 42,666 $ 10,858 As of September 30, 2017, all payments on bonds and notes for the PG have been made as required and the PG is in compliance with the related covenants. Government of the United States Virgin Islands Notes to Basic Financial Statements 94 (e) Insurance Guaranty Fund Minimum Balance Requirement Under Title 22, Chapter 10 of the VIC, the Virgin Islands Insurance Guaranty Fund is required to maintain a minimum balance of $50.0 million for claimant payments in the event of a failure of an insurance carrier. On February 10, 2012, legislation was enacted authorizing a reduction in the minimum balance to be held by the Virgin Islands Insurance Guaranty Fund from $50.0 million to $10.0 million. Effective September 30, 2019, in the event the balance in the Insurance Guaranty Fund equals or exceeds $50.0 million, amounts in excess thereof shall be deposited, at the direction of the Commissioner of Finance, into the General Fund. Component Units 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, 2017, are as follows (expressed in thousands): Maturity Interest Rate (%) Balance Bonds Payable Virgin Islands Water and Power Authority (Electric System): Bond Anticipation of 2016 2019 5.5 $ 33,960 Revenue Bonds of 2015 2025 1.60 13,000 Revenue Bonds of 2012 2025 4.00 - 6.06 56,605 Revenue Bonds of 2010 2035 4.00 - 6.85 55,935 Revenue Bonds of 2007 2031 4.50 - 5.00 57,585 Revenue Bonds of 2003 2028 4.00 – 5.00 45,525 Virgin Islands Water and Power Authority (Water System): Revenue Bonds of 1998 2017 5.50 3,665 Virgin Islands Port Authority: Series A Revenue Bonds of 2014 2033 4.00 – 5.00 24,925 Series B Revenue Bonds of 2014 2044 3.00 – 5.00 13,365 Series C Revenue Bonds of 2014 2025 2.00 – 5.00 3,920 Subtotal 308,485 Plus unamortized premium 5,701 Bonds payable, net 314,186 Less amount due within one year (19,146) Bonds payable, due in more than one year $ 295,040 Government of the United States Virgin Islands Notes to Basic Financial Statements 95 The changes in bonds payable for discretely presented component units are as follows for the year ended September 30, 2017 (expressed in thousands): Beginning Balance Additions Reductions Ending Balance Due Within One Year Due Thereafter Virgin Islands Water and Power Authority: Electric System $ 243,340 $ 33,960 $ (12,135) $ 265,165 $ 12,408 $ 252,757 Water System 7,118 - (3,453) 3,665 3,665 - Virgin Islands Port Authority 48,380 - (3,024) 45,356 3,073 42,283 Total $ 298,838 $ 33,960 $ (18,612) $ 314,186 $ 19,146 $ 295,040 The changes in notes payable, line of credit payable, and other long-term liabilities for discretely presented component units are as follows for the year ended September 30, 2017 (expressed in thousands): Beginning Balance Additions Reductions Ending Balance Due Within One Year Due Thereafter Notes payable Virgin Islands Housing Authority $ 870 $ - $ (435) $ 435 $ 435 $ - Virgin Islands Port Authority 912 - (39) 873 873 - Virgin Islands Water and Power Authority: Electric System 476 - (476) - - - University of the Virgin Islands 78,840 5,379 (2,230) 81,989 2,342 79,647 Other component units* 6,028 - (645) 5,383 866 4,517 Total $ 87,126 $ 5,379 $ (3,825) $ 88,680 $ 4,516 $ 84,164 Line of credit payable Virgin Islands Water and Power Authority: Electric System $ 25,128 $ 2,000 $ - $ 27,128 $ 27,128 $ - Water System 2,500 - - 2,500 2,500 - Total $ 27,628 $ 2,000 $ - $ 29,628 $ 29,628 $ - *University of the Virgin Islands Research and Technology Park Corporation (unaudited) Government of the United States Virgin Islands Notes to Basic Financial Statements 96 Beginning Balance Additions Reductions Ending Balance Due Within One Year Due Thereafter Other long-term liabilities: Virgin Islands Housing Authority $ 15,861 $ 2,900 $ (3,352) $ 15,409 $ 2,253 $ 13,156 Virgin Islands Port Authority 2,502 848 (968) 2,382 1,006 1,376 Virgin Islands Water and Power Authority: Electric System 56,626 155,082 - 211,708 7,831 203,877 Water System 9,722 235 - 9,957 - 9,957 Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 3,022 324 - 3,346 3,346 - Juan F. Luis Hospital 9,104 576 (676) 9,004 8,840 164 University of the Virgin Islands 4,526 1,643 (665) 5,504 665 4,839 Other component units* 11,560 1,516 (721) 12,355 1,235 11,120 Total $ 112,923 $ 163,124 $ (6,382) $ 269,665 $ 25,176 $ 244,489 *University of the Virgin Islands Research and Technology Park Corporation (unaudited) (a) Bonds Payable Virgin Islands Water and Power Authority – Electric System Bond Anticipation of 2016 In November 2016, the Electric System of WAPA closed on financing for $33.9 million to fund the Streetlight Conversion Project. The funding provides for (i) acquisition, assembly and installation of the light-emitting diode (LED) and solar panels; (ii) engineering and project management; and (iii) integration with WAPA’s Tantalus “smart meter” network or automated metering infrastructure (AMI). The rate on the bond anticipation notes (BANs) was 5.50% maturing November 15, 2018. The Electric System refinanced the BANs prior to their maturity date. The BANs will now mature in July 2020, and the interest rate will be 7.00%. Virgin Islands Water and Power Authority – Electric System Revenue Bonds of 2015 In November 2015, the Electric System of WAPA issued a bond series designated as 2015A Series Bond, issued in the principal amount of up to S13.0 million under the Electric Revenue Bond Resolution, as supplemented, and as further supplemented by a Fifth Supplemental Resolution adopted on September 24, 2015, as Amended and Restated on November 25, 2015. The proceeds of the 2015A Bonds will be used to finance or refinance the acquisition and installation of an automated metering system and other costs related thereto. Virgin Islands Water and Power Authority – Electric System Revenue Bonds of 2012 In May 2012, the Electric System of WAPA issued: (i) 2012A Electric System Revenue Refunding Bonds amounting to $17.3 million; (ii) 2013B Electric System Subordinated Revenue Bonds amounting to $19.7 million; and (iii) 2013C Electric System Subordinated Revenue Bonds amounting to $32.1 million. The proceeds of the Series 2012A Bonds were used to refund the Electric System Revenue Refunding Bonds, Series 1998 and pay certain costs of issuances of the Series 2013A Bonds. The proceeds of the Series 2012B Bonds were used to refinance a portion of the Electric System Term Loan, make a deposit into the Subordinated Debt Service Reserve Fund sufficient to satisfy the Series 2012B Subordinated Debt Service Fund Requirement and pay certain costs of issuance of the Series 2012B Bonds. Government of the United States Virgin Islands Notes to Basic Financial Statements 97 The proceeds of the Series 2012C Bonds were used to refinance all or a portion of the Electric System Working Capital Lines of Credit and Overdraft Credit Facility, make a deposit into the Series 2012C Subordinated Debt Service Reserve Fund sufficient to satisfy the Subordinated Debt Service Reserve Fund Requirement and pay certain costs of issuance of the Series 2012C Bonds. Virgin Islands Water and Power Authority – Electric System Revenue Bonds of 2010 In March 2010, the Electric System of WAPA issued $39.1 million 2010A Electric System Revenue Refunding Bonds; $9.0 million 2010B Electric System Revenue Bonds; and $37.3 million 2010C Electric System Revenue Refunding Bonds. The proceeds of the Series 2010A Bonds were used to: i) fund a portion of the cost of certain capital expenditures, 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. Virgin Islands Water and Power Authority – Electric System Revenue Bonds of 2007 In June 2007, the Electric System of WAPA issued $57.6 million 2007A Electric System Subordinated Revenue Bonds, to pay certain costs of issuance of the bonds, make certain required deposits to the Subordinated Debt Service Fund to finance the costs of certain capital improvements, refinance capital improvements funded through draws on a Line of Credit, and to reinstall a $10.0 million Line of Credit. Virgin Islands Water and Power Authority – Electric System Revenue Bonds of 2003 In June 2003, the Electric System of WAPA 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. 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. 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 (125%) 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 WAPA on May 17, 2007, as amended and supplemented (the Subordinated Bond Resolution), WAPA 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 (115%) 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 (100%) the Maximum Aggregate Debt Service for each such fiscal year (total debt coverage). Government of the United States Virgin Islands Notes to Basic Financial Statements 98 For the year ended June 30, 2017, the Electric System’s Debt Service Coverage ratio was 1.92 for total Debt Coverage. Section 606(2) of the Resolution provides that if the Authority fails to achieve such 1.00 coverage in a particular year, the Electric System must “take whatever steps it can to produce the amount of net electric revenues required in the following fiscal year.” Section 701 (3) of the Resolution relates to covenant defaults and makes them an event of default if such covenant default continues for 60 days after notice unless the Electric System is proceeding with diligence to cure such default. The Electric System believes it is taking such steps currently to ensure future compliance with the ratio, including filing of a request for increased rates. 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. Virgin Islands Water and Power Authority – Water System Revenue Bonds of 1998 In December 1998, the Water System of WAPA issued the 1998 Water System Revenue and Refunding Bonds amounting to $44.2 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 Water System’s Bond Resolution requires the Water System under Section 606(1), for as long as the bonds are outstanding, to establish rates “so that in each fiscal year the net water revenues shall at all times be at least 1.25 the aggregate debt service requirement for such fiscal year.” For the year ended June 30, 2017, the Water System’s Debt Service Coverage ratio was 2.00. Section 606(2) of the Resolution provides that if the Water System fails to achieve such 1.25 coverage in a particular year, the Water System must “take whatever steps it can to produce the amount of net water revenues required in the following fiscal year.” Section 701(3) of the Resolution relates to covenant defaults and makes them an event of default if such covenant default continues for 60 days after notice unless the Water System is proceeding with diligence to cure such default. The management of the Water System advises it is taking necessary steps to ensure future compliance with debt coverage ratios. 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 99 Virgin Islands Port Authority – Series A, B, and C Revenue Bonds of 2014 In October 2014, VIPA issued the 2014 Series Revenue Bonds A, B & C amounting to $48.6 million, with an average interest rate of 4.70%. A portion of the proceeds was used to refund the outstanding bond series 2003 A and C amounting to $24.5 million, which included accrued interest as of the redemption date for October 27, 2014. The proceeds from the issuance of the 2014 Series used in the refunding were deposited in an escrow account, held by the Trustee on behalf of the holders of the refunded bonds, and applied to such redemption contemporaneously with the issuance of the Series 2014 Bonds. As a result, the 2003 A & C Bonds were paid off. The 2003 Series B Marine Revenue Bonds were also paid off. The Authority reduced its total debt service requirement by $1.7 million, which resulted in an economic gain (difference between the present value of the debt service payments on the old and new debt) of $2.4 million. In addition, the Authority recognized a deferred charge on debt refunding amounting to $0.4 million. The proceeds of the 2014 Bonds, together with certain other available funds of the Authority, will be used for: (i) refunding $24.5 million in 2003 Series A Marine Revenue bonds and pay off the 2003 Series bonds; (ii) for the financing of various capital projects; (iii) to fund a deposit to the debt service fund; (iv) to fund a deposit to the operation, maintenance, renewal and replacement reserve account; and (v) to pay the cost of issuance of the 2014 Bonds. The 2014 bonds issued by VIPA contain certain bond indentures. The bonds’ indentures contain certain account restrictions and funding covenants to cover interest, debt service, maintenance and other costs specified in the corresponding indentures. The bonds’ indentures also specify certain debt service coverage requirements determined from Net Available Revenues (as defined) of the Marine Division. The provisions of each of the bonds’ indentures require that rates and fees charged for the use of each facility generate enough revenues to pay all operation and maintenance expenses, exclusive of depreciation and certain non-cash charges, of the respective facilities plus (i) at least 125% of the principal and interest, and redemption account sinking fund deposit requirements 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 appropriation for such period. Government of the United States Virgin Islands Notes to Basic Financial Statements 100 Future debt service requirements for discretely presented component units’ bonds payable are as follows (expressed in thousands): Maturity Year Principal Interest 2018 $ 18,518 $ 15,653 2019 50,009 14,542 2020 16,401 12,181 2021 16,989 11,386 2022 17,760 10,620 2023-2027 87,194 39,585 2028-2032 73,433 19,400 2033-2037 24,181 4,716 2038-2042 3,500 588 2043-2047 500 38 Total 308,485 $ 128,709 Plus unamortized premium 5,701 Bonds payable, net $ 314,186 (b) Notes Payable Virgin Islands Housing Authority In July 2012, VIHA signed an interest free non-recourse repayment agreement with the PG for the mis-use of disaster related expenditures related to Hurricane Marilyn which occurred in 1995. The balance of the outstanding note was $0.4 million as of September 30, 2017. Virgin Islands Port Authority In April 2017, VIPA obtained a short-term note for $1.8 million with interest at a 3.18% annual rate. This note has a 9-month maturity and is due in January 2018. This note was used to finance VIPA’s insurance premiums. The outstanding balance of $0.9 million as of September 30, 2017, was fully paid in December 2017. Virgin Islands Water and Power Authority – Electric System In November 2008, the Electric System of WAPA obtained general obligation notes from First Bank in the amount of $40.0 million at an interest rate of 5.50%, the proceeds of which were used to finance outstanding invoices from HOVENSA. The Notes were issued based on a five-year amortization, but with a balloon payment in three years. In October 2008, pursuant to Amended Order No. 05/2009 in Docket No. 289, the Public Service Commission (PSC) ordered (i) the principal and interest payments on the Notes to be recognized for recovery through the Levelized Energy Adjustment Clause (LEAC) billing factor for the Electric System and the Water System commencing in November 2008, of which 82.5%, or $7.6 million annually, has been allocated to the Electric System and 17.5%, or $1.6 million annually to the Water System; and (ii) the collection of the fuel costs recoverable balance to be reduced by the principal amount of the Notes. Government of the United States Virgin Islands Notes to Basic Financial Statements 101 Pursuant to the Guaranty of the Government for the benefit of First Bank, dated November 13, 2008 (the General Obligation Guaranty), which was authorized by the Legislature in Act 7028, the Government agreed to guarantee the payment of the principal and interest on the Notes. In October 2010, the Electric System of WAPA petitioned the commission for approval of a refinancing of the $40.0 million term loan. Through Order #16/2011 issued by the PSC in December 2010, the loan was approved. On December 22, 2010, the term-loan was refinanced at an interest rate of 5.25%. The term loan was refinanced based on a new five-year amortization but with a balloon payment in three years. In June 2012, the Electric System of WAPA petitioned the Commission for the approval of a refinancing of the remaining balance of the term loan following the Series 2012 Bond issue. Through Order #27/2012 issued by the PSC in July 2012, the loan was approved. The term loan was refinanced at an interest rate of 5.50% and final maturity on April 2016. The new allocation of the principal and interest payments of the Notes to be recognized for recovery through the LEAC billing factor for the Electric System is 30% and 70% for the Water System. As of June 30, 2017, the notes were fully repaid. University of the Virgin Islands In June 2011, UVI entered into two capital project loan agreements (loan agreements) in the amounts of $44.0 million and $16.0 million, with Rice Capital Access Program, LLC. The purpose of the capital project loans was to: (i) advance refund the University’s 1999 Series A Bonds and 2004 Series A Bonds; and (ii) to pay for construction costs of a 100-bed student residence facility and other construction improvement costs of facilities on the St. Thomas and St. Croix campuses. The advance refunding resulted in a difference between the reacquisition price and the net carrying amount of the old outstanding bonds of approximately $4.5 million and an economic gain of $6.8 million. During fiscal year 2015, UVI entered into two capital project loan agreements for the medical school under Series 2015 3-1 and Series 2015 3-2. UVI received advances amounting to $5.4 million related to Series 2015 3-1. UVI also entered into a loan agreement with First Bank of Puerto Rico for a Medical School Loan. A variable rate was assigned to all the loans. UVI Research and Technology Park Corporation (unaudited) In February 2013, RTPark obtained a $3.0 million loan from a member. A portion of the loan proceeds were used to repay a previous loan from UVI to complete construction on 64 West Center. This loan has a 6.75% interest rate and is payable over 15 years. At September 30, 2017, the note payable amount was $1.9 million. The loan is secured by RTPark’s tangible and intangible property. (c) Line of Credit Payable The Electric System of WAPA has available bank lines of credit for $13.0 million for capital projects and $20.0 million for working capital purposes. Interest on amounts borrowed is payable quarterly at a variable interest rate of prime plus 1%, London Interbank Offered Rate (LIBOR) plus 1.5% or 1.5% above the interest rate on three-year United States Government treasury notes. Government of the United States Virgin Islands Notes to Basic Financial Statements 102 The Electric System has the option to select the variable interest rate to utilize for any borrowings on these notes and during 2017, made a $2.0 million draw on the Working Capital Line of Credit. At June 30, 2017, there was $27.1 million outstanding under the lines of credit for the Electric System. The lines were extended to have a maturity through October 31, 2019. The Water System of WAPA has available bank lines of credit of $2.5 million for the Water System. Interest on amounts borrowed is payable quarterly at a variable interest rate of prime plus 1.0%, London Inter-Bank Offer Rate (LIBOR) plus 1.75%, or 175 basis points above the interest rate on three-year United States Government treasury notes. The Water System has the option to select the variable interest rate to utilize for any borrowings on these notes. At June 30, 2017, there was $2.5 million outstanding under the lines of credit for the Water System. The lines were extended to have a maturity through October 31, 2019. 12. General Tax Revenue For the year ended September 30, 2017, general tax revenue of the PG consisted of the following (expressed in thousands): General PFA Debt Service PFA Capital Projects Other Governmental Total Income taxes $ 318,415 $ - $ - $ - $ 318,415 Real property taxes 46,242 - - 6,269 52,511 Gross receipts taxes 2,635 160,340 1,421 250 164,646 Excise taxes 129,153 108,886 - 4,912 242,951 Other taxes 66,157 - - 5,643 71,800 $ 562,602 $ 269,226 $ 1,421 $ 17,074 850,323 Tax revenue not recognized on the full accrual basis (5,081) Total tax revenue – government-wide $ 845,242 Government of the United States Virgin Islands Notes to Basic Financial Statements 103 13. Governmental Fund Balances Following is a detail of the aggregated fund balances presented in the Balance Sheet – Governmental Funds as of September 30, 2017, (expressed in thousands): General PFA Debt Service PFA Capital Projects Federal Funds Other Governmental Total Restricted for: Debt service $ – $ 260,064 $ – $ – $ – $ 260,064 Capital projects – – 163,080 - – 163,080 General government – – – 34,384 - 34,384 Health - - - - - - Public safety - - - 560 - 560 Education - - - 37 - 37 Transportation and communication - - - - - - Culture and recreation - - - - - - Total – 260,064 163,080 34,981 - 458,125 Committed to: General government 16,667 – – – 8,179 24,846 Public safety – – – – 4 4 Public housing and welfare – – – – 337 337 Transportation and communication – – – – 13,297 13,297 Culture and recreation - – – – 327 327 Total 16,667 – – – 22,144 38,811 Assigned to: General government 552 – – – 98,292 98,844 Public safety – – – – 1,669 1,669 Health – – – – 3,926 3,926 Public housing and welfare – – – – 5,774 5,774 Education – – – – - - Transportation and communication – – – – 8,253 8,253 Culture and recreation – – – – 1,049 1,049 Total 552 – – – 118,963 119,515 Unassigned (225,060) – – (72,251) (56,321) (353,632) Total fund (deficit) balances $ (207,841) $ 260,064 $ 163,080 $ (37,270) $ 84,786 $ 262,819 The assigned fund balance includes approximately $71.6 million in unexpended encumbrances. Encumbrances are utilized to determine commitments related to unperformed (executor) contracts for goods and services and to prevent the over-spending of an appropriation. Government of the United States Virgin Islands Notes to Basic Financial Statements 104 14. Commitments and Contingencies Primary Government (a) Collective Bargaining Agreements Currently, the Government has entered into union contracts with thirteen (13) distinct labor organizations representing government employees in various bargaining units. Collectively, these bargaining units have approximately thirty-nine (39) collective bargaining agreements in existence. Nine (9) bargaining units have not negotiated a collective bargaining agreement with the Government. Employees in the various bargaining units are not under a single pay plan. Consequently, it is common to have employees performing the same classification of work in different departments and agencies. Of the approximately nine thousand (9,000) government workers, approximately seven thousand (7,000) are union members. Virgin Islands statutes governing bargaining with unions requires arbitration in the event an impasse is reached in negotiations. 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. As of September 30, 2017, the Government has contractual liabilities for retroactive union arbitration salary payments estimated at $195.3 million accruing from fiscal years 1993 through 2010, as established by the Virgin Islands Retroactive Wage Commission. 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. (b) Federal Assistance Programs The Government receives financial assistance from the federal government in the form of loans, grants, and entitlements. Monetary and nonmonetary federal financial assistance to governmental funds amounted to approximately $220.0 million and $56.5 million, respectively, for the year ended September 30, 2017. Receipt of grants and loss reimbursements is generally conditioned upon compliance with terms and conditions of the grant agreements and applicable federal regulations, including the expenditure of resources for eligible purposes. Substantially all grants are subject to audit under U.S. Office of Management and Budget’s Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. Disallowances as a result of these audits may become liabilities of the Government. As discussed in Note 18, the Government is a recipient of disaster recovery funds due to the September 2017 hurricanes. Audits of disaster recovery funds may continue for decades, and federal reimbursements may be required to be repaid as a result of federal audits. 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. Government of the United States Virgin Islands Notes to Basic Financial Statements 105 (c) U.S. Department of Education Special Conditions Since 2006, in accordance with special conditions imposed by the U.S. Department of Education (USED), the Government has contracted with a third-party fiduciary agent to ensure that the Government manages and administers USED grants in accordance with applicable federal and financial management requirements. The special conditions also require the Government to submit quarterly reports on progress in improving all aspects of the fiscal management of federal education grants. The Virgin Islands has implemented a Self-Contained Model known as the Federal Grants Specialized Processing Unit to address the special conditions and as the approach for reassuming management of the grant funds. (d) U.S. Department of Labor Designation On February 3, 2017, the Virgin Islands Department of Labor was placed on high-risk grantee status by the U.S. Department of Labor. High-risk grantee status is an administrative designation used by federal agencies to indicate unsatisfactory performance in the management of federal grants. Management is currently working with the U.S. Department of Labor to implement corrective action. (e) Legal Proceedings and Litigation Claims The Government is a defendant in numerous legal proceedings pertaining to matters incidental to the performance of routine governmental operations. Under Title 33, Section 3411(c) of the V.I. Code, no judgment shall be awarded against the Government that exceeds $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 $16.1 million for awarded and anticipated unfavorable judgments as of September 30, 2017. Changes in the reported provision for legal claims during September 30, 2017, resulted from the following activity (expressed in thousands): Beginning Balance at October 1, 2016 New Claims Claims Payments and Changes in Estimates Ending Balance at September 30, 2017 Provision for legal claims $ 13,783 $ 3,027 $ (665) $ 16,145 Government of the United States Virgin Islands Notes to Basic Financial Statements 106 The breakdown of the provision for legal claims at September 30, 2017, as reflected in governmental activities, is as follows (expressed in thousands): Current portion $ 331 Long-term portion 15,814 $ 16,145 (f) Landfill Closure and Post-Closure Costs Federal laws and regulations, including the Clean Air Act, 42 U.S.C. § 7401 et seq. (CAA), and regulations promulgated thereunder, including the federal standards set forth in 40 C.F.R. Part 62, Subpart GGG (Federal Plan), and the National Emission Standards for Hazardous Air Pollutants for Municipal Landfill Maximum Achievable Control Technology, set forth in 40 C.F.R. Part 63, Subpart AAAA (Landfill MACT), and the Solid Waste Disposal Act, 42 U.S.C. § 6901 et seq. (RCRA), and regulations promulgated thereunder, including federal municipal solid waste landfill operating, closure, and post-closure criteria set forth in 40 C.F.R. Part 258, and three EPA administrative orders issued pursuant to RCRA § 7003(a), 42 U.S.C. § 6973(a), and Territorial laws and regulations, including V.I. Code Title 19, Chapter 56 (Solid and Hazardous Waste Management), Title 12, Chapter 9 (Air Pollution Control), and Title 12, Chapter 21 (Virgin Islands Coastal Zone Management), and regulations promulgated thereunder, require the Government to construct and operate certain environmental control systems and otherwise comply with certain requirements during operation of each of its landfill sites, properly close the site (including placement of a final landfill cover) when the landfill (or portion thereof) stops accepting waste, and perform certain post-closure maintenance and monitoring functions at the site for 30 years following closure. Compliance costs during the operational phase will be paid prior to closure. 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 statement of net position date. The $97.9 million reported as landfill compliance, closure, and post-closure care liability at September 30, 2017, 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, 2017. The estimated used capacity and expected closure of each of the Government landfills is as follows: Landfill Estimated Used capacity Estimated Closure date Bovoni 98% 2022 Anguilla 97% 2021 Susannaberg 100% Closed Government of the United States Virgin Islands Notes to Basic Financial Statements 107 The actual cost to perform closure and post-closure may be higher due to inflation, changes in technology, or changes in regulations. The Government is required by state and federal laws and regulations to make annual contributions to a trust to finance closure and post-closure care. The Government began making annual contributions to a trust in fiscal year 2007 to finance closure and post-closure costs. The Government expects that future inflation costs will be paid from interest earnings on these annual contributions and other financing measures. However, if interest earnings and financing measures should prove to be inadequate, or additional post-closure care requirements are determined due to changes in technology or applicable laws or regulations, these costs may need to be recovered through charges to future landfill users. (g) Wastewater Treatment Plant Consent Decree Since 1985, the Government has been subject to a consent decree issued by the Virgin Islands District Court, governing the operation of its wastewater treatment plants. The consent decree was amended in 1996 and further modified with the 2002 Stipulation to the Amended Consent Decree (the Stipulation) to establish deadlines for the construction of new secondary treatment facilities, including the replacement of the existing St. Croix and Airport Lagoon (Charlotte Amalie) wastewater treatment plants. The Stipulation required 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. The cost of both facilities was estimated at approximately $50.0 million. In January 2004, the Government’s Legislature authorized the creation of the VIWMA for the purpose of meeting environmental requirements of wastewater 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. The treatment facilities were completed in July 2007 and January 2008 at a cost of approximately $27.0 million and $29.0 million for the St. Croix and the St. Thomas treatment facilities, respectfully. The Stipulation also establishes certain interim deadlines and performance standards that must be met by the Government pending completion of the new facilities. In addition, the Stipulation establishes specified penalties for violation of any of the deadlines or performance standards set forth therein. As of the date of the basic financial statements, the Government is current on all of its outstanding obligations pursuant to the stipulation. (h) Memorandum of Understanding – EPA On August 21, 2002, the Government and the United States Environmental Protection Agency (EPA) entered into a memorandum of understanding documenting the EPA’s agreement to support the renewal of the Territorial Pollutant Discharge Elimination System (TPDES) 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. (Cruzan Rum) 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 Virgin Islands Department of Planning and Natural Resources after consultation with EPA to be necessary and appropriate. Government of the United States Virgin Islands Notes to Basic Financial Statements 108 Pursuant to the memorandum of understanding, the Government’s obligation to fund such activities is limited to $6.0 million in the aggregate, commencing on October 13, 2003. Subsequently, 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. At the conclusion of the MOU treatability study period, the PG agreed to reissue the TPDES permit to Cruzan Rum in 2008 with the requirement that the rum distillery design and construct a treatment facility for the rum distillery effluent within three years. PFA issued the Series 2009 Cruzan Bonds to fund the treatment facility which is currently operating under a 2013 TPDES permit. (i) 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 worker’s compensation liability amount in fiscal year 2017 and 2016, as recorded in the Government Insurance Fund, are as follows (expressed in thousands): September 30, 2017 2016 Claims payable, beginning of year $ 38,459 $ 32,053 Incurred claims and changes in estimates 5,760 10,921 Payments for claims and adjustments expenses (3,757) (4,515) Claims payable, end of year $ 40,462 $ 38,459 (j) Bond Credit Ratings On December 2, 2016, Fitch Ratings downgraded the Territory’s gross receipts tax bonds to BB from BBB. The rating agency pointed to the Government’s use of bond issuances to fund operating needs as the reason for the downgrade. On January 20, 2017, Fitch further downgraded the gross receipts bonds to BB- from BB. On December 9, 2016, Standard & Poor’s Global Ratings (S&P) downgraded the Territory’s gross receipts tax bonds to BBB- from B. S&P cited the weak economic conditions in the Territory, declining debt coverage, and the potential that additional debt will further dilute the coverage. In August 2017, Fitch Ratings downgraded the Government’s Matching Fund Revenue and Gross Receipts Tax debt to B from BB-. The Government ceased providing information to S&P in August 2017, to evaluate the Government’s liquidity, and in October 2017, S&P withdrew its credit ratings. Government of the United States Virgin Islands Notes to Basic Financial Statements 109 In January 2018, Moody’s Investor Services downgraded the Government’s Matching Fund Revenue Bonds as follows: Senior Lien Bonds to Caa2 from Caa1; Subordinate Lien Bonds to Caa3 from Caa2; Subordinated Indenture (Diageo) Bonds to Caa3 from Caa2; and Subordinated Indenture (Cruzan) Bonds to Caa3 from Caa2. (k) Operating Agreement – Limetree Bay Terminals, LLC In January 2012, Hess Oil Virgin Islands Corporation (Hess Oil) announced that it would close its oil refinery on the island of St. Croix and the facility would serve as a storage terminal. The company amended tax returns for the three years before the closing, and a legal dispute arose with the Government over amounts due to, or from, the company in connection with the amended returns and other requirements of Hess Oil’s agreement with the Government. On December 1, 2015, the Government settled its dispute with Hess Oil. The company agreed to transfer to the Government 330 acres of land near the oil terminal (estimated value $21.0 million), 130 housing units at the oil terminal (estimated value $27.0 million), and a vocational school and a community center (both estimated at a value of $1.0 million) for a payment in lieu of taxes (PILOT) valued at $50.0 million. On December 1, 2015, the Government entered into an operating agreement with the new operator of the oil terminal, Limetree Bay Terminals, LLC (Limetree). Limetree agreed to investigate refurbishing and reopening the terminal, with an investment of $125.0 million. In December 2015, Limetree paid $220.0 million as a payment in lieu of taxes, $9.0 million as a reimbursement for contingent claims, and agreed to invest $6.0 million in the construction of a bitumen tank at the facility. As part of the operating agreement Limetree receives exemption from property taxes, income taxes, and local taxes. Limetree will be subject to a concession payment of 10% of terminal revenues. Should the oil refinery reopen, Limetree will be required to pay concession fees of 17.5% of refinery income to the Government on a quarterly basis. If there is a change in the control of Limetree, the Government is to receive 10% of the transaction value of the exchange, not to be less than $25.5 million. In December 2018, Limetree obtained $1.3 billion in financing to reopen the oil refinery operation. Upon closing, the Government received $40.0 million in short-term financing and $30.0 million in payment for the 130 housing units, vocational school and community center at the oil refinery. Pension Trust Fund (a) Pension Reform In response to a recommendation in a September 27, 2011, audit report from the Office of the Inspector General and U.S. Department of Interior, the PG formed a Pension Reform Joint Task Force (the Task Force) to address the declining fiscal condition of the GERS. The Office of the Inspector General’s audit report had concluded that, due to insufficient contribution levels and an unbalanced ratio of active to retired members, the retirement system of the U.S. Virgin Islands may default as soon as the year 2025. Government of the United States Virgin Islands Notes to Basic Financial Statements 110 The Task Force has submitted recommendations to the Legislature to: (i) increase government and employee contributions towards pension benefits; (ii) raise contribution rates for senators and judges; (iii) reduce retiree current benefits by 10 percent; (iv) increase the early retirement age from fifty (50) to fifty-five (55) and the regular retirement age from sixty (60) to sixty-five (65); (v) limit the cost of living increase; and (vi) change the formula used to calculate benefits. On February 5, 2015, GERS increased employee contribution rates by 1% to be implemented over a three-year period and to be effective for three years. The Government’s contributions to the system increased by 3% from 17.5% to 20.5%. In March 2016, the Office of the Virgin Islands Inspector General issued a report on the alternative investment program administered by GERS. The report concluded that the non-traditional investments of the retirement system were subject to higher risks than other GERS assets. In September 2016, GERS sponsored a public summit to present projections of investment returns and future benefit payments for the system. Actuarial reports indicate that the assets of the system may be fully depleted by the year 2023. Component Units (a) Virgin Islands Water and Power Authority – Electric System In September 1989, WAPA Electric facilities were damaged by Hurricane Hugo. WAPA reconstructed the facilities with proceeds from insurance and the Federal Emergency Management Agency (FEMA). At June 30, 2017, the Electric System has recorded a liability of $4.1 million respectively for amounts owed to the Federal Emergency Management Agency (FEMA) for overpayments related to certain questioned costs. Currently, FEMA and its sub-recipient, the Government of the Virgin Islands, do not have a mechanism in place for recovering the overpayment of disaster-related funds. In addition, FEMA has not made a formal request for repayment of these funds. In management’s opinion, the resolution of this matter will not have a material adverse effect on the WAPA’s changes in financial position or cash flows. In October 2008, WAPA Electric facilities on the island of St. Croix were damaged by Hurricane Omar. WAPA expended $2.7 million for storm cleanup and system restoration through June 2010. The Territory was declared a federal disaster after the hurricane and was eligible for reimbursement of 75% of what was expended according to the category of the damage. WAPA Electric has recorded a receivable from FEMA through the Office of Management and Budget – Public Assistance (OMB-PA) amounting to approximately $1.0 million. In August 2010, WAPA Electric facilities were damaged by Hurricane Earl. WAPA expended over $2.0 million for storm clean-up and restoration, which was completed in October 2010. The Territory was declared a Federal disaster area after the Hurricane and was eligible for reimbursement of 75% - 80% of what was expended according to the category damage. WAPA recorded a receivable of $1.3 million from FEMA through the Virgin Islands Territorial Emergency Management Agency (VITEMA) Public Assistance Program. Government of the United States Virgin Islands Notes to Basic Financial Statements 111 In April 2012, WAPA leased a temporary 22-megawatt mobile power plant for $14.6 million for eighteen (18) months through October 2013. In November 2013, management and the vendor extended the original lease agreement for an additional twelve (12) months through November 2014 for $7.8 million. The lease term was then amended for an additional twenty-four (24) months through November 2016, for $13.2 million. Total lease payments for fiscal year 2017 were $6.1 million. Additionally, during the normal course of business, WAPA leases additional and various property and equipment to support Electric System operations. The leases are generally short-term in nature and lease payments are not significant to the overall operations of the Electric System. WAPA has signed purchase power agreements with several companies to integrate a combined 18MW of solar electricity into the WAPA’s electrical grid system. The agreements are for between twenty (20) and twenty-five (25) years, expiring between 2022 and 2027. WAPA will not own the solar assets but will be able to purchase solar generated electricity at contracted rates. On September 30, 2011, WAPA Electric entered into a Memorandum of Agreement (MOA) with viNGN, Inc., a Virgin Islands corporation and wholly owned subsidiary of the PFA. The MOA terms call for WAPA Electric to provide in-kind contributions in connection with a federal grant received by viNGN, Inc. The in-kind contributions consist of the use of certain facilities, equipment, and communications infrastructure. The total in-kind match value budgeted by WAPA was $15.2 million. The term of the MOA is twenty-five (25) years upon execution, with two additional twenty-five (25) year terms unless either party provides a written notice of non-renewal not less than twelve (12) months, but no sooner than twenty-four (24) months prior to the expiration of the original term or any additional term. (b) Virgin Islands Water and Power Authority – Water System In 2011, the Water System of WAPA entered into two agreements with Seven Seas Corporation to build, operate and maintain two reverse osmosis facilities, one on St. Croix and one on St. Thomas, and sell the water from the facilities to WAPA. The agreements both have twenty (20) year terms expiring through 2032. (c) Virgin Islands Port Authority In accordance with the approved Compliance Plan between the Virgin Islands Waste Management Authority, VIPA, and the FAA, the Government has addressed the previous issues related to the potential flight hazards created by birds attracted to the Anguilla Landfill near the Henry E. Rohlsen Airport. With the landfill now only accepting baled debris, the FAA was satisfied with the progress made towards closing the facility. (d) Governor Juan F. Luis Hospital & Medical Center The Governor Juan F. Luis Hospital and Medical Center previously held an equity ownership with a radiology practice within the hospital. The radiology practice paid rent to the hospital and the hospital paid for service to hospital patients. As of September 30, 2017, the hospital owed the radiology practice $8.6 million in unpaid invoices for hospital patients. Government of the United States Virgin Islands Notes to Basic Financial Statements 112 (e) Other Various discretely presented component units are presently defendants or codefendants 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 due to court judgments under the V.I. Code. 15. Retirement Systems Primary Government As required, the Government follows the provisions of GASB Statement No. 68, Accounting and Financial Reporting for Pensions – an amendment of GASB Statement No. 27, as amended by GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date – an amendment of GASB Statement No. 68 and GASB Statement No. 82, Pension Issues – an amendment of GASB Statements No. 67, No. 68, and No. 73. Following is a description of the pension plan and accounting for pension expense, liabilities, and deferred outflows/inflows of resources. (a) Plan Description and Benefits Full time employees of the Government are members of GERS, a cost sharing, multiple-employer, defined benefit pension plan (the plan) established as of October 1, 1959 Title 3, Chapter 27 of the V.I. Code to provide retirement, death, and disability benefits. Benefits may be extended to beneficiaries of plan members. The plan covers all employees of the Government except employees compensated on a contract fee basis, casual, per diem or provisional and part time employees who work less than twenty (20) hours per week. Persons over the age of fifty-five (55) may opt out of the plan by providing formal notification to the plan. Vesting of benefits occurs after ten (10) years of service. Benefits may be extended to beneficiaries of plan members. There are two tiers within the plan: Tier I: Employees hired prior to September 30, 2005 Tier II: Employees hired on or after October 1, 2005 Regular employees who have completed thirty (30) years of credited service or have attained age sixty (60) with at least ten (10) years of credited service are eligible for a full-service retirement annuity. Members who are considered “safety employees” as defined in the Code are eligible for full retirement benefits when they have earned at least twenty (20) years of service or have reached the age of fifty-five (55) with at least ten (10) years of credited service. Regular and safety employees who have attained age fifty (50) with at least ten (10) years of credited service may elect to retire early with a reduced benefit. The monthly annuity benefit payment is determined by applying a stipulated benefit ratio to the member’s average compensation. Average compensation for Tier I members is determined by averaging the five highest years of credited service within the last ten years of service, subject to the maximum salary limitations in effect during such service. Average compensation for Tier II members is determined by averaging the most recent five years of credited service within the last ten years of service, subject to the maximum salary limitations in effect during the 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. Government of the United States Virgin Islands Notes to Basic Financial Statements 113 GERS is a separate and independent agency that is included for financial reporting purposes as a blended 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 the Employees’ Retirement System of the Government of the Virgin Islands, 3438 Kronprindsens Gade, St. Thomas, Virgin Islands 00802. (b) Funding and Contribution Policy Contributions to GERS are established by the Board of Trustees of GERS. The Government’s required contribution for Tier I and Tier II members through December 31, 2014 was 17.5% of the member’s annual salary. Effective January 1, 2015, the Government’s required contribution was increased to 20.5% of the Tier I and Tier II member’s annual salary. Effective January 1, 2017, the required employee contributions are 11% and 11.5% of annual salary for Tier I and Tier II regular employees, respectively; 12% and 14% for Tier I and Tier II senators, respectively; 14% and 15% for Tier I and Tier II judges, respectively; and 13% and 13.625% for Tier I and Tier II safety (hazardous employees and eligible employees under Act 5226), respectively. Prior to June 29, 2000, member contributions were refundable without interest upon withdrawal from employment before retirement. Effective July 1, 2009, the GERS Board of Trustees approved an effective annual interest rate on refunded contributions of 2.0% per annum. Both the defined benefit pension plan administered by GERS, and the PG have a fiscal year that ends on September 30th. The following time frames are used to measure and report the PG’s pension liability: Valuation Date: October 1, 2016 Measurement Date: September 30, 2016 Measurement Period: October 1, 2015 – September 30, 2016 The PG is considered an employer of the plan with a proportionate share of 76.4171% as of September 30, 2016, which was an increase of 1.1255% from its proportionate share measured as of September 30, 2015. The PG’s percentage was determined based on its respective contributions as a percentage of the total contributions to the plan. The PG’s proportionate share of employer contributions recognized by GERS was $61.8 million for the plan’s fiscal year ended September 30, 2016. (c) Pension Liabilities, Expense, and Deferred Outflows/Inflows of Resources As of September 30, 2017, the actuarially calculated net pension liability of the PG was $3.5 billion. The net pension liability is measured as of September 30, 2016, and the total pension liability is actuarially computed as of October 1, 2016. For the measurement date September 30, 2015, there was a change in assumptions for calculating the proportionate share. Actuarially determined proportionate share information was estimated by management of GERS based on an average four-year respective share of the PG’s relative contributions. Previously, the proportionate share information was estimated by management of GERS based on the respective share of single year contributions at the measurement date. For the year ended September 30, 2017, the Government recognized $268.0 million of pension expense, inclusive of amortization of deferred outflows of pension related items. Government of the United States Virgin Islands Notes to Basic Financial Statements 114 Following is a schedule of deferred outflows and deferred inflows allocated to the Government in the computation of the net pension liability for the year ended September 30, 2017, (expressed in thousands): Governmental Activities Deferred Outflows Deferred Inflows Difference between expected and actual experience $ 111,235 $ - Net difference between projected and actual investment earnings on pension plan investments 42,540 4,091 Changes in assumptions 729,331 - Changes in proportion and differences between contributions and proportional share of contributions 33,499 1,936 Contributions made subsequent to measurement date 61,759 - Total $ 978,364 $ 6,027 Amounts reported as deferred outflows and inflows, exclusive of contributions made after the measurement date, will be recognized in pension expense as follows (expressed in thousands): Year Ending September 30, 2018 $ 179,533 2019 241,292 2020 189,845 2021 177,188 2022 61,360 Thereafter 61,360 Total $ 910,578 (d) Actuarial Assumptions A summary of the actuarial assumptions and methods used to calculate the total pension liability as of the measurement date at September 30, 2016, is provided below. Refer to the October 1, 2016, actuarial valuation report for a complete description of all other assumptions, which can be found on GERS’ website. September 30, 2016 Inflation Rate 2.50% Salary Increases 3.25% including inflation Actuarial Cost Method Entry age normal Expected Rate of Return 7.00% Municipal Bond Yield 3.06% Discount Rate 3.20% Mortality Table RP-2014 Blue Collar The demographic assumptions for the 2016 actuarial valuation are based on the results of an actuarial experience study for the period October 1, 2011 through September 30, 2015. Government of the United States Virgin Islands Notes to Basic Financial Statements 115 (e) Investment Rate of Return The long-term expected rate of return of 7.00% on pension plan investments was determined using the building-block method in which best-estimate ranges of expected future real rates of returns (expected returns, net of pension plan investment expense, and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. Best estimates of arithmetic real rates of return for each major asset class included in the pension plan’s target asset allocation as of the measurement date of September 30, 2016, are summarized in the following table: Asset Class Target Allocation Long-Term Expected Real Rate of Return Domestic equity 29% 6.59% International equity 12% 8.29% Fixed income 27% 1.59% Cash 2% 0.99% Alternatives 30% 5.50% Total 100% (f) Discount Rate The discount rate used to measure total pension liability was 3.20% as of September 30, 2016, which was a decrease of 0.64% from the discount rate as of September 30, 2015. The projection of cash flows used to determine the discount rate assumed plan member contributions will be made at the current contribution rate, including the future increases in the employee contribution rates legislated. Using the above assumptions, GERS fiduciary net position is not projected to be available to make all projected future benefit payments to current plan members. The plan’s long-term expected rate of return on pension plan investments of 7.00% was applied to all periods of projected benefit payments that are covered by projected assets. For periods where projected future benefit payments are not covered by projected assets, the yield on a twenty (20) year AA Municipal Bond Index was applied. As of September 30, 2016, that rate was 3.06%. Government of the United States Virgin Islands Notes to Basic Financial Statements 116 (g) Sensitivity of Proportionate Share of the Net Pension Liability to Changes in the Discount Rate Following is a schedule of net pension liability for the Government calculated using the discount rate of 3.20%, as well as what the net pension liability would be if it were calculated using a discount rate that is one percentage point lower or one percentage point higher than the current rate for the year ended September 30, 2017, (expressed in thousands): 1% Decrease (2.20%) Current Discount (3.20%) 1% Increase (4.20%) Net pension liability $ 4,134,460 $ 3,535,517 $ 3,044,158 Detailed information about the pension plan’s fiduciary net position is available in the separately issued GERS financial report. (h) Early Retirement Incentive Program 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 seventy-five (75) years as of the date of the legislation, to retire without reduction of annuity. Members, who have attained the age of fifty (50) with at least ten (10) but less than thirty (30) years of credited service, may add an additional three (3) years to their age for this computation. Members with thirty (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. For each employee electing to retire pursuant to Section 8(a) of the Early Retirement Act of 1994 (the Act), the Government contributes to GERS, on a quarterly basis, an amount equal to the employer and employee contributions that would have been made until the employee reached the age of 62 had the employee not elected to retire under this provision. For employees electing to retire under Section 8(b) of the Act, the Government contributes to GERS a sum equal to the additional contribution the employer and employee would have made had the employee received a salary 4.0% 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 and has 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. Government of the United States Virgin Islands Notes to Basic Financial Statements 117 Postemployment Benefits In addition to the pension benefits described above, 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 V.I. Code as part of a cost-sharing, multiple employer defined benefit OPEB plan, in which most component units of the PG participate and contribute. All employees who retire from government service after attaining age fifty-five (55) with at least thirty (30) years of service, except for policemen and firemen who can retire with at least twenty (20) years of service, are eligible for these benefits. The PG’s postemployment benefit cost is calculated on the annual required contribution of the PG, an amount actuarially determined. The first actuarial valuation was prepared as of October 1, 2007, in accordance with provisions of GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions and has been updated by the actuarial consultant on October 1, 2009, 2011, 2013 and 2015. Based on census data included in the October 1, 2015 actuarial valuation of OPEB, 9,313 active employees, 7,864 service retirees, 1,982 spouses of service and disability retirees covered for medical and dental benefits, 250 disability retirees, and 219 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. Effective October 1, 2013, separate medical premiums for non-Medicare retirees and Medicare retirees are being used to determine contribution requirements, instead of a premium blended with active costs. 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 V.I. 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, 2017, the Legislature budgeted, and paid $13.2 million for retiree health insurance payments. The annual required contribution represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year, and amortize any unfunded actuarial liabilities over a period not to exceed an open thirty (30) year period. Government of the United States Virgin Islands Notes to Basic Financial Statements 118 (a) Annual OPEB Cost and Net OPEB Obligation The following table shows the components of the PG’s annual postemployment benefits cost, percentage of OPEB costs contributed, and the net OPEB obligation (expressed in thousands): Fiscal Year Annual OPEB Cost Percentage of Annual OPEB Cost Contributed Net OPEB Obligation 9/30/2015 $ 67,713 43.63% $ 357,224 9/30/2016 90,056 34.04% 416,623 9/30/2017 93,741 35.12% 477,438 (b) Actuarial Accrued Liability and Funding Status Actuarial Valuation Date October 1, 2015 Actuarial Accrued Liability (AAL) $ 1,283,144 Unfunded AAL $ 1,283,144 Funded Ratio 0% 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 first actuarial valuation dated October 1, 2007, liabilities at October 1, 2008 were rolled back to October 1, 2007. In subsequent valuation reports, actual benefit payments were used for the fiscal years ended September 30, 2009 through 2017. Covered health care and dental care expenses were assumed to increase in future years based on the claims experience for fiscal year 2015, and a trend assumption beginning at 8.0% for pre- Medicare retirees, 6.0% for post-Medicare retirees, 6.0% for dental benefits, and grading down to an ultimate rate of 4.5% in fiscal year 2021 and after. The entry age normal actuarial cost method with costs on a level percentage of payroll basis was used to determine the annual required cost of OPEB benefits to retirees. Amortization is over an open thirty (30) year period as a level percentage of payroll. Payroll growth is assumed to be 3.25% 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 2.5% per annum was used, compounded annually. Government of the United States Virgin Islands Notes to Basic Financial Statements 119 The valuation assumed that the annual unit cost per covered individual (i.e., retiree or spouse) for medical, prescription drugs and dental care for the fiscal year ended September 30, 2015, was $8,243, $1,779, and $999 for retirees under age sixty-five (65) and $1,130, $1,786, and $243 for retirees over age sixty-five (65). The normal cost reflects the average age of the covered population and is based on claims experience for the fiscal year ended September 30, 2015, 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 developed for retirees and spouses by combining their claim experience. Dependent children claims were included in developing the composite retiree and spouse cost. Costs were adjusted to reflect the anticipated lag in claim payment. An administrative loading was added as well. WICO Employee Retirement Plan The WICO Employee Retirement Plan (the Plan) is a defined contribution retirement and savings plan sponsored by the Company, covering the Company’s employees not governed by a collective bargaining agreement. The Plan is administered by Weber Shapiro & Co. LLP. Under the provisions of the Plan, employees must contribute at least 3.0% of their gross compensation and may contribute up to 7.0% of their compensation. The Company matches 3.0% of the employees’ contribution plus a non-elective distribution at the discretion of the Company, which is divided among eligible employees, proportionate to compensation. Required contributions to the pension and savings plan made and charged to operations were approximately $120,000 for the year ended September 30, 2017. Total contributions made to the Plan by covered employees during 2017 amounted to $127,000. The Company does not offer other post-retirement benefits to its employees. Component Units (a) University TIAA-CREF Defined-Contribution Plan 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. Total contributions made by the University and plan members to TIAA-CREF and GERS amounted to $4.0 million for the fiscal year ended September 30, 2017. Government of the United States Virgin Islands Notes to Basic Financial Statements 120 16. Liquidity Primary Government At September 30, 2017, the Government reported a total net deficit in governmental activities amounting to $4.4 billion. The net deficit is a culmination of several factors such as: (i) the 2008 financial markets collapse and subsequent recession resulting in a reduction in income tax revenue and increase in unemployment; (ii) increases in costs of operations; (iii) the negative effect of certain IRS regulations resulting in a reduction of economic development companies operating in the Territory; (iv) the adoption of an accounting standard which required the reporting of pension liabilities and pension expense based on actuarial computations; and (v) in September 2017, the Government experienced significant infrastructure damage as a result of two Category 5 hurricanes. Following is a summary of the Government’s unrestricted net deficit for governmental activities for fiscal years 2015 through 2017: Fiscal Year Governmental Unrestricted Net Deficit (Increase)/ Decrease 2015 $ (4,152,336) $ (2,217,677) 2016 (4,247,570) (95,234) 2017 (4,797,101) (549,531) Following is a summary of the general fund deficit. At September 30, 2017, the Government reported a fund deficit in the general fund of $207.8 million. This fund deficit balance represents an increase in the deficit by $134.8 million from the preceding fiscal year, mainly due to the reduction in tax collections and increase in spending. Fiscal Year Committed Assigned Unassigned Total 2015 $ 14,687 $ 576 $ (74,073) $ (58,810) 2016 16,513 - (89,599) (73,086) 2017 16,667 552 (225,060) (207,841) The Government has been working to stabilize and solidify its financial position through the implementation of an aggressive multi-pronged plan. In March 2017, the Legislature addressed the general fund deficits with the enactment of the Virgin Islands Revenue Enhancement and Economic Recovery Act, a five-year plan of revenue initiatives and cost-cutting measures to reduce and eliminate structural deficits. The Government has legislated increases in local taxes such as the gross receipts taxes and hotel taxes. The Government expects structural deficits following the 2017 hurricanes to be offset by the economic activity related to construction and federal recovery assistance. The post-hurricane construction economy is strong as residents replace damaged property along with the influx of federal workers and construction firms. Airbnb properties have increased to replace hotel rooms damaged by the storms. The Government has successfully negotiated the direct withholding of hotel tax by Airbnb. Cruise ship calls have returned to near normal levels. The Government has experienced an increase in tax collections reported by the Virgin Islands Bureau of Internal Revenue. The Government has also continued to receive its annual matching fund rum excise tax advance from the U.S. Department of Interior. Government of the United States Virgin Islands Notes to Basic Financial Statements 121 New sources of revenue streams expected in fiscal years 2019 and 2020 include the settlement with the Secretary of the Treasury on amounts related to the Disaster Tax Relief and Airport and Airway Extension Act of 2017 and increasing revenues from the Limetree Bay Terminal concessioner. Additionally, immediately following the hurricanes of 2017, the federal government acted to provide relief to the U.S. Virgin Islands through legislation and supplemental appropriations for disaster recovery assistance. The Government expects to receive approximately $8.0 billion in federal assistance through fiscal year 2025. The Government has also participated in the Federal Emergency Management Agency’s (FEMA) Community Disaster Loan (CDL) program. The CDL program provides operational funding for local governments to continue to operate after a substantial revenue loss (greater than 5%) caused by a disaster. The term of the CDL loans is five (5) years and can be extended to ten (10) years. The Government’s ability to access the CDL facility has allowed it to remain current in its obligations. The Government has pledged gross receipts taxes for the timely payment of the CDLs. The Government has also been the recipient of insurance recoveries and private donations. While the Government has certain revenues pledged for debt service on various bonds and notes, to date, revenues pledged for debt service have not been significantly impacted. The Government does not anticipate the issuance of additional bonds in the immediate future. All payments on bonds and notes obligations have been remitted as required. Other significant liabilities of the Government, mainly consisting of benefits due to the Government’s workforce and landfill closure costs, represent obligations of the Government, but do not require the use of current resources. To meet the continuing liquidity needs of the Government, various financing sources will be relied upon. Also see Note 18. WICO The Company is in a negative working capital position as of September 30, 2017. The Company is a component unit of PFA which experienced credit rating downgrades due to the financial and budgetary challenges experienced by the Government. In March 2017, the Legislature addressed general fund deficits with the enactment of the Virgin Islands Revenue Enhancement and Economic Recovery Act, a five-year plan of revenue initiatives and cost-cutting measures. To date, revenues pledged for debt service have not been significantly impacted by the Government’s financial condition. viNGN viNGN is a component unit of PFA which maintains an advance payable to PFA of approximately $36.8 million as of September 30, 2017. PFA experienced credit rating downgrades due to the financial and budgetary challenges experienced by the Government. In March 2017, the Legislature addressed the general fund deficits with the enactment of the Virgin Islands Revenue Enhancement and Economic Recovery Act, a five-year plan of revenue initiatives and cost-cutting measures. To date, revenues pledged for debt service have not been significantly impacted by the Government’s financial condition. Government of the United States Virgin Islands Notes to Basic Financial Statements 122 Component Units (a) Virgin Islands Water and Power Authority – Electric System Management of the Electric System (the System) has been attempting to stabilize and solidify its financial condition. The System has successfully petitioned the Virgin Islands Legislature to increase its debt ceiling limit and is working with an external financial team to restructure debt and gain access to additional financing to sustain operations and fund capital projects. Management of the System is also preparing a comprehensive base rate petition and semi-annual LEAC filings for submission to the Public Service Commission prior to the end of calendar year 2019, which will produce additional liquidity and allow the System to build working capital reserves. The plan also includes a strategy to right-size and streamline the System’s processes. The System continues to aggressively pursue federal funding for the acquisition of new high efficiency generation and renewables which will improve reliability, resiliency, and efficiency and reduce operating costs. (b) Virgin Islands Government Hospital and Health Facilities Corporation During the year ended September 30, 2017, the Roy L. Schneider Hospital experienced a decrease in net position of $27.3 million. Current liabilities of the Hospital exceed current assets by $35.2 million as of September 30, 2017. The Roy L. Schneider Hospital operates the only hospital on St. Thomas and a health center on St. John, providing health care related services to approximately 50,000 residents. During the year ended September 30, 2017, the Governor Juan F. Luis Hospital and Medical Center experienced a decrease in net position of $22.4 million. Current liabilities of the Hospital exceed current assets by $45.8 million. The Governor Juan F. Luis Hospital and Medical Center operates the only hospital on the island of St. Croix. The Board of directors and management of the hospitals are implementing fiscal sustainability measures to improve operation efficiencies, evaluate change capture and pricing improvements, reduce accounts receivable collection time, and evaluate Medicare reimbursement options and opportunities. Both hospitals incurred significant structural damages related to the September 2017 hurricanes and have received FEMA Community Disaster Loans. The full impact of the hurricanes continues to be evaluated as the hospitals seek grants and federal assistance to continue operations. Government of the United States Virgin Islands Notes to Basic Financial Statements 123 17. Fund Deficit Primary Government The following non-major funds have a net fund deficit as of September 30, 2017, (expressed in thousands): Governmental Funds Rural Library Extension $ 572 Water & Electric System Projects $ 1,698 Employment Security Administration 2,233 Sewer System Fund 175 Federally Aided Education Program 9,599 District Potable Water Fund 4,962 Air & Water Pollution Control 7,143 Paternity And Child Support 11,618 Virgin Islands Planning Board Projects 3,000 District Street Light Fund 20,915 Highway Safety 4,600 Virgin Islands Law Enforcement 4,435 Virgin Islands Energy Office 3,655 Forensic Science 74 Virgin Islands National Guard Federal Vocational Rehabilitation 1,848 and State Agreement 2,760 Hurricane Hugo Insurance Claims 3,908 Food Stamp Welfare 2,434 Virgin Islands Army National Guard 2,266 Federal Programs/Department Emergency Drought Relief 156 Conservation 4,006 Outdoor Recreation Program 32 Federal Aided Community Action Agency 187 Narcotics Strike Force Forfeiture 1 Commission On Aging 50 Small Business Development Elementary/Secondary Education 19 Administration Managerial And Job Training Partnership Technical Assistance 8 Act Of 1983-1984 8,614 Juvenile Detention Center Fund Civil Defense Protection 849 Non-Lapsing 14 Health Information Council Assistance 18 Natural Resource Reclamation 2,205 Drug Education Training Program 123 Section 12 Bond Proceeds 24,547 Federal Health Program Not on Federal Road Fund 6,330 Letter of Credit System 489 Major Repair And Improvement 58 Boating Safety Program 584 Fishery and Wildlife Projects 35 Fish and Game 309 Net fund deficit $ 136,529 Proprietary Funds Frederiksted Small Business Fund $ 164 Altona Community Development Fund 3 Housing Construction Revolving 7,653 Emergency Housing Fund 82 Virgin Islands ID Registration Fund 28 Virgin Islands Elections Fund 241 Consumer Protection Fund 200 Government Insurance Fund 40,465 Virgin Islands Housing Finance Authority 2,898 Homestead and Home Revolving Fund 344 Net fund deficit $ 52,078 Government of the United States Virgin Islands Notes to Basic Financial Statements 124 18. Subsequent Events Primary Government The Government is making significant progress towards restoring its facilities which were damaged by Hurricanes Irma and Maria in September 2017. The Government continues the process of tabulating the associated costs and expenses with respect to remediation, clean-up, mitigation, and the restoration of services. In an effort to close potential shortfalls and to serve returning citizens, the Government continues to work closely with federal agencies, such as FEMA, HUD, SBA, etc. to maximize its recovery from all available sources, subject to any sublimits and retentions. (a) Federal Recovery Assistance Immediately following the hurricanes of 2017, the federal government acted to provide relief to the U.S. Virgin Islands through legislation and supplemental appropriations for disaster recovery assistance. The Disaster Tax Relief and Airport and Airway Extension Act of 2017 provided new tax credits to employers in federal disaster areas, allowed residents to take qualified distributions from retirement plans, and provided special rules in the determination of deductible casualty losses. The legislation was intended to be revenue-neutral to the U.S. Virgin Islands, and the Secretary of the Treasury committed within the Act to reimburse the Government an amount equal to the loss in revenue the Territory would experience due to the passage of the Act. The Virgin Islands Bureau of Internal Revenue is negotiating with the Internal Revenue Service for the legislated reimbursement related to this Act. On February 9, 2018, the Bipartisan Budget Act of 2018 was signed which provided $89.3 billion in additional supplemental appropriations for communities impacted by the 2017 hurricanes and wildfires. Included in this law are specific relief provisions to repair local and federal facilities in the U.S. Virgin Islands. Through September 2019, federal assistance awarded to the Territory included $87.0 million in FEMA Individual Assistance grants, $1.8 billion in FEMA Public Assistance grants, $462.0 million in FEMA Hazard Mitigation grants, and $1.9 billion in Community Development Block Grants for a total of $4.2 billion dollars. Other federal grants awarded by various federal agencies amounted to $99.0 million, for a total of approximately $4.3 billion. (b) Federal Loans The Government has also participated in FEMA’s Community Disaster Loan (CDL) program. As of September 2019, the Government has received $145.0 million through the CDL program. Government of the United States Virgin Islands Notes to Basic Financial Statements 125 (c) Insurance Recoveries and Private Donations The Government insures all of its properties for risks of direct physical loss or damage including earthquake, windstorm, flood, sea wave, and storm surge and was able to secure advance funding for some of the needed repairs. Windstorm limits were $60.0 million per occurrence and the Government received $120.0 million for the two hurricanes. Of the insurance proceeds received, $91.4 million were designated for the PG and $18.5 million for various component units. The Territory has also received sizable amounts in private donations which are being administered by the Community Foundation of the Virgin Islands, a 501(c)(3) nonprofit tasked by the Government to receive and distribute private donations for recovery efforts. (d) Collection of Excise Tax In September 2018, the U.S. District Judge issued an order enjoining the Government from collecting an excise tax. The order follows a ruling that the way the excise tax was administered in the Territory violated the Commerce Clause of the U.S. Constitution. The order prohibits the Government from levying excise tax, a tax historically brought against goods imported in the Territory, until the District Court Judge signs off on a new method of collection. To address this, the Virgin Islands Bureau of Internal Revenue is working with the Attorney General to submit all the required documents to lift the order. (e) Other Financing and Payments In December 2018, Limetree obtained $1.25 billion in financing to reopen the former HOVENSA oil refinery operation on the island of St. Croix. As part of the financing agreement, the Government received $40.0 million in short-term financing and a $30.0 million payment for the 130 housing units, vocational school, and community center located at the facility. Component Units (a) Virgin Islands Public Finance Authority In November 2017, PFA engaged the services of two international firms, to assist with the administration and management of recovery funds. The firms are charged with providing oversight and direction of the disaster emergency response and to execute all necessary documents on behalf of the Territory. In August 2018, PFA received a grant of $3.0 million from the Department of the Interior to create and fund an Office of Disaster Recovery to provide financial management and coordination of disaster relief funds. (b) Virgin Islands Water and Power Authority Starting in December 2017, WAPA began working with FEMA to request mitigation funding to permanently strengthen the electrical distribution system. Funding under the Hazard Mitigation Grant Program was initially being implemented on a 75/25 cost-share basis of the approved costs; however, on May 18, 2018, the President of the United States approved the cost-share formula in the United States Virgin Islands to 90/10. Government of the United States Virgin Islands Notes to Basic Financial Statements 126 To date, FEMA has approved, and WAPA is eligible to receive, approximately $625.0 million in mitigation funding. Of the $625.0 million that FEMA has approved, $480.0 million is for underground and submarine transmission and distribution and drops directly to customer meters. WAPA expects the local match will be paid from U.S. Department of Housing and Urban Development’s Community Development Block Grants. The Public Assistance Grant Program administered by FEMA provides federal support to include assistance for debris removal, life-saving emergency protective measures, and the repair, replacement, or restoration of disaster-damaged facilities. As of October 1, 2018, WAPA has been approved for approximately $481.5 million in grant funding and has received $413.0 million of the award based upon a reimbursement process. Furthermore, in order to fund its working capital needs in the aftermath of the hurricanes, WAPA obtained $31.0 million under the CDL program administered by FEMA. This loan was originally issued under the Electric System, subordinate to all existing Electric System indebtedness including outstanding bonds, notes, and bank facilities. In March 2018, WAPA entered into another loan for $44.0 million and refinanced the existing $31.0 million for a combined loan of $75.0 million, secured now as a first lien of the Water System’s revenues. The proceeds of these loans were used to provide working capital mostly for fuel invoices, payroll, and other critical operating expenses. In August 2018, WAPA closed on an additional allocation of the CDL program of up to $16.0 million. This loan is structured as a Senior Electric System Bond Anticipation Note which will convert to Senior Electric System Bonds upon the delivery of a consulting engineer’s report. However, on November 14, 2018, the Authority adopted the Ninth Supplementary Bond Resolution, which authorized the issuance of its Electric System Revenue Bond Anticipation Notes, Series 2018C in a principal amount to include, among other things, a CDL allocation of $19.5 million approved by FEMA, which amount includes $16.0 million to refund the Series 2018A Notes and $3.5 million of additional CDL allocation to be subsequently drawn upon by WAPA (the Series 2018C Senior Notes). The Series 2018A Senior Notes are expected to be exchanged by FEMA for the Series 2018C Senior Notes, which will mature on July 1, 2021. As the maturity date of the Series 2016A Subordinated Bond Anticipation Notes (BAN) approached in the aftermath of Hurricanes Irma and Maria, WAPA decided to reissue another short-term note to keep rates low until a long-term financing option became available. Accordingly, on November 14, 2018, WAPA and the beneficial owners of the Series 2016A Subordinated BANs entered into an agreement to extend the original maturity date of the Series to no later than December 7, 2018. Further, on November 14, 2018, WAPA’s Board authorized the issuance of the 2018B Senior BANs. WAPA anticipates refinancing the Series 2016A Subordinated BANs with its Series 2018B Senior BANs, in the principal amount of $33.9 million. The Series 2018B BANs will mature on July 1, 2020. As of September 2019, WAPA received approximately $26.0 million from the Government as a partial payment for outstanding utility bills. Government of the United States Virgin Islands Notes to Basic Financial Statements 127 (c) Virgin Islands Port Authority Rebuilding the air and seaports has taken precedence over other activities. The Henry E. Rohlsen Airport in St. Croix reopened to commercial traffic on October 5, 2017, and overall flights to the Territory have been steadily increasing. The first ship to the St. Thomas ports since the storms was welcomed back on November 10, 2017, and the port in St. Croix welcomed back its first ship, on November 15, 2017. In January 2018, the Authority engaged the services of a construction management and design-build firm to provide engineering and construction management services for the repairs of the damaged properties. To date, approximately $80.0 million in insurance recoveries has been received. (d) Virgin Islands Government Hospital and Health Facilities Corporation In January 2018, the Schneider Regional Medical Center received authorization for a $28.0 million CDL. As of September 2019, $15.9 million had been drawn down. As of September 2019, the Government Juan F. Luis Hospital & Medical Center received authorization for a $40.0 million CDL. As of September 2019, $13.0 million had been drawn down. (e) West Indian Company In June 2018, WICO, in coordination with VIPA, applied for a permit to dredge 250,000 cubic yards which will be removed from the channel and turn basin and another 40,000 cubic yards will be removed from WICO’s berth area, to accommodate larger cruise ships. The PG has committed to funding $23.0 million for this project from the Department of Housing and Urban Development’s Community Development Block Grant - Disaster Recovery Funds. Also in June 2018, the Legislature of the Virgin Islands passed Act 8053 authorizing the transfer of a property owned by WICO to the PG for use as a public decorative arts museum. This transfer is part of a negotiated settlement with WICO for unpaid payments in lieu of taxes (PILOT) due to the PG from prior years. WICO will be responsible for paying the costs of transferring and converting the property to a museum, as well as the annual maintenance for the property. (f) Other Component Units Various components units insure all of their properties and were able to secure advance funding for some of the needed repairs of the damages caused by Hurricanes Irma and Maria. Management’s Evaluation While inflows of Federal and private funds continue to bolster the reconstruction activity, the eventual amount and timing for receipt of such funds cannot be predicted at this time. Management has evaluated events and transactions occurring after September 30, 2017, the statement of net position date, and through September 30, 2019, the date the financial statements were available to be issued and noted that there have been no additional events or transactions which would require adjustments to or disclosure in the Government’s financial statements for the year ended September 30, 2017. Required Supplementary Information Government of the United States Virgin Islands Schedule of Funding Progress 128 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) 10/1/2007 $ – $ 976,455,000 $ 976,455,000 – N/A N/A 10/1/2009 $ – $ 1,069,562,000 $ 1,069,562,000 – $ 418,467,000 255.59% 10/1/2011 $ – $ 1,133,327,000 $ 1,133,327,000 – $ 403,389,000 280.95% 10/1/2013 $ – $ 982,484,000 $ 982,484,000 – $ 298,873,000 240.55% 10/1/2015 $ – $ 1,283,144,000 $ 1,283,144,000 – $ 408,063,000 314.45% Additional Note Disclosure - Annual OPEB Cost and Net OPEB Obligation Fiscal Year Ended Annual OPEB Cost Percentage of Annual OPEB Cost Contributed Net OPEB Obligation 9/30/2008 $ 78,185,000 40.36% $ 46,629,000 9/30/2009 $ 82,004,000 42.34% $ 93,195,000 9/30/2010 $ 85,946,000 42.89% $ 143,002,000 9/30/2011 $ 89,962,000 35.06% $ 201,423,000 9/30/2012 $ 80,322,000 45.65% $ 245,079,000 9/30/2013 $ 71,176,000 43.95% $ 284,974,000 9/30/2014 $ 65,247,000 47.77% $ 319,056,000 9/30/2015 $ 67,713,000 43.63% $ 357,224,000 9/30/2016 $ 90,056,000 34.04% $ 416,623,000 9/30/2017 $ 93,741,000 35.12% $ 477,438,000 Government of the United States Virgin Islands Schedule of Net Pension Liability 129 September 30, (in thousands) 2017 2016 2015 Primary Government’s proportion of the NPL 76.4171% 75.2916% 75.2803% Primary Government’s proportionate share of the NPL $ 3,535,517 $ 3,065,617 $ 2,323,163 Primary Government’s covered-employee payroll $ 300,909 $ 277,091 $ 267,698 Primary Government’s proportionate share of the NPL as a percentage of its covered-employee payroll 1,175% 1,106% 868% Plan fiduciary net position as a percentage of the total pension liability 16.54% 19.58% 27.26% This schedule is intended to show a 10-year trend. Additional years will be reported as they become available. The amounts presented for each fiscal year are as of the measurement date (September 30 of the previous year). Government of the United States Virgin Islands Schedule of Contributions 130 September 30, (in thousands) 2017 2016 2015 Actuarially required contributions of the Primary Government $ 191,481 $ 186,089 $ 150,628 Contributions in relation to the statutorily required contributions 61,759 68,291 64,357 Contribution deficiency (excess) $ 129,722 $ 117,798 $ 86,271 Primary Government covered-employee payroll $ 307,132 $ 300,909 $ 277,091 Contributions as a percentage of covered-employee payroll 20.11% 22.69% 23.23% This schedule is intended to show a 10-year trend. Additional years will be reported as they become available. The amounts presented for each fiscal year are as of the latest fiscal year. Original Revised Budget Budget Actual Variance Revenues Taxes 662,070 $ 662,070 $ 548,500 $ (113,570) $ Federal grants and contributions - - 10,523 10,523 Charges for services 76,098 76,098 9,390 (66,708) Interest and other 111,974 111,974 32,423 (79,551) Total revenues 850,142 850,142 600,836 (249,306) Expenditures Current: General government 508,574 508,324 519,194 (10,870) Public safety 131,539 131,539 57,169 74,370 Health 42,101 35,101 24,534 10,567 Public housing and welfare 80,542 80,542 58,495 22,047 Education 175,900 174,150 170,284 3,866 Transportation and communication 28,049 28,049 17,425 10,624 Culture and recreation 16,163 16,163 5,475 10,688 Debt service: Principal - - 1,862 (1,862) Interest - - 1,158 (1,158) Loan issuance costs - - 433 (433) Total expenditures 982,868 973,868 856,029 117,839 Deficiency of revenues over expenditures (132,726) (123,726) (255,193) (131,467) Other financing sources (uses) Loans issued - - 20,000 20,000 New resource initiative 121,700 121,700 - (121,700) Transfers from other funds 51,100 51,100 93,648 42,548 Transfer to other funds (1,469) (1,469) 12,046 13,515 Total other financing sources (uses), net 171,331 171,331 125,694 (45,637) Excess (deficiency) of revenues and net other financing sources over expenditures 38,605 $ 47,605 $ (129,499) $ (177,104) $ See accompanying notes to the Schedule. Schedule of Revenues and Expenditures – Budget and Actual Government of the United States Virgin Islands (in thousands) Year Ended September 30, 2017 Budgetary Basis − General Fund 131 Government of the United States Virgin Islands Notes to Schedule of Revenues and Expenditures - Budget and Actual Budgetary Basis – General Fund 132 1. 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. 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. Government of the United States Virgin Islands Notes to Schedule of Revenues and Expenditures - Budget and Actual Budgetary Basis – General Fund 133 2. 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 of the excess (deficiency) of revenue and net other financing sources over expenditures for the year ended September 30, 2017, is presented below (expressed in thousands): Deficiency of revenues and net other financing sources over expenditures $ (177,104) Entity difference – excess of revenues and net other financing over expenditures – activities with budgets not legally adopted 42,349 Deficiency of revenues and net other financing sources over expenditures – GAAP basis (net change in fund balance) $ (134,755) 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. The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee. Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards and Reports Required by Government Auditing Standards and the Uniform Guidance Year Ended September 30, 2017 ` Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards and Reports Required by Government Auditing Standards and the Uniform Guidance Year Ended September 30, 2017 Government of the United States Virgin Islands Contents 2 Independent Auditor’s Reports Required by Government Auditing Standards and the Uniform Guidance Independent Auditor’s 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 3-5 Independent Auditor’s Report on Compliance For Each Major Federal Program, Report on Internal Control Over Compliance, and Report on the Schedule of Expenditures of Federal Awards Required by the Uniform Guidance 6-17 Schedule of Expenditures of Federal Awards 18-26 Notes to Schedule of Expenditures of Federal Awards 27-29 Schedule of Findings and Questioned Costs 30-142 Management’s Appendices Appendix A: Status of Prior Audit Findings 143-177 Appendix B: Corrective Action Plan 178-212 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 3 Tel: 301-354-2500 Fax: 301-354-2501 www.bdo.com 12505 Park Potomac Ave, Suite 700 Potomac, MD 20854 Independent Auditor’s 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 To the Honorable Governor of the Government of the United States Virgin Islands We have audited, 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, 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, 2017, and the related notes to the financial statements, which collectively comprise the Government’s basic financial statements, and have issued our report thereon dated September 30, 2019. We expressed a qualified opinion on the financial statements of the governmental activities, general fund, federal grants fund, and aggregate discretely-presented component units opinion units based on the circumstances noted in our aforementioned report. In addition, we expressed a disclaimer of opinion on the financial statements of the business type activities, unemployment insurance-enterprise fund, and aggregate remaining fund information opinion units based on the circumstances described in our aforementioned report. Our aforementioned report includes references to other auditors who audited the financial statements of the Virgin Islands Housing Authority (VIHA), Virgin Islands Economic Development Authority (VIEDA), Virgin Islands Waste Management Authority (VIWMA), Magens Bay Authority (MBA), Virgin Islands Government Hospital and Health Facilities Corporation (Roy L. Schneider Hospital and Governor Juan F. Luis Hospital and Medical Center), Virgin Islands Housing Finance Authority (VIHFA), Employees’ Retirement System of the Government of the Virgin Islands (GERS), Virgin Islands Lottery (V.I. Lottery), The West Indian Company Limited (WICO), Virgin Islands Next Generation Network (viNGN), and Tobacco Settlement Financing Corporation (TSFC) 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. We audited the financial statements of the Virgin Islands Water and Power Authority (WAPA), the Virgin Islands Port Authority (VIPA), the University of the Virgin Islands (UVI), and the Virgin Islands Public Broadcasting System (VIPBS). This report does not include the results of our testing of internal control over financial reporting or compliance and other matters for WAPA, VIPA, UVI, and VIPBS which is reported on separately by us. The financial statements of the Virgin Islands Government Hospital and Health Facilities Corporation (Governor Juan F. Luis Hospital and Medical Center) were not audited in accordance with Government Auditing Standards. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Government’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances 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. Accordingly, we do not express an opinion on the effectiveness of the Government’s internal control. 4 Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that have not been identified. However, as described in greater detail in the accompanying schedule of findings and questioned costs, we did identify certain deficiencies in internal control that we consider to be material weaknesses and significant deficiencies. 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 a 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 the deficiencies identified below and described in greater detail in the accompanying schedule of findings and questioned costs to be material weaknesses. Finding # Nature of Finding 2017-001 Financial Position 2017-002 Accounting in the Aftermath of Disasters 2017-003 Year-End Close Process 2017-004 Revenue and Receivables 2017-005 Grants Management 2017-006 Capital Assets and Related Expenditures 2017-007 Recording of Liabilities 2017-008 Management of the Medicaid Program 2017-009 Unemployment Insurance Trust Fund 2017-010 Workers Compensation Program 2017-011 Payroll, Related Accruals, and Other Expenditures A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the deficiencies identified below and described in greater detail in the accompanying schedule of findings and questioned costs to be significant deficiencies. Finding # Nature of Finding 2017-012 Bank Accounts 2017-013 Information Technology Environment 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. 5 The results of our tests disclosed instances of noncompliance or other matters that are required to be reported under Government Auditing Standards as identified below and described in greater detail in the accompanying schedule of findings and questioned costs. Finding # Nature of Finding 2017-014 Landfill Consent Decrees 2017-015 Establishment of a Medical Malpractice Trust Fund 2017-016 Procurement Regulations 2017-017 Casino Control Commission The Government’s Responses to Findings The Government’s responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The Government’s responses were not subjected to the auditing procedures applied in the audit of the financial statements and accordingly, we express no opinion on them. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Government’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Government’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. September 30, 2019 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 6 Tel: 301-354-2500 Fax: 301-354-2501 www.bdo.com 12505 Park Potomac Ave, Suite 700 Potomac, MD 20854 Independent Auditor’s Report on Compliance For Each Major Federal Program, Report on Internal Control Over Compliance, and Report on the Schedule of Expenditures of Federal Awards Required by the Uniform Guidance To the Honorable Governor of the Government of the United States Virgin Islands Report on Compliance for Each Major Federal Program We have audited the Government of the United States Virgin Islands’ (the Government) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Compliance Supplement that could have a direct and material effect on each of the Government’s major Federal programs for the year ended September 30, 2017. The Government’s major Federal programs are identified in the summary of auditor’s results section of the accompanying schedule of findings and questioned costs. The Government’s basic financial statements include the operations of the Virgin Islands Public Finance Authority (VIPFA), Virgin Islands Housing Authority (VIHA), Virgin Islands Economic Development Authority (VIEDA), Virgin Islands Waste Management Authority (VIWMA), Magens Bay Authority (MBA), Virgin Islands Government Hospital and Health Facilities Corporation (Roy L. Schneider Hospital and Governor Juan F. Luis Hospital and Medical Center), Virgin Islands Housing Finance Authority (VIHFA), Employees’ Retirement System of the Government of the Virgin Islands (GERS), Virgin Islands Lottery (V.I. Lottery), The West Indian Company Limited (WICO), Virgin Islands Next Generation Network (viNGN), University of the Virgin Islands Research and Technology Park Corporation (RTPark), and Tobacco Settlement Financing Corporation (TSFC). The financial statements of RTPark have not been audited, and we were not engaged to audit the financial statements as part of our audit of the Government’s basic financial statements. The accompanying Schedule of Expenditures of Federal Awards and our audit described below do not include the Federal expenditures of these organizational units. As may be applicable, these organizational units of the Government have a separate independent audit performed in accordance with Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. The accompanying Schedule of Expenditures of Federal Awards and our audit described below also do not include the Federal expenditures of the Virgin Islands Water and Power Authority (WAPA), the Virgin Islands Port Authority (VIPA), the University of the Virgin Islands (UVI), and the Virgin Islands Public Broadcasting System (VIPBS). As may be applicable, the results of our testing of compliance for WAPA, VIPA, UVI, and VIPBS is reported on separately by us. Management’s Responsibility Management is responsible for compliance with Federal statutes, regulations, and the terms and conditions of its Federal awards applicable to its Federal programs. Auditor’s Responsibility Our responsibility is to express an opinion on compliance for each of the Government’s major Federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). 7 Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major Federal program occurred. An audit includes examining, on a test basis, evidence about the Government’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major Federal program. However, our audit does not provide a legal determination of the Government’s compliance. Basis for Adverse Opinion on CFDA 10.561 Supplemental Nutrition Assistance Program Cluster, CFDA 93.778 Medicaid Cluster, CFDA 12.401 National Guard Military Operations and Maintenance (O&M) Projects, and CFDA 17.225 Unemployment Insurance As described in the accompanying schedule of findings and questioned costs, and as listed below, the Government did not comply with requirements regarding the following: Finding # CFDA # Program (or Cluster) Name Compliance Requirement 2017-025 10.561 Supplemental Nutrition Assistance Program Cluster Allowable Costs/Cost Principles - Payroll Activities 2017-026 10.561 Supplemental Nutrition Assistance Program Cluster Allowable Costs/Cost Principles - Indirect Cost Activities 2017-027 10.561 Supplemental Nutrition Assistance Program Cluster Cash Management 2017-028 10.561 Supplemental Nutrition Assistance Program Cluster Equipment and Real Property Management 2017-029 10.561 Supplemental Nutrition Assistance Program Cluster Period of Performance 2017-030 10.561 Supplemental Nutrition Assistance Program Cluster Procurement, Suspension, and Debarment 2017-031 10.561 Supplemental Nutrition Assistance Program Cluster Special Tests and Provisions – EBT Card Security 2017-032 10.561 Supplemental Nutrition Assistance Program Cluster Special Tests and Provisions – EBT Card Reconciliation 2017-033 10.561 Supplemental Nutrition Assistance Program Cluster Special Tests and Provisions – ADP System for SNAP-Recertifications 2017-044 93.778 Medicaid Cluster Activities Allowed or Unallowed 2017-045 93.778 Medicaid Cluster Cash Management 2017-046 93.778 Medicaid Cluster Eligibility 2017-047 93.778 Medicaid Cluster Matching, Level of Effort, and Earmarking 2017-048 93.778 Medicaid Cluster Procurement, Suspension, and Debarment 2017-049 93.778 Medicaid Cluster Reporting 2017-050 93.778 Medicaid Cluster Special Tests and Provisions - Federal Financial Participation Refunds 2017-051 93.778 Medicaid Cluster Special Tests and Provisions - Provider Eligibility 8 Finding # CFDA # Program (or Cluster) Name Compliance Requirement 2017-052 93.778 Medicaid Cluster Special Tests and Provisions - Inpatient Hospital and Long-Term Care Facility Audits 2017-053 93.778 Medicaid Cluster Special Tests and Provisions - Medicaid Fraud Control Unit 2017-054 93.778 Medicaid Cluster Special Tests and Provisions - ADP Risk Analysis and System Security Review 2017-055 93.778 Medicaid Cluster Special Tests and Provisions - Utilization Control & Program Integrity 2017-077 12.401 National Guard Military Operations and Maintenance (O&M) Projects Allowable Cost/Cost Principles – Payroll Activities 2017-078 12.401 National Guard Military Operations and Maintenance (O&M) Projects Cash Management 2017-079 12.401 National Guard Military Operations and Maintenance (O&M) Projects Matching, Level of Effort, and Earmarking 2017-080 12.401 National Guard Military Operations and Maintenance (O&M) Projects Period of Performance 2017-081 12.401 National Guard Military Operations and Maintenance (O&M) Projects Reporting 2017-071 17.225 Unemployment Insurance Activities Allowed or Unallowed 2017-072 17.225 Unemployment Insurance Cash Management 2017-073 17.225 Unemployment Insurance Eligibility 2017-088 10.561 Supplemental Nutrition Assistance Program Cluster Data Collection Form and Single Audit Reporting Package 2017-088 93.778 Medicaid Cluster Data Collection Form and Single Audit Reporting Package 2017-088 12.401 National Guard Military Operations and Maintenance (O&M) Projects Data Collection Form and Single Audit Reporting Package 2017-088 17.225 Unemployment Insurance Data Collection Form and Single Audit Reporting Package Compliance with such requirements is necessary, in our opinion, for the Government to comply with the requirements applicable to those programs. Adverse Opinion on CFDA 10.561 Supplemental Nutrition Assistance Program Cluster, CFDA 93.778 Medicaid Cluster, CFDA 12.401 National Guard Military Operations and Maintenance (O&M) Projects, and CFDA 17.225 Unemployment Insurance In our opinion, because of the significance of the matters discussed in the Basis for Adverse Opinion paragraph, the Government did not comply in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on CFDA 10.561 Supplemental Nutrition Assistance Program Cluster, CFDA 93.778 Medicaid Cluster, CFDA 12.401 National Guard Military Operations and Maintenance (O&M) Projects, and CFDA 17.225 Unemployment Insurance for the year ended September 30, 2017. 9 Basis for Qualified Opinion on CFDA 10.555/10.559 Child Nutrition Cluster, CFDA 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children, CFDA 93.600 Head Start, CFDA 93.767 Children’s Health Insurance Program, CFDA 93.563 Child Support Enforcement, and CFDA 66.605 Performance Partnership Grants As described in the accompanying schedule of findings and questioned costs, and as listed below, the Government did not comply with requirements regarding the following: Finding # CFDA # Program (or Cluster) Name Compliance Requirement 2017-023 10.555 10.559 Child Nutrition Cluster Period of Performance 2017-024 10.555 10.559 Child Nutrition Cluster Procurement, Suspension, and Debarment 2017-037 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children Procurement, Suspension, and Debarment 2017-038 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children Special Tests and Provisions – Review of Redeemed Food Instruments and Cash-Value Vouchers 2017-039 93.600 Head Start Allowable Cost/Cost Principles – Payroll Activities 2017-043 93.600 Head Start Period of Performance 2017-056 93.767 Children’s Health Insurance Program Activities Allowed or Unallowed 2017-063 93.563 Child Support Enforcement Allowable Costs/Cost Principles – Payroll Activities 2017-067 93.563 Child Support Enforcement Matching, Level of Effort, and Earmarking 2017-086 66.605 Performance Partnership Grants Procurement, Suspension, and Debarment Compliance with such requirements is necessary, in our opinion, for the Government to comply with the requirements applicable to those programs. Qualified Opinion on CFDA 10.555/10.559 Child Nutrition Cluster, CFDA 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children, CFDA 93.600 Head Start, CFDA 93.767 Children’s Health Insurance Program, CFDA 93.563 Child Support Enforcement, and CFDA 66.605 Performance Partnership Grants In our opinion, except for the noncompliance described in the Basis for Qualified Opinion paragraph, the Government complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on CFDA 10.555/10.559 Child Nutrition Cluster, CFDA 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children, CFDA 93.600 Head Start, CFDA 93.767 Children’s Health Insurance Program, CFDA 93.563 Child Support Enforcement, and CFDA 66.605 Performance Partnership Grants for the year ended September 30, 2017. 10 Unmodified Opinion on Each of the Other Major Federal Programs In our opinion, the Government complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its other major Federal programs identified in the summary of auditor’s results section of the accompanying schedule of findings and questioned costs for the year ended September 30, 2017. Other Matters The results of our auditing procedures disclosed other instances of noncompliance which are required to be reported in accordance with the Uniform Guidance and which are described in the accompanying schedule of findings and questioned costs, and as listed below. Our opinion on each major Federal program is not modified with respect to these matters. Finding # CFDA # Program (or Cluster) Name Compliance Requirement 2017-018 10.555 10.559 Child Nutrition Cluster Allowable Costs/Cost Principles - Payroll Activities 2017-019 10.555 10.559 Child Nutrition Cluster Allowable Costs/Cost Principles - Indirect Cost Activities 2017-020 10.555 10.559 Child Nutrition Cluster Cash Management 2017-021 10.555 10.559 Child Nutrition Cluster Equipment and Real Property Management 2017-022 10.555 10.559 Child Nutrition Cluster Matching, Level of Effort, and Earmarking 2017-034 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children Cash Management 2017-035 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children Eligibility 2017-036 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children Equipment and Real Property Management 2017-040 93.600 Head Start Cash Management 2017-041 93.600 Head Start Equipment and Real Property Management 2017-042 93.600 Head Start Matching, Level of Effort, and Earmarking 2017-057 93.767 Children’s Health Insurance Program Cash Management 2017-058 93.767 Children’s Health Insurance Program Matching, Level of Effort, and Earmarking 2017-059 93.767 Children’s Health Insurance Program Reporting 2017-060 93.323 Epidemiology and Laboratory Capacity for Infectious Diseases Cash Management 2017-061 93.323 Epidemiology and Laboratory Capacity for Infectious Diseases Equipment and Real Property Management 2017-062 93.323 Epidemiology and Laboratory Capacity for Infectious Diseases Reporting 2017-064 93.563 Child Support Enforcement Allowable Costs/Cost Principles - Indirect Cost Activities 2017-065 93.563 Child Support Enforcement Cash Management 11 Finding # CFDA # Program (or Cluster) Name Compliance Requirement 2017-066 93.563 Child Support Enforcement Equipment and Real Property Management 2017-068 93.563 Child Support Enforcement Reporting 2017-069 20.205 Highway Planning and Construction Cluster Cash Management 2017-070 20.205 Highway Planning and Construction Cluster Equipment and Real Property Management 2017-074 15.875 Economic, Social, and Political Development of the Territories Cash Management 2017-075 15.875 Economic, Social, and Political Development of the Territories Equipment and Real Property Management 2017-076 15.875 Economic, Social, and Political Development of the Territories Procurement, Suspension, and Debarment 2017-082 66.605 Performance Partnership Grants Allowable Costs/Cost Principles - Indirect Cost Activities 2017-083 66.605 Performance Partnership Grants Cash Management 2017-084 66.605 Performance Partnership Grants Equipment and Real Property Management 2017-085 66.605 Performance Partnership Grants Matching, Level of Effort, and Earmarking 2017-087 66.605 Performance Partnership Grants Reporting 2017-088 10.555 10.559 Child Nutrition Cluster Data Collection Form and Single Audit Reporting Package 2017-088 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) Data Collection Form and Single Audit Reporting Package 2017-088 93.600 Head Start Data Collection Form and Single Audit Reporting Package 2017-088 93.767 Children’s Health Insurance Program Data Collection Form and Single Audit Reporting Package 2017-088 93.323 Epidemiology and Laboratory Capacity for Infectious Diseases Data Collection Form and Single Audit Reporting Package 2017-088 93.563 Child Support Enforcement Data Collection Form and Single Audit Reporting Package 2017-088 20.205 Highway Planning and Construction Cluster Data Collection Form and Single Audit Reporting Package 2017-088 15.875 Economic, Social, and Political Development of the Territories Data Collection Form and Single Audit Reporting Package 2017-088 66.605 Performance Partnership Grants Data Collection Form and Single Audit Reporting Package The Government’s responses to the noncompliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs and corrective action plan. The Government’s responses were not subjected to our auditing procedures applied in the audit of compliance and accordingly, we express no opinion on the responses. 12 Report on Internal Control Over Compliance Management of the Government is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Government’s internal control over compliance with the types of requirements that could have a direct and material effect on each major Federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major Federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Government’s internal control over compliance. Our consideration of internal control over compliance was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as discussed below, we did identify certain deficiencies in internal control over compliance that we consider to be material weaknesses and significant deficiencies. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a Federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is reasonable possibility that material noncompliance with a type of compliance requirement of a Federal program will not be prevented, or detected and corrected, on a timely basis. We consider the deficiencies in internal control over compliance described in the accompanying schedule of findings and questioned costs, and as listed below, to be material weaknesses: Finding # CFDA # Program (or Cluster) Name Compliance Requirement 2017-020 10.555 10.559 Child Nutrition Cluster Cash Management 2017-021 10.555 10.559 Child Nutrition Cluster Equipment and Real Property Management 2017-023 10.555 10.559 Child Nutrition Cluster Period of Performance 2017-024 10.555 10.559 Child Nutrition Cluster Procurement, Suspension, and Debarment 2017-025 10.561 Supplemental Nutrition Assistance Program Cluster Allowable Cost/Cost Principles - Payroll Activities 2017-027 10.561 Supplemental Nutrition Assistance Program Cluster Cash Management 2017-028 10.561 Supplemental Nutrition Assistance Program Cluster Equipment and Real Property Management 2017-029 10.561 Supplemental Nutrition Assistance Program Cluster Period of Performance 2017-030 10.561 Supplemental Nutrition Assistance Program Cluster Procurement, Suspension, and Debarment 13 Finding # CFDA # Program (or Cluster) Name Compliance Requirement 2017-034 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children Cash Management 2017-036 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children Equipment and Real Property Management 2017-037 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children Procurement, Suspension, and Debarment 2017-038 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children Special Tests and Provisions – Review of Redeemed Food Instruments and Cash-Value Vouchers 2017-039 93.600 Head Start Allowable Cost/Cost Principles - Payroll Activities 2017-040 93.600 Head Start Cash Management 2017-041 93.600 Head Start Equipment and Real Property Management 2017-043 93.600 Head Start Period of Performance 2017-044 93.778 Medicaid Cluster Activities Allowed or Unallowed 2017-045 93.778 Medicaid Cluster Cash Management 2017-046 93.778 Medicaid Cluster Eligibility 2017-048 93.778 Medicaid Cluster Procurement, Suspension, and Debarment 2017-049 93.778 Medicaid Cluster Reporting 2017-051 93.778 Medicaid Cluster Special Tests and Provisions - Provider Eligibility 2017-052 93.778 Medicaid Cluster Special Tests and Provisions - Inpatient Hospital and Long- Term Care Facility Audits 2017-053 93.778 Medicaid Cluster Special Tests and Provisions - Medicaid Fraud Control Unit 2017-054 93.778 Medicaid Cluster Special Tests and Provisions - ADP Risk Analysis and System Security Review 2017-055 93.778 Medicaid Cluster Special Tests and Provisions - Utilization Control & Program Integrity 2017-056 93.767 Children’s Health Insurance Program Activities Allowed or Unallowed 2017-057 93.767 Children’s Health Insurance Program Cash Management 2017-059 93.767 Children’s Health Insurance Program Reporting 2017-060 93.323 Epidemiology and Laboratory Capacity for Infectious Diseases Cash Management 2017-061 93.323 Epidemiology and Laboratory Capacity for Infectious Diseases Equipment and Real Property Management 2017-063 93.563 Child Support Enforcement Allowable Costs/Cost Principles – Payroll Activities 2017-065 93.563 Child Support Enforcement Cash Management 2017-066 93.563 Child Support Enforcement Equipment and Real Property Management 14 Finding # CFDA # Program (or Cluster) Name Compliance Requirement 2017-067 93.563 Child Support Enforcement Matching, Level of Effort, and Earmarking 2017-068 93.563 Child Support Enforcement Reporting 2017-069 20.205 Highway Planning and Construction Cluster Cash Management 2017-070 20.205 Highway Planning and Construction Cluster Equipment and Real Property Management 2017-071 17.225 Unemployment Insurance Activities Allowed or Unallowed 2017-072 17.225 Unemployment Insurance Cash Management 2017-073 17.225 Unemployment Insurance Eligibility 2017-074 15.875 Economic, Social, and Political Development of the Territories Cash Management 2017-075 15.875 Economic, Social, and Political Development of the Territories Equipment and Real Property Management 2017-076 15.875 Economic, Social, and Political Development of the Territories Procurement, Suspension, and Debarment 2017-077 12.401 National Guard Military Operations and Maintenance (O&M) Projects Allowable Costs/Cost Principles – Payroll Activities 2017-078 12.401 National Guard Military Operations and Maintenance (O&M) Projects Cash Management 2017-079 12.401 National Guard Military Operations and Maintenance (O&M) Projects Matching, Level of Effort, and Earmarking 2017-080 12.401 National Guard Military Operations and Maintenance (O&M) Projects Period of Performance 2017-081 12.401 National Guard Military Operations and Maintenance (O&M) Projects Reporting 2017-083 66.605 Performance Partnership Grants Cash Management 2017-084 66.605 Performance Partnership Grants Equipment and Real Property Management 2017-085 66.605 Performance Partnership Grants Matching, Level of Effort, and Earmarking 2017-086 66.605 Performance Partnership Grants Procurement, Suspension, and Debarment A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a Federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. 15 We consider the deficiencies in internal control over compliance described in the accompanying schedule of findings and questioned costs, and as listed below, to be significant deficiencies: Finding # CFDA # Program (or Cluster) Name Compliance Requirement 2017-018 10.555 10.559 Child Nutrition Cluster Allowable Costs/Cost Principles - Payroll Activities 2017-019 10.555 10.559 Child Nutrition Cluster Allowable Costs/Cost Principles - Indirect Cost Activities 2017-022 10.555 10.559 Child Nutrition Cluster Matching, Level of Effort, and Earmarking 2017-026 10.561 Supplemental Nutrition Assistance Program Cluster Allowable Costs/Cost Principles - Indirect Cost Activities 2017-031 10.561 Supplemental Nutrition Assistance Program Cluster Special Tests and Provisions – EBT Card Security 2017-032 10.561 Supplemental Nutrition Assistance Program Cluster Special Tests and Provisions – EBT Card Reconciliation 2017-033 10.561 Supplemental Nutrition Assistance Program Cluster Special Tests and Provisions – ADP System for SNAP- Recertifications 2017-035 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children Eligibility 2017-042 93.600 Head Start Matching, Level of Effort, and Earmarking 2017-047 93.778 Medicaid Cluster Matching, Level of Effort, and Earmarking 2017-050 93.778 Medicaid Cluster Special Tests and Provisions - Federal Financial Participation Refunds 2017-058 93.767 Children’s Health Insurance Program Matching, Level of Effort, and Earmarking 2017-062 93.323 Epidemiology and Laboratory Capacity for Infectious Diseases Reporting 2017-064 93.563 Child Support Enforcement Allowable Costs/Cost Principles - Indirect Cost Activities 2017-082 66.605 Performance Partnership Grants Allowable Costs/Cost Principles - Indirect Cost Activities 2017-087 66.605 Performance Partnership Grants Reporting 2017-088 10.555 10.559 Child Nutrition Cluster Data Collection Form and Single Audit Reporting Package 2017-088 10.561 Supplemental Nutrition Assistance Program Cluster Data Collection Form and Single Audit Reporting Package 2017-088 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children Data Collection Form and Single Audit Reporting Package 2017-088 93.600 Head Start Data Collection Form and Single Audit Reporting Package 2017-088 93.778 Medicaid Cluster Data Collection Form and Single Audit Reporting Package 2017-088 93.767 Children’s Health Insurance Program Data Collection Form and Single Audit Reporting Package 16 Finding # CFDA # Program (or Cluster) Name Compliance Requirement 2017-088 93.323 Epidemiology and Laboratory Capacity for Infectious Diseases Data Collection Form and Single Audit Reporting Package 2017-088 93.563 Child Support Enforcement Data Collection Form and Single Audit Reporting Package 2017-088 20.205 Highway Planning and Construction Cluster Data Collection Form and Single Audit Reporting Package 2017-088 17.225 Unemployment Insurance Data Collection Form and Single Audit Reporting Package 2017-088 15.875 Economic, Social, and Political Development of the Territories Data Collection Form and Single Audit Reporting Package 2017-088 12.401 National Guard Military Operations and Maintenance (O&M) Projects Data Collection Form and Single Audit Reporting Package 2017-088 66.605 Performance Partnership Grants Data Collection Form and Single Audit Reporting Package The Government’s responses to the internal control over compliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs and corrective action plan. The Government’s responses were not subjected to the auditing procedures applied in the audit of compliance and accordingly, we express no opinion on the responses. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance 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, 2017, and the related notes to the financial statements, which collectively comprise the Government’s basic financial statements. We issued our report thereon dated September 30, 2019, which expressed a qualified opinion on the financial statements of the governmental activities, general fund, federal grants fund, and aggregate discretely-presented component units opinion units based on the circumstances noted in our aforementioned report. In addition, we expressed a disclaimer of opinion on the financial statements of the business type activities, unemployment insurance- enterprise fund, and aggregate remaining fund information opinion units based on the circumstances described in our aforementioned report. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the basic financial statements. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by the Uniform Guidance and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. 17 The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, except for the effects on the Schedule of Expenditures of Federal Awards of the circumstances noted above, the information is fairly stated in all material respects in relation to the basic financial statements as a whole. September 30, 2019 Schedule of Expenditures of Federal Awards Year ended September 30, 2017 Pass-Through Federal Entity Passed Total CFDA Identifying Through to Federal Federal Grantor/Pass-Through Grantor/Program or Cluster Title Number Number Subrecipients Expenditures U.S. Department of Agriculture Plant and Animal Disease, Pest Control, and Animal Care 10.025 87,428 $ Specialty Crop Block Grant Program - Farm Bill 10.170 001561211 30,001 $ 35,161 Professional Standards for School Nutrition Employees 10.547 13,992 Child Nutrition Cluster National School Lunch Program 10.555 5,570,492 Summer Food Service Program for Children (SFSPC) 10.559 5,700 Total Child Nutrition Cluster 5,576,192 Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) 10.557 5,321,164 Child and Adult Care Food Program 10.558 2,207,068 State Administrative Expenses for Child Nutrition 10.560 389,390 SNAP Cluster State Administrative Matching Grants for the Supplemental Nutrition Assistance Program 10.561 63,226,304 Food Distribution Cluster Emergency Food Assistance Program (Administrative Costs) 10.568 39,352 WIC Farmers' Market Nutrition Program 10.572 12,677 Child Nutrition Discretionary Grants Limited Availability 10.579 75,104 Fresh Fruit and Vegetable Program 10.582 23,689 Cooperative Forestry Assistance 10.664 16,560 Urban and Community Forestry Program 10.675 001561211 22,585 98,296 Forest Legacy Program 10.676 30,338 Forest Stewardship Program 10.678 102,487 Total U.S. Department of Agriculture 52,586 77,255,202 Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards 18 Year ended September 30, 2017 Pass-Through Federal Entity Passed Total CFDA Identifying Through to Federal Federal Grantor/Pass-Through Grantor/Program or Cluster Title Number Number Subrecipients Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards U.S. Department of Health and Human Services Special Programs for the Aging - Title VII, Chapter 3 Programs for Prevention for Elder Abuse 93.041 1,146,151 Special Programs for the Aging - Title VII, Chapter 2 Long Term Care Ombudsman Services for Older Individuals 93.042 13,806 Aging Cluster Special Programs for the Aging - Title III, Part B Grants for Supportive Services and Senior Centers 93.044 358,752 Special Programs for the Aging - Title III, Part C Nutrition Services 93.045 1,755,618 Nutrition Services Incentive Program 93.053 8,740 Total Aging Cluster 2,123,110 National Family Caregiver Support, Title III, Part E 93.052 166,292 Public Health Emergency Preparedness 93.069 259,304 Birth Defects and Developmental Disabilities - Prevention and Surveillance 93.073 136,592 Hospital Preparedness Program (HPP) and Public Health Emergency Preparedness (PHEP) Aligned Cooperative Agreements 93.074 585,036 Affordable Care Act (ACA) Personal Responsibility Education Program 93.092 93,656 Maternal and Child Health Federal Consolidated Programs 93.110 94,103 Project Grants and Cooperative Agreements for Tuberculosis Control Programs 93.116 76,376 Emergency Medical Services for Children 93.127 132,781 Cooperative Agreements to States/Territories for the Coordination and Development of Primary Care Offices 93.130 171,786 Injury Prevention and Control Research and State and Community Based Programs 93.136 33,587 Projects for Assistance in Transition from Homelessness (PATH) 93.150 50,000 19 Year ended September 30, 2017 Pass-Through Federal Entity Passed Total CFDA Identifying Through to Federal Federal Grantor/Pass-Through Grantor/Program or Cluster Title Number Number Subrecipients Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards U.S. Department of Health and Human Services (continued) Family Planning-Services 93.217 826,429 Substance Abuse and Mental Health Services-Projects of Regional and National Significance 93.243 134,795 Universal Newborn Hearing Screening 93.251 198,259 Immunization Cooperative Agreements 93.268 1,273,121 Epidemiology and Laboratory Capacity for Infectious Diseases (ELC) 93.323 4,607,937 Behavioral Risk Factor Surveillance System 93.336 1,313 ACL Independent Living State Grants 93.369 194 Maternal, Infant, and Early Childhood Home Visiting Cluster Affordable Care Act (ACA) Maternal, Infant, and Early Childhood Home Visiting Program 93.505 1,068,906 The Affordable Care Act: Building Epidemiology, Laboratory, and Health Information Systems Capacity in the Epidemiology and Laboratory Capacity for Infectious Diseases (ELC) and Emerging Infections Program (EIP) Cooperative Agreements; PPHF 93.521 36,193 Promoting Safe and Stable Families 93.556 647,223 TANF Cluster Temporary Assistance for Needy Families State Programs 93.558 001560155 1,914,109 2,979,922 Family Support Payments to States - Assistance Payments 93.560 001560155 716,830 716,830 Child Support Enforcement 93.563 3,524,132 Low-Income Home Energy Assistance 93.568 46,470 Community Services Block Grant 93.569 398,284 CCDF Cluster Child Care and Development Block Grant 93.575 2,548,588 20 Year ended September 30, 2017 Pass-Through Federal Entity Passed Total CFDA Identifying Through to Federal Federal Grantor/Pass-Through Grantor/Program or Cluster Title Number Number Subrecipients Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards U.S. Department of Health and Human Services (continued) Grants to States for Access and Visitation Programs 93.597 56,310 Head Start 93.600 7,963,891 Developmental Disabilities Basic Support and Advocacy Grants 93.630 104,488 Stephanie Tubbs Jones Child Welfare Services Program 93.645 299,082 Social Services Block Grant 93.667 001560155 30,000 48,647 Child Abuse and Neglect State Grants 93.669 594,368 Family Violence Prevention and Services/Domestic Violence Shelter and Supportive Services 93.671 55,794 PPHF: Health Care Surveillance/Health Statistics – Surveillance Program Announcement: Behavioral Risk Factor Surveillance System Financed in Part by Prevention and Public Health Fund 93.745 78,815 Preventive Health and Health Services Block Grant funded solely with Prevention and Public Health Funds (PPHF) 93.758 180,722 Children's Health Insurance Program 93.767 7,177,930 Medicaid Cluster Medical Assistance Program 93.778 49,435,107 Domestic Ebola Supplement to the Epidemiology and Laboratory Capacity for Infectious Diseases (ELC) 93.815 184,599 HIV Care Formula Grants 93.917 901,440 HIV Prevention Activities-Health Department Based 93.940 633,890 Human Immunodeficiency Virus (HIV)/Acquired Immunodeficiency Virus Syndrome (AIDS) Surveillance 93.944 147,257 Assistance Programs for Chronic Disease Prevention and Control 93.945 402,299 Block Grants for Community Mental Health Services 93.958 39,622 Block Grants for Prevention and Treatment of Substance Abuse 93.959 472,285 Zika Health Care Services Program 93.966 6,182 Preventive Health Services-Sexually Transmitted Diseases Control Grants 93.977 138,363 Maternal and Child Health Services Block Grant to the States 93.994 1,009,580 Total U.S. Department of Health and Human Services 2,660,939 94,021,847 21 Year ended September 30, 2017 Pass-Through Federal Entity Passed Total CFDA Identifying Through to Federal Federal Grantor/Pass-Through Grantor/Program or Cluster Title Number Number Subrecipients Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards U.S. Department of Transportation Highway Planning and Construction Cluster Highway Planning and Construction 20.205 20,827,486 Motor Carrier Safety Assistance 20.218 263,371 Federal Transit Cluster Federal Transit - Capital Investment Grants 20.500 45,841 Federal Transit - Formula Grants 20.507 941,572 Total Federal Transit Cluster 987,413 Transit Services Programs Cluster Enhanced Mobility of Seniors and Individuals with Disabilities 20.513 88,421 Highway Safety Cluster State and Community Highway Safety 20.600 791,284 Interagency Hazardous Materials Public Sector Training and Planning Grants 20.703 54,310 Total U.S. Department of Transportation 23,012,285 U.S. Department of Labor Labor Force Statistics 17.002 283,393 Compensation and Working Conditions 17.005 47,564 Employment Service Cluster Employment Service/Wagner-Peyser Funded Activities 17.207 1,663,231 Disabled Veterans' Outreach Program (DVOP) 17.801 81,092 Total Employment Service Cluster 1,744,323 Unemployment Insurance 17.225 10,067,221 Senior Community Service Employment Program 17.235 963,856 WIA/WIOA Cluster WIA/WIOA Adult Program 17.258 511,042 WIA/WIOA Youth Activities 17.259 755,568 WIA/WIOA Dislocated Worker Formula Grant 17.278 706,111 Total WIA/WIOA Cluster 1,972,721 WIA/WIOA Dislocated Worker National Reserve Technical Assistance and Training 17.281 6,081 Occupational Safety and Health-State Program 17.503 11,774 Total U.S. Department of Labor 15,096,933 22 Year ended September 30, 2017 Pass-Through Federal Entity Passed Total CFDA Identifying Through to Federal Federal Grantor/Pass-Through Grantor/Program or Cluster Title Number Number Subrecipients Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards U.S. Department of Education Special Education Cluster (IDEA) Special Education - Grants to States 84.027 8,061,112 Impact Aid 84.041 107,980 Rehabilitation Services - Vocational Rehabilitation Grants to States 84.126 1,731,402 Rehabilitation Services - Independent Living Services for Older Individuals Who Are Blind 84.177 566 Special Education - Grants for Infants and Families 84.181 711,085 School Safety National Activities (formerly Safe and Drug-Free Schools and Communities-National Programs) 84.184 672,310 Supported Employment Services for Individuals with Severe Disabilities 84.187 28,795 Territories and Freely Associated States Education Grant Program 84.256 527,646 Advanced Placement Program 84.330 650 Striving Readers 84.371 190,082 Statewide Longitudinal Data Systems 84.372 1,029,627 Consolidated Grant to the Outlying Areas 84.403 30,618,842 Total U.S. Department of Education 43,680,097 U.S. Department of the Interior Fish and Wildlife Cluster Sport Fish Restoration Program 15.605 1,306,327 Wildlife Restoration and Basic Hunter Education 15.611 1,061,989 Total Fish and Wildlife Cluster 2,368,316 Cooperative Endangered Species Conservation Fund 15.615 64,505 State Wildlife Grants 15.634 76,503 Economic, Social, and Political Development of the Territories 15.875 160342882 18,500 4,820,691 Historic Preservation Fund Grants-In-Aid 15.904 160342882 148,700 432,131 Total U.S. Department of the Interior 167,200 7,762,146 U.S. Department of Defense National Guard Military Operations and Maintenance (O&M) Projects 12.401 4,198,011 23 Year ended September 30, 2017 Pass-Through Federal Entity Passed Total CFDA Identifying Through to Federal Federal Grantor/Pass-Through Grantor/Program or Cluster Title Number Number Subrecipients Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards U.S. Environmental Protection Agency Surveys, Studies, Research, Investigations, Demonstrations, and Special Purpose Activities Relating to the Clean Air Act 66.034 18,501 State Clean Diesel Grant Program 66.040 5 Multipurpose Grants to States and Tribes 66.204 62,885 Construction Grants for Wastewater Treatment Works 66.418 2,220,947 Water Quality Management Planning 66.454 96,278 Drinking Water State Revolving Fund Cluster Capitalization Grants for Drinking Water State Revolving Funds 66.468 138919282 2,748,952 2,895,913 State Grants To Reimburse Operators of Small Water Systems For Training and Certification Costs 66.471 13,187 Beach Monitoring and Notification Program Implementation Grants 66.472 236,436 Performance Partnership Grants 66.605 2,380,208 Underground Storage Tank Prevention, Detection and Compliance Program 66.804 75,154 Leaking Underground Storage Tank Trust Fund Corrective Action Program 66.805 25,913 State and Tribal Response Program Grants 66.817 89,181 Total U.S. Environmental Protection Agency 2,748,952 8,114,608 U.S. Department of Homeland Security Boating Safety Financial Assistance 97.012 339,645 Disaster Grants - Public Assistance (Presidentially Declared Disasters) 97.036 825544042 323,817 947,152 Emergency Management Performance Grants 97.042 1,160,523 Assistance to Firefighters Grant 97.044 761,459 Pre-Disaster Mitigation 97.047 825544042 202,401 335,796 Homeland Security Grant Program 97.067 825544042 9,548 568,782 Staffing for Adequate Fire and Emergency Response (SAFER) 97.083 545,520 Total U.S. Department of Homeland Security 535,766 4,658,877 24 Year ended September 30, 2017 Pass-Through Federal Entity Passed Total CFDA Identifying Through to Federal Federal Grantor/Pass-Through Grantor/Program or Cluster Title Number Number Subrecipients Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards U.S. Department of Justice Sexual Assault Services Formula Program 16.017 001560155 50,120 50,120 Juvenile Justice and Delinquency Prevention - Allocation to States 16.540 81,268 National Criminal History Improvement Program (NCHIP) 16.554 10,080 Crime Victim Assistance 16.575 829924047 500,627 530,143 Crime Victim Compensation 16.576 38,029 Violence Against Women Formula Grants 16.588 829924047 172,029 450,793 Residential Substance Abuse Treatment for State Prisoners 16.593 26,138 State Criminal Alien Assistance Program 16.606 61,767 Public Safety Partnership and Community Policing Grants 16.710 699,981 Enforcing Underage Drinking Laws Program 16.727 10,000 Edward Byrne Memorial Justice Assistance Grant Program 16.738 152,166 Recovery Act - Edward Byrne Memorial Justice Assistance Grant Program 16.803 5,848 Paul Coverdell Forensic Sciences Improvement Grant Program 16.742 49,402 Support for Adam Walsh Act Implementation Grant Program 16.750 77,262 Total U.S. Department of Justice 722,776 2,242,997 U.S. Department of Commerce Economic Development Cluster Economic Adjustment Assistance 11.307 238,500 Interjurisdictional Fisheries Act of 1986 11.407 7,577 Coastal Zone Management Administration Awards 11.419 160342882 45,000 847,751 Financial Assistance for National Centers for Coastal Ocean Science 11.426 2,133 Marine Fisheries Initiative 11.433 28,011 Cooperative Fishery Statistics 11.434 282,850 Southeast Area Monitoring and Assessment Program 11.435 441,160 Meteorologic and Hydrologic Modernization Development 11.467 1,000,108 Coral Reef Conservation Program 11.482 539,534 State and Local Implementation Grant Program 11.549 97,584 Total U.S. Department of Commerce 45,000 3,485,208 25 Year ended September 30, 2017 Pass-Through Federal Entity Passed Total CFDA Identifying Through to Federal Federal Grantor/Pass-Through Grantor/Program or Cluster Title Number Number Subrecipients Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards National Endowment for the Arts Promotion of the Arts - Partnership Agreements 45.025 134306660 309,804 309,804 Grants to States 45.310 106,606 Total National Endowment for the Arts 309,804 416,410 U.S. Department of Energy State Energy Program 81.041 179,757 Weatherization Assistance for Low-Income Persons 81.042 285,997 Total U.S. Department of Energy 465,754 Corporation for National and Community Service Retired and Senior Volunteer Program 94.002 15,690 Foster Grandparent/Senior Companion Cluster Foster Grandparent Program 94.011 001560155 156 152,800 Total Corporation for National and Community Service 156 168,490 Executive Office of the President High Intensity Drug Trafficking Areas Program 95.001 95,106 Total Expenditures of Federal Awards 7,243,179 $ 284,673,971 $ See accompanying notes to the schedule of expenditures of federal awards. 26 Government of the United States Virgin Islands Notes to Schedule of Expenditures of Federal Awards 27 1. Reporting Entity The Schedule of Expenditures of Federal Awards (the Schedule) includes the activity of all Federal award programs administered by the Government of the United States Virgin Islands (the Government), as defined in a manner consistent with the entity defined in the basic financial statements as of and for the year ended September 30, 2017, except that certain organizational units (as defined previously) are excluded as they contract for separate audits in accordance with the requirements of Title 2 U.S. Code of Federal Regulations, Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Accordingly, the accompanying Schedule presents the Federal financial assistance programs administered by the primary Government for the year ended September 30, 2017. Further, because the Schedule presents only a selected portion of the operations of the Government, it is not intended to and does not present the financial position and changes in net position of the Government. 2. Basis of Presentation Federal award programs include direct expenditures, monies passed through to nonstate agencies (i.e., payments to subrecipients) and nonmonetary assistance. The Schedule presents total Federal awards expended for each individual Federal program in accordance with Office of Management and Budget (OMB) Circular A-133 and the Uniform Guidance. Federal award program titles are reported as presented in the Catalog of Federal Domestic Assistance (CFDA). Federal award program titles not presented in the Catalog are identified by the Federal Agency number followed by (.000). 3. Basis of Accounting The expenditures for each of the Federal award programs are presented in the Schedule on a modified accrual basis, except for nonmonetary programs, which are presented based on the fair value of the food stamps (CFDA No. 10.561 in the amount of $58,562,256) and the food cost (CFDA No. 10.557 in the amount of $3,519,361) distributed during the year. The modified accrual basis of accounting incorporates an estimation approach to determine the amount of expenditures incurred if not yet billed by a vendor. The Government’s accounting system provides the primary information from which the Schedule is prepared. 4. Matching Costs Matching costs, such as the non-Federal share of certain program costs, are not included in the accompanying Schedule, except Unemployment Insurance (CFDA No. 17.225), as indicated in Note 8. 5. Indirect Cost Rate The Government has not elected to use the 10 percent de minimis indirect cost rate allowed under the Uniform Guidance. Government of the United States Virgin Islands Notes to Schedule of Expenditures of Federal Awards 28 6. Relationship to Federal Financial Reports The regulations and guidelines governing the preparation of Federal financial reports vary by Federal agency and among programs administered by the same agency. Accordingly, the amounts reported in the Federal financial reports do not necessarily agree with the amounts reported in the accompanying Schedule, which are prepared on the basis explained in Note 3. 7. Rebates from the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) During fiscal year 2017, the Government received cash rebates from infant formula manufacturers in the amount of approximately $512,000 on sales of formula to participants in the WIC program (CFDA No. 10.557), which are netted against total expenditures included in the Schedule. Rebate contracts with infant formula manufacturers are authorized by 7 CFR 246.16(m) as a cost containment measure. Rebates represent a reduction of expenditures previously incurred for WIC food benefit costs. 8. Unemployment Insurance (UI) The U.S. Department of Labor in consultation with the Office of Management and Budget officials has determined that for the purpose of audits and reporting under the Uniform Guidance, State or Territory Unemployment Insurance (UI) funds as well as Federal funds should be considered Federal awards for determining Type A programs. A State or Territory receives Federal funds for administrative purposes. State or Territory unemployment taxes must be deposited to a state (territory) account in the Federal Unemployment Trust Fund, used only to pay benefits under the Federally approved state law. State or Territory UI funds as well as Federal funds are included on the Schedule. The following table provides a breakdown of the Territory and Federal portions of the total amount expended under CFDA No. 17.225. Territory UI Benefits (Trust Fund) $ 7,770,929 Federal UI Benefits (Administration) 2,296,292 Total $ 10,067,221 9. Research and Development Programs The Government may receive and expend Federal funding for various research and development programs. The aggregate amount of such expenditures for the year ended September 30, 2017, did not equal an amount that would constitute a major program under the guidelines of the Uniform Guidance. Government of the United States Virgin Islands Notes to Schedule of Expenditures of Federal Awards 29 10. Contingencies The Government is subject to audit examination by funding sources to determine compliance with grant conditions. In the event that expenditures would be disallowed, repayment could be required. Management believes that the impact of any disallowed grant expenditures would not have a material adverse effect on the Government’s financial position, changes in net position, or liquidity. 11. Subsequent Events On September 6 and 19, 2017, the United States Virgin Islands were struck by two Category 5 hurricanes. The extent and severity of the storms was unprecedented and resulted in catastrophic damage to the Territory, as a whole. On or about September 7 and 20, 2017, the President of the United States declared the United States Virgin Islands a disaster area and eligible for Federal Emergency Management Agency (FEMA) recovery assistance. On February 9, 2018, the Bipartisan Budget Act of 2018 was signed which provided $89.3 billion in additional supplemental appropriations for communities impacted by the 2017 hurricanes and wildfires. Included in this law are specific relief provisions to repair local and federal facilities in the U.S. Virgin Islands. Through September 2019, federal assistance awarded to the Territory included $87.0 million in FEMA Individual Assistance grants, $1.8 billion in FEMA Public Assistance grants, $462.0 million in FEMA Hazard Mitigation grants, and $1.9 billion in Community Development Block Grants for a total of $4.2 billion dollars. Other federal grants awarded by various federal agencies amounted to $99.0 million, for a total of approximately $4.3 billion. The Government has also participated in FEMA’s Community Disaster Loan (CDL) program. As of September 2019, the Government has received $145.0 million through the CDL program. The Government through the Virgin Islands Public Finance Authority, a blended component unit of the Government, engaged the services of two international firms, to assist with the administration and management of recovery funds. The firms are charged with providing oversight and direction of the disaster emergency response and with executing all necessary documents on behalf of the Territory. While inflows of Federal funds continue to bolster the reconstruction activity, the eventual amount and timing of receipt of such funds cannot be predicted as this time. Schedule of Findings and Questioned Costs Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 30 Section I - Summary of Auditor’s Results Financial Statements Type of auditor’s report issued on whether the financial statements audited were prepared in accordance with generally accepted accounting principles: Governmental Activities Qualified Business-Type Activities Disclaimer General Fund Qualified Debt Service Fund Unmodified Capital Projects Fund Unmodified Federal Grants Fund Qualified West Indian Company-Enterprise Fund Unmodified Unemployment Insurance-Enterprise Fund Disclaimer viNGN-Enterprise Fund Unmodified Aggregate Remaining Fund Information Disclaimer Aggregate Discretely-Presented Component Units Qualified Internal control over financial reporting: • Material weakness(es) identified? X Yes No • Significant deficiency(ies) identified? X Yes None reported Noncompliance material to financial statements noted? X Yes No Federal Awards Internal control over major federal programs: • Material weakness(es) identified? X Yes No • Significant deficiency(ies) identified? X Yes None reported Type of auditor’s report issued on compliance for major federal programs: CFDA Number Name of Federal Program or Cluster Opinion 10.555/10.559 Child Nutrition Cluster Qualified 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children Qualified 10.561 Supplemental Nutrition Assistance Program Cluster Adverse 12.401 National Guard Military Operations and Maintenance (O&M) Projects Adverse Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 31 Any audit findings disclosed that are required to be reported in accordance with 2 CFR 200.516(a)? X Yes No Identification of major federal programs: Dollar threshold used to distinguish between Type A and Type B programs: $3,000,000 Auditee qualified as low-risk auditee? Yes X No CFDA Number Name of Federal Program or Cluster Opinion 15.875 Economic, Social, and Political Development of the Territories Unmodified 17.225 Unemployment Insurance Adverse 20.205 Highway Planning and Construction Cluster Unmodified 66.605 Performance Partnership Grants Qualified 93.323 Epidemiology and Laboratory Capacity for Infectious Diseases Unmodified 93.563 Child Support Enforcement Qualified 93.600 Head Start Qualified 93.767 Children's Health Insurance Program Qualified 93.778 Medicaid Cluster Adverse CFDA Number Name of Federal Program or Cluster 10.555/10.559 Child Nutrition Cluster 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children 10.561 Supplemental Nutrition Assistance Program Cluster 12.401 National Guard Military Operations and Maintenance (O&M) Projects 15.875 Economic, Social, and Political Development of the Territories 17.225 Unemployment Insurance 20.205 Highway Planning and Construction Cluster 66.605 Performance Partnership Grants 93.323 Epidemiology and Laboratory Capacity for Infectious Diseases 93.563 Child Support Enforcement 93.600 Head Start 93.767 Children's Health Insurance Program 93.778 Medicaid Cluster Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 32 Section II - Financial Statement Findings Finding 2017-001: Financial Position The Government is in a difficult financial position based primarily on operating losses, outstanding debt, bond downgrades, and pension obligation issues. This matter has been exacerbated by the hurricanes of September 2017. Management has been working to stabilize and solidify its financial position through the implementation of an aggressive multi-pronged plan which includes facets such as legislative acts addressing revenue initiatives and cost-cutting measures and proposed rate increases for employees’ contributions towards pension plans. The Government is also a recipient of significant federal assistance in connection with the 2017 hurricanes. It is further noted that as of September 30, 2017, all payments on bonds and notes obligations have been remitted as required. Deficits in Unrestricted Net Position For the past few years, the unrestricted net position class has incurred significant losses in its operations. This financial position has caused the financial statements to include a disclosure in the audit opinion. This situation must improve if the Government is to fund the high levels of debt and pension obligations and access future bond markets. Future plans and budgets should be developed to produce operating income, avoid continuing deficits, and begin to rebuild equity. Continuation of these negative financial results could have a significant impact on the financial position and cash flows of the Government. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Plan Funding Considerations Finding and Recommendation: The Government of the Virgin Islands Employees’ Retirement System (GERS or the Retirement System) is a defined benefit pension plan established by the Government to provide retirement, death, and disability benefits for its employees. The Government also provides other post-employment benefits (OPEB) for healthcare, prescriptions, dental, and life insurance coverage. We noted that the Government has not funded the minimum annual required contributions (ARC) for the Retirement System and the OPEB plan for several years. • The Government funded 25% of the minimum ARC for the Retirement System for the year ended September 30, 2017. The most recent GERS actuarial valuation report as of October 1, 2016, disclosed a net pension liability of $4.6 billion which represents a long-term obligation the Government has to fund. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 33 • The Government is projected to fund 35% of the ARC for the OPEB plan, for the year ended September 30, 2017. As of such point in time, the actuarial accrued liability and funding status showed an unfunded accrued obligation of $1.3 billion. Because of the accumulated underfunded ARC over a number of years, the Government has amassed a net OPEB obligation of $477.0 million as reflected on the books and records. Management may consider embarking on an advisory path to study other alternatives to ensure the minimum ARC obligations are met each year. Additionally, the Government should consider establishing an OPEB Trust Fund which would accumulate assets in order to meet the required obligations. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government Insurance Fund Finding and Recommendation: We noted a financial strain (from claims) due to a mismatch from the Government’s employers’ premium contributions into the Government Insurance Fund. For the years ended September 30, 2017 and 2016, the ratio of expenditures to income has been 128% and 211%, respectively. It appears that losses since the financial crisis of 2008 have easily exceeded the premiums collected sans the impact of operational costs to run the Workers Compensation portion of the Fund. In order to maintain continued solvency, we recommend that management consider an evaluation of the claims adjudication and related processes (as an attempt to lower the costs) in lieu of making any increases to the likely mandated employer contribution formulas. Management may also consider embarking on an advisory path to consider some alternatives that could minimize the severity of any losses. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Other Post-Employment Benefits Obligation Effective for the fiscal year ended September 30, 2018, the Government will be required to implement Statement No. 75 of the Governmental Accounting Standards Board, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. The accounting standard will require that a liability be recorded for the Government’s proportionate share of the unfunded OPEB actuarial accrued obligation with an offsetting decrease to net position. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 34 Finding 2017-002: Accounting in the Aftermath of Disasters On September 6 and 19, 2017, the United States Virgin Islands were struck by two Category 5 hurricanes. The extent and severity of the storms was unprecedented and resulted in catastrophic damage to the Territory, as a whole. Specifically impacting the finance functions, there was extensive damage of business premises, furniture and equipment, electronic servers, and various files and supporting documentation along with displacement of employees and operations. Capital Assets Impairment Process Finding and Recommendation: Governments are required to evaluate prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred. Such events or changes in circumstances that may be indicative of impairment include amongst others, evidence of physical damage. We noted the following regarding the Government’s capital assets impairment process: • Beyond the significant buildings, motor vehicles, and infrastructure, there was lack of a coordinated inventory process to evaluate the damages suffered. These individually smaller items such as, machinery and equipment, were cumulatively significant for financial reporting purposes. • While various damage assessment reports were performed by distinct experts hired in the aftermath of the disasters, there was a lack of coordination with the accounting team in ensuring that the reports would also be sufficient for recording impairment loss(es) on the books and records. • We noted that some damage assessments for the departments and agencies were informally done, or were not performed at all, until the accounting team requested them. Further, each division or department seemed to have its own separate process or methodology. • Damage assessments were not readily matched to the asset registers due to incomplete and inaccurate descriptions in the respective registers. This resulted in additional time and effort in calculating and applying impairment to specific capital assets. Because of the above factors, the capital assets impairment process had to be reperformed at a much later date and resulted in significant delays and adjustments during the audit process. We recommend that the Government implement a formal process whereby, annual impairment assessments are conducted, independent of the external audit. Further, the results of periodic physical counts should be readily available for analysis by external parties and should be compared to the detailed capital asset subsidiary ledger and communicated to the Department of Finance so that necessary adjustments can be recorded. This will help improve the tracking of assets for disposal and impairment purposes. It should also be noted that as a recipient of Federal grant funds, the Government is required to have in place an inventory management system to track items purchased with Federal funds. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 35 Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Formalize Emergency Payroll Procedures Payroll processing commences with timesheets which are approved by agency heads in the STATS system (timesheet system), which then forms the basis for payroll processing at Department of Finance. It was noted that payroll processing during the last month of the fiscal year was severely impacted as result of the September 2017 hurricanes. The hurricanes resulted in a major loss of power and displacement of personnel. Employees could not attend work for days as the roads were rendered inaccessible. As a result, the recording of timesheets in the STATS system was temporarily shelved. As a transitory relief measure, the Government instituted the “Straight 80” payroll process where all “active” employees in the employee database (ERP system) were paid for 80 hours during the last payroll. We noted the following with regard to the process: • Management could not provide a formal documented policy regarding how the “Straight 80” payroll process would be performed along with the required subsequent reconciliations that would be necessitated (as employees were paid based on estimates). • A reconciliation of the payroll paid based on estimated times versus what should have actually been paid after verifying with the various department heads was not performed on a timely basis. The reconciliation was only performed after the audit process commenced. We recommend that a formal written emergency procedures manual be developed for use by the Government in case of a major disruption to operations. This manual should address the processes to be performed, the key contacts or personnel, and the reconciliations that would be required. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 36 Finding 2017-003: Year-End Close Process Accounting tasks, such as periodic reconciliations, play a key role in proving the accuracy of accounting data and information included in various interim financial statements and/or reports. Timeliness and Methodology of Close Process Finding and Recommendation: • We noted a significant delay in the year-end closing process and preparation of year-end financial statements. We noted that in many cases, reconciliations were finalized during the audit process, which represents a substantial delay when compared to the Government’s fiscal year-end. Therefore, detailed schedules supporting general ledger accounts did not always agree with the respective general ledger balances. Significant post-closing adjustments were provided during the audit process. Reconciliation mechanisms should be enhanced in an effort to avoid the recurrence of such errors. • We noted that post-closing adjustments are not posted in the accounting system but are maintained in a manual excel working trial balance. Considering the volume of post-closing adjustments and the manual process of reversing year-end accruals and/or other adjustments, there is continuous opportunity where items can be missed and may not be accurately and timely captured, and therefore, increasing the potential for prior period adjustments to correct balances. • During our review of the Government’s draft financial statements, we noted inconsistencies and/or omissions with the incorporation of disclosures in the footnotes to the financial statements along with inconsistencies in the incorporation of component units’ financial statements as it related to classification and reporting of account balances. In order to prevent significant errors in the financial records and financial statements as well as prevent possible irregularities, including fraud, to exist and continue without notice, we recommend that all accounts, accruals, and reconciliations be reviewed on a periodic basis. The composition of any unreconciled differences should be determined and followed up on, and any journal entries, deemed necessary as a result, should be recorded during the fiscal year. Further strict adherence to the year-end closing schedule should be required because this will allow for the year-end work and audit preparation to be a much less time-consuming and arduous process, without sacrificing the quality of the accounting records or minimizing existing internal controls. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 37 Journal Entries Finding and Recommendation: We noted that several individuals have access rights to create, approve, and post journal entries. We understand that this represents an internal management decision with respect to access which is deemed necessary for day-to-day operations. However, in order to maintain a desirable separation of duties, we recommend that the Government continue to re-evaluate the appropriateness of this access. We also noted that adequate supporting documentation was not always readily available in the Enterprise Resource Planning (ERP) system for certain manual journal entries which had been selected for further review. Although these instances were subsequently rectified, management should ensure consistent and strict adherence to its records retention policy. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 38 Finding 2017-004: Revenue and Receivables The Government’s Bureau of Internal Revenue (the Bureau) is responsible for administering the internal revenue tax laws of the Virgin Islands. As such, the Bureau manages the processes over the following types of taxes: income, gross receipts, excise, highway user’s, hotel room, entertainment, and fuel taxes. Additionally, through the Government’s Division of Real Property Tax, all commercial and residential property subject to taxation in the Virgin Islands is assessed, property tax bills are prepared and mailed, and the collection of property taxes is carried out. Reconciliation of Subsidiary Registers Finding and Recommendation: The Government maintains various subsidiary registers as derived from its tax recordation systems, primarily VITAX and CAVU. However, the Government does not reconcile its subsidiary registers to its tax receivable general ledger account balances. A strong control system over receivables includes an accurate accounting system that maintains agreement between the subsidiary ledger and the general ledger. To prevent the need for major adjustments to the impacted tax receivable and revenue accounts at the end of each year, we suggest that the general ledger accounts be reconciled to the detailed records on a quarterly basis. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Allowance for Doubtful Accounts Finding and Recommendation: Adjustments to the allowances for doubtful accounts are calculated by the use of a formula that was established many years ago. This computation places a high degree of reliance on past experience and can be greatly influenced by specific large write-offs that may occur from time to time. It is difficult to determine whether these historical formulas are properly matching bad-debt expense and tax revenue in the most appropriate manner, but it appears that the total allowances were understated. As a result, a significant adjustment was required during the audit process. We believe that consideration should be given to re-evaluating the Government’s model for establishing the allowances required to include some accounts receivable performance measures. Poor practices in this area have a direct negative impact on the Government because this affects cash flow. An updated analysis will provide management with accurate doubtful-account allowances that matches bad-debt expense with tax revenue. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 39 Real Property Tax Finding and Recommendation: • We noted six (6) sampled tax credit items for which the Government was unable to provide completed supporting documentation. Management should recognize that the potential exists for additional discrepancies. • With respect to delinquent accounts, we noted that the property owners enter into settlement agreements with the Government which includes a fixed amount of penalties and interest. It is noted, however, that the CAVU system, continues to calculate such interest and penalties even after the actual settlement date. This has the effect of potentially inflating the calculated interest in the stand-alone CAVU system. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Other Revenues Finding and Recommendation: • The Government was unable to provide readily available supporting documentation for 25% of the sampled items for charges for services and 53% of the sampled items for interest and other revenues. As a result, additional time and effort was required during the audit process to locate and/or identify alternative methodologies. • During our procedures over stamp tax revenues, we noted four (4) sampled items for which the Government was unable to provide completed supporting documentation. Management should recognize that the potential exists for additional discrepancies. It is important to produce certain detailed reports and records at specific time periods, and to maintain these for possible analysis by users such as management, independent auditors, or governmental bodies. Management should consider strict adherence to or a revision of its records retention policy. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 40 Finding 2017-005: Grants Management The Government receives grant and contract funds from various funding agencies. These situations necessitate a strong accounting system to record specific grant and contract activities. Consideration must also be given to compliance with laws and regulations that are a component of any grant or contract accepted. Control Systems Over the Schedule of Expenditures of Federal Awards Finding and Recommendation: The flow of accounting transactions into the ERP system is a critical aspect of the design and maintenance of a strong system of controls over the Schedule of Expenditures of Federal Awards (SEFA). As a consequence of following certain practices, expenditures are being charged to incorrect projects, codes, and Catalog of Federal Domestic Assistance (CFDA) numbers and, it becomes critical that SEFA expenditures between the Government’s ERP system and individual agency or departmental records, where the respective Federal programs are managed and administered, are reconciled on a more consistent basis. The reconciliations should also facilitate the reporting requirements of each contract and grant. We noted the following: • There are times when manual adjustments are made at the individual agency or departmental level, outside of the ERP system. • In certain cases, as a result of errors in recording expenditures at the agency or departmental level, we noted that local expenditures may be included in the SEFA, as produced from the ERP system. • We noted that there are instances, while an approval for a new grant is imminently pending and the Government is incurring start-up expenditures on said new grant program, all expenditures are coded to an existing (old) project code. Subsequently, upon the grant’s approval, the Government does not revert back and reclassify the expenditures to the correct project codes. • We noted certain block grants may be allocated to two or more grant programs at the agency or departmental level. However, this allocation may not be readily evident in the SEFA, as produced from the ERP system. • We noted various instances where pass-through amounts had not been reflected on the SEFA. These issues also impact the roll-forward schedule for the general ledger account entitled ‘Due from Federal government.’ The aforementioned methods have resulted in additional analysis and delays in order to ensure accuracy of the SEFA. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 41 The following reclassification adjustments were necessitated during the annual audit process: • Approximately $3.5 million in expenditures had not been reflected in CFDA Number 10.557, Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). • Approximately $185,000 in expenditures had erroneously been recorded to CFDA Number 10.555, National School Lunch Program but belonged to CFDA Number 10.558, Child and Adult Care Food Program and CFDA Number 10.560, State Administrative Expenses for Child Nutrition. • Approximately $58.5 million in expenditures had not been reflected in CFDA Number 10.561, State Administrative Matching Grants for the Supplemental Nutrition Assistance Program. Alternatively, approximately $506,000 in expenditures had erroneously been reflected in the program. • Approximately $622,000 in expenditures had erroneously been recorded to CFDA Number 93.600, Head Start but belonged to CFDA Number 10.558, Child and Adult Care Food Program. • Approximately $4.6 million had been reflected as expenditures for CFDA Number 93.667, Social Services Block Grant; however, the majority of these funds had actually been spent for various other Federal programs. • Approximately $300,000 had been reflected as expenditures for CFDA Number 93.778, Medical Assistance Program; however, these funds had actually been spent for CFDA Number 93.767, Children’s Health Insurance Program. • Approximately $7.6 million had not been reflected in CFDA Number 20.205, Highway Planning and Construction. • Approximately $1.3 million had erroneously been reflected as expenditures in CFDA Number 97.036, Disaster Grants – Public Assistance. While we noted an improvement in fiscal year 2017, communication and reconciliation mechanisms should be continued to be enhanced between the centralized Government agency which is responsible for collecting the SEFA information and each individual agency which manages Federal grant programs in an effort to avoid the recurrence of such errors and misclassifications. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Federal Grants and Contributions Finding and Recommendation: Based on our review of the schedule of grants and contracts, we noted the Government is not monitoring its outstanding Federal receivables on a periodic basis. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 42 We noted an improvement in record-keeping where the Government implemented a process of establishing a discrete and separate receivable balance on a per grant/project basis. However, the following key component was lacking: • A readily verifiable identification with respect to the aging and collection of prior year receivables along with its impact, if any, on the adequacy of the allowance for uncollectable accounts. Specifically, there is no documentation matching each cash receipt to the expenses and noting which period it was incurred in. This leads to difficulty in establishing individual balances of both receivables and deferrals from grants and contracts, may mask items that have been inactive for many years, and can cause confusion regarding the true level of activity. Additional time and effort was required during the audit process to rectify and reconcile the balances. We recommend that receivables should be tracked by the individual Government agency(ies) by performing the following: • Maintenance of a drawdown schedule noting the expenses making up each drawdown for each Federal program and the period in which the expenses were incurred. • A copy of each drawdown noting proper approvals should be attached in the ERP system along with the corresponding bank statement showing the receipt of funds from the Federal government. • A listing of expenses supporting the amount drawn down should be included in the ERP system. This detail should include the invoice date and/or payroll period and check date. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 43 Finding 2017-006: Capital Assets and Related Expenditures Capital assets constitute an investment of substantial amounts, thereby, requiring an excellent system of controls for the maintenance and safeguarding of these assets. While we noted the Government has taken certain preliminary steps, we recommend continued diligence with respect to the monitoring and review of capital assets and in ensuring the reconciliation of supporting registers to the primary register. Record Keeping Finding and Recommendation: The process of maintaining capital asset records (i.e. recording additions, disposals, and transfers) is a manually intensive process conducted when performing the annual financial statement close. As such, supervisory review and other checks and balances may not be timely and/or effective in all instances. We recommend that the Government evaluate the year end cut-off procedures and policies in order to monitor purchases for capitalizable assets and in order to accurately account for all open and unpaid invoices and payments subsequent to year end. During our sampled procedures over capital asset additions, we noted the following: • Four (4) items acquired in fiscal year 2017 that were above the asset capitalization threshold had not been reflected in the initial additions listing. • Thirty-six (36) assets acquired in fiscal year 2016 were capitalized in fiscal year 2017. Although these items were adjusted and rectified during the audit process, we recommend an enhancement to the process by instituting a system of tagging capitalizable assets in the ERP system from the time of requisition to the time when the assets are received and paid for. Requisitions should be agreed to approved capital expenditure budgets. This also entails that requesting agencies and departments are given appropriate guidance as to the capitalization thresholds to ensure transactions are properly tagged in the ERP system. In turn, this would allow additions to be easily generated by the capital assets team via the ERP system, instead of manually scrubbing the disbursements listing at year- end. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Reconciliation and Review of Subsidiary Registers Finding and Recommendation: The Government maintains a subsidiary register for the purpose of calculating depreciation for all assets. We noted recurring unresolved variances between the subsidiary ledgers and the general ledger that were adjusted during the audit process. Based on our review of the subsidiary registers, we noted the following: Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 44 • Accumulated manual input errors had been carried over into the current ERP asset registers. For instance, acquisition dates for assets initially recorded as construction in process (CIP) had not been updated to reflect the actual transfer dates upon completion of the project and thereby, resulted in excess depreciation expense. • Subsidiary registers for buildings and infrastructure contained incomplete and inadequate descriptions which made it difficult to identify which ‘parent assets’ (i.e., building complex or road network) these pertained to. Moreover, subsidiary register information for infrastructure assets should be aligned to how these are being identified by the Department of Public Works (DPW) who physically oversees this asset category. • Subsidiary registers for land contained a significant number of properties that are lumped into only few asset numbers instead of being recorded as individual properties. Some machinery and equipment that had been purchased in bulk was lumped together into one asset code and others did not contain tagging information to physically identify the items. • Various buildings in the asset register were identified as transferred to other component units in prior years and were adjusted during the audit process. Asset transfers to/from the Government should be monitored on a timely basis and a thorough review of the asset custodians should be regularly performed to ensure that all central Government assets are properly accounted for and, as applicable, formal transfer of the title(s) has occurred. To prevent the need for major adjustments at the end of each year, we recommend that the general ledger accounts be reconciled to the detailed records on a quarterly basis. This examination should be comprised of a review of acquisition dates, deprecation calculations, and asset descriptions. Additionally, unique asset numbers and sufficient tagging information should always be assigned to separately identifiable assets. Moreover, routine physical counts should be performed and reconciled with the asset registers. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 45 Construction in Progress (CIP) Monitoring The Government has a significant number of on-going construction projects. The necessary analysis to identify the status of projects was only completed and/or necessary adjustments were made during the audit process. Confirmation procedures should be performed in a timely manner in order to have accurate CIP information. • During our sampled procedures over the construction in progress activity, we noted the following: o Twenty-five (25) projects did not have a confirmed status at year-end. o One (1) project was transferred out to the completed assets category but was only partially completed. o One (1) project was confirmed to be complete but had not been closed out and transferred to the completed assets category. o Two (2) projects were confirmed to be terminated but had not been closed out and expensed. o One (1) project was confirmed to be complete and transferred out to the completed assets category but was missing supporting invoices which made up the final cost. o One (1) project had no identifiable project manager and the Government was not able to confirm the status of the project. • The Government adopted the method of using the ‘release of claims’ date as the date the project was placed in service. However, we noted an inconsistent application of this methodology. o In some instances, the ‘release of claims’ date did not correspond with the actual date the project was placed in service. For instance, one building was completed, occupied and used by the Government during the year but the ‘release of claims’ had not yet been provided by the contractor. o In other instances, we noted that the ‘release of claims’ date was not known, and the date of the last invoice received on the project was utilized as an indicator of when the project was completed. In anticipation of the increase in the number of CIP projects after fiscal year 2017 due to the hurricane restoration activity, it is imperative to maintain a good system of recording project costs accurately and timely, and monitoring project status on a consistent basis with the respective project owners. It is critical that the Government reconciles these costs with the reports and records of the respective project managers, ensuring agreement to contract costs and capital expenditure budgets, and applying a consistent method of determining project completion and transfer to the related depreciable asset class. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 46 Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Capital Assets - Business-Type Activities The Government is currently utilizing an excel worksheet to monitor capital assets within its business- type activities. During the year, the Government began the process of uploading additions into the ERP asset registers. However, the asset register for the beginning balances has yet to be uploaded. We recommend the completion of the automation process and implementation of subsequent review and reconciliation procedures in order to ensure that accurate and timely information is available. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 47 Finding 2017-007: Recording of Liabilities A fundamental element of a sound system of internal controls is an effective liability calculation process. Such a process helps ensure that all liability transactions are properly recorded, appropriately supported, and subjected to supervisory review. Poor practice in this area allows for situations to occur in which accounts payable and other liabilities accrue without regard to the ability to repay the debt until they reach near crisis proportions. This kind of situation is most detrimental because it directly affects cash flow. In recent times, the Government’s financial statements have grown in complexity. The Government should consider performing a liabilities close process on a quarterly schedule in order to detect and correct on a timely basis, while at the same time, enhancing the Government’s knowledge over its financial condition. Retroactive Pay Liability Finding and Recommendation: The Government’s lack of control over its retroactive pay liability has affected the auditor’s ability to opine on certain affected opinion units. • We noted that currently there is a $195.0 million retroactive pay liability reflected on the books and records; however, the supporting schedules can only confirm $184.0 million which, in turn, is based on an analysis of collective bargaining agreements (CBAs) from the initial retroactive pay wage Commission findings. • Approximately 77% of the Government’s employees are paid varying rates, based on different CBAs. We noted that there are several CBAs that have not been evaluated, implemented, ratified, and accrued for. We recommend that management set up a master file that summarizes the pay rate from each CBA and related factors that influence the rate. Management should then periodically review the master file and compare pay rates to the authorized rates contained in personnel files to determine that the current and effective rates in usage are appropriate. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Medical Malpractice Liability Finding and Recommendation: It is noted that Reciprocal Insurance Fund includes disbursements pertaining to payments of medical malpractice claims. However, we further noted that the Government has not completed the necessary analysis in order to determine the quantifiable recordation of a corresponding and estimated liability for medical malpractice claims, in accordance with generally accepted accounting principles. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 48 Due to a lack of controls around the Government’s claims data process, it has been unable to gather and generate the proper information which is needed for an actuary to compile an estimated liability at year-end. As such, the Government’s records do not permit, nor is it practical to extend audit procedures sufficiently to determine the extent by which the Business-Type Activities and the Aggregate Remaining Fund Information may have been impacted, as of and for the year ended September 30, 2017, thereby effecting the auditor’s ability to opine on said opinion units. We recommend that the Government consider allocating adequate resources to properly evaluate the necessary information which can then be provided to an actuarial service provider as it facilitates the Government in calculating the year-end liability. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Accounts Payable Finding and Recommendation: At present, the Government’s general ledger control account for accounts payable does not agree with the subsidiary ledger balances during the entire fiscal year. This is due to the fact that management establishes its accounts payable subsidiary ledger through a manually intensive process, which is based solely on subsequent events when performing the yearly financial statement close process. This practice, in turn, is based on a system functionality wherein, the accounting system does not allow for recording or accrual of invoices when the obligation is incurred, but rather when the corresponding allotment has been approved by the Office of Management and Budget (OMB). This routine also impacts the accuracy in recordation of capital assets in that any accruals for goods and services received is not properly and timely recorded in the capital asset register, resulting in capital assets being reflected in the incorrect periods. Overall, this generates significant adjustments during the yearly financial statement close process and a manual scrub exercise with respect to capital expenditures. Moreover, supervisory review of the accounts payable reconciliation process and estimation of accrued liabilities may not be timely and/or effective in all instances. Management may consider utilizing its ERP Accounts Payable module more regularly in order to reduce the existing manual efforts through which accounts payable are currently established. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Landfill Closure and Post Closure Costs Liability Finding and Recommendation: The Government obtains various reports with respect to its closure and post closure cost estimates for the three landfills in the U.S. Virgin Islands. The post-closure cost estimates for fiscal year 2017 for all three landfills were updated by applying an inflation rate. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 49 While updating the landfill closure and post-closure cost estimates using an inflation factor is an acceptable procedure, going forward, we recommend the Government comprehensively review all reports and calculations to ensure that assumptions included are accurate. For instance, we noted that currently, the annual closure maintenance costs are calculated based on 34 years of monitoring versus the required 30 years. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Quality of Census Data Finding and Recommendation: Maintaining current and accurate records and statistics is an important control for participant data, not to mention other compliance with employment laws and regulations. We noted that the Government’s census data, submitted to various actuarial service providers, currently requires significant adjustments and assumptions before it can be utilized to complete the necessary calculations. This introduces a greater level of uncertainty than might ordinarily apply to such calculations. Internal controls should ensure the accuracy of all active employee and retiree census data before submission for future valuations, calculations, or analysis. We recommend adequate resources be allocated to properly evaluate all census information provided to the various actuarial service providers as they facilitate the Government in calculating the related liabilities. The employee data in the census information should be accurate or it could have a material effect on the Government’s financial statements and the auditor’s ability to opine on said financial statements Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 50 Finding 2017-008: Management of the Medicaid Program Each State or Territory establishes systems for administering and providing Medicaid benefits. The Medicaid program is jointly funded by the Federal and the respective local government. The Virgin Islands Department of Human Services (the Department) is the primary agency responsible for administering the Government’s Medicaid program. Cost Report Audits and System Security Review Finding and Recommendation: • Two Government owned and operated hospitals, the Governor Juan F. Luis Hospital & Medical Center and the Roy Lester Schneider Hospital, provide Medicaid services to eligible Territory residents. Both hospitals function on a non-DRG platform, meaning that they charge through daily per diem rates based upon the number of patients serviced. The costs incurred by the hospitals, long-term care facilities and/or Federally Qualified Health Centers (FQHC) participating in the Medicaid program are to be summarized in a cost report which, in turn, is to be submitted to the Department. The cost reports are then required to be audited per the Government’s Medicaid State Plan. Based on audits of the cost reports, a receivable or a payable should be recorded for the difference between costs submitted for reimbursement and the costs actually reimbursed. We noted that the Department has not audited cost reports recently. We recommend that management evaluate and develop policies and procedures to obtain and audit the cost reports. This will allow the Government to reduce the time between Medicaid expenditures being incurred and the ultimate reimbursement from the Federal government. • The Department did not perform a risk analysis and system security review for the Virgin Islands Benefit Eligibility System (VIBES) when it was implemented in July 2017. As a result, there is no assurance that the system is working as intended. This exposes the program to possible unauthorized activity and payment to ineligible participants. The Government’s records do not permit a determination as to the sufficiency of the design and operation of key controls surrounding the environment in which the Government’s Medicaid claims reside. As such, we are unable to determine how the Governmental Activities and the General Fund information may have been impacted, as of and for the year ended September 30, 2017, thereby effecting the auditor’s ability to opine on said opinion units. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 51 Utilization Control and Medicaid Fraud Control Unit Finding and Recommendation: A State or Territory Medicaid plan must provide methods and procedures to safeguard against unnecessary utilization of care and services, including long-term care institutions. Further, States or Territories are required as part of their Medicaid State Plans to maintain a Medicaid Fraud Control Unit (MFCU), unless the United States Secretary of Health and Human Services determines that certain safeguards are met regarding fraud and abuse, and waives the requirement. We noted that the Department does not have a MFCU in place nor does it have the necessary controls or procedures to safeguard against unnecessary utilization of care and services and to identify, investigate, and refer suspected fraud cases. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 52 Finding 2017-009: Unemployment Insurance Trust Fund Account Reconciliation Process Finding and Recommendation: We noted that the majority of the account reconciliations were not available during the audit process. Others contained incomplete information and/or were not in accordance with required accounting practices. As such, the Government’s records do not permit, nor is it practical to extend audit procedures sufficient to determine the extent by which the Business Type Activities and Unemployment Insurance Trust Fund may have been impacted, as of and for the year ended September 30, 2017, thereby affecting the auditor’s ability to opine on said opinion unit. Accounting tasks, such as periodic reconciliations, play a key role in proving the accuracy of accounting data and information included in various interim financial statements and/or reports. Timely preparation of complete and accurate reconciliations is also key to maintaining adequate control over both cash receipts and disbursements. In order to prevent significant errors in the financial records and financial statements as well as prevent possible irregularities, including fraud, to exist and continue without notice, we recommend that all accounts, accruals, and reconciliations be prepared and reviewed on a periodic basis. We recommend that the Government consider allocating adequate resources to properly evaluate the necessary information which can then be used to reflect the Fund’s activity at each fiscal year-end. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 53 Finding 2017-010: Workers Compensation Program The workers compensation program provides for medical costs, death benefits, and lost wages arising from work-related accidents. The program is administered by the Division of Workers’ Compensation within the Virgin Islands Department of Labor (VIDOL). Accuracy of the Program Loss Reserves Finding and Recommendation: The preferred actuarial approach to determine loss and loss expense reserves is to employ a variety of reserving methods to estimate ultimate losses by accident year. Each method has advantages and disadvantages dependent on such items as the claims environment, the age of the accident year, and stability of the method. From within this range of indicated ultimate losses, a selection is made based on a review of the various methods and actuarial judgment. We noted that, historically, the data underlying the Government’s analysis is as of September 30, 2013. A delay in claims payments during the 48 months beginning October 1, 2013 and ended September 30, 2017, resulted in significantly lower paid amounts in the data valued as of September 30, 2017, compared with the prior period evaluation. As such, the Government’s actuary concluded that there is no predictive value in the data as of September 30, 2017. Since loss development factors are determined based on the assumption that a percentage of the total reported losses are paid at any given point in time, the application of the paid patterns underlying the Government’s loss triangles to the paid losses valued as of September 30, 2017, would have resulted in understating the ultimate values. As a result and in an effort to improve the predictive value in the current year, the actuary modified the methodology to also include the accounts payables of the two major hospitals in the U.S. Virgin Islands. Based on hindsight comparisons and other calculations derived from claim counts, we were able to conclude that the actuary’s ultimate loss projections are within a range of reasonable estimates. However, actuarial estimates improve as more information becomes available at each maturity. As such, we recommend that the Government consider the following: • Initiate the development of a formal document describing the processes used in computing and reporting these liabilities in the financial statements. The Government and its actuary should consider incorporating open claims and severity models in their projections. • Provide a clear reasoning as to how the Government establishes any subjective assumptions. • Include explicit explanations for any changes made to methodologies or programs made in the current period that were not present in the prior period valuation. • Monitoring the accounts payables balance(s) for the major hospitals to ensure that any relevant matters are reflected in future analyses. • For completeness, we suggest constructing a formal Risk Control Matrix and a visual flow chart relating to the valuation processes. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 54 Finding 2017-011: Payroll, Related Accruals, and Other Expenditures A strong and efficient system of controls over purchasing and expenditures is critically important. A strong internal control system can generally be implemented to cover potential threats of error and misappropriation with a reasonable effort. These include proper supervision, review, and separation of like-minded duties or functions. Payroll Expenditures Finding and Recommendation: • As a result of the ADI Time payroll system not having been backed up before the September 2017 hurricanes, the Department of Human Services was unable to provide readily available supervisor approved timesheets for the last several months of the fiscal year. Additional time and effort was required during the audit process to locate and/or identify alternative methodologies. Adequate arrangements should be made for protection of files and use of backup space. • We also noted that the compensated absences schedule includes some redundant data. For instance, there are employees that should not be on the schedule that have accrued balances, negative balances, or zero balances. While deemed insignificant to the overall operations, we recommend that the Government examine the contents and eliminate such information. • A significant understatement in the year-end payroll accrual was noted and adjusted during the audit process. We recommend that payroll reconciliations be prepared and reviewed for accuracy and completeness on a timely basis. Furthermore, we noted that the Government’s payroll registers contained various Hospital employees. It is noted that several years ago, the payroll process for Hospital employees was performed simultaneously with that of the Government’s and hence, the combined registers. The Hospital now has its own payroll management process. As a result, the Government’s payroll registers now contain extra employees that have zero balances when a pay-check run is performed, thereby confounding the reports unnecessarily. We recommend that management consider the need for retaining only the necessary information. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Transactions with Personnel Finding and Recommendation: The Government has policies with respect to executive and/or other employee expense reimbursements indicating that each business expense incurred either by credit cards or advance payments must be substantiated with adequate documentation, such as statement of expense, purchase order, approved Government Travel Request (GTR), travel voucher, and receipts, which, in combination, are sufficient to establish each element of the expenditure. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 55 We noted instances where sufficient supporting documentation was not available to substantiate reimbursements. Moreover, in some instances we noted that there was no evidence of independent review or approval of expenses incurred by executives. This area can receive intense scrutiny and as a best practice, we recommend the Government consider instituting a stricter monitoring process to ensure compliance with stated policies and an independent review process for executive expenses. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Supporting Documentation for Expenditures Finding and Recommendation: The Government’s policies dictate that all expenditure items must have adequate support and resulting approvals, as maintained within its ERP system. During our sampled procedures, we identified three (3) items for which proper support for the expenditures was not readily available within the ERP system, yet the expenditures had been approved. While the supporting information was subsequently provided, in order to strengthen internal controls over disbursements, it is recommended that the Government adhere to its stated policies. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 56 Finding 2017-012: Bank Accounts Cash is the most liquid of assets and has the highest risk for theft, embezzlement, and misappropriation. Timely preparation of complete and accurate bank reconciliations is key to maintaining adequate control over both cash receipts and disbursements. Strengthen Controls Over Bank Reconciliations Finding and Recommendation: During fiscal year 2017, we noted some instances where bank reconciliations were not reviewed on a timely basis and bank reconciliation variances had not been properly explained or investigated. We continue to recommend that bank reconciliations be prepared and reviewed for accuracy and completeness on a timely basis. Ideally, these reconciliations and reviews should take place on a monthly basis. Additionally, we observed the following: • We noted a significant amount of outstanding checks, some issued as far back as 1998, which are still being carried on the reconciliations. Outstanding checks and other uncleared reconciling items that are over one year old should be investigated and removed from the bank reconciliations and the original transactions should be reversed. Research should be done periodically to eliminate large numbers of old items being carried from month to month and from year to year. As an auxiliary step, consideration should also be given to the Territory’s unclaimed property laws. • In one instance, we noted a check dated in 2018 which had been improperly included on the September 30, 2017, outstanding check list. This error resulted in a $1.3 million adjustment to cash. We recommend that management perform a more detailed review of reconciling items on the bank reconciliations to avoid large adjustments after the year-end close. • We noted $57.0 million in checks that were printed in fiscal year 2017 but had not been mailed prior to year-end. These checks were properly reclassified to accounts payable during the audit process. It is best practice to mail checks once they have been printed to avoid confusion as to what invoices are truly outstanding. Further, checks should only be printed once there are enough funds in the account(s) to cover the requisite payment amounts. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Cash Pooling and Allocation(s) Throughout the year, all expenditures are charged against each fund’s cash account. Due to the nature of operations, the Government’s Treasury department does not have a separate bank account for each fund and for each of the cash accounts in the general ledger. Therefore, each bank account includes activity for multiple funds. In some instances, funds "borrow" from the General Fund. At year-end, an entry is prepared to correct or "true-up" the cash balances for each fund. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 57 We recommend that management enhance the documentation provided to support the pooling and subsequent allocation of the cash accounts. More specifically, there should be a clear link between the confirmed cash account balances and the cash balance per fund presented within the year-end financial statements. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 58 Finding 2017-013: Information Technology Environment We reviewed various applications and systems which are utilized for the Government’s day-to-day processing needs. Finding and Recommendation: We noted the following during our procedures over program change management: • The Oracle programmer has the ability to migrate program changes into the production environment of VIDOLA$. • Final approval to go live for the VIDOLA$ upgrade was informal in nature. • There is an IT Consultant with administrative access to the OS/400 system, which provides the individual with update access to the production environment of the VITAX application. We noted the following during our procedures over user access: • The Oracle Programmer has root or administrative access to the Red Hat operating system, VIDOLA$ application, and Oracle database management system. In addition, some individuals were granted inappropriate administrative access to the Oracle database (including non-IT personnel). • Members of the Windows domain admin. at the Bureau of Internal Revenue appear to be excessive. There are 26 total user accounts that have this domain access. • There are no formal re-certifications of user access security rights performed for the following Windows domains and applications: Windows Domain: o Department of Finance o Department of Human Services o Bureau of Internal Revenue o Lieutenant Governor’s Office o Department of Labor Applications: o Timeforce o RawData o MUNIS o CAVU o VIDOLA$ o CAMA o VITAX o Property Information System o ScanOptics o VIMS o CARIBS o VIBES Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 59 We noted the following with respect to segregation of duty conflicts: • Administrative access rights to the Windows domain at the Bureau of Internal Revenue is provided to non-IT personnel as well as IT consultants. • Administrative access to the Oracle Database is provided to non-IT personnel. We noted the following with respect to operating system security: • The password and account lockout configurations have not been implemented to enforce strong passwords on the following operating systems and applications: Operating Systems: o Department of Finance o Department of Labor (including Red Hat) o Bureau of Internal Revenue o Lieutenant Governor’s Office o Department of Human Services Applications: o Timeforce o Property Information System o CAVU o VIDOLA$ o VIMS o VIBES o MMIS Inappropriate system modifications to applications can cause incorrect calculations and compromise functionality. The Government may consider evaluating its documentation process to mitigate the risk of any potential change being implemented without the appropriate approval(s). Further, inappropriate or excessive access may result in unauthorized data changes or transactions. The Government may consider evaluating its user access and administration (user addition, modification, and removal) controls in order to ensure that appropriate access is granted. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 60 Finding 2017-014: Landfill Consent Decrees Finding and Recommendation: Closure and post-closure directives related to landfills are regulated by various Federal laws, including requirements by the United States Environmental Protection Agency (EPA). As such, the Government is required 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. During our procedures, we noted that there are a number of noncompliance matters with respect to EPA decrees concerning the Anguilla and Bovoni landfills. These matters are comprised of various health and safety risks, lack of submission of various required reports, and a non-completion of the groundwater monitoring system for the Anguilla landfill perimeter. We also noted that penalties associated with these noncompliance matters will continue to accrue at certain specified rates. We recommend that the Government consider budgeting funds to pay penalties already accrued. In addition, the Government should take the measures necessary to address immediate noncompliance with the consent decree time tables to avoid future penalties. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 61 Finding 2017-015: Establishment of a Medical Malpractice Trust Fund Finding and Recommendation: In lieu of the procurement of a group insurance policy as set forth in subsection (a) of Virgin Islands Code Section 27, the Commissioner of Health is authorized to self-insure health care providers against claims arising out of the rendering of, or failure to render, medical care or services, or against claims for injury or death to patients arising out of the activities of health care providers, upon compliance with the following condition (amongst others): • Establishment of a Medical Malpractice Risk Management Trust Fund to provide coverage against professional medical malpractice liability, which Fund shall be managed by a licensed broker or brokerage firm. The investment plan of such firm shall be subject to the approval of the Medical Malpractice Action Review Committee; a maximum of 1% of the proceeds of such Fund may be used by the Territorial Office of Risk Management as defined within the Code, for administrative purposes. Interest accruing on such Fund shall be retained or redeposited into such Fund. We noted that the Government has not set up a separate trust fund. We recommend that the Government continue to monitor the applicable requirements related to professional medical malpractice, to ensure the Government remains in compliance. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 62 Finding 2017-016: Procurement Regulations Finding and Recommendation: Procurement is governed by Title 31, Chapter 23, Sections 231 – 251, of the Virgin Islands Code which states the various types and requirements for procuring goods and services. The Department of Property and Procurement is the agency primarily responsible for all acquisitions of goods and services. Procurement regulations and procedures state that contract files must be maintained documenting the history of the procurement, including requisitions and solicitations. In addition, a justification letter must describe the need for a purchase, competitive prices must be obtained from other suppliers, and note the accepted delivery terms. If the intent of the justification letter is to seek approval for an exception to the Procurement Code, then that relevant section of the law must be referenced in the justification letter. We noted two (2) instances where the contract file did not contain the requisite documentation to provide evidence that the procurement met the stated requirements. We recommend that the Government perform periodic reviews of purchase orders and contracts to ensure that regulations are being adhered to. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 63 Finding 2017-017: Casino Control Commission Finding and Recommendation: Title 32, Chapter 21, Section 514 of the Virgin Islands Code states that the Chairman of the Casino Control Commission “shall submit to the Department of Finance by the 30th day of the month following the end of each quarter a report detailing the amount, nature, and the justification for each item of expenditure in the previous quarter. The report shall be accompanied by receipts and any other documentation required by the Department of Finance’s rules and regulations or other laws of the Virgin Islands. An annual financial report of the fiscal year’s expenditures from the special checking account shall be compiled by the Chairman of the Commission and submitted to the Legislature and the Department of Finance by the 30th of the month following the end of the fiscal year.” We noted that the Casino Commission is not submitting the requisite reports to the Department of Finance. It is recommended that the Department of Finance maintain proper oversight over the Casino Control Commission and obtain and review the required reports. The reviews should encompass supporting documentation for all financial transactions and a review of compliance with Virgin Islands policies and procedures. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 64 Section III – Federal Award Findings and Questioned Costs Finding Number: 2017-018 Prior Year Finding Number: 2016-067 Compliance Requirement: Allowable Cost/Cost Principles – Payroll Activities Program: Government Department/Agency: U.S. Department of Agriculture Child Nutrition Cluster CFDA #: 10.555, 10.559 Award #: 1VI300308 Award Year: 10/01/2016 – 09/30/2017 Department of Education (DOE) Criteria – 2 CFR 200.303, Internal Control, requires the non-federal entity to establish and maintain effective internal control over Federal awards that provides reasonable assurance that the non-federal entity is managing Federal awards in compliance with Federal statutes, regulations, and other terms and conditions. Additionally, 2 CFR 200.430(i) states that charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records must also support the distribution of the employee’s salary or wages among specific activities or cost objectives if the employee works on more than one Federal award; a Federal award and non-Federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity. Condition – We sampled and selected 60 payroll transactions and noted that the supporting timesheet for 1 transaction had not been properly reviewed and approved. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOE’s compliance with the specified requirements. Total amount of payroll expenditures charged to the program in fiscal year 2017 were $5,576,192. Effect – DOE is not in compliance with the stated provisions. Failure to properly review and support expenditures can result in noncompliance with laws and regulations along with loss of funding. Cause – DOE did not appear to exercise due diligence in following internal procedures over reviews and authorizations. Recommendation – We recommend that DOE continue to be vigilant in following internal procedures over reviews and authorizations. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 65 Finding Number: 2017-019 Prior Year Finding Number: 2016-068 Compliance Requirement: Allowable Costs/Cost Principles – Indirect Cost Activities Program: Government Department/Agency: U.S. Department of Agriculture Child Nutrition Cluster CFDA #: 10.555, 10.559 Award #: 1V1300308 Award Year: 10/01/2016 – 09/30/2017 Department of Education (DOE) Criteria – Actual conditions must be taken into account in selecting the base to be used in allocating the expenses in each grouping to the benefitted functions. When an allocation can be made by assignment of a cost grouping directly to the function benefitted, the allocation must be made in that manner. When the expenses in a grouping are more general in nature, the allocation should be made using a selected base which produces results that are equitable to both the Federal Government and the governmental unit. Condition – DOE did not reconcile and record indirect costs accurately in the accounting system and did not accurately allocate the share of indirect costs to the program. It appears that indirect costs of approximately $232,000 were excluded and this resulted in an understatement of indirect costs claimed for the period. Questioned Costs – Not applicable. Context – This condition was identified per review of DOE’s compliance with the specified requirements. DOE has an approved indirect cost rate agreement of 25.14%. Effect – Reimbursable amounts were understated. Cause – Indirect costs were not properly calculated and captured in the accounting system. Recommendation – We recommend that DOE should review and reconcile cost allocations to ensure accuracy. DOE may also consider revising its future cost allocations for any understatements. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 66 Finding Number: 2017-020 Prior Year Finding Number: 2016-069 Compliance Requirement: Cash Management Program: Government Department/Agency: U.S. Department of Agriculture Child Nutrition Cluster CFDA #: 10.555, 10.559 Award #: 1V1300308 Award Year: 10/01/2016 – 09/30/2017 Department of Education (DOE) Criteria – The Cash Management Improvement Act of 1990 (CMIA) agreement between the Government of the United States Virgin Islands and the U.S. Department of Treasury requires that established funding techniques and clearance patterns be complied with when requesting Federal funds. The CMIA agreement stipulates that funding for payments to vendors and all other costs require the use of an average clearance funding technique and a clearance pattern of 4 days for this program. The CMIA agreement also stipulates that funding for payments for salaries requires the use of an average clearance funding technique and a clearance pattern of 0 days for this program. These techniques require DOE to minimize the time that elapses between the payment of the disbursement and the request for reimbursement. Condition – We reviewed 22 out of 191 drawdowns made during fiscal year 2017, totaling $932,180, and noted that 2 out of the 22 sampled drawdowns were not in accordance with provisions of the CMIA agreement and all of the selections did not contain evidence of review and approval. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOE’s compliance with provisions of the CMIA agreement and general compliance principles. Total fiscal year 2017 drawdown requests were $4,841,356. Effect – DOE is not in compliance with the stated provisions. The opportunity to use the money for other immediate cash needs is unnecessarily delayed when funds are not requested timely. Additionally, inaccurate information may have been reported to the Federal government in the absence of required reviews. Cause – DOE did not appear to exercise due diligence in requesting Federal funds consistent with the CMIA agreement and its actual cash needs and in following internal procedures over reviews and authorizations. Recommendation – We recommend that DOE comply with the provisions of the CMIA agreement and request Federal funds consistent with the CMIA agreement funding techniques and clearance patterns for this program and continue to be vigilant in following internal procedures over reviews and authorizations. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 67 Finding Number: 2017-021 Prior Year Finding Number: 2016-070 Compliance Requirement: Equipment and Real Property Management Program: Government Department/Agency: U.S. Department of Agriculture Child Nutrition Cluster CFDA #: 10.555, 10.559 Award #: 1V1300308 Award Year: 10/01/2016 – 09/30/2017 Department of Education (DOE) Criteria – Per 2 CFR section 200.313, property records must be maintained that include a description of the property, a serial number or other identification number, the source of property, who holds title, the acquisition date, cost of the property, percentage of Federal participation in the cost of the property, the location, use and conditions of the property, and any ultimate disposition data including the date of disposal and sale price of the property. Further, a physical inventory of equipment should be taken at least once every 2 years and reconciled to the equipment records along with the usage of an appropriate control system to safeguard and maintain equipment. Condition – The Government’s Department of Property and Procurement (DPP) maintains the equipment register for DOE. DPP was unable to provide complete property records which met the stated requirements. Further, we selected 5 equipment items for inspection and noted the following: • 1 item selected did not agree to the record-keeping maintained in the equipment register. • 1 item selected has been duplicated in the equipment register. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOE’s compliance with the specified requirements. Effect – There is a risk that inadequate recordkeeping of equipment could lead to misappropriation of assets and noncompliance with Federal regulations resulting in a return of Federal awards received. Cause – The Government does not appear to have a process in place to adequately monitor equipment acquired with Federal funds. Recommendation – We recommend that DOE and DPP improve internal controls to ensure adherence to Federal regulations related to equipment and its related maintenance. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing such assets. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 68 Finding Number: 2017-022 Prior Year Finding Number: N/A Compliance Requirement: Matching, Level of Effort, and Earmarking Program: Government Department/Agency: U.S. Department of Agriculture Child Nutrition Cluster CFDA #: 10.555, 10.559 Award #: 1V1300308 Award Year: 10/01/2016 – 09/30/2017 Department of Education (DOE) Criteria – In accordance with 2 CFR section 200.306, Cost Sharing or Matching, the State or Territory is required to contribute State-appropriated funds amounting to at least 30 percent of funds it received under Section 4 of the National School Lunch Act (NSLA) in the school year beginning July 1, 1980, unless otherwise exempted by 7 CFR section 210.17. In the fall of each year, the Food and Nutrition Service (FNS) furnishes each State or Territory with a report giving data for use in determining its matching requirements. However, the State or Territory revenues derived from the operation of the NSLP and State or Territory revenues expended for salaries and administrative expenses of the NSLP at the State or Territory level are not considered in this computation. In States or Territories with per capita income lower than the national average, the 30 percent match is proportionately reduced (sections 7(a)(1) and (2) of the NSLA, and 7 CFR section 210.17(a)). Condition – We sampled and selected 40 transactions totaling $232,835, and noted 1 transaction did not contain evidence of review and approval. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOE’s compliance with the specified requirements. Effect – DOE is not in compliance with the stated provisions. Cause – DOE did not appear to exercise due diligence in following internal procedures over reviews and authorizations. Recommendation – We recommend that DOE deploy resources that are given the responsibility to ensure periodic monitoring and compliance of the match requirement throughout the fiscal year. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 69 Finding Number: 2017-023 Prior Year Finding Number: 2016-071 Compliance Requirement: Period of Performance Program: Government Department/Agency: U.S. Department of Agriculture Child Nutrition Cluster CFDA #: 10.555, 10.559 Award #: 1V1300308 Award Year: 10/01/2016 – 09/30/2017 Department of Education (DOE) Criteria – Per 2 CFR 200.309, a non-Federal entity may charge to the Federal award only allowable costs incurred during the period of performance and any costs incurred before the Federal awarding agency or pass-through entity made the Federal award that were authorized by the Federal awarding agency or pass- through entity. Per 2 CFR 200.343(b), unless the federal awarding agency or pass-through entity authorized an extension, a non-Federal entity must liquidate all obligations incurred under the Federal award not later than 90 calendar days after the end date of the period of performance as specified in the terms and conditions of the Federal award. Condition – We sampled and selected 15 transactions totaling $101,030, and noted that 5 out of the 15 transactions were not properly reviewed and approved and were paid outside the period of performance. Questioned Costs – Below reporting threshold. Context – This is a condition identified per review of DOE’s compliance with the specified requirements. The 5 transactions paid outside the period of performance amounted to $17,126. Effect – DOE is not in compliance with the stated provisions. Failure to properly review and support expenditures can result in noncompliance with laws and regulations along with loss of funding. Cause – DOE did not appear to have adequate policies and procedures in place to ensure compliance with the required period of performance stipulations. Recommendation – We recommend that DOE strengthen its processes with respect to setting up and charging expenditures between various grant awards. We also recommend that DOE enhance its review process to properly determine the activities of each grant relative to the appropriate period of performance. Such information should also be monitored, retained, and approved by a responsible official of DOE in a timely manner. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 70 Finding Number: 2017-024 Prior Year Finding Number: N/A Compliance Requirement: Procurement, Suspension, and Debarment Program: Government Department/Agency: U.S. Department of Agriculture Child Nutrition Cluster CFDA #: 10.555, 10.559 Award #: 1V1300308 Award Year: 10/01/2016 – 09/30/2017 Department of Education (DOE) Criteria – Recipients of Federal awards must have adequate policies and controls in place to ensure that the procedures are properly documented in the entity’s files, provide full and open competition supported by a cost or price analysis, provide a vendor debarment or suspension certification, provide for retention of files, and that supporting documentation corroborate compliance with these requirements. Condition – The Government’s Department of Property and Procurement (DPP) is primarily responsible for procurement transactions. In our review of 12 procurement transactions meeting the test threshold, we noted 5 procurement files that did not have sufficient supporting documents available to validate the procurements decision made. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOE’s compliance with the specified requirements. We reviewed 12 procurement files with expenditures totaling $236,720, for fiscal year 2017. Effect – DOE could inadvertently contract with or sub-awards to parties that are suspended or debarred from doing business with the Federal government as well as award contracts to vendors whose contract prices are unreasonable. In addition, contracts may be executed to unqualified vendors. Cause – DOE does not appear to have a process in place to adequately monitor and maintain completed contract files comprising of all supporting documents. Recommendation – We recommend that DOE and DPP improve internal controls to ensure adherence to Federal regulations relating to the procurement of goods and services and review current record retention policies. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing procurement tasks. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 71 Finding Number: 2017-025 Prior Year Finding Number: N/A Compliance Requirement: Allowable Cost/Cost Principles – Payroll Activities Program: Government Department/Agency: U.S. Department of Agriculture Supplemental Nutrition Assistance Program Cluster CFDA #: 10.561 Award #: 1VI430457, 1VI400408 Award Year: 10/01/2016 – 09/30/2017, 10/01/2016 – 09/30/2018 Department of Human Services (DHS) Criteria – 2 CFR 200.303, Internal Control, requires the non-federal entity to establish and maintain effective internal control over Federal awards that provides reasonable assurance that the non-federal entity is managing Federal awards in compliance with Federal statutes, regulations, and other terms and conditions. Additionally, 2 CFR 200.430(i) states that charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records must also support the distribution of the employee’s salary or wages among specific activities or cost objectives if the employee works on more than one Federal award; a Federal award and non-Federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity. Condition – We sampled and selected 25 payroll transactions and noted the following: • 1 Notice of Personnel Action (NOPA) was not available for review. • 2 NOPAs had not been updated to reflect the correct project charge codes. • 6 NOPAs were populated subsequent to the costs being incurred. • 1 transaction had different project codes in the approved NOPA as compared to the payroll register. • 1 fringe benefit calculation had utilized 100% of the salary base, while the NOPA stated only a 50% Federal allocation portion. • 9 transactions did not contain evidence of review and approval. • 11 timesheets were not available in order to ascertain proper review and approval. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Total amount of payroll expenditures charged to the program in fiscal year 2017 were $3,194,684. Effect - DHS is not in compliance with the stated provisions. Failure to properly review and support expenditures can result in noncompliance with laws and regulations along with loss of funding. Cause – DHS does not appear to have adequate policies and procedures in place to ensure compliance with applicable cost principles and maintenance of underlying documentation. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 72 Recommendation – We recommend that DHS improve internal controls to ensure adherence to Federal regulations related to the fiscal and administrative requirements for expending and accounting for payroll expenditures. Where employees work solely on a single Federal program, charges for their salaries and wages should be supported by periodic certifications. Where employees work on multiple activities or cost objectives, a distribution of their salaries or wages should be supported by personnel activity reports (time and attendance) or equivalent documents. Such information should also be monitored, retained, and approved by a responsible official of DHS in a timely manner. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 73 Finding Number: 2017-026 Prior Year Finding Number: N/A Compliance Requirement: Allowable Costs/Cost Principles – Indirect Cost Activities Program: Government Department/Agency: U.S. Department of Agriculture Supplemental Nutrition Assistance Program Cluster CFDA #: 10.561 Award #: 1VI430457, 1VI400408 Award Year: 10/01/2016 – 09/30/2017, 10/01/2016 – 09/30/2018 Department of Human Services (DHS) Criteria – Actual conditions must be taken into account in selecting the base to be used in allocating the expenses in each grouping to the benefitted functions. When an allocation can be made by assignment of a cost grouping directly to the function benefitted, the allocation must be made in that manner. When the expenses in a grouping are more general in nature, the allocation should be made using a selected base which produces results that are equitable to both the Federal Government and the governmental unit. Condition – DHS did not reconcile and record indirect costs accurately in the accounting system and did not accurately allocate the share of indirect costs to the program. It appears that indirect costs for the fourth quarter of fiscal year 2017 were excluded and no true-up analysis was performed, and this resulted in an understatement of indirect costs claimed for the period. Questioned Costs – Not determinable. Context – This condition was identified per review of DHS’ compliance with the specified requirements. DHS has an approved indirect cost rate agreement of 19.24%. Effect – Reimbursable amounts were understated. Cause – Indirect costs were not properly calculated and captured in the accounting system. Recommendation – We recommend that DHS should review and reconcile cost allocations to ensure accuracy. DHS may also consider revising its future cost allocations for any understatements. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 74 Finding Number: 2017-027 Prior Year Finding Number: 2016-016 Compliance Requirement: Cash Management Program: Government Department/Agency: U.S. Department of Agriculture Supplemental Nutrition Assistance Program Cluster CFDA #: 10.561 Award #: 1VI430457, 1VI400408 Award Year: 10/01/2016 – 09/30/2017, 10/01/2016 – 09/30/2018 Department of Human Services (DHS) Criteria – The Cash Management Improvement Act of 1990 (CMIA) agreement between the Government of the United States Virgin Islands and the U.S. Department of Treasury requires that established funding techniques and clearance patterns be complied with when requesting Federal funds. The CMIA agreement stipulates that funding for payments to vendors and all other costs require the use of an average clearance funding technique and a clearance pattern of 4 days for this program. The CMIA agreement also stipulates that funding for payments for salaries requires the use of an average clearance funding technique and a clearance pattern of 0 days for this program. These techniques require DHS to minimize the time that elapses between the payment of the disbursement and the request for reimbursement. Condition – We reviewed 8 out of 22 drawdowns made during fiscal year 2017, totaling $888,433, and noted that 4 out of the 8 sampled drawdowns were not in accordance with the provisions of the CMIA agreement. Moreover, all month-end cash drawdown reconciliations did not contain evidence of review and approval. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the provisions of the CMIA agreement and general compliance principles. Total fiscal year 2017 drawdown requests were $4,030,899. Effect – DHS is not in compliance with the stated provisions. The opportunity to use the money for other immediate cash needs is unnecessarily delayed when funds are not requested timely. Cause – DHS did not appear to exercise due diligence in requesting Federal funds consistent with the CMIA agreement and its actual cash needs and in following internal procedures over reviews and authorizations. Recommendation - We recommend that DHS comply with the provisions of the CMIA agreement and request Federal funds consistent with the CMIA agreement funding techniques and clearance patterns for this program and continue to be vigilant in following internal procedures over reviews and authorizations. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 75 Finding Number: 2017-028 Prior Year Finding Number: 2016-017 Compliance Requirement: Equipment and Real Property Management Program: Government Department/Agency: U.S. Department of Agriculture Supplemental Nutrition Assistance Program Cluster CFDA #: 10.561 Award #: 1VI430457, 1VI400408 Award Year: 10/01/2016 – 09/30/2017, 10/01/2016 – 09/30/2018 Department of Human Services (DHS) Criteria – Per 2 CFR section 200.313, property records must be maintained that include a description of the property, a serial number or other identification number, the source of property, who holds title, the acquisition date, cost of the property, percentage of Federal participation in the cost of the property, the location, use and conditions of the property, and any ultimate disposition data including the date of disposal and sale price of the property. Further, a physical inventory of equipment should be taken at least once every 2 years and reconciled to the equipment records along with the usage of an appropriate control system to safeguard and maintain equipment. Condition – The Government’s Department of Property and Procurement (DPP) maintains the equipment register for DHS. DPP was unable to provide complete property records which met the stated requirements. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect – There is a risk that inadequate recordkeeping of equipment could lead to misappropriation of assets and noncompliance with Federal regulations resulting in a return of Federal awards received. Cause – The Government does not appear to have a process in place to adequately monitor equipment acquired with Federal funds. Recommendation – We recommend that DHS and DPP improve internal controls to ensure adherence to Federal regulations related to equipment and its related maintenance. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing such assets. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 76 Finding Number: 2017-029 Prior Year Finding Number: N/A Compliance Requirement: Period of Performance Program: Government Department/Agency: U.S. Department of Agriculture Supplemental Nutrition Assistance Program Cluster CFDA #: 10.561 Award #: 1VI430457, 1VI400408 Award Year: 10/01/2016 – 09/30/2017, 10/01/2016 – 09/30/2018 Department of Human Services (DHS) Criteria – Per 2 CFR 200.309, a non-Federal entity may charge to the Federal award only allowable costs incurred during the period of performance and any costs incurred before the Federal awarding agency or pass-through entity made the Federal award that were authorized by the Federal awarding agency or pass- through entity. Per 2 CFR 200.343(b), unless the federal awarding agency or pass-through entity authorized an extension, a non-Federal entity must liquidate all obligations incurred under the Federal award not later than 90 calendar days after the end date of the period of performance as specified in the terms and conditions of the Federal award. Condition – We sampled and selected 54 transactions totaling $466,795, and noted that 4 out of the 54 transactions were not properly reviewed and approved and were paid outside the period of performance. Questioned Costs – Below reporting threshold. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. The 4 transactions paid outside the period of performance amounted to $24,790. Effect – DHS is not in compliance with the stated provisions. Failure to properly review and support expenditures can result in noncompliance with laws and regulations along with loss of funding. Cause – DHS did not appear to have adequate policies and procedures in place to ensure compliance with the required period of performance stipulations. Recommendation – We recommend that DHS strengthen its processes with respect to setting up and charging expenditures between various grant awards. We also recommend that DHS enhance its review process to properly determine the activities of each grant relative to the appropriate period of performance. Such information should also be monitored, retained, and approved by a responsible official of DHS in a timely manner. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 77 Finding Number: 2017-030 Prior Year Finding Number: 2016-018 Compliance Requirement: Procurement, Suspension, and Debarment Program: Government Department/Agency: U.S. Department of Agriculture Supplemental Nutrition Assistance Program Cluster CFDA #: 10.561 Award #: 1VI430457, 1VI400408 Award Year: 10/01/2016 – 09/30/2017, 10/01/2016 – 09/30/2018 Department of Human Services (DHS) Criteria – Recipients of Federal awards must have adequate policies and controls in place to ensure that the procedures are properly documented in the entity’s files, provide full and open competition supported by a cost or price analysis, provide a vendor debarment or suspension certification, provide for retention of files, and that supporting documentation corroborate compliance with these requirements. Condition – The Government’s Department of Property and Procurement (DPP) is primarily responsible for procurement transactions. In our review of 8 procurement transactions meeting the test threshold, we noted the following: • All procurement files did not have sufficient supporting documents available to verify the contractors’ exclusion from the Excluded Parties List System to validate the procurement decisions made. • 2 procurement files did not have sufficient documentation to ensure that the covered transactions were not debarred, suspended or otherwise excluded. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. We reviewed 8 procurement files with expenditures totaling $526,534, for fiscal year 2017. Effect – DHS could inadvertently contract with or make sub-awards to parties that are suspended or debarred from doing business with the Federal government as well as award contracts to vendors whose contract prices are unreasonable. In addition, contracts may be executed to unqualified vendors. Cause – DHS does not appear to have a process in place to adequately monitor and maintain completed contract files comprising of all supporting documents. Recommendation – We recommend that DHS and DPP improve internal controls to ensure adherence to Federal regulations relating to the procurement of goods and services and review current records retention policies. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing procurement tasks. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 78 Finding Number: 2017-031 Prior Year Finding Number: N/A Compliance Requirement: Special Tests and Provisions – EBT Card Security Program: Government Department/Agency: U.S. Department of Agriculture Supplemental Nutrition Assistance Program Cluster CFDA #: 10.561 Award #: 1VI430457, 1VI400408 Award Year: 10/01/2016 – 09/30/2017, 10/01/2016 – 09/30/2018 Department of Human Services (DHS) Criteria - Per 7 CFR Section 274.8(b)(3), as an addition to or component of the Security Program required of Automated Data Processing (ADP) systems, the State or Territory agency shall ensure that the certain electronic benefits transfer (EBT) security requirements are established. As such, DHS is required to maintain adequate security over, and documentation/records for EBT cards, to prevent their theft, embezzlement, loss damage, destruction, unauthorized transfer, negotiation, or use. Condition – DHS contracted with Fidelity National Information Service (FIS) for the issuance and security of the EBT cards; however, it is DHS’ ultimate responsibility to ensure the contractor has controls in place to maintain adequate security over, and documentation/records of EBT cards. During our review, we noted the following: • 6 out of the 9 EBT cards selected did not have signed status reports to verify that the cards returned were actually destroyed or shredded. • The reconciliation of EBT cards for March 2017 was not properly reviewed. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect – Without adequate internal controls to ensure compliance with EBT card security requirements, there is an increased risk that the inventory of EBT cards will not be properly maintained and accounted for. Cause – DHS does not have adequate policies and procedures in place to ensure adequate safeguarding and documentation of EBT cards. Recommendation - We recommend that DHS implement formal policies and procedures to maintain adequate security over, and documentation and records for EBT Cards. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 79 Finding Number: 2017-032 Prior Year Finding Number: N/A Compliance Requirement: Special Tests and Provisions – EBT Card Reconciliation Program: Government Department/Agency: U.S. Department of Agriculture Supplemental Nutrition Assistance Program Cluster CFDA #: 10.561 Award #: 1VI430457, 1VI400408 Award Year: 10/01/2016 – 09/30/2017, 10/01/2016 – 09/30/2018 Department of Human Services (DHS) Criteria - Per 7 CFR sections 274.3(a)(1) and 274.4(a)), the State or Territory must have systems in place to reconcile all of the funds entering into, exiting from, and remaining in the system each day with the State or Territory’s benefit account with Treasury and EBT contractor records. This includes a reconciliation of the State or Territory’s issuance files of postings to recipient accounts with the EBT contractor. Condition – During our tests of the monthly EBT card reconciliations, we noted that for all samples selected, the food stamp issuance information in the CARIBS system was not properly reviewed and approved. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect – Noncompliance with program requirements could result in disallowances of costs. Cause – DHS does not appear to have adequate policies and procedures in place to ensure a consistent and systematic review of the data in its files. Recommendation – We recommend that DHS perform regular reviews of the data and reconciliations to ensure accuracy and completeness. Additional levels of review by a supervisor or manager can provide more timely quality assurance oversight over the process. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 80 Finding Number: 2017-033 Prior Year Finding Number: N/A Compliance Requirement: Special Tests and Provisions – ADP System for SNAP-Recertifications Program: Government Department/Agency: U.S. Department of Agriculture Supplemental Nutrition Assistance Program Cluster CFDA #: 10.561 Award #: 1VI430457, 1VI400408 Award Year: 10/01/2016 – 09/30/2017, 10/01/2016 – 09/30/2018 Department of Human Services (DHS) Criteria - Per 2 CFR Section 272.10(a), All State or Territory agencies are required to sufficiently automate their SNAP operations and computerize their systems for obtaining, maintaining, utilizing, and transmitting information concerning SNAP. Per 7 CFR sections 272.10 and 277.18, State agencies are required to automate their SNAP operations and computerize their systems for obtaining, maintaining, utilizing, and transmitting information concerning SNAP. This includes: (1) processing and storing all case file information necessary for eligibility determination and benefit calculation, identifying specific elements that affect eligibility, and notifying the certification unit of cases requiring notices of case disposition, adverse action and mass change, and expiration; (2) providing an automatic cutoff of participation for households which have not been recertified at the end of their certification period by reapplying and being determined eligible for a new period (7 CFR sections 272.10(b)(1)(iii) and 273.10(f) and (g)); and (3) generating data necessary to meet Federal issuance and reconciliation reporting requirements. Condition – We noted that 5 out of the 40 recertifications selected did not have the supporting Notice of Expiration to determine if the participant was notified 1 month prior to the recertification deadline. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect – Without an effectively designed and operating system in place, ineligible beneficiaries may receive benefits under the SNAP grant and DHS may make payments on behalf of those beneficiaries resulting in noncompliance. Cause – DHS does not appear to have adequate policies and procedures in place to ensure a consistent and systematic review of the data in its participant case files. Recommendation – We recommend that DHS perform regular reviews of the data in its participant case files to ensure accuracy and completeness and confirming that only eligible participants are receiving the entitled benefits. Additional levels of review by a supervisor or manager can provide more timely quality assurance oversight over the eligibility process. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 81 Finding Number: 2017-034 Prior Year Finding Number: N/A Compliance Requirement: Cash Management Program: Government Department/Agency: U.S. Department of Agriculture Special Supplemental Nutrition Program for Women, Infants, and Children CFDA #: 10.557 Award #: 1VI700708 Award Year: 10/01/2016 – 09/30/2017 Department of Health (DOH) Criteria – The Cash Management Improvement Act of 1990 (CMIA) agreement between the Government of the United States Virgin Islands and the U.S. Department of Treasury requires that established funding techniques and clearance patterns be complied with when requesting Federal funds. The CMIA agreement stipulates that funding for payments to vendors and all other costs require the use of an average clearance funding technique and a clearance pattern of 4 days for this program. The CMIA agreement also stipulates that funding for payments for salaries requires the use of an average clearance funding technique and a clearance pattern of 0 days for this program. These techniques require DOH to minimize the time that elapses between the payment of the disbursement and the request for reimbursement. Condition – We reviewed 40 out of 348 drawdowns made during fiscal year 2017, totaling $753,475, and noted that 4 out of the 40 sampled drawdowns were not in accordance with provisions of the CMIA agreement. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOH’s compliance with provisions of the CMIA agreement and general compliance principles. Total fiscal year 2017 drawdown requests were $5,384,190. Effect – DOH is not in compliance with the stated provisions. The opportunity to use the money for other immediate cash needs is unnecessarily delayed when funds are not requested timely. Cause – DOH did not appear to exercise due diligence in requesting Federal funds consistent with the CMIA agreement and its actual cash needs. Recommendation – We recommend that DOH comply with the provisions of the CMIA agreement and request Federal funds consistent with the CMIA agreement funding techniques and clearance patterns for this program. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 82 Finding Number: 2017-035 Prior Year Finding Number: N/A Compliance Requirement: Eligibility Program: Government Department/Agency: U.S. Department of Agriculture Special Supplemental Nutrition Program for Women, Infants, and Children CFDA #: 10.557 Award #: 1VI700708 Award Year: 10/01/2016 – 09/30/2017 Department of Health (DOH) Criteria – Plan and eligibility requirements must comply with various Federal requirements. 2 CFR 200.303, Internal Control, requires the non-federal entity to establish and maintain effective internal control over Federal awards that provides reasonable assurance that the non-federal entity is managing Federal awards in compliance with Federal statutes, regulations, and other terms and conditions. Condition – In our review of 40 claimant files, we noted 1 instance where a review and approval of the eligibility had not been performed. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOH’s compliance with specified requirements. Effect – Noncompliance with program requirements could result in disallowances of costs and claimants could be receiving benefits that they are not entitled to receive. Cause – DOH does not appear to have adequate policies and procedures in place to ensure a consistent and systematic review of the data in its claimant files. Recommendation – We recommend that DOH perform regular reviews of the data in its claimant files to ensure accuracy and completeness and confirming that only eligible claimants are receiving the entitled benefits. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 83 Finding Number: 2017-036 Prior Year Finding Number: N/A Compliance Requirement: Equipment and Real Property Management Program: Government Department/Agency: U.S. Department of Agriculture Special Supplemental Nutrition Program for Women, Infants, and Children CFDA #: 10.557 Award #: 1VI700708 Award Year: 10/01/2016 – 09/30/2017 Department of Health (DOH) Criteria – Per 2 CFR section 200.313, property records must be maintained that include a description of the property, a serial number or other identification number, the source of property, who holds title, the acquisition date, cost of the property, percentage of Federal participation in the cost of the property, the location, use and conditions of the property, and any ultimate disposition data including the date of disposal and sale price of the property. Further, a physical inventory of equipment should be taken at least once every 2 years and reconciled to the equipment records along with the usage of an appropriate control system to safeguard and maintain equipment. Condition – The Government’s Department of Property and Procurement (DPP) maintains the equipment register for DOH. DPP was unable to provide complete property records which met the stated requirements. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOH’s compliance with the specified requirements. Effect – There is a risk that inadequate recordkeeping of equipment could lead to misappropriation of assets and noncompliance with Federal regulations resulting in a return of Federal awards received. Cause – The Government does not appear to have a process in place to adequately monitor equipment acquired with Federal funds. Recommendation – We recommend that DPP and DOH improve internal controls to ensure adherence to Federal regulations related to equipment and its related maintenance. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing such assets. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 84 Finding Number: 2017-037 Prior Year Finding Number: N/A Compliance Requirement: Procurement, Suspension, and Debarment Program: Government Department/Agency: U.S. Department of Agriculture Special Supplemental Nutrition Program for Women, Infants, and Children CFDA #: 10.557 Award #: 1VI700708 Award Year: 10/01/2016 – 09/30/2017 Department of Health (DOH) Criteria – Recipients of Federal awards must have adequate policies and controls in place to ensure that the procedures are properly documented in the entity’s files, provide full and open competition supported by a cost or price analysis, provide a vendor debarment or suspension certification, provide for retention of files, and that supporting documentation corroborate compliance with these requirements. Condition – The Government’s Department of Property and Procurement (DPP) is primarily responsible for procurement transactions. In our review of 14 procurement transactions meeting the test threshold, we noted 2 procurement files that did not have sufficient supporting documents available to validate the procurement decisions made. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOH’s compliance with the specified requirements. We reviewed 14 procurement files with expenditures totaling $52,111, for fiscal year 2017. Effect – DOH could inadvertently contract with or make sub-awards to parties that are suspended or debarred from doing business with the Federal government as well as award contracts to vendors whose contract prices are unreasonable. In addition, contracts may be executed to unqualified vendors. Cause – DOH does not appear to have a process in place to adequately monitor and maintain completed contract files comprising of all supporting documents. Recommendation – We recommend that DOH and DPP improve internal controls to ensure adherence to Federal regulations relating to the procurement of goods and services and review current records retention policies. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing procurement tasks. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 85 Finding Number: 2017-038 Prior Year Finding Number: N/A Compliance Requirement: Special Tests and Provisions – Review of Redeemed Food Instruments and Cash-Value Vouchers Program: Government Department/Agency: U.S. Department of Agriculture Special Supplemental Nutrition Program for Women, Infants, and Children CFDA #: 10.557 Award #: 1VI700708 Award Year: 10/01/2016 – 09/30/2017 Department of Health (DOH) Criteria – A State or Territory agency operating a retail food delivery system must take the actions to ensure that payments of the program food funds to vendors conform to program regulations and the State or Territory agency’s vendor, farmer, farmer’s market agreements to detect errors and, where applicable, enforce price limitations. The State or Territory agency must have in place a process for reviewing all, or a representative sample of, Food Instruments (FI) and Cash-Value Vouchers (CVV) submitted by vendors for redemption. For EBT systems, this would be a daily automated reconciliation process with follow-up procedures to resolve any discrepancies identified. Condition – DOH was unable to provide data supporting its review of redeemed food instruments and cash-value voucher performed. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOH’s compliance with the specified requirements. Effect – Noncompliance with program requirements could result in failure to detect errors or questionable FIs and CVVs resulting in erroneous redemptions of program funds. Cause – DOH does not appear to have adequate policies and procedures in place to ensure a consistent and systematic review of its transactions. Recommendation – We recommend that DOH comply with the specified requirements and establish adequate policies and procedures to ensure that its review of redeemed food instruments and cash- value vouchers can be substantiated. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 86 Finding Number: 2017-039 Prior Year Finding Number: N/A Compliance Requirement: Allowable Cost/Cost Principles – Payroll Activities Program: Government Department/Agency: U.S. Department of Health and Human Services Head Start CFDA #: 93.600 Award #: 02CH3011-04-00, 02CH3011-05-01 Award Year: 07/01/2013 – 06/30/2018 Department of Human Services (DHS) Criteria – 2 CFR 200.303, Internal Control, requires the non-federal entity to establish and maintain effective internal control over Federal awards that provides reasonable assurance that the non-federal entity is managing Federal awards in compliance with Federal statutes, regulations, and other terms and conditions. Additionally, 2 CFR 200.430(i) states that charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records must also support the distribution of the employee’s salary or wages among specific activities or cost objectives if the employee works on more than one Federal award; a Federal award and non-Federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity. Condition – We sampled and selected 25 payroll transactions and noted that supporting timesheets for 17 transactions had not been properly reviewed and approved. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Total amount of payroll expenditures charged to the program in fiscal year 2017 were $6,927,033. Effect – DHS is not in compliance with the stated provisions. Failure to properly review and support expenditures can result in noncompliance with laws and regulations along with loss of funding. Cause – DHS did not appear to exercise due diligence in following internal procedures over reviews and authorizations. Recommendation – We recommend that DHS continue to be vigilant in following internal procedures over reviews and authorizations. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 87 Finding Number: 2017-040 Prior Year Finding Number: 2016-020 Compliance Requirement: Cash Management Program: Government Department/Agency: U.S. Department of Health and Human Services Head Start CFDA #: 93.600 Award #: 02CH3011-04-00, 02CH3011-05-01 Award Year: 07/01/2013 – 06/30/2018 Department of Human Services (DHS) Criteria – The Cash Management Improvement Act of 1990 (CMIA) agreement between the Government of the United States Virgin Islands and the U.S. Department of Treasury requires that established funding techniques and clearance patterns be complied with when requesting Federal funds. The CMIA agreement stipulates that funding for payments to vendors and all other costs require the use of an average clearance funding technique and a clearance pattern of 4 days for this program. The CMIA agreement also stipulates that funding for payments for salaries requires the use of an average clearance funding technique and a clearance pattern of 0 days for this program. These techniques require DHS to minimize the time that elapses between the payment of the disbursement and the request for reimbursement. Condition – We reviewed 10 out of 59 drawdowns made during fiscal year 2017, totaling $2,217,403, and noted that 3 out of the 10 sampled drawdowns were not in accordance with the provisions of the CMIA agreement. Moreover, all month-end cash drawdown reconciliations did not contain evidence of review and approval. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the provisions of the CMIA agreement and general compliance principles. Total fiscal year 2017 drawdown requests were $7,930,104. Effect – DHS is not in compliance with the stated provisions. The opportunity to use the money for other immediate cash needs is unnecessarily delayed when funds are not requested timely. Additionally, inaccurate information may have been reported to the Federal government in the absence of required reviews. Cause – DHS did not appear to exercise due diligence in requesting Federal funds consistent with the CMIA agreement and its actual cash needs and in following internal procedures over reviews and authorizations. Recommendation - We recommend that DHS comply with the provisions of the CMIA agreement and request Federal funds consistent with the CMIA agreement funding techniques and clearance patterns for this program and continue to be vigilant in following internal procedures over reviews and authorizations. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 88 Finding Number: 2017-041 Prior Year Finding Number: 2016-021 Compliance Requirement: Equipment and Real Property Management Program: Government Department/Agency: U.S. Department of Health and Human Services Head Start CFDA #: 93.600 Award #: 02CH3011-04-00, 02CH3011-05-01 Award Year: 07/01/2013 – 06/30/2018 Department of Human Services (DHS) Criteria – Per 2 CFR section 200.313, property records must be maintained that include a description of the property, a serial number or other identification number, the source of property, who holds title, the acquisition date, cost of the property, percentage of Federal participation in the cost of the property, the location, use and conditions of the property, and any ultimate disposition data including the date of disposal and sale price of the property. Further, a physical inventory of equipment should be taken at least once every 2 years and reconciled to the equipment records along with the usage of an appropriate control system to safeguard and maintain equipment. Condition – The Government’s Department of Property and Procurement (DPP) maintains the equipment register for DHS. DPP was unable to provide complete property records which met the stated requirements. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect – There is a risk that inadequate recordkeeping of equipment could lead to misappropriation of assets and noncompliance with Federal regulations resulting in a return of Federal awards received. Cause – The Government does not appear to have a process in place to adequately monitor equipment acquired with Federal funds. Recommendation – We recommend that DHS and DPP improve internal controls to ensure adherence to Federal regulations related to equipment and its related maintenance. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing such assets. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 89 Finding Number: 2017-042 Prior Year Finding Number: N/A Compliance Requirement: Matching, Level of Effort, and Earmarking Program: Government Department/Agency: U.S. Department of Health and Human Services Head Start CFDA #: 93.600 Award #: 02CH3011-04-00,02CH3011-05-01 Award Year: 07/01/2013 – 06/30/2018 Department of Human Services (DHS) Criteria – In accordance with 2 CFR section 200.306, Cost Sharing or Matching, and the requirements of the grant agreements, the program is required to contribute matching funds through cash, in-kind contributions, and/or other non-cash support. Condition – We sampled and selected 40 compiled matching/earmarking reports and noted that 9 out of the 40 reports did not contain evidence of review and approval. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect – DHS is in not in compliance with the stated provisions. Cause – DHS did not appear to exercise due diligence in following internal procedures over reviews and authorizations. Recommendation – We recommend that DHS deploy resources that are given the responsibility to ensure periodic monitoring and compliance of the match requirements throughout the fiscal year. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 90 Finding Number: 2017-043 Prior Year Finding Number: 2016-022 Compliance Requirement: Period of Performance Program: Government Department/Agency: U.S. Department of Health and Human Services Head Start CFDA #: 93.600 Award #: 02CH3011-04-00, 02CH3011-05-01 Award Year: 07/01/2013 – 06/30/2018 Department of Human Services (DHS) Criteria – Per 2 CFR 200.309, a non-Federal entity may charge to the Federal award only allowable costs incurred during the period of performance and any costs incurred before the Federal awarding agency or pass-through entity made the Federal award that were authorized by the Federal awarding agency or pass- through entity. Per 2 CFR 200.343(b), unless the federal awarding agency or pass-through entity authorized an extension, a non-Federal entity must liquidate all obligations incurred under the Federal award not later than 90 calendar days after the end date of the period of performance as specified in the terms and conditions of the Federal award. Condition – We sampled and selected 56 transactions totaling $279,341, and noted that 11 out of the 56 transactions were not properly reviewed and approved and were paid outside the period of performance. Questioned Costs – Below reporting threshold. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. The 11 transactions paid outside the period of performance amounted to $8,761. Effect – DHS is not in compliance with the stated provisions. Failure to properly review and support expenditures can result in noncompliance with laws and regulations along with loss of funding. Cause – DHS did not appear to have adequate policies and procedures in place to ensure compliance with the required period of performance stipulations. Recommendation – We recommend that DHS strengthen its processes with respect to setting up and charging expenditures between various grant awards. We also recommend that DHS enhance its review process to properly determine the activities of each grant relative to the appropriate period of performance. Such information should also be monitored, retained, and approved by a responsible official of DHS in a timely manner. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 91 Finding Number: 2017-044 Prior Year Finding Number: N/A Compliance Requirement: Activities Allowed or Unallowed Program: Government Department/Agency: U.S. Department of Health and Human Services Medicaid Cluster CFDA #: 93.778 Award #: Various Award Year: 10/01/2014 – 09/30/2022 Department of Human Services (DHS) Criteria – 2 CFR 200.303, Internal Control, requires the non-federal entity to establish and maintain effective internal control over Federal awards that provides reasonable assurance that the non-federal entity is managing Federal awards in compliance with Federal statutes, regulations, and other terms and conditions. Condition – We reviewed 61 claims processed during fiscal year 2017 totaling $1,203,770, and noted that 12 out of the 61 claims tested were overpaid due to incorrect rates in the Medicaid Management Information System (MMIS). The providers were paid for Inpatient and Outpatient procedures that should not have been paid. Moreover, the 12 overpaid claims should have been included in the per diem rate paid to the providers. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Total claims paid in fiscal year 2017 were $35,632,133. Effect – Noncompliance with program requirements could result in disallowances of costs and providers could be receiving benefits that they are not entitled to receive. Cause – DHS does not appear to have adequate policies and procedures in place to ensure a consistent and systematic review of the data in its provider case files. Recommendation – We recommend that DHS perform regular reviews of the data in its provider case files to ensure accuracy and completeness and confirming that only eligible providers are receiving the entitled benefits. Additional levels of review by a supervisor or manager can provide more timely quality assurance oversight over the process. In addition, we recommend that DHS determine the feasibility of automating the adjudication process within the MMIS system. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 92 Finding Number: 2017-045 Prior Year Finding Number: 2016-023 Compliance Requirement: Cash Management Program: Government Department/Agency: U.S. Department of Health and Human Services Medicaid Cluster CFDA #: 93.778 Award #: Various Award Year: 10/01/2014 – 09/30/2022 Department of Human Services (DHS) Criteria - The Cash Management Improvement Act of 1990 (CMIA) agreement between the Government of the United States Virgin Islands and the U.S. Department of Treasury requires that established funding techniques and clearance patterns be complied with when requesting Federal funds. The CMIA agreement stipulates that funding for payments to vendors and all other costs require the use of an average clearance funding technique and a clearance pattern of 7 days for this program. The CMIA agreement also stipulates that funding for payments for salaries requires the use of an average clearance funding technique and a clearance pattern of 0 days for this program. These techniques require DHS to minimize the time that elapses between the payment of the disbursement and the request for reimbursement. Condition - We reviewed 14 out of 104 drawdowns made during fiscal year 2017, totaling $10,870,936, and noted the following: • 13 out of the 14 sampled drawdowns were not in accordance with the provisions of the CMIA agreement. • 13 out of the 14 drawdowns did not contain evidence of review and approval. • 1 drawdown totaling $838,594 had been drawn down twice and was transferred to another MAP and Affordable Care Act (ACA) account without obtaining the requisite approval. Further, we noted that the reconciliation of drawdowns to the ERP system was performed by the same employee who requested the drawdowns, resulting in incompatible duties. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the provisions of the CMIA agreement and general compliance principles. Total fiscal year 2017 drawdown requests were $49,431,393. Effect – DHS is not in compliance with the stated provisions. The opportunity to use the money for other immediate cash needs is unnecessarily delayed when funds are not requested timely. Additionally, inaccurate information may have been reported to the Federal government in the absence of required reviews. Cause – DHS did not appear to exercise due diligence in requesting Federal funds consistent with the CMIA agreement and its actual cash needs and in following internal procedures over review and authorizations. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 93 Recommendation – We recommend that DHS comply with the provisions of the CMIA agreement and request Federal funds consistent with the CMIA agreement funding techniques and clearance patterns for this program and continue to be vigilant in following internal procedures over reviews and authorizations. Further, to the extent possible, incompatible duties should be segregated to serve as a check and balance. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 94 Finding Number: 2017-046 Prior Year Finding Number: 2016-024 Compliance Requirement: Eligibility Program: Government Department/Agency: U.S. Department of Health and Human Services Medicaid Cluster CFDA #: 93.778 Award #: Various Award Year: 10/01/2014 – 09/30/2022 Department of Human Services (DHS) Criteria – Plan and eligibility requirements must comply with various Federal requirements. 2 CFR 200.303, Internal Control, requires the non-federal entity to establish and maintain effective internal control over Federal awards that provides reasonable assurance that the non-federal entity is managing Federal awards in compliance with Federal statutes, regulations, and other terms and conditions. Additionally, in accordance with the State Plan under Title XIX of the Social Security Act, Section 4.7, Maintenance of Records, the Medicaid agency maintains or supervises the maintenance of records necessary for the proper and efficient operation of the plan, including records regarding applications, determination of eligibility, the provisions of medical assistance, and administrative costs, statistical, fiscal and other records necessary for reporting and accountability. Condition – DHS is responsible for determining participant eligibility. During our testing of eligibility, we noted that DHS did not have consistent monitoring processes in place to review eligibility determinations made. In addition, we were unable to determine that the eligibility population was complete. In our review of 60 participant case files, we identified the following: • For 24 participants, there was no evidence the applicant had completed an application. • For 27 participants, the application had not been processed in a timely manner. • For 26 participants, there was no documentation in the case files supporting the verification of income requirements. • For 8 participants, there was no documentation in the case files that the applicant had provided a social security card. • For 11 participants, there was no documentation in the case files supporting verification of the citizenship or immigration status requirements. • For 23 participants, there was no evidence that a recertification was done within 12 months. • For 27 participants, there was no evidence that a review and approval of the eligibility determination had been performed. • DHS was unable to provide 32 participant case files for our review. We also noted that the State or Territory Plan had not been completely updated with all amendments. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 95 Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect – Noncompliance with program requirements could result in disallowances of costs and participants could be receiving benefits that they are not entitled to receive. Cause – DHS does not appear to have adequate policies and procedures in place to ensure a consistent and systematic review of the data in its participant case files. Further, DHS does not appear to have a process in place for periodic updates to its State or Territory Plan. Recommendation – We recommend that DHS perform regular reviews of the data in its participant case files to ensure accuracy and completeness and confirming that only eligible participants are receiving the entitled benefits. Additional levels of review by a supervisor or manager can provide more timely quality assurance oversight over the eligibility process. We also recommend that management review the State or Territory Plan to ensure all provisions are current and all amendments are incorporated. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 96 Finding Number: 2017-047 Prior Year Finding Number: N/A Compliance Requirement: Matching, Level of Effort, and Earmarking Program: Government Department/Agency: U.S. Department of Health and Human Services Medicaid Cluster CFDA #: 93.778 Award #: Various Award Year: 10/01/2014 – 09/30/2022 Department of Human Services (DHS) Criteria – In accordance with the Compliance Supplement, the State or Territory is required to pay part of the costs of providing health care to the poor and part of the costs of administering the program. Different participation rates apply to medical assistance payments. There are also different Federal financial participation rates for the different types of costs incurred in administering the entitlement program, such as administration (including administration of family planning services), training, computer, and other costs (42 CFR sections 433.10 and 433.15). Condition – We sampled and selected 3 matching calculations from the CMS-64, Quarterly Statement of Expenditures for the Medicaid Assistance Program reports and noted that 3 out of the 4 reports did not contain evidence of review and approval. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect – DHS is in not in compliance with the stated provisions. Cause – DHS did not appear to exercise due diligence in following internal procedures over reviews and authorizations. Recommendation – We recommend that DHS deploy resources that are given the responsibility to ensure periodic monitoring and compliance of the match requirements throughout the fiscal year. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 97 Finding Number: 2017-048 Prior Year Finding Number: N/A Compliance Requirement: Procurement, Suspension, and Debarment Program: Government Department/Agency: U.S. Department of Health and Human Services Medicaid Cluster CFDA #: 93.778 Award #: Various Award Year: 10/01/2014 – 09/30/2022 Department of Human Services (DHS) Criteria – Recipients of Federal awards must have adequate policies and controls in place to ensure that the procedures are properly documented in the entity’s files, provide full and open competition supported by a cost or price analysis, provide a vendor debarment or suspension certification, provide for retention of files, and that supporting documentation corroborate compliance with these requirements. Condition – The Government’s Department of Property and Procurement (DPP) is primarily responsible for procurement transactions. In our review of 7 procurement transactions meeting the test threshold, we noted that all the procurement files did not have sufficient supporting documents available to validate the procurement decisions made. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. We reviewed 7 procurement files with expenditures totaling $10,828,047, for fiscal year 2017. Effect – DHS could inadvertently contract with or make sub-awards to parties that are suspended or debarred from doing business with the Federal government as well as award contracts to vendors whose contract prices are unreasonable. In addition, contracts may be executed to unqualified vendors. Cause – DHS does not appear to have a process in place to adequately monitor and maintain completed contract files comprising of all supporting documents. Recommendation – We recommend that DHS and DPP improve internal controls to ensure adherence to Federal regulations relating to the procurement of goods and services and review current records retention policies. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing procurement tasks. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 98 Finding Number: 2017-049 Prior Year Finding Number: N/A Compliance Requirement: Reporting Program: Government Department/Agency: U.S. Department of Health and Human Services Medicaid Cluster CFDA #: 93.778 Award #: Various Award Year: 10/01/2014 – 09/30/2022 Department of Human Services (DHS) Criteria – In accordance with the Compliance Supplement, the State or Territory is required to submit CMS-64, Quarterly Statement of Expenditures for the Medicaid Assistance Program, thirty days after the end of the quarter. Condition – We reviewed 3 out of the 4 quarterly CMS-64 reports submitted during the fiscal year and noted that the fourth quarter report’s financial information did not agree with the underlying records. We also noted there was no evidence of a review or approval prior to submission. Further, we noted 2 instances where DHS had failed to submit the reports within the respective due dates. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect – DHS is not in compliance with stated provisions and inaccurate information may have been reported to the Federal government. Cause – It appears that policies and procedures, including review over reporting procedures were not functioning as intended. Further, DHS does not have adequate control over maintenance of the underlying documentation used in preparing various reports. Recommendation – We recommend that DHS reevaluate its policies and procedures to ensure proper monitoring and review of the required reports by an appropriate official who would ensure the information submitted is complete, accurate, consistent, and submitted within the required timeframe. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 99 Finding Number: 2017-050 Prior Year Finding Number: N/A Compliance Requirement: Special Tests and Provisions – Federal Financial Participation Refunds Program: Government Department/Agency: U.S. Department of Health and Human Services Medicaid Cluster CFDA #: 93.778 Award #: Various Award Year: 10/01/2014 – 09/30/2022 Department of Human Services (DHS) Criteria or Specific Requirement - Title 42 CFR section 433.40(c), Refund of Federal Financial Participation (FFP) for uncashed checks states that if a check remains uncashed beyond a period of 180 days from the date it was issued (i.e., the date of the check), it will no longer be regarded as an allowable program expenditure. If the State has claimed and received FFP for the amount of the uncashed check, it must refund the amount of FFP received. Condition - DHS is required to identify cancelled and uncashed checks beyond a period of 180 days of issuance at the end of each calendar quarter and refund all FFP received for uncashed checks by adjusting the CMS-64 report, Quarterly Statement of Expenditures for the Medical Assistance Program. We noted that DHS did not identify cancelled or uncashed checks over 180 days after issuance and refund the corresponding FFP in a timely manner. Questioned Costs – Not determinable. Context - This is a condition identified per review of DHS’ compliance with the specified requirements. Effect - DHS is not in compliance with regulations which result in untimely refunds of the FFP to the Federal government. There is also potential for disallowed costs that were never refunded due to checks remaining uncashed beyond a period of 180 days from the date of issuance. Cause - DHS does not have adequate policies and procedures in place to request and review the cancelled and uncashed check report on a quarterly basis as required. Recommendation - We recommend that DHS comply with the specified requirements and establish adequate policies and procedures to ensure that cancelled and uncashed checks over 180 days from the date of issuance are identified on a quarterly basis and all FFP received for uncashed checks are refunded to the Federal government in a timely manner. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 100 Finding Number: 2017-051 Prior Year Finding Number: N/A Compliance Requirement: Special Tests and Provisions – Provider Eligibility Program: Government Department/Agency: U.S. Department of Health and Human Services Medicaid Cluster CFDA #: 93.778 Award #: Various Award Year: 10/01/2014 – 09/30/2022 Department of Human Services (DHS) Criteria – In order to receive Medicaid payments, providers of medical services must be licensed in accordance with Federal, State, and local laws and regulations to participate in the Medicaid program. Moreover, in accordance with the disclosure requirements of 42 CFR 455 subpart B, Disclosure of Information by Providers and Fiscal Agents, providers that are not practitioners or a group of practitioners are required to disclose certain information when applying to participate in the Medicaid program. Condition – During our review of 23 providers receiving payments during the fiscal year, we noted the following: • DHS was unable to provide the eligibility determination letter for all selected providers. • 11 out of the 23 providers selected did not furnish the required disclosure information prior to enrollment in the Medicaid program. • We also noted that the State or Territory Plan had not been updated with all amendments. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect - Noncompliance with program requirements could result in disallowances of costs and ineligible providers could be participating in the program. Cause - DHS does not appear to have adequate policies and procedures in place to ensure a consistent and systematic review of documentation and file maintenance. Recommendation - We recommend that DHS perform regular reviews of the data in its files to ensure accuracy and completeness. DHS should also review its records retention policies to ensure that complete documentation is maintained, safeguarded, and available for review. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 101 Finding Number: 2017-052 Prior Year Finding Number: 2016-025 Compliance Requirement: Special Tests and Provisions - Inpatient Hospital and Long-Term Care Facility Audits Program: Government Department/Agency: U.S. Department of Health and Human Services Medicaid Cluster CFDA #: 93.778 Award #: Various Award Year: 10/01/2014 – 09/30/2022 Department of Human Services (DHS) Criteria – The State or Territory Medicaid agency pays for inpatient hospital services and long-term care facility services through the use of rates that are reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated providers. The State or Territory Medicaid agency must provide for the filing of uniform cost reports for each participating provider. These cost reports are used to establish payment rates. The State or Territory Medicaid agency must provide for the periodic audits of financial and statistical records of participating providers. The specific audit requirements will be established by the State or Territory Plan (42 CFR section 447.253). Condition – DHS provides Medicaid services to eligible Territory residents through inpatient hospitals and long-term care facilities. These hospitals and facilities include various Territory agencies and third- party service providers. The costs incurred by these facilities are summarized in a cost report that is submitted to DHS. DHS awarded a contract in August 2017 for the audit of these cost reports; however, we noted that DHS had not received any audited cost reports for fiscal year 2017. Questioned Costs - Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect – Without timely audits of the cost reports, DHS has no assurance that the costs incurred by the medical facilities are actual costs incurred. Further, the difference between costs submitted for reimbursement and the costs actually reimbursed result in the use of local, rather than Federal, dollars to fund Medicaid expenditures. Cause – DHS did not have sufficient time to obtain audited cost reports for fiscal year 2017, due to delays in awarding of the contract for the requisite services. Recommendation – We recommend that DHS evaluate and develop policies and procedures to obtain and audit the cost reports. This will allow DHS to reduce the time between the Medicaid expenditures being incurred and the ultimate reimbursement from the Federal government. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 102 Finding Number: 2017-053 Prior Year Finding Number: 2016-026 Compliance Requirement: Special Tests and Provisions - Medicaid Fraud Control Unit Program: Government Department/Agency: U.S. Department of Health and Human Services Medicaid Cluster CFDA #: 93.778 Award #: Various Award Year: 10/01/2014 – 09/30/2022 Department of Human Services (DHS) Criteria – States or Territories are required as part of their Medicaid State plans to maintain a Medicaid Fraud Control Unit (MFCU), unless the Secretary of HHS determines that certain safeguards are met regarding fraud and abuse and waives the requirement. Condition - The DHS Medical Assistance Program does not have in place a Medicaid Fraud Control Unit. Further, we were not provided with a list of violations of Medicaid laws and regulations. Questioned Costs - Not determinable. Context - This is a condition identified per review of DHS’ compliance with the specified requirements. Effect - There may be prolonged, ongoing cases of fraud which may be unnoticed and remain unreported by the program. Funds available are possibly being used inappropriately, with no methodology of properly identifying or tracking the amounts. Cause - DHS does not have an effective system in place to address the program’s requirements. Recommendation - A Medicaid Fraud Control Unit needs to be implemented immediately, as it is a program requirement. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 103 Finding Number: 2017-054 Prior Year Finding Number: N/A Compliance Requirement: Special Tests and Provisions – ADP Risk Analysis and System Security Review Program: Government Department/Agency: U.S. Department of Health and Human Services Medicaid Cluster CFDA #: 93.778 Award #: Various Award Year: 10/01/2014 – 09/30/2022 Department of Human Services (DHS) Criteria – State or Territory agencies must establish and maintain a program for conducting periodic risk analyses to ensure that appropriate, cost effective safeguards are incorporated into new and existing systems. State or Territory agencies must perform risk analyses whenever significant system changes occur. State or Territory agencies shall review the ADP system security of installations involved in the administration of HHS programs on a biennial basis. At a minimum, the reviews shall include an evaluation of physical and data security operating procedures and personnel practices. The State or Territory agency shall maintain reports on its biennial ADP system security reviews, together with pertinent supporting documentation, for HHS on-site reviews (45 CFR section 95.621). Condition – DHS implemented the Virgin Islands Benefit Eligibility System (VIBES) in July 2017. DHS was unable to provide supporting documentation to evidence the performance of the required ADP Risk Analysis and System Security Review. Questioned Costs - Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect - The absence of policies to ensure these analyses and reviews are performed may lead to physical and data security issues and noncompliance with program requirements. Further, DHS’ risk of incomplete or inaccurate data processing, or worse, the risk of fraud, increases. Cause – DHS’ records do not permit a determination as to the sufficiency of the design and operation of key controls surrounding the environment in which the Medicaid claims reside. Recommendation - We recommend that management should perform and review a risk analysis and system security review for VIBES. All issues should be addressed by management. If management becomes aware that such a report will not be available, we recommend that management conduct its own review. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 104 Finding Number: 2017-055 Prior Year Finding Number: 2016-028 Compliance Requirement: Special Tests and Provisions - Utilization Control and Program Integrity Program: Government Department/Agency: U.S. Department of Health and Human Services Medicaid Cluster CFDA #: 93.778 Award #: Various Award Year: 10/01/2014 – 09/30/2022 Department of Human Services (DHS) Criteria – The State or Territory plan must provide methods and procedures to safeguard against unnecessary utilization of care and services, including long-term care institutions. The State or Territory must have: (1) methods or criteria for identifying suspected fraud cases; (2) methods for investigating these cases; and (3) procedures, developed in cooperation with legal authorities, for referring suspected fraud cases to law enforcement officials (42 CFR parts 455, 456, and 1002). Suspected fraud should be referred to the State or Territory Medicaid Fraud Control Unit (42 CFR part 1007). The State or Territory Medicaid agency must establish and use written criteria for evaluating the appropriateness and quality of Medicaid services. The agency must have procedures for the ongoing post-payment review, on a sample basis, of the need for and the quality and timeliness of Medicaid services. The State or Territory Medicaid agency may conduct this review directly or may contract with a quality improvement organization (QIO). Condition – DHS does not have the necessary controls or procedures to safeguard against unnecessary utilization of care and services and to identify, investigate, and refer suspected fraud cases. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect – There may be prolonged, ongoing cases of unnecessary utilization and fraud which may be unnoticed and remain unreported by the program. Funds available are possibly being used inappropriately, with no methodology of properly identifying or tracking the amounts. Cause – DHS does not have an effective system in place to address the program’s requirements. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 105 Recommendation – DHS should reconsider whether it would like to be directly responsible for Utilization Control and Program Integrity, or if the use of a QIO would better suit current needs. Once this is decided, DHS should take the necessary steps to ensure compliance with this requirement. The written procedures should reflect the actual actions to be taken. In the event a QIO is used, DHS should be involved throughout, so that it is aware of the program’s vulnerabilities and has the opportunity to make the necessary changes for improvement in a timely manner. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 106 Finding Number: 2017-056 Prior Year Finding Number: 2016-029 Compliance Requirement: Activities Allowed or Unallowed Program: Government Department/Agency: U.S. Department of Health and Human Services Children’s Health Insurance Program CFDA #: 93.767 Award #: Various Award Year: 10/01/2015 – 09/30/2018 Department of Human Services (DHS) Criteria – 2 CFR 200.303, Internal Control, requires the non-federal entity to establish and maintain effective internal control over Federal awards that provides reasonable assurance that the non-federal entity is managing Federal awards in compliance with Federal statutes, regulations, and other terms and conditions. Condition – We reviewed 60 claims processed during fiscal year 2017 totaling $395,525, and noted the following: • 2 out of the 60 provider agreements had expired prior to the date the medical service had been provided. • 12 out of the 60 claims did not have evidence that they were properly reviewed and approved. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Total claims paid in fiscal year 2017 were $8,918,145. Effect – Noncompliance with program requirements could result in disallowances of costs and providers could be receiving benefits that they are not entitled to receive. Cause – DHS does not appear to have adequate policies and procedures in place to ensure a consistent and systematic review of the data in its provider case files. Recommendation – We recommend that DHS perform regular reviews of the data in its provider case files to ensure accuracy and completeness and confirming that only properly enrolled medical providers are providing medical services. Additional levels of review by a supervisor or manager can provide more timely quality assurance oversight over the process. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 107 Finding Number: 2017-057 Prior Year Finding Number: 2016-030 Compliance Requirement: Cash Management Program: Government Department/Agency: U.S. Department of Health and Human Services Children’s Health Insurance Program CFDA #: 93.767 Award #: Various Award Year: 10/01/2015 – 09/30/2018 Department of Human Services (DHS) Criteria - The Cash Management Improvement Act of 1990 (CMIA) agreement between the Government of the United States Virgin Islands and the U.S. Department of Treasury requires that established funding techniques and clearance patterns be complied with when requesting Federal funds. The CMIA agreement stipulates that funding for payments to vendors and all other costs require the use of an average clearance funding technique and a clearance pattern of 4 days for this program. The CMIA agreement also stipulates that funding for payments for salaries requires the use of an average clearance funding technique and a clearance pattern of 0 days for this program. These techniques require DHS to minimize the time that elapses between the payment of the disbursement and the request for reimbursement. Condition – We reviewed 9 out of 20 drawdowns made during fiscal year 2017, totaling $4,722,131, and noted that 5 out of the 9 sampled drawdowns were not in accordance with the provisions of the CMIA agreement and all of the selections did not contain evidence of review and approval. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the provisions of the CMIA agreement and general compliance principles. Total fiscal year 2017 drawdown requests were $7,177,930. Effect – DHS is not in compliance with the stated provisions. The opportunity to use the money for other immediate cash needs is unnecessarily delayed when funds are not requested timely. Additionally, inaccurate information may have been reported to the Federal government in the absence of required reviews. Cause – DHS did not appear to exercise due diligence in requesting Federal funds consistent with the CMIA agreement and its actual cash needs and in following internal procedures over review and authorizations. Recommendation – We recommend that DHS comply with the provisions of the CMIA agreement and request Federal funds consistent with the CMIA agreement funding techniques and clearance patterns for this program and continue to be vigilant in following internal procedures over reviews and authorizations. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 108 Finding Number: 2017-058 Prior Year Finding Number: 2016-031 Compliance Requirement: Matching, Level of Effort, and Earmarking Program: Government Department/Agency: U.S. Department of Health and Human Services Children’s Health Insurance Program CFDA #: 93.767 Award #: Various Award Year: 10/01/2015 – 09/30/2018 Department of Human Services (DHS) Criteria – In accordance with the Compliance Supplement, the State or Territory is required to pay part of the costs of providing health care to the poor and part of the costs of administering the program. Different participation rates apply to medical assistance payments. There are also different Federal financial participation rates for the different types of costs incurred in administering the entitlement program, such as administration (including administration of family planning services), training, computer, and other costs (42 CFR sections 433.10 and 433.15). Condition – We sampled and selected 3 matching calculations from the CMS-21, Quarterly CHIP Expenditures reports and noted that 3 out of the 4 reports did not contain evidence of review and approval. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect – DHS is in not in compliance with the stated provisions. Cause – DHS did not appear to exercise due diligence in following internal procedures over reviews and authorizations. Recommendation – We recommend that DHS deploy resources that are given the responsibility to ensure periodic monitoring and compliance of the match requirements throughout the fiscal year. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 109 Finding Number: 2017-059 Prior Year Finding Number: 2016-032 Compliance Requirement: Reporting Program: Government Department/Agency: U.S. Department of Health and Human Services Children’s Health Insurance Program CFDA #: 93.767 Award #: Various Award Year: 10/01/2015 – 09/30/2018 Department of Human Services (DHS) Criteria – In accordance with the Compliance Supplement, the State or Territory is required to submit CMS-21, Quarterly Children’s Health Insurance Program Statement of Expenditures for Title XXI for the Children’s Health Insurance Program, thirty days after the end of the quarter. Condition – We reviewed 3 out of the 4 quarterly CMS-21 reports submitted during the fiscal year and noted that the fourth quarter report’s financial information did not agree with the underlying records. We also noted that there was no evidence of review or approval prior to submission. Further, we noted 2 instances where DHS had failed to submit the reports within the respective due dates. Questioned Costs – Not determinable. Context – This is a condition identified per review of DHS’ compliance with the specified requirements. Effect – DHS is not in compliance with stated provisions and inaccurate information may have been reported to the Federal government. Cause – It appears that policies and procedures, including review over reporting procedures were not functioning as intended. Further, DHS does not have adequate control over maintenance of the underlying documentation used in preparing various reports. Recommendation – We recommend that DHS reevaluate its policies and procedures to ensure proper monitoring and review of the required reports by an appropriate official who would ensure the information submitted is complete, accurate, consistent, and submitted within the required timeframe. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 110 Finding Number: 2017-060 Prior Year Finding Number: N/A Compliance Requirement: Cash Management Program: Government Department/Agency: U.S. Department of Health and Human Services Epidemiology and Laboratory Capacity for Infectious Diseases CFDA #: 93.323 Award #: CK000377-03 Award Year: 08/01/2014 – 07/31/2019 Department of Health (DOH) Criteria – Effective control and accountability must be maintained for all grant awards to ensure funds are requested and used solely for authorized purposes. Condition – DOH did not perform a reconciliation of the Federal cash drawdown transactions and cash receipts recorded in the ERP system. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOH’s compliance with the specified requirements and general compliance principles. Total fiscal year 2017 drawdown requests were $4,318,949. Effect – DOH is not in compliance with the stated provisions. Inaccurate information may have been reported to the Federal government in the absence of required reconciliation and reviews. Cause – It appears that policies and procedures, including review over cash management transactions, were not functioning as intended. Recommendation - We recommend that DOH reevaluate its policies and procedures to ensure proper monitoring and continue to be vigilant in following internal procedures over reviews and authorizations. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 111 Finding Number: 2017-061 Prior Year Finding Number: N/A Compliance Requirement: Equipment and Real Property Management Program: Government Department/Agency: U.S. Department of Health and Human Services Epidemiology and Laboratory Capacity for Infectious Diseases CFDA #: 93.323 Award #: CK000377-03 Award Year: 08/01/2014 – 07/31/2019 Department of Health (DOH) Criteria – Per 2 CFR section 200.313, property records must be maintained that include a description of the property, a serial number or other identification number, the source of property, who holds title, the acquisition date, cost of the property, percentage of Federal participation in the cost of the property, the location, use and conditions of the property, and any ultimate disposition data including the date of disposal and sale price of the property. Further, a physical inventory of equipment should be taken at least once every 2 years and reconciled to the equipment records along with the usage of an appropriate control system to safeguard and maintain equipment. Condition – The Government’s Department of Property and Procurement (DPP) maintains the equipment register for DOH. DPP was unable to provide complete property records which met the stated requirements. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOH’s compliance with the specified requirements. Effect – There is a risk that inadequate recordkeeping of equipment could lead to misappropriation of assets and noncompliance with Federal regulations resulting in a return of Federal awards received. Cause – The Government does not appear to have a process in place to adequately monitor equipment acquired with Federal funds. Recommendation – We recommend that DOH and DPP improve internal controls to ensure adherence to Federal regulations related to equipment and its related maintenance. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing such assets. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 112 Finding Number: 2017-062 Prior Year Finding Number: N/A Compliance Requirement: Reporting Program: Government Department/Agency: U.S. Department of Health and Human Services Epidemiology and Laboratory Capacity for Infectious Diseases CFDA #: 93.323 Award #: CK000377-03 Award Year: 08/01/2014 – 07/31/2019 Department of Health (DOH) Criteria – Each State or Territory must file various financial, programmatic, and special reports. Additionally, the requirements necessitate that all submitted reports should be supported by the underlying performance records and presented in accordance with program requirements. Condition – We reviewed the 2 reports submitted and noted that 1 report did not have the necessary evidence of review and approval prior to submission. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOH’s compliance with the specified requirements. Effect – DOH is not in compliance with the stated provisions and inaccurate information may have been reported to the Federal government. Cause – It appears that policies and procedures, including review over reporting procedures were not functioning as intended. Recommendation – We recommend that DOH reevaluate its policies and procedures to ensure proper monitoring and review of the required reports by an appropriate official who would ensure the information submitted is complete, accurate, consistent and submitted within the required timeframe. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 113 Finding Number: 2017-063 Prior Year Finding Number: 2016-038 Compliance Requirement: Allowable Cost/Cost Principles – Payroll Activities Program: Government Department/Agency: U.S. Department of Health and Human Services Child Support Enforcement CFDA #: 93.563 Award #: 1704VICSES, 1704VICEST Award Year: 10/01/2016 – 09/30/2017 Department of Justice (DOJ) Criteria – 2 CFR 200.303, Internal Control, requires the non-federal entity to establish and maintain effective internal control over Federal awards that provides reasonable assurance that the non-federal entity is managing Federal awards in compliance with Federal statutes, regulations, and other terms and conditions. Additionally, 2 CFR 200.430(i) states that charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records must also support the distribution of the employee’s salary or wages among specific activities or cost objectives if the employee works on more than one Federal award; a Federal award and non-Federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity. Condition – We sampled and selected 60 payroll transactions and noted that 5 transactions in the payroll register did not agree to the supporting timesheets and Notice of Personnel Actions (NOPAs). Questioned Costs – Not determinable. Context – This is a condition identified per review of DOJ’s compliance with the specified requirements. The total amount of payroll expenditures charged to the program in fiscal year 2017 was $1,920,081. Effect – DOJ is not in compliance with the stated provisions. Failure to properly review and support expenditures can result in noncompliance with laws and regulations along with loss of funding. Cause – DOJ did not appear to exercise due diligence in following internal procedures over reviews and authorizations. Recommendation – We recommend that DOJ continue to be vigilant in following internal procedures over reviews and authorizations. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 114 Finding Number: 2017-064 Prior Year Finding Number: N/A Compliance Requirement: Allowable Cost/Cost Principles – Indirect Cost Activities Program: Government Department/Agency: U.S. Department of Health and Human Services Child Support Enforcement CFDA #: 93.563 Award #: 1704VICSES, 1704VICEST Award Year: 10/01/2016 – 09/30/2017 Department of Justice (DOJ) Criteria – Actual conditions must be taken into account in selecting the base to be used in allocating the expenses in each grouping to the benefitted functions. When an allocation can be made by assignment of a cost grouping directly to the function benefitted, the allocation must be made in that manner. When the expenses in a grouping are more general in nature, the allocation should be made using a selected base which produces results that are equitable to both the Federal Government and the governmental unit. Condition – DOJ did reconcile and record indirect costs accurately in the accounting system and did not accurately allocate the share of indirect costs to the program. It appears that indirect costs of approximately $321,000 were excluded and resulted in an understatement of indirect costs claimed for the period. Questioned Costs – Not applicable. Context – This is a condition identified per review of DOJ’s compliance with the specified requirements. DOJ has an approved indirect cost rate agreement of 29.92%. Effect – Reimbursable amounts were understated. Cause – Indirect costs were not properly calculated and captured in the accounting system. Recommendation – We recommend that DOJ should review and reconcile cost allocations to ensure accuracy. DOJ may also consider revising its future cost allocations for any understatements. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 115 Finding Number: 2017-065 Prior Year Finding Number: 2016-040 Compliance Requirement: Cash Management Program: Government Department/Agency: U.S. Department of Health and Human Services Child Support Enforcement CFDA #: 93.563 Award #: 1704VICSES, 1704VICEST Award Year: 10/01/2016 – 09/30/2017 Department of Justice (DOJ) Criteria – The Cash Management Improvement Act of 1990 (CMIA) agreement between the Government of the United States Virgin Islands and the U.S. Department of Treasury requires that established funding techniques and clearance patterns be complied with when requesting Federal funds. The CMIA agreement stipulates that funding for payments to vendors and all other costs require the use of an average clearance funding technique and a clearance pattern of 4 days for this program. The CMIA agreement also stipulates that funding for payments for salaries requires the use of an average clearance funding technique and a clearance pattern of 0 days for this program. These techniques require DOJ to minimize the time that elapses between the payment of the disbursement and the request for reimbursement. Condition – We reviewed 7 out of the 65 drawdowns made during fiscal year 2017, totaling $396,933, and noted the following: • 4 out of the 7 sampled drawdowns did not contain evidence of review and approval. • 2 out of the 7 sampled drawdowns were not in accordance with the provisions of the CMIA agreement. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOJ's compliance with the provisions of the CMIA agreement and general compliance principles. Total fiscal year 2017 drawdown requests were $3,319,943. Effect – DOJ is not in compliance with the stated provisions. The opportunity to use the money for other immediate cash needs is unnecessarily delayed when funds are not requested timely. Additionally, inaccurate information may have been reported to the Federal government in the absence of required reviews. Cause – DOJ did not appear to exercise due diligence in requesting Federal funds consistent with the CMIA agreement and its actual cash needs and in following internal procedures over reviews and authorizations. Recommendation – We recommend that DOJ comply with the provisions of the CMIA agreement and request Federal funds consistent with the CMIA agreement funding techniques and clearance patterns for this program and continue to be vigilant in following internal procedures over reviews and authorizations. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 116 Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 117 Finding Number: 2017-066 Prior Year Finding Number: 2016-041 Compliance Requirement: Equipment and Real Property Management Program: Government Department/Agency: U.S. Department of Health and Human Services Child Support Enforcement CFDA #: 93.563 Award #: 1704VICSES, 1704VICEST Award Year: 10/01/2016 – 09/30/2017 Department of Justice (DOJ) Criteria – Per 2 CFR section 200.313, property records must be maintained that include a description of the property, a serial number or other identification number, the source of property, who holds title, the acquisition date, cost of the property, percentage of Federal participation in the cost of the property, the location, use and conditions of the property, and any ultimate disposition data including the date of disposal and sale price of the property. Further, a physical inventory of equipment should be taken at least once every 2 years and reconciled to the equipment records along with the usage of an appropriate control system to safeguard and maintain equipment. Condition – The Government’s Department of Property and Procurement (DPP) maintains the equipment register for DOJ. DPP was unable to provide complete property records which met the stated requirements. Further, an inventory count had not been performed. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOJ’s compliance with the specified requirements. Effect – There is a risk that inadequate recordkeeping of equipment could lead to misappropriation of assets and noncompliance with Federal regulations resulting in a return of Federal awards received. Cause – The Government does not appear to have a process in place to adequately monitor equipment acquired with Federal funds. Recommendation – We recommend that DOJ and DPP improve internal controls to ensure adherence to Federal regulations related to equipment and its related maintenance. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing such assets. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 118 Finding Number: 2017-067 Prior Year Finding Number: 2016-042 Compliance Requirement: Matching, Level of Effort, and Earmarking Program: Government Department/Agency: U.S. Department of Health and Human Services Child Support Enforcement CFDA #: 93.563 Award #: 1704VICSES, 1704VICEST Award Year: 10/01/16 - 09/30/17 Department of Justice (DOJ) Criteria – In accordance with the Compliance Supplement, the program allows the State or Territory to be funded at the Federal financial participation rate of 66% for eligible program costs. Condition – Management was unable to readily exhibit and provide its computation of the matching calculation or provide evidence that they were monitoring compliance with said requirements. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOJ’s compliance with the specified requirements. Effect – DOJ is not in compliance with the stated provisions. Cause – DOJ does not appear to have adequate policies and procedures in place to ensure complete compliance with the matching requirement. Recommendation – We recommend that DOJ deploy resources that are given the responsibility to ensure periodic monitoring and compliance of the match requirement throughout the fiscal year. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 119 Finding Number: 2017-068 Prior Year Finding Number: 2016-044 Compliance Requirement: Reporting Program: Government Department/Agency: U.S. Department of Health and Human Services Child Support Enforcement CFDA #: 93.563 Award #: 1704VICSES, 1704VICEST Award Year: 10/01/16 - 09/30/17 Department of Justice (DOJ) Criteria – Each State or Territory must file various financial, programmatic, and special reports. Additionally, the requirements necessitate that all submitted reports should be supported by the underlying performance records and presented in accordance with program requirements. Condition – We reviewed 4 out of the 12 reports submitted and noted the following: • 1 instance where the report did not agree to the underlying supporting documentation. • 1 instance where the report did not have evidence of review and approval prior to submission. Also, we were unable to determine if the report was actually submitted as the submission date was not evident. Questioned Costs – Not determinable. Context – This is a condition identified per review of DOJ’s compliance with the specified requirements. Effect – DOJ is not in compliance with stated provisions and inaccurate information may have been reported to the Federal government. Cause – It appears that policies and procedures, including review over reporting procedures were not functioning as intended. Further, DOJ does not have adequate control over maintenance of the underlying documentation used in preparing various reports. Recommendation – We recommend that DOJ reevaluate its policies and procedures to ensure proper monitoring and review of the required reports by an appropriate official who would ensure the information submitted is complete, accurate, consistent, and submitted within the required timeframe. Views of Responsible Officials – The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 120 Finding Number: 2017-069 Prior Year Finding Number: 2016-049 Compliance Requirement: Cash Management Program: Government Department/Agency: U.S. Department of Transportation Highway Planning and Construction Cluster CFDA #: 20.205 Award #/Name: Territorial Highway Program Implementation and Stewardship Agreement Award Year: 10/01/2016 - 9/30/2020 Department of Public Works (DPW) Criteria – The Cash Management Improvement Act of 1990 (CMIA) agreement between the Government of the United States Virgin Islands and the U.S. Department of Treasury requires that established funding techniques and clearance patterns be complied with when requesting Federal funds. The CMIA agreement stipulates that funding for payments to vendors and all other costs require the use of an average clearance funding technique and a clearance pattern of 4 days for this program. The CMIA agreement also stipulates that funding for payments for salaries requires the use of an average clearance funding technique and a clearance pattern of 0 days for this program. These techniques require DPW to minimize the time that elapses between the payment of the disbursement and the request for reimbursement. Condition – We reviewed 60 out of 350 drawdowns made during fiscal year 2017, totaling $5,231,216, and noted that 47 out of the 60 sampled drawdowns were not in accordance with the provisions of the CMIA agreement. We also noted that 1 out of the 60 drawdowns did not have the required supporting documentation. Questioned Costs – Not determinable. Context – This is a condition identified per review of DPW’s compliance with the provisions of the CMIA agreement and general compliance principles. Total fiscal year 2017 drawdown requests were $5,816,624. Effect – DPW is not in compliance with the stated provisions. The opportunity to use the money for other immediate cash needs is unnecessarily delayed when funds are not requested timely. Cause – DPW did not appear to exercise due diligence in requesting Federal funds consistent with the CMIA agreement and its actual cash needs. Recommendation - We recommend that DPW comply with the provisions of the CMIA agreement and request Federal funds consistent with the CMIA agreement funding techniques and clearance patterns for this program. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 121 Finding Number: 2017-070 Prior Year Finding Number: 2016-050 Compliance Requirement: Equipment and Real Property Management Program: Government Department/Agency: U.S. Department of Transportation Highway Planning and Construction Cluster CFDA #: 20.205 Award #/Name: Territorial Highway Program Implementation and Stewardship Agreement Award Year: 10/01/2016 - 09/30/2020 Department of Public Works (DPW) Criteria – Per 2 CFR section 200.313, property records must be maintained that include a description of the property, a serial number or other identification number, the source of property, who holds title, the acquisition date, cost of the property, percentage of Federal participation in the cost of the property, the location, use and conditions of the property, and any ultimate disposition data including the date of disposal and sale price of the property. Further, a physical inventory of equipment should be taken at least once every 2 years and reconciled to the equipment records along with the usage of an appropriate control system to safeguard and maintain equipment. Condition – The Government’s Department of Property and Procurement (DPP) maintains the equipment register for DPW. DPP was unable to provide complete property records which met the stated requirements. Questioned Costs – Not determinable. Context – This is a condition identified per review of DPW’s compliance with the specified requirements. Effect – There is a risk that inadequate recordkeeping of equipment could lead to misappropriation of assets and noncompliance with Federal regulations resulting in a return of Federal awards received. Cause – The Government does not appear to have a process in place to adequately monitor equipment acquired with Federal funds. Recommendation – We recommend that DPW and DPP improve internal controls to ensure adherence to Federal regulations related to equipment and its related maintenance. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing such assets. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 122 Finding Number: 2017-071 Prior Year Finding Number: 2016-057 Compliance Requirement: Activities Allowed or Unallowed Program: Government Department/Agency: U.S. Department of Labor Unemployment Insurance CFDA #: 17.225 Award #: Various Award Year: 10/01/2012 – 12/31/2019 Department of Labor (VIDOL) Criteria – In accordance with 2 CFR Part 200, a State or Territory must adopt its own written fiscal and administrative requirements for expending and accounting for all funds, which are consistent with the provisions of the Uniform Guidance and extend such policies to all sub-recipients. These fiscal and administrative requirements must be sufficiently specific to ensure that: funds are used in compliance with all applicable Federal statutory and regulatory provisions, costs are reasonable and necessary for operating these programs, and funds are not used for general expenses required to carry out other responsibilities of a State or Territory or its sub-recipients. Condition – VIDOL was unable to provide reconciled accounting information relating to the majority of the Unemployment Insurance Trust Fund accounts. As such, we were unable to conclude on the fiscal and administrative requirements with respect to expending and accounting for all funds related to the Unemployment Insurance program. Questioned Costs – Not determinable. Context – This is a condition identified per review of VIDOL’s compliance with the specified requirements. Effect – Accounting tasks, such as periodic reconciliations, play a key role in proving the accuracy of accounting data and information included in various interim financial statements and/or Federal reports. A lack of timely preparation of complete and accurate reconciliations results in the absence of adequate control over both cash receipts and disbursements. Cause – VIDOL does not appear to have adequate policies and procedures in an effort to adequately administer the expending and accounting for all funds. Recommendation – We recommend that VIDOL improve internal controls to ensure adherence to Federal regulations related to the fiscal and administrative requirements for expending and accounting for all funds. In order to prevent significant errors in the financial records as well as prevent possible irregularities, including fraud, to exist and continue without notice, we recommend that all accounts, accruals, and reconciliations be reviewed on a periodic basis. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 123 Finding Number: 2017-072 Prior Year Finding Number: 2016-058 Compliance Requirement: Cash Management Program: Government Department/Agency: U.S. Department of Labor Unemployment Insurance CFDA #: 17.225 Award #: Various Award Year: 10/01/2012 – 12/31/2019 Department of Labor (VIDOL) Criteria – The Cash Management Improvement Act of 1990 (CMIA) agreement between the Government of the United States Virgin Islands and the U.S. Department of Treasury requires that established funding techniques and clearance patterns be complied with when requesting Federal funds. The CMIA agreement stipulates that funding for payments to vendors and all other costs require the use of an average clearance funding technique and a clearance pattern of 4 days for this program. The CMIA agreement also stipulates that funding for payments for salaries requires the use of an average clearance funding technique and a clearance pattern of 0 days for this program. These techniques require VIDOL to minimize the time that elapses between the payment of the disbursement and the request for reimbursement. Condition – We reviewed 60 out of 261 drawdowns made during fiscal year 2017, totaling $1,453,739, and noted that 1 out of the 60 sampled drawdowns was not in accordance with the provisions of the CMIA agreement. Questioned Costs – Not determinable. Context – This is a condition identified per review of VIDOL’s compliance with the provisions of the CMIA agreement and general compliance principles. Total fiscal year 2017 drawdown requests were $2,178,626. Effect – VIDOL is not in compliance with the stated provisions. The opportunity to use the money for other immediate cash needs is unnecessarily delayed when funds are not requested timely. Cause – VIDOL did not appear to exercise due diligence in requesting Federal funds consistent with the CMIA agreement and its actual cash needs. Recommendation - We recommend that VIDOL comply with the provisions of the CMIA agreement and request Federal funds consistent with the CMIA agreement funding techniques and clearance patterns for this program. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 124 Finding Number: 2017-073 Prior Year Finding Number: 2016-059 Compliance Requirement: Eligibility Program: Government Department/Agency: U.S. Department of Labor Unemployment Insurance CFDA #: 17.225 Award #: Various Award Year: 10/01/2012 – 12/31/2019 Department of Labor (VIDOL) Criteria – Public Law 112-96 Sec. 2101 requires that as a condition of eligibility for regular compensation, a claimant must be able to work, available to work, legally authorized to work in the United States, and actively seeking work. Further, 2 CFR 200.303, Internal Control, requires the non-federal entity to establish and maintain effective internal control over Federal awards that provides reasonable assurance that the non-federal entity is managing Federal awards in compliance with Federal statues, regulations, and other terms and conditions. Condition – In our review of 60 unemployment claimant files, we noted 25 instances where the VIDOL was not able to provide evidence that the claimant met the criteria for participating in the UI program, but had received benefits during the year. Questioned Costs – Not determinable. Context – This is a condition identified per review of VIDOL’s compliance with specified requirements. Effect – Noncompliance with program requirements could result in disallowances of costs and claimants could be receiving benefits that they are not entitled to receive under the program. Cause – VIDOL does not appear to have adequate policies and procedures in place to ensure a consistent and systematic review of the data in its claimant files. Recommendation - We recommend that VIDOL perform regular reviews of the data in its claimant files to ensure accuracy and completeness and confirming that only eligible claimants are receiving the entitled benefits. Additional levels of review by a supervisor or manager can provide more timely quality assurance oversight over the eligibility process. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 125 Finding Number: 2017-074 Prior Year Finding Number: N/A Compliance Requirement: Cash Management Program: Government Department/Agency: U.S. Department of the Interior Economic, Social, and Political Development of the Territories CFDA #: 15.875 Award #: Various Award Year: Various Various Criteria – The Cash Management Improvement Act of 1990 (CMIA) agreement between the Government of the United States Virgin Islands and the U.S. Department of Treasury requires that established funding techniques and clearance patterns be complied with when requesting Federal funds. The CMIA agreement stipulates that funding for payments to vendors and all other costs require the use of an average clearance funding technique and a clearance pattern of 4 days for this program. These techniques require the Government to minimize the time that elapses between the payment of the disbursement and the request for reimbursement. Condition – We reviewed 11 out of 94 drawdowns made during fiscal year 2017, totaling $1,799,154, and noted that 7 out of the 11 sampled drawdowns were not in accordance with the provisions of the CMIA agreement. Questioned Costs – Not determinable. Context – This is a condition identified per review of the Government’s compliance with the provisions of the CMIA agreement and general compliance principles. Total fiscal year 2017 drawdown requests were $4,669,660. Effect – The Government is in not in compliance with the stated provisions. The opportunity to use the money for other immediate cash needs is unnecessarily delayed when funds are not requested timely. Cause – The Government did not appear to exercise due diligence in requesting Federal funds consistent with the CMIA agreement and its actual cash needs. Recommendation - We recommend that the Government comply with the provisions of the CMIA agreement and request Federal funds consistent with the CMIA agreement funding techniques and clearance patterns for this program. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 126 Finding Number: 2017-075 Prior Year Finding Number: N/A Compliance Requirement: Equipment and Real Property Management Program: Government Department/Agency: U.S. Department of the Interior Economic, Social, and Political Development of the Territories CFDA #: 15.875 Award #: Various Award Year: Various Various Criteria – Per 2 CFR section 200.313, property records must be maintained that include a description of the property, a serial number or other identification number, the source of property, who holds title, the acquisition date, cost of the property, percentage of Federal participation in the cost of the property, the location, use and conditions of the property, and any ultimate disposition data including the date of disposal and sale price of the property. Further, a physical inventory of equipment should be taken at least once every 2 years and reconciled to the equipment records along with the usage of an appropriate control system to safeguard and maintain equipment. Condition – The Government’s Department of Property and Procurement (DPP) maintains the equipment register. DPP was unable to provide complete property records which met the stated requirements. Questioned Costs – Not determinable. Context – This is a condition identified per review of the Government’s compliance with the specified requirements. Effect – There is a risk that inadequate recordkeeping of equipment could lead to misappropriation of assets and noncompliance with Federal regulations resulting in a return of Federal awards received. Cause – The Government does not appear to have a process in place to adequately monitor equipment acquired with Federal funds. Recommendation – We recommend that DPP improve internal controls to ensure adherence to Federal regulations related to equipment and its related maintenance. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing such assets. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 127 Finding Number: 2017-076 Prior Year Finding Number: N/A Compliance Requirement: Procurement, Suspension, and Debarment Program: Government Department/Agency: U.S. Department of the Interior Economic, Social, and Political Development of the Territories CFDA #: 15.875 Award #: Various Award Year: Various Various Criteria – Recipients of Federal awards must have adequate policies and controls in place to ensure that the procedures are properly documented in the entity’s files, provide full and open competition supported by a cost or price analysis, provide a vendor debarment or suspension certification, provide for retention of files, and that supporting documentation corroborate compliance with these requirements. Condition – The Government’s Department of Property and Procurement (DPP) is primarily responsible for procurement transactions. In our review of 14 procurement transactions meeting the test threshold, we noted that 1 procurement file did not have sufficient supporting documents available to validate the procurement decision made. Questioned Costs – Not determinable. Context – This is a condition identified per review of the Government’s compliance with the specified requirements. We reviewed 14 procurement files with expenditures totaling $1,671,301, for fiscal year 2017. Effect – The Government could inadvertently contract with or make sub-awards to parties that are suspended or debarred from doing business with the Federal government as well as award contracts to vendors whose contract prices are unreasonable. In addition, contracts may be executed to unqualified vendors. Cause – The Government does not appear to have a process in place to adequately monitor and maintain completed contract files comprising of all supporting documents. Recommendation – We recommend that the Government improve internal controls to ensure adherence to Federal regulations relating to the procurement of goods and services and review current records retention policies. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing procurement tasks. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 128 Finding Number: 2017-077 Prior Year Finding Number: N/A Compliance Requirement: Allowable Cost/Cost Principles – Payroll Activities Program: Government Department/Agency: U.S. Department of Defense National Guard Military Operations and Maintenance (O&M) Projects CFDA #: 12.401 Award #: W9127P-15-2-1000 Award Year: 10/01/2016 - 09/30/2017 Office of the Adjutant General (OTAG) Criteria – 2 CFR 200.303, Internal Control, requires the non-federal entity to establish and maintain effective internal control over Federal awards that provides reasonable assurance that the non-federal entity is managing Federal awards in compliance with Federal statutes, regulations, and other terms and conditions. Additionally, 2 CFR 200.430(i) states that charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records must also support the distribution of the employee’s salary or wages among specific activities or cost objectives if the employee works on more than one Federal award; a Federal award and non-Federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity. Condition – We sampled and selected 116 payroll transactions and noted the following: • 6 supporting timesheets were not available for review. • 2 supporting timesheets had not been properly reviewed and approved. • 8 supporting timesheets did not agree to the hours reported in the payroll register. • 27 payroll transactions did not agree to the Notice of Personnel Action (NOPA) project codes. • 4 payroll transactions were funded from the fiscal year 2016 project code. • 14 transactions were charged to incorrect project codes. • 2 transactions utilized the incorrect Federal share rates. Questioned Costs – Not determinable. Context – This is a condition identified per review of OTAG’s compliance with specified requirements. Total expenditures charged to the program during fiscal year 2017 were $1,587,611. Effect – OTAG is not in compliance with the stated provisions. Failure to properly review and support expenditures can result in noncompliance with laws and regulations along with loss of funding. Cause – OTAG does not appear to have adequate policies and procedures in place to ensure compliance with applicable cost principles and maintenance of underlying documentation. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 129 Recommendation – We recommend that OTAG improve internal controls to ensure adherence to Federal regulations related to the fiscal and administrative requirements for expending and accounting for payroll expenditures. Where employees work solely on a single Federal program, charges for their salaries and wages should be supported by periodic certifications. Where employees work on multiple activities or cost objectives, a distribution of their salaries or wages should be supported by personnel activity reports (time and attendance) or equivalent documents. Such information should also be monitored, retained, and approved by a responsible official of OTAG in a timely manner. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 130 Finding Number: 2017-078 Prior Year Finding Number: 2016-045 Compliance Requirement: Cash Management Program: Government Department/Agency: U.S. Department of Defense National Guard Military Operations and Maintenance (O&M) Projects CFDA #: 12.401 Award #: W9127P-15-2-1000 Award Year: 10/01/2016 - 09/30/2017 Office of the Adjutant General (OTAG) Criteria – The Cash Management Improvement Act of 1990 (CMIA) agreement between the Government of the United States Virgin Islands and the U.S. Department of Treasury requires that established funding techniques and clearance patterns be complied with when requesting Federal funds. The CMIA agreement stipulates that funding for payments to vendors and all other costs require the use of an average clearance funding technique and a clearance pattern of 4 days for this program. The CMIA agreement also stipulates that funding for payments for salaries requires the use of an average clearance funding technique and a clearance pattern of 0 days for this program. These techniques require OTAG to minimize the time that elapses between the payment of the disbursement and the request for reimbursement. Condition – We reviewed 60 out of 251 drawdowns made during the year, totaling $2,270,309, and noted the following: • 44 out of the 60 sampled drawdowns were not in accordance with provisions of the CMIA agreement. • 11 out of 60 sampled drawdowns were not available for review. Questioned Costs – Not determinable. Context – This is a condition identified per review of OTAG’s compliance with the provisions of the CMIA agreement and general compliance principles. Total fiscal year 2017 drawdown requests were $4,020,732. Effect – OTAG is not in compliance with the stated provisions. The opportunity to use the money for other immediate cash needs is unnecessarily delayed when funds are not requested timely. Additionally, inaccurate information may have been reported to the Federal government in the absence of required reviews and supporting information. Cause – OTAG did not appear to exercise due diligence in requesting Federal funds consistent with the CMIA agreement and its actual cash needs and in following internal procedures over reviews, authorizations and retention of documents. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 131 Recommendation – We recommend that OTAG comply with the provisions of the CMIA agreement and request Federal funds consistent with the CMIA agreement funding techniques and clearance patterns for this program. Alternatively, if OTAG cannot meet the stated requirements due to the nature of its award agreement, measures should be taken to amend the stated requirements. Further, we recommend that OTAG improve its internal controls to ensure adherence to its current record retention policies. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 132 Finding Number: 2017-079 Prior Year Finding Number: 2016-046 Compliance Requirement: Matching, Level of Effort, and Earmarking Program: Government Department/Agency: U.S. Department of Defense National Guard Military Operations and Maintenance (O&M) Projects CFDA #: 12.401 Award #: W9127P-15-2-1000 Award Year: 10/01/2016 - 09/30/2017 Office of the Adjutant General (OTAG) Criteria – In accordance with and depending on the individual grant agreements for different programs, OTAG is required to contribute matching funds through cash, in-kind contributions, and/ or other non- cash support. Condition – OTAG was unable to readily exhibit and provide its computation of the matching calculation or provide evidence that it was monitoring compliance with said requirement. Questioned Costs – Not determinable. Context – This is a condition identified per review of OTAG’s compliance with the specified requirements. Effect – OTAG is not in compliance with the stated provisions. Cause – OTAG does not appear to have adequate policies and procedures in place to ensure complete compliance with the matching requirement. Recommendation – We recommend that OTAG deploy resources that are given the responsibility to ensure periodic monitoring and compliance of the match requirement throughout the fiscal year. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 133 Finding Number: 2017-080 Prior Year Finding Number: 2016-047 Compliance Requirement: Period of Performance Program: Government Department/Agency: U.S. Department of Defense National Guard Military Operations and Maintenance (O&M) Projects CFDA #: 12.401 Award #: W9127P-15-2-1000 Award Year: 10/01/2016 - 09/30/2017 Office of the Adjutant General (OTAG) Criteria – Per 2 CFR 200.309, a non-Federal entity may charge to the Federal award only allowable costs incurred during the period of performance and any costs incurred before the Federal awarding agency or pass-through entity made the Federal award that were authorized by the Federal awarding agency or pass- through entity. Per 2 CFR 200.343(b), unless the federal awarding agency or pass-through entity authorized an extension, a non-Federal entity must liquidate all obligations incurred under the Federal award not later than 90 calendar days after the end date of the period of performance as specified in the terms and conditions of the Federal award. Condition – We sampled and selected 116 transactions totaling $500,507, and noted that 22 out of the 116 transactions were not properly reviewed and approved and were paid outside the period of performance. Questioned Costs – $163,394. Context – This is a condition identified per review of OTAG’s compliance with the specified requirements. The known amount of the 22 transactions paid outside the period of performance amounted to $163,394. Effect – OTAG is not in compliance in compliance with the stated provisions. Failure to properly review and support expenditures can result in noncompliance with laws and regulations along with loss of funding. Cause – OTAG did not appear to have adequate policies and procedures in place to ensure compliance with the required period of performance stipulations. Recommendation – We recommend that OTAG strengthen its processes with respect to setting up and charging expenditures between various grant awards. We also recommend that OTAG enhance its review process to properly determine the activities of each grant relative to the appropriate period of performance. Such information should also be monitored, retained, and approved by a responsible official of OTAG in a timely manner. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 134 Finding Number: 2017-081 Prior Year Finding Number: 2016-048 Compliance Requirement: Reporting Program: Government Department/Agency: U.S. Department of Defense National Guard Military Operations and Maintenance (O&M) Projects CFDA #: 12.401 Award #: W9127P-15-2-1000 Award Year: 10/01/2016 - 09/30/2017 Office of the Adjutant General (OTAG) Criteria – Each State or Territory must file various financial, programmatic, and special reports. Additionally, the requirements necessitate that all submitted reports should be supported by the underlying performance records and presented in accordance with program requirements. Condition – During our review of the SF-270 reports, we noted the following: • 49 out of the 60 sampled samples did not have the necessary evidence of review and approval prior to submission. • 11 out of the 60 sampled reports were not available for review. Questioned Costs – Not determinable. Context – This is a condition identified per review of OTAG’s compliance with the specified requirements. Effect – OTAG is not compliance with the stated provisions and inaccurate information may have been reported to the Federal government. Cause – It appears that policies and procedures, including review over reporting procedures were not functioning as intended. Recommendation – We recommend the OTAG reevaluate its policies and procedures to ensure proper monitoring and review of the required reports by an appropriate official who would ensure that information submitted is complete, accurate, consistent, and submitted within the required timeframe. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 135 Finding Number: 2017-082 Prior Year Finding Number: N/A Compliance Requirement: Allowable Costs/Cost Principles – Indirect Cost Activities Program: Government Department/Agency: U.S. Environmental Protection Agency Performance Partnership Grants CFDA #: 66.605 Award #: Various Award Year: 10/01/2009 – 3/31/2018 Department of Planning and Natural Resources (DPNR) Criteria – Actual conditions must be taken into account in selecting the base to be used in allocating the expenses in each grouping to the benefitted functions. When an allocation can be made by assignment of a cost grouping directly to the function benefitted, the allocation must be made in that manner. When the expenses in a grouping are more general in nature, the allocation should be made using a selected base which produces results that are equitable to both the Federal Government and the governmental unit. Condition – DPNR did not reconcile and record indirect costs accurately in the accounting system and did not accurately allocate the share of indirect costs to the program. It appears that indirect costs of approximately $5,400 were excluded and this resulted in an understatement of indirect costs claimed for the period. Questioned Costs – Not applicable. Context – This is a condition identified per review of DPNR’s compliance with the specified requirements. DPNR has an approved indirect cost rate agreement of 19.38%. Effect – Reimbursable amounts were understated. Cause – Indirect costs were not properly calculated and captured in the accounting system. Recommendation – We recommend that DPNR should review and reconcile cost allocations to ensure accuracy. DPNR may also consider revising its future cost allocations for any understatements. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 136 Finding Number: 2017-083 Prior Year Finding Number: N/A Compliance Requirement: Cash Management Program: Government Department/Agency: U.S. Environmental Protection Agency Performance Partnership Grants CFDA #: 66.605 Award #: Various Award Year: 10/01/2009 – 3/31/2018 Department of Planning and Natural Resources (DPNR) Criteria - The Cash Management Improvement Act of 1990 (CMIA) agreement between the Government of the United States Virgin Islands and the U.S. Department of Treasury requires that established funding techniques and clearance patterns be complied with when requesting Federal funds. The CMIA agreement stipulates that funding for payments to vendors and all other costs require the use of an average clearance funding technique and a clearance pattern of 4 days for this program. The CMIA agreement also stipulates that funding for payments for salaries requires the use of an average clearance funding technique and a clearance pattern of 0 days for this program. These techniques require DPNR to minimize the time that elapses between the payment of the disbursement and the request for reimbursement. Condition - We reviewed 5 out of 8 drawdowns made during fiscal year 2017, totaling $2,036,072, and noted that 1 out of the 5 sampled drawdowns was not in accordance with the provisions of the CMIA agreement. Questioned Costs – Not determinable Context – This is a condition identified per review of DPNR’s compliance with the provisions of the CMIA agreement and general compliance principles. Total fiscal year 2017 drawdown requests were $2,090,125. Effect – DPNR is not in compliance with the stated principles. The opportunity to use money for other immediate cash needs is unnecessarily delayed when funds are not requested timely. Cause – DPNR did not appear to exercise due diligence in requesting Federal funds consistent with the CMIA agreement and its actual cash needs. Recommendation – We recommend that DPNR comply with the provisions of the CMIA agreement and request Federal funds consistent with the CMIA agreement funding techniques and clearance patterns for this program. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 137 Finding Number: 2017-084 Prior Year Finding Number: N/A Compliance Requirement: Equipment and Real Property Management Program: Government Department/Agency: U.S. Environmental Protection Agency Performance Partnership Grants CFDA #: 66.605 Award #: Various Award Year: 10/01/2009 – 03/31/2018 Department of Planning and Natural Resources (DPNR) Criteria – Per 2 CFR section 200.313, property records must be maintained that include a description of the property, a serial number or other identification number, the source of property, who holds title, the acquisition date, cost of the property, percentage of Federal participation in the cost of the property, the location, use and conditions of the property, and any ultimate disposition data including the date of disposal and sale price of the property. Further, a physical inventory of equipment should be taken at least once every 2 years and reconciled to the equipment records along with the usage of an appropriate control system to safeguard and maintain equipment. Condition – Condition – The Government’s Department of Property and Procurement (DPP) maintains the equipment register for DPNR. DPP was unable to provide complete property records which met the stated requirements. Further, we selected 4 equipment items for inspection and noted the following: • All items selected did not agree to the record-keeping maintained in the equipment register • We also noted that the physical condition for 3 out of the 4 equipment items selected had not been maintained. Questioned Costs – Not determinable. Context – This is a condition identified per review of DPNR’s compliance with the specified requirements. Effect – There is a risk that inadequate recordkeeping of equipment could lead to misappropriation of assets and noncompliance with Federal regulations resulting in a return of Federal awards received. Cause – The Government does not appear to have a process in place to adequately monitor equipment acquired with Federal funds. Recommendation – We recommend that DPNR and DPP improve internal controls to ensure adherence to Federal regulations related to equipment and its related maintenance. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing such assets. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 138 Finding Number: 2017-085 Prior Year Finding Number: N/A Compliance Requirement: Matching, Level of Effort, and Earmarking Program: Government Department/Agency: U.S. Environmental Protection Agency Performance Partnership Grants CFDA #: 66.605 Award #: Various Award Year: 10/01/2009 – 03/31/2018 Department of Planning and Natural Resources (DPNR) Criteria – In accordance with and depending on the individual grant agreements, EPA requires the recipient of the award to contribute matching funds. Condition – We sampled and selected 60 transactions and noted that 24 out of the 60 transactions did not contain evidence of review and approval. It also appears that the local match for fiscal year 2017 is understated by approximately $45,000. Questioned Costs – Not determinable. Context – This is a condition identified per review of DPNR’s compliance with the specified requirements. Effect – DPNR is not in compliance with the stated provisions. Cause – DPNR does not appear to have adequate policies and procedures in place to ensure complete compliance with the matching requirement. Recommendation – We recommend that DPNR deploy resources that are given the responsibility to ensure periodic monitoring and compliance of the match requirement throughout the fiscal year. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 139 Finding Number: 2017-086 Prior Year Finding Number: N/A Compliance Requirement: Procurement, Suspension, and Debarment Program: Government Department/Agency: U.S. Environmental Protection Agency Performance Partnership Grants CFDA #: 66.605 Award #: Various Award Year: 10/01/2009 – 03/31/2018 Department of Planning and Natural Resources (DPNR) Criteria – Recipients of Federal awards must have adequate policies and controls in place to ensure that the procedures are properly documented in the entity’s files, provide full and open competition supported by a cost or price analysis, provide a vendor debarment or suspension certification, provide for retention of files, and that supporting documentation corroborate compliance with these requirements. Condition – The Government’s Department of Property and Procurement (DPP) is primarily responsible for procurement transactions. In our review of 4 procurement transactions meeting the test threshold, we noted all procurement files did not have sufficient supporting documents available to validate the procurement decisions made. Questioned Costs – Not determinable. Context – This is a condition identified per review of DPNR’s compliance with the specified requirements. We reviewed 4 procurement files with expenditures totaling $143,604, for fiscal year 2017. Effect – DPNR could inadvertently contract with or make sub-awards to parties that are suspended or debarred from doing business with the Federal government. Cause – DPNR does not appear to have a process in place to adequately monitor and maintain completed contract files comprising of all supporting documents. Recommendation – We recommend that DPNR and DPP improve internal controls to ensure adherence to Federal regulations relating to the procurement of goods and services and review current records retention policies. There should be timely coordination and communication amongst all Government departments and/or agencies that are responsible for handling and managing procurement tasks. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 140 Finding Number: 2017-087 Prior Year Finding Number: N/A Compliance Requirement: Reporting Program: Government Department/Agency: U.S. Environmental Protection Agency Performance Partnership Grants CFDA #: 66.605 Award #: Various Award Year: 10/01/2009 – 03/31/2018 Department of Planning and Natural Resources (DPNR) Criteria – Each State or Territory must file various financial, programmatic, and special reports. Additionally, the requirements necessitate that all submitted reports should be supported by the underlying performance records and presented in accordance with program requirements. Condition – We reviewed 5 out of the 10 reports submitted during the fiscal year and noted that 4 reports did not have the necessary evidence of review and approval prior to submission. Questioned Costs – Not determinable. Context – This is a condition identified per review of DPNR’s compliance with the specified requirements. Effect – DPNR is not in compliance with stated provisions and inaccurate information may have been reported to the Federal government. Cause – It appears that policies and procedures, including review over reporting procedures were not functioning as intended. Recommendation – We recommend that DPNR reevaluate its policies and procedures to ensure proper monitoring and review of the required reports by an appropriate official who would ensure the information submitted is complete, accurate, consistent and submitted within the required timeframe. Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 141 Finding Number: 2017-088 Prior Year Finding Number: N/A Compliance Requirement: Data Collection Form and Single Audit Reporting Package Program: CFDA # 10.555/10.559 Child Nutrition Cluster CFDA # 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children CFDA # 10.561 Supplemental Nutrition Assistance Program Cluster CFDA # 12.401 National Guard Military Operations and Maintenance (O&M) Projects CFDA # 15.875 Economic, Social, and Political Development of the Territories CFDA # 17.225 Unemployment Insurance CFDA # 20.205 Highway Planning and Construction Cluster CFDA # 66.605 Performance Partnership Grants CFDA # 93.323 Epidemiology and Laboratory Capacity for Infectious Diseases CFDA # 93.563 Child Support Enforcement CFDA # 93.600 Head Start CFDA # 93.767 Children’s Health Insurance Program CFDA # 93.778 Medicaid Cluster Criteria – 2 CFR 200.512, Report Submission, establishes that the audit shall be completed and the data collection form and reporting package shall be submitted to the Federal Audit Clearinghouse (FAC) within the earlier of 30 days after receipt of the auditor’s report or nine (9) 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. As such, in a memorandum to Federal awarding agencies from the Office of Management and Budget, Office of Federal Financial Management (OFFM) dated October 29, 2017, the OFFM identified administrative relief for grantees impacted by Hurricanes Harvey, Irma, and Maria wherein, grantees were allowed to delay the completion and submission of the 2017 data collection form and single audit reporting package to twelve (12) months beyond the normal due date. Condition – The Government did not comply with the required submission date of the data collection form and reporting package to the FAC for the fiscal year ended September 30, 2017. The delayed due date for this report was no later than June 30, 2019. Questioned Costs – Not applicable. Context – This is a condition identified per review of the Government’s compliance with the specified requirements. Effect – The Government could be exposed to a reduction or elimination of funds by the Federal awarding agencies. Cause – The Government did not have controls in place to ensure that the reporting package was submitted to the FAC within the required timeframe. Recommendation – We recommend that the Government establish controls to ensure the reporting package is submitted to the FAC annually within the required timeframe. Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2017 142 Views of Responsible Officials - The Government concurs with the auditor’s findings and recommendations. The planned corrective actions are presented in the Government’s Corrective Action Plan attached as Appendix B to the Single Audit Report. Management’s Appendices Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 143 Section I – Financial Statement Findings Finding 2016-001, 2015-001 and 2014-001: Year-End Close Process Timeliness and Methodology of Close Process Current Status: Repeated. Finding 2017-003. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: In an effort to develop reliable and timely interim and year-end financial statements, all accounts, accruals, and reconciliations will be reviewed on a quarterly basis. Any unreconciled differences will be identified and resolved, with any applicable journal entries, recorded in the financial system of the Government. The Accounting Director, with oversight from the Assistant Commissioner, will continue to enforce the closing procedure(s) whereby all post-closing and audit adjustments maintained in the manual excel working trial balance are reviewed, ratified, and recorded in the financial management system throughout the audit engagement, such that the general ledger reflects audited balances and the correct opening balances for the upcoming fiscal year. As for more detail reconciliations between accounts that are not visible on a higher reconciliation overview, such as accurate federal classifications, or incorrect postings to grants, this will require additional human resources, to include the option of contractual agreement(s) to ensure that a more detail reconciliation is being completed. The Government will begin to assess the needs and take the necessary steps to provide necessary one on one meetings to identify the lack or needs. Journal Entries Current Status: Repeated. Finding 2017-003. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: In an effort to maintain a desirable separation of duties, management has updated the policy by implementing controls whereas, the individual that creates a journal entry will not approve or post that journal. This was only available to a limited staff at the Department of Finance and the policy has been made effective immediately. We are continuing to find these rare occurrences and reach out to those employees, to include Munis and system permissions. We also have to work with MUNIS to see if the names generated in the entry and posting area indeed denote no separation of duties. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 144 Finding 2016-002, 2015-002 and 2014-003: Revenue and Receivables Reconciliation of Subsidiary Registers Current Status: Repeated. Finding 2017-004. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: For purposes of interim financial reporting, the Bureau of Internal Revenue and the Department of Finance will conduct quarterly reconciliation meetings to reduce end of year adjustments, reconcile NSF checks in timely manner, and implement internal safeguards to allow for more efficient reconciliation. Allowance for Doubtful Accounts Current Status: Repeated. Finding 2017-004. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: For purposes of interim financial reporting, the Bureau of Internal Revenue will review and implement a new formula for doubtful accounts. We will continue to look at the rare cases of this impact. Tax Return Processing Method Current Status: Corrective action was taken. Finding not repeated in current year. Income Taxes Current Status: Corrective action was taken. Finding not repeated in current year. Optimum Usage of the Real Property Tax System Current Status: Corrective action was taken. Finding not repeated in current year. Real Property Tax Current Status: Repeated. Finding 2017-004. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 145 Corrective Action Plan: In an effort to provide adequate supporting documentations for sampled items, the Government will review, revise, and redistribute its records retention policy to departments and agencies. Other Revenues Current Status: Repeated. Finding 2017-004. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: In an effort to provide adequate supporting documentations for sampled items, the Government will ensure that the procedures to attach the documents are fully adhered to. We will conduct spot checks to ensure persons are adhering to this process. Finding 2016-003, 2015-003 and 2014-004: Grants Management Control Systems Over the Schedule of Expenditures of Federal Awards Current Status: Repeated. Finding 2017-005. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The SEFA is prepared by the Department of Finance via a customized report that extracts information from the ERP system. However, the reconciliation of grant expenditures is ostensibly decentralized at the departmental/agency level. As such, departments/agencies are primarily responsible for performing the reconciliation function between grant expenditures and federal financial reports; which, in the long run, will improve the reliability of the SEFA and reporting to grantor agencies. Therefore, in an effort to enhance the monthly reconciliation function, the Office of Management and Budget will fully implement the Grants Management Module, per the ERP system. Given that certain financial data related to the SEFA is provided to the Department of Finance by certain third-parties using separate financial systems, the Department of Finance will continue to coordinate with said parties – through the respective department/agency – in order mitigate the prospect of duplicating entries by documenting the roles, responsibilities, and timelines associated with posting financial data onto the central Government’s ERP system. Federal Grants and Contributions Current Status: Repeated. Finding 2017-005. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 146 Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: In an effort to more accurately account for Federal receivables and related transactions, the Office of Management and Budget will collaboratively work with the Department of Finance to fully implement the Grants Management Module, per the ERP system. In addition, the Government will conduct research to examine the need for training and proper oversight, to ensure that individuals are reconciling and properly classifying federal expenditures. This could also entail outsourcing this responsibility or developing a unit to address the oversight. Finding 2016-004, 2015-004 and 2014-005: Capital Assets and Related Expenditures Record Keeping Current Status: Repeated. Finding 2017-006. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Department of Property & Procurement will spearhead the monitoring and review of the Government’s capital assets and ensure reconciliation of supporting registers to its primary register. As the lead agency for managing the property of the Government, the Department of Property & Procurement will coordinate and communicate amongst all Government departments and/or agencies that are responsible for handling and managing capital assets. Impairment and Disposals Current Status: Repeated. Finding 2017-002. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: In an effort to implement a formal process whereby a periodic impairment assessment is conducted and to ensure that all disposals and retirements are consistently processed, the Government will identify key personnel from various departments and agencies to form a Capital Assets team in addition to full implementation of the fixed asset module within the ERP system. Reconciliation of Subsidiary Register Current Status: Repeated. Finding 2017-006. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 147 Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: In an effort to verify that all assets in the subsidiary register are reviewed and updated with sufficient descriptions, corrected acquisition dates, and recalculated accumulated depreciation, the Government’s Capital Assets team will be responsible for reconciling the general ledger accounts to the detailed records on a quarterly basis. Finding 2016-005, 2015-005 and 2014-006: Recording of Liabilities Retroactive Pay Liability Current Status: Repeated. Finding 2017-007. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Division of Personnel (DOP) will work with the Office of Collective Bargaining (OCB) and the Office of Management and Budget (OMB) to develop a master file that will serve as a clearinghouse for collective bargaining agreements and negotiated pay rates for unionized public sector workers. The Government’s Chief Negotiator will take the lead in developing the master file containing negotiated pay rates. OCB management will coordinate with the Division of Personnel’s staff, to include the Director and Information Technology/ Records Management staff, along with senior budget analysts from OMB to first develop a firm number with regard to the Government’s retroactive obligation. This process has already started. Additionally, on a bi-annual basis, the team will meet in order to compare negotiated employee salary rates to those contained in the official personnel records within the ERP system database. It must be noted that DOP functions as a facilitator with regard to the hiring process and relies on official financial information from OCB and OMB. OCB negotiates and interprets contract language for unionized public sector workers while OMB certifies the availability of funding for the purpose of wage implementation. DOP then reviews, audits, and implements newly negotiated wages. Medical Malpractice Liability Current Status: Repeated. Finding 2017-007. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 148 Corrective Action Plan: The Department of Health will allocate the requisite resources to properly evaluate the necessary information, which can then be provided to an actuarial service provider for purposes of facilitating the Government in calculating the year-end medical malpractice liability. Accounts Payable Current Status: Repeated. Finding 2017-007. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: At present, the ERP system does not allow departments/agencies to enter vendor invoices unless a sufficient allotment is approved by OMB. As a result of this system functionality, certain vendor invoices are set-aside, rather than entered (or accrued for immediately), until OMB provides for a periodic allotment – which may occur several months after year-end. Therefore, given that the OMB allotment process is the underlying controlling mechanism for entering vendor invoices, the Department of Finance must perform a manually intensive review of year-end transactions that are posted in a subsequent year. The Department of Finance will proactively collaborate with the software vendor supporting its ERP Accounts Payable module to ascertain whether a reduction in the existing manual efforts can be achieved. Ongoing training and employee development will be made available for all users of the accounts payable module and continuous development of the standard operating policies will be enhanced. Income Tax Refunds Payable Current Status: Corrective action was taken. Finding not repeated in current year. Landfill Closure and Post Closure Costs Liability Current Status: Repeated. Finding 2017-007. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Government will work with its consultants to implement monitoring controls and ensure that all calculations are reviewed timely. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 149 Finding 2016-006, 2015-006 and 2014-007: Management of the Medicaid Program Cost Report Audits Current Status: Repeated. Finding 2017-008. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Medicaid Program is presently in an active contract with a vendor who is providing the cost audits and reconciliations as required by the Federal regulations. The audits were delayed due to the passage of the hurricanes in September 2017. Presently, the auditor is wrapping up the audits inclusive of fiscal year 2017 and anticipates completion by the end of calendar year 2019. Utilization Control and Medicaid Fraud Control Unit Current Status: Repeated. Finding 2017-008. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: Subsequent to fiscal year-end and during 2018, the V.I. Medicaid Fraud Control Unit (MFCU) was established through a Memorandum of Understanding. The unit is located within the Department of Justice. The MFCU has Territory-wide authority to investigate and criminally prosecute (or refer for prosecution) cases of Medicaid fraud and patient abuse or neglect in residential care facilities. The MFCU may also bring civil actions to recover false Medicaid claims. The MFCU has a memorandum of understanding with the Virgin Islands Medicaid Program which describes the agencies' working relationship. Further, as the Medicaid Fraud Control Unit has been created, the program is in the process of developing its own internal controls in an effort to prevent unnecessary utilization of care and services. The Medical Assistance Program continues to conduct clinical reviews of all inpatient stays over ten days, including a clinical review of the Patient Care Plans. Finding 2016-007, 2015-007 and 2014-008: Unemployment Insurance Trust Fund Current Status: Repeated. Finding 2017-009. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 150 Corrective Action Plan: The Virgin Islands Department of Labor (VIDOL) recognizes the need to properly report the activities of the Unemployment Insurance Trust Fund. VIDOL has requested and received approval from the Virgin Islands Office of Management and Budget for the hiring of accountants, whose responsibilities will be to record the activities of the Fund in accordance with generally accepted accounting practices. In addition, as part of the year-end financial reporting process related to the Government’s financial statement preparation, VIDOL will work with the Department of Finance to ensure that it receives the Unemployment Insurance Trust Fund information timely. Finding 2016-008, 2015-008 and 2014-011: Workers Compensation Program Accuracy of the Program Loss Reserves Current Status: Repeated. Finding 2017-010. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: Workers Compensation claims are handled manually; therefore, assumptions of existing claim losses are unpredictable as it takes on claim (severe injury) to change future claims costs and/or payouts as healthcare rates vary and based on the availability of funds. Projection is made based on previous year’s history. VIDOL purchased the ERIC System Risk Management software. Government Insurance Fund Current Status: Repeated. Finding 2017-001. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Executive and Legislative branches of Government will collaborate to implement various recommendations of its actuary in an effort to provide for the long-term financial viability of the Fund. Finding 2016-009, 2015-009 and 2014-009: Pension Plan Obligations Plan Funding Considerations Current Status: Repeated. Finding 2017-001. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 151 Corrective Action Plan: In prior fiscal years, the Government allocated the relevant resources to conduct comprehensive studies and recommend revisions to benefits as well as establish funding policies to ensure the minimum ARC obligations are met each year. Much of the efforts put forth are now being deliberated by the Legislature for approval and submission to the Governor. Plan Valuation Methodology Current Status: Corrective action was taken. Finding not repeated in current year. Plan Census Data and Upcoming Pronouncement Current Status: Repeated. Finding 2017-001 and 2017-007. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: We are working with the actuary to implement this Standard; explicitly, the calculation of the net OPEB liability for the fiscal year ended September 30, 2018. For the past three (3) years, since the implementation of the new Benefits system (V3), Government Employees’ Retirement System (GERS) has been allocating resources to identify and correct inaccurate member data in the census database that is provided to our actuaries. Additionally, GERS will allocate displaced employees due to the suspension of the Loan Program to assist with the due diligence on the accuracy of the member information in the census database. The Division of Personnel will coordinate with the GERS Administrator to discuss how both agencies can collaborate to effectively improve the quality of the census data. It is anticipated that the GERS and the Division of Personnel will do an annual comparative analysis of the employee and retiree related data held by both entities. During this process, data will be reconciled in both databases. After the initial reconciliation is completed, an annual review will be done to ensure that relevant information is synchronized within both systems. Information Technology and Records Management personnel from both agencies will be intimately involved in these meetings. Finding 2016-010, 2015-010 and 2014-002: Bank Accounts Strengthen Controls Over Bank Reconciliations Current Status: Repeated. Finding 2017-012. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 152 Corrective Action Plan: The Treasury Director, with oversight from the Assistant Commissioner will reexamine process to include reviewing outstanding checks and other reconciling items that have not cleared a specific bank account for more than one year. Upon identifying negotiable instruments that exceed the one-year threshold, the Treasury Director will develop an annual procedure to further research and validate the status of the reconciling items in an effort to ascertain whether they can be properly removed from on-going bank reconciliations, with the original transaction(s) reversed. Finding 2016-011, 2015-011 and 2014-010: Payroll, Related Accruals, and Other Expenditures Payroll Expenditures Current Status: Repeated. Finding 2017-011. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: We will enhance monitoring of deactivating employees from the system and we will closely review reports for appropriate and accurate information. Transactions with Personnel Current Status: Repeated. Finding 2017-011. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Department of Finance will coordinate with the Office of the Governor to strengthen, recommunicate, and monitor the reimbursement policy of the Government. Furthermore, we are exploring systems for automatic reconciliations and will consider hiring someone to work at the Department of Finance, specifically to handle credit card payments. Supporting Documentation for Expenditures Current Status: Repeated. Finding 2017-011. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: We will continue to enforce the Standard of Operating Procedures and Policies (SOPP) that all invoices are attached in the ERP system and closely examine the invoice approval process. As part of the invoice approval, invoices are closely reviewed and supported in the Accounts Payable module. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 153 Finding 2016-012, 2015-012 and 2014-012: Information Technology Environment Current Status: Repeated. Finding 2017-013. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan I: The Bureau of Internal Revenue (the Bureau) acknowledges that there are issues surrounding the IT area that must be addressed to ensure the integrity and protection of the systems. The Bureau will establish change management policies and procedures that would require formal notice of approval of changes, followed by accepted processes for the migration of changes into production. The Bureau will research the ability to change system applications from universal administrative credentials to a user specific/rule specific credential model and establish and implement policies to prevent segregation of duties conflicts. Corrective Action Plan II: The Virgin Islands Department of Labor (VIDOL) will adapt standards prescribed by the National Institute of Standards and Technology that directly relate to change and configuration management. As this endeavor seeks to retrain the thought process of technical and program staff to work in harmony, a project plan will need to be created and implemented. The change management plan will provide the timeline, milestones, resources, and framework to identify needed tasks and produce required outcomes. Data and program code integrity as well as segregation of duties are critical to the reduction of risk for the VIDOLA$ application. VIDOL will focus on mitigating risks of fraud by ensuring that no single individual has the authority to execute program changes without checks and balances. VIDOL will implement structured program change procedures in accordance with best practices and established industry standards. Segregation of duties guidelines and policies will be included in the change management process. VIDOL is working to create a functional test environment for the VIDOLA$ application. VIDOL is working in conjunction with the Bureau of Information Technology (BIT) to obtain the needed hardware to upgrade the production application server and leverage the same hardware to implement a test server. The project is moving forward as both agencies are working out details on hardware and related software licensing. Partnering with BIT will provide VIDOL with the ability to utilize the latest in virtualization technology to maximize all aspects of test environment snapshots, deployment procedures, cloning, and performance analysis. Policies and guidelines will be created to govern the security of information systems related to administrative access to systems. Described in these policies will be the least level of access needed for individuals to complete needed tasks. Additionally, the root level access to the operating system will be terminated for programmers. Audit, authorization, and accountability logs will be maintained for review, action, and accountability. Corrective Action Plan III: Policies and guidelines will be created to govern the security of information systems related to administrative users. Described in these policies will be a list of persons who should have administrative control and authority over the system. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 154 Additionally, any person with administrative access who is not entitled to, it will be removed immediately. Audit, authorization, and accountability logs will be maintained for review, action, and accountability. Corrective Action Plan IV: Policies and guidelines will be created to govern the use of developing stronger passwords combinations. Finding 2016-013 and 2015-013: Landfill Consent Decrees Current Status: Repeated. Finding 2017-014. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Government of the Virgin Islands is currently seeking funding, through the Virgin Islands Legislature, to address the funding concerns and to organize the work flow to timely complete reports to meet EPA decrees concerning the various issues. Finding 2016-014 and 2015-014: Establishment of a Medical Malpractice Trust Fund Current Status: Repeated. Finding 2017-015. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Department of Health will continue to closely monitor the applicable laws related to professional medical malpractice by setting up a separate trust fund to be managed by a licensed broker or brokerage firm and to set up an investment plan approved by the Medical Malpractice Action Review Committee. Finding 2016-015: Procurement Regulations Current Status: Repeated. Finding 2017-016. Reason for recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Government will continue to take the necessary measures to address noncompliance and perform periodic reviews of purchase orders and contracts to ensure that regulations are being adhered to by providing justification letters that meet the requirements. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 155 Section II - Federal Award Findings (By Program) Program: Government Department/Agency: U.S. Department of Agriculture Supplemental Nutrition Assistance Program Cluster CFDA #: 10.561 Award #: 1VI400408, 1VI430457 Award Year: 10/01/2014 – 09/30/2016, 10/01/2015 – 09/30/2016 Department of Human Services (DHS) Finding 2016-016, 2015-017 and 2014-015: Cash Management Current Status: Repeated. Finding 2017-027. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: DHS has implemented corrective measures comprising of proper financial controls to prevent further occurrences. However, DHS suffered a setback with the passage of two (2) catastrophic category 5 hurricanes in the latter part of fiscal year 2017 and continues to encounter severe periodic connectivity issues. Additionally, non-governmental emails are no longer utilized. Finding 2016-017, 2015-018 and 2014-016: Equipment and Real Property Management Current Status: Repeated. Finding 2017-028. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: DHS is working on implementing the proper controls to prevent further occurrences. DHS is still in the process of reconciling the asset listing provided from DPP. Additionally, training was provided territory-wide on the various inventory processes and additional staffing is being recruited. Monthly meetings occurred between the Program Administrator and Fiscal Administrator to ensure compliance. However, DHS suffered a setback with the passage of two (2) catastrophic category 5 hurricanes in the latter part of fiscal year 2017 which inflicted serious damage to property. Finding 2016-018: Procurement, Suspension, and Debarment Current Status: Repeated. Finding 2017-030. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 156 Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Government’s Procurement Process, Overview and Guide Policy were revised and updates were made to the Procurement Policies and Procedures Manual. The updated version was posted to DPP’s website and training to User Agencies was conducted. Training was also posted online. Finding 2016-019 and 2015-019: Reporting Current Status: Corrective action was taken. Finding not repeated in current year. Program: Government Department/Agency: U.S. Department of Health and Human Services Head Start CFDA #: 93.600 Award #: 02CH3011/02, 02CH3011/03, 02CH3011-04 Award Year: 07/01/2013 – 06/30/2018 Department of Human Services (DHS) Finding 2016-020, 2015-029 and 2014-026: Cash Management Current Status: Repeated. Finding 2017-040. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: DHS has implemented corrective measures comprising of proper financial controls to prevent further occurrences. However, DHS suffered a setback with the passage of two (2) catastrophic category 5 hurricanes in the latter part of fiscal year 2017 and continues to encounter severe periodic connectivity issues. Additionally, non-governmental emails are no longer utilized. Finding 2016-021, 2015-030 and 2014-028: Equipment and Real Property Management Current Status: Repeated. Finding 2017-041. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 157 Corrective Action Plan: DHS is working on implementing the proper controls to prevent further occurrences. DHS is still in the process of reconciling the asset listing provided from DPP. Additionally, training was provided territory-wide on the various inventory processes and additional staffing is being recruited. Monthly meetings occurred between the Program Administrator and Fiscal Administrator to ensure compliance. However, DHS suffered a setback with the passage of two (2) catastrophic category 5 hurricanes in the latter part of fiscal year 2017 which inflicted serious damage to property. Finding 2016-022: Period of Performance Current Status: Repeated. Finding 2017-043. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Department of Human Services continues to work closely with Department of Finance to ensure that all adjustments are completed timely. This will ensure payments are posted to the corresponding grants where expenditures are applicable. Staff is required to monitor accounts and reconcile monthly to ensure postings are made to the correct grant period. Program: Government Department/Agency: U.S. Department of Health and Human Services Department of Human Services (DHS) Medicaid Cluster CFDA #: 93.778 Award #: Various Award Year: 07/01/2012 – 09/30/2017 Finding 2016-023, 2015-034, 2014-031, 2013-009 and 12-09: Cash Management Current Status: Repeated. Finding 2017-045. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: DHS has implemented corrective measures comprising of proper financial controls to prevent further occurrences. However, DHS suffered a setback with the passage of two (2) catastrophic category 5 hurricanes in the latter part of fiscal year 2017 and continues to encounter severe periodic connectivity issues. Additionally, non-governmental emails are no longer utilized. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 158 Finding 2016-024 and 2015-035: Eligibility Current Status: Repeated. Finding 2017-046. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: VIBES System has been implemented as of July 2017. Maintenance and Operational (M&O) is ongoing for any challenges to the system. Finding 2016-025, 2015-036, 2014-035, 2013-019 and 12-16: Special Tests and Provisions - Inpatient Hospital and Long-Term Care Facility Audits Current Status: Repeated. Finding 2017-052. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Medicaid Program is presently in an active contract with a vendor who is providing the cost audits and reconciliations as required by the Federal regulations. The audits were delayed due to the passage of 2 major hurricanes in September 2017. Presently, the auditor is wrapping up the audit inclusive of fiscal year 2017 and anticipates completion by the end of calendar year 2019. Finding 2016-026, 2015-038, 2014-034, 2013-022 and 12-21: Special Tests and Provisions - Medicaid Fraud Control Unit Current Status: Repeated. Finding 2017-053. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: Medicaid Program submitted the waiver request to CMS for Medicaid Fraud Control Unit (MFCU), which is still under consideration. However, based on the disaster emergency bill that was submitted by U.S. Congress and signed into law by President Trump in February 2018, the VI Medicaid Program will reconsider establishing the MCFU. Finding 2016-027: Not used. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 159 Finding 2016-028, 2015-040, 2014-033, 2013-018 and 12-15: Special Tests and Provisions - Utilization Control & Program Integrity Current Status: Repeated. Finding 2017-055. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: As the Medicaid Fraud Control Unit has been created, the program is in the process of developing its own internal controls in an effort to prevent unnecessary utilization of care and services. The Medical Assistance Program continues to conduct clinical reviews of all inpatient stays over ten days, including a clinical review of the Patient Care Plans. Program: Government Department/Agency: U.S. Department of Health and Human Services Children’s Health Insurance Program CFDA #: 93.767 Award #: 05-1605VQ5021 Award Year: 10/01/2014 – 09/30/2016 Department of Human Services (DHS) Finding 2016-029: Activities Allowed or Unallowed Current Status: Repeated. Finding 2017-056. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The new Medicaid Director was employed as of July 2017. This finding was brought to the Director’s attention and the necessary measures are being implemented. Finding 2016-030: Cash Management Current Status: Repeated. Finding 2017-057. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 160 Corrective Action Plan: DHS has implemented corrective measures comprising of proper financial controls to prevent further occurrences. However, DHS suffered a setback with the passage of two (2) catastrophic category 5 hurricanes in the latter part of fiscal year 2017 and continues to encounter severe periodic connectivity issues. Additionally, non-governmental emails are no longer utilized. Finding 2016-031: Matching, Level of Effort, and Earmarking Current Status: Repeated. Finding 2017-058. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Department of Human Services continues to work closely with our MMIS contractors to ensure that the correct rate used for all claims. Finding 2016-032: Reporting Current Status: Repeated. Finding 2017-059. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: DHS’s Fiscal office has implemented tiered review of the CMS-64 to eliminate such errors in the future. Program: Government Department/Agency: U.S. Department of Health and Human Services Aging Cluster CFDA #: 93.044, 93.045, 93.053 Award #: 1601VISOSR, 1501VISOSR, 1401VISOSR Award Year: 10/01/2015 – 09/30/2018, 10/01/2014 – 09/30/2017, 10/01/2013 – 09/30/2016 Department of Human Services (DHS) Finding 2016-033: Allowable Costs/Cost Principles – Payroll Activities Current Status: Ongoing implementation. DHS has implemented measures to ensure that the time certification forms are completed and verified timely. Specifically, a copy of the completed form is provided to the Fiscal supervisor at the same time it is being submitted to Human Resources – Payroll Division. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 161 Finding 2016-034: Cash Management Current Status: Ongoing implementation. DHS has implemented corrective measures comprising of proper financial controls to prevent further occurrences. However, DHS suffered a setback with the passage of two (2) catastrophic category 5 hurricanes in the latter part of fiscal year 2017 and continues to encounter severe periodic connectivity issues. Additionally, non-governmental emails are no longer utilized. Finding 2016-035: Eligibility Current Status: Ongoing implementation. DHS continues to work on the development of internal policies and procedures in determining eligibility. Once in place, the requisite staff will be trained accordingly. Finding 2016-036: Matching, Level of Effort, and Earmarking Current Status: Ongoing implementation. DHS administrative expenditures do not surpass the limitations; therefore, a waiver is not required. DHS now maintains a log differentiating administrative and programmatic costs. Finding 2016-037: Subrecipient Monitoring Current Status: Ongoing implementation. DHS continues to work on the development of internal policies and procedures in monitoring subrecipients. Once in place, the requisite staff will be trained accordingly. Program: Government Department/Agency: U.S. Department of Health and Human Services Child Support Enforcement CFDA #: 93.563 Award #: 1504VICSES, 1604VICSES, 1604VICEST Award Year: 10/01/2015 – 09/30/2016 Department of Justice (DOJ) Finding 2016-038: Allowable Costs/Cost Principles – Payroll Activities Current Status: Repeated. Finding 2017-063. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 162 Corrective Action Plan: PCSD-DOJ will ensure that charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. A full review of all NOPAs will be executed upon issuance. NOPAs will be reviewed by the fiscal officer and a report will be given to the Director. Finding 2016-039: Allowable Costs/Cost Principles – Non-Payroll Activities Current Status: Corrective action was taken. Finding not repeated in current year. Finding 2016-040, 2015-049 and 2014-047: Cash Management Current Status: Repeated. Finding 2017-065. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: PCSD continues the process of reviewing, initialing, and dating the supporting documents before a payment request is made. Policies and procedures are in place to ensure compliance with the Uniform Guidance. PCSD is working with DOF to comply with the CMIA agreement and will use the clearance pattern of 4 days or less. Finding 2016-041, 2015-050 and 2014-048: Equipment and Real Property Management Current Status: Repeated. Finding 2017-066. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: PCSD continues to work with DPP to ensure that the equipment inventories are performed periodically for assets purchased for the program. Finding 2016-042: Matching, Level of Effort, and Earmarking Current Status: Repeated. Finding 2017-067. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 163 Corrective Action Plan: PCSD Director continues to review, initial, and date all supporting documents before a request for payment is made. DOJ continues to adhere to all policies and procedures to ensure compliance with the matching requirement. Finding 2016-043: Period of Performance Current Status: Corrective action was taken. Finding not repeated in current year. Finding 2016-044: Reporting Current Status: Repeated. Finding 2017-068. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: PCSD has contracted a vendor which will monitor the system. Program: Government Department/Agency: U.S. Department of Defense National Guard Military Operations and Maintenance (O&M) Projects CFDA #: 12.401 Award #: W9127P-15-2-1000 Award Year: 10/01/2015 - 09/30/2016 Office of the Adjutant General (OTAG) Finding 2016-045 and 2015-051: Cash Management Current Status: Repeated. Finding 2017-078. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Office of Management and Budget has expressed to the Department of Finance through correspondence that OTAG be removed from the Treasury State Agreement (TSA), effective fiscal year 2018. If the request is accepted, OTAG will no longer fall under the CMIA. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 164 Finding 2016-046 and 2015-052: Matching, Level of Effort, and Earmarking Current Status: Repeated. Finding 2017-079. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Master Cooperative Agreement (MCA) through the appendices identifies the cost share and what is required by persons performing management functions. All cost sharing expenditures are typed on the Purchase Orders with the various percentages. The spreadsheets are used by the Agency for reconciliation purposes. The proof of payment is being recorded on the purchase orders with a check detail attached. Finding 2016-047: Period of Performance Current Status: Repeated. Finding 2017-080. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: Although the Federal Government stipulates a 90 day close out period after the end of the fiscal year (September 30), OTAG has minor construction contracts that would require more than the 90-day period for payment purposes only. The MCA contract between the two Governments (Federal and Local) is valid for a period of five (5) years, and any payment that was inadvertently left unpaid during the 90-day period can be paid and will be reimbursed by the Federal Government. Finding 2016-048, 2015-053 and 2014-049: Reporting Current Status: Repeated. Finding 2017-081. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: Although not timely, reconciliations of reports have always been implemented. The United States Property and Fiscal Office has been providing the signature pages to OTAG. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 165 Program: Government Department/Agency: U.S. Department of Transportation Highway Planning and Construction Cluster CFDA #: 20.205 Award #/Name: Territorial Highway Program Implementation and Stewardship Agreement Award Year: 10/01/2015 – 09/30/2016 Department of Public Works (DPW) Finding 2016-049, 2015-054, 2014-050, 2013-009 and 12-09: Cash Management Current Status: Repeated. Finding 2017-069. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: DPW has been exempted from the Treasury State Agreement (TSA), effective October 1, 2018 and DPW will no longer fall under the CMIA agreement, since this is a manually reimbursable program. Finding 2016-050 and 2015-055: Equipment and Real Property Management Current Status: Repeated. Finding 2017-070. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: Department of Public Works, in conjunction with the Department of Property & Procurement has ensured that all equipment purchased with Federal funds are properly registered, tagged, including date of acquisition, and all disposals are tracked and recorded accordingly. Finding 2016-051 and 2015-056: Procurement, Suspension, and Debarment Current Status: Corrective action was taken. Finding not repeated in current year. Finding 2016-052 and 2015-057: Special Tests and Provisions – Quality Assurance Program Current Status: Corrective action was taken. Finding not repeated in current year. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 166 Finding 2016-053 and 2015-058: Special Tests and Provisions – Wage Rate Requirements Current Status: Corrective action was taken. Finding not repeated in current year. Program: Government Department/Agency: U.S. Environmental Protection Agency Construction Grants for Wastewater Treatment Works CFDA #: 66.418 Award #: 78003201, 78003401, 78003501 Award Year: 10/01/2014 – 09/30/2018 Department of Public Works (DPW) Finding 2016-054 and 2015-059: Cash Management Current Status: Corrective action was taken. DPW has been exempted from the Treasury State Agreement (TSA), effective October 1, 2018 and DPW will no longer fall under the CMIA agreement, since this is a manually reimbursable program. Finding 2016-055 and 2015-060: Reporting Current Status: Ongoing implementation. The Virgin Islands Waste Management Authority (VIWMA) submitted the quarterly reports to DPW on a timely basis, and will continue to do so. Finding 2016-056 and 2015-061: Special Tests and Provisions – Wage Rate Requirements Current Status: Ongoing Implementation. The Program Manager of Office of Highway Engineering has ensured that all Project Managers have completed the necessary documentation for review of the certified payrolls. Program: Government Department/Agency: U.S. Department of Labor Unemployment Insurance CFDA #: 17.225 Award #: UI280081655A78 Award Year: 10/01/2015 – 12/31/2018 Department of Labor (VIDOL) Finding 2016-057, 2015-065 and 2014-054: Activities Allowed or Unallowed Current Status: Repeated. Finding 2017-071. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 167 Corrective Action Plan: The VIDOL has received all the reconciliations from Benham and Hodge (BH). The most recent reconciliations from 2011-2016 have been submitted to USDOL, and the VIDOL is awaiting their final determination and recommendations for next steps, if applicable. In the meantime, BH has been engaged to work on the 2017 reconciliations. Finding 2016-058: Cash Management Current Status: Repeated. Finding 2017-072. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The VIDOL currently has its Cash Management and Draw down Policy in place. This policy has been reviewed and approved by the Regional Office. The two referenced cases were due to circumstances beyond the department’s control as was noted during the review of these cases. Going forward, management at VIDOL will ensure that the staff adhere to the specifications stipulated in the draw-down policy and re-emphasize the importance of adhering to the terms of the CMIA agreement. Refresher training was done in May 2017. Finding 2016-059 and 2015-066: Eligibility Current Status: Repeated. Finding 2017-073. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: UI and IT will work together to develop a plan to perform regular reviews of the data. UI will create a job ticket to address the condition of eligibility for regular compensation. Finding 2016-060: Period of Performance Current Status: Corrective action was taken. Finding not repeated in current year. Finding 2016-061: Special Tests and Provisions – UI Program Integrity – Overpayment Current Status: Corrective action was taken. Finding not repeated in current year. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 168 Program: Government Department/Agency: U.S. Department of Labor Employment Service Cluster CFDA #: 17.207, 17.801 Award #: ES260501455A78, ES275221555A78, ES294431655A78, ES275221555A78, ES260501455A78, ES246501355A78, DV266241555578 Award Year: 07/01/2014 – 09/30/2017, 07/01/2015 – 09/30/2018, 07/01/2016 – 07/01/2019, 07/01/2015 – 09/30/2018, 07/01/2014 – 09/30/2017, 07/01/2013 – 09/30/2016, 10/01/2015 – 09/30/2016 Department of Labor (VIDOL) Finding 2016-062: Allowable Costs/Cost Principles – Payroll Activities Current Status: Ongoing implementation. Finding 2016-063: Allowable Costs/Cost Principles – Indirect Cost Activities Current Status: Ongoing implementation. VIDOL will ensure that the review and approval process is properly documented. Finding 2016-064: Cash Management Current Status: Ongoing implementation. The VIDOL currently has an effective Cash Management and Drawdown Policy in place. A policy refresher will be conducted with the respective staff. Finding 2016-065: Eligibility Current Status: Ongoing implementation. VIDOL will implement a schedule for regular file review and work to strengthen its Benefits Payment Control Unit to prevent such discrepancies. Finding 2016-066: Reporting Current Status: Ongoing implementation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 169 Program: Government Department/Agency: U.S. Department of Agriculture Child Nutrition Cluster CFDA #: 10.555, 10.556 Award #: 1VI300308 Award Year: 10/01/2015 – 09/30/2016 Department of Education (DOE) Finding 2016-067, 2015-067 and 2014-055: Allowable Cost/Cost Principles – Payroll Activities Current Status: Repeated. Finding 2017-018. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: Beginning fiscal year 2018, DOE and DOF have successfully applied separate accounts to reflect Federal expenditures for the School Breakfast and National School Lunch Programs. In addition, the Programs will ensure that NOPAs of employees are reviewed for accuracy to determine that employees are being paid from correct funding sources. Finding 2016-068, 2015-068 and 2014-058: Allowable Costs/Cost Principles - Indirect Cost Activities Current Status: Repeated. Finding 2017-019. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Special Nutrition Programs utilizes prevailing rates for prior years until the new rates are negotiated and received. There are instances where adjustments are done in-house or forwarded to the Department of Finance for processing. The Program will ensure that the correct indirect cost rate is utilized once it is negotiated and received and will make adjustments, as necessary. The Special Nutrition Programs will also follow-up with the Department of Finance with any adjustments that may have been forwarded for processing. Finding 2016-069, 2015-069 and 2014-059: Cash Management Current Status: Repeated. Finding 2017-020. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 170 Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: While this is a common Government finding, the Special Nutrition Programs have implemented an internal spreadsheet that displays the date of the draws, draw numbers, expense categories, and current indirect cost rate at the time draws are made. Finding 2016-070, 2015-070 and 2014-060: Equipment and Real Property Management Current Status: Repeated. Finding 2017-021. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Special Nutrition Programs will follow-up with the Department’s Fixed Asset Division to attempt a resolution with this common Government finding. Finding 2016-071: Period of Performance Current Status: Repeated. Finding 2017-023. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Financial Control Officer will be responsible for ensuring that all expenditures are charged to the correct grants and grant periods. All grant expenditures will be reviewed on a regular basis to ensure that they are accurate and allowable. Program: Government Department/Agency: U.S. Department of Health and Human Services Temporary Assistance for Needy Families Cluster CFDA #: 93.558 Award #: 1501VITANF Award Year: 10/01/2014 - 09/30/2015 Department of Human Services (DHS) Finding 2015-020 and 2014-018: Activities Allowed or Unallowed Current Status: Ongoing implementation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 171 Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: After a review of the current State Plans designed to enable the effective utilization of funding under TANF, a request is being provided to the overseeing agency requesting that funding be aligned to match the programmatic needs. Finding 2015-021: Allowable Costs/Cost Principles – Payroll Activities Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: To ensure time certification forms are completed and verified timely, a copy of the completed form is provided to the Fiscal Administrator at the same time it is being submitted to the Human Resources – Payroll Division. Finding 2015-022 and 2014-019: Cash Management Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: DHS has implemented corrective measures comprising of proper financial controls to prevent further occurrences. However, DHS suffered a setback with the passage of two (2) catastrophic category 5 hurricanes in the latter part of fiscal year 2017 and continues to encounter severe periodic connectivity issues. Additionally, non-governmental emails are no longer utilized. Finding 2015-023 and 2014-020: Eligibility Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 172 Corrective Action Plan: Administrative Memo CO5-2016 (Audit Findings) was re-distributed to all workers at the January 2017 month-end meeting, and all necessary corrective actions will be taken, henceforth. The current system, CARIBS, is being replaced within the next year with the VI Benefit & Eligibility system, VIBES. Finding 2015-024: Equipment and Real Property Management Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: DHS is working on implementing the proper controls to prevent further occurrences. DHS is still in the process of reconciling the asset listing provided from DPP. Additionally, training was provided territory-wide on the various inventory processes and additional staffing is being recruited. Monthly meetings occurred between the Program Administrator and Fiscal Administrator to ensure compliance. However, DHS suffered a setback with the passage of two (2) catastrophic category 5 hurricanes in the latter part of fiscal year 2017 which inflicted serious damage to property. Finding 2015-025 and 2014-021: Reporting Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Program Administrator and the Chief Financial Officer have collectively implemented corrective measures to ensure compliance. An internal memo was distributed with required procedures in conjunction with meetings to ensure a clear and concise understanding of the requisite procedures. Finding 2015-026 and 2014-022: Special Tests and Provisions - Child Support Non-Cooperation Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 173 Corrective Action Plan: An Administrative Memo was distributed to supervisors and staff on September 30, 2016, and again in January 2017, re-iterating the Federal mandates and the Department’s requirements in adhering to these mandates. Internal audits are being performed to determine compliance. Finding 2015-027 and 2014-023: Special Tests and Provisions - Penalty for Refusal to Work Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: An Administrative Memo was distributed to supervisors and staff on September 30, 2016, and again in January 2017, re-iterating the Federal mandates and the Department’s requirements in adhering to these mandates. Internal audits are being performed to determine compliance. Finding 2015-028, 2014-025, 2013-017 and 12-14: Special Tests and Provisions - Income Eligibility and Verification System Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: DHS has assigned workers in each district to do the IEVS matching reports, as received from the CARIBS system interface with DOL. DHS continues to partner with VI DOL to ensure DOL’s timely transmission records received. While the availability of data depends on the employer’s submission of the QW to DOL, alternate options are being explored including establishment of an interface with the Bureau of Internal Revenue. DHS is in the process of building a new joint eligibility system, Virgin Islands Benefit Eligibility System (VIBES), with a component to interface with the Virgin Islands Bureau of Internal Revenue (VIBIR). Program: Government Department/Agency: U.S. Department of Commerce Coastal Zone Management Administration Awards CFDA #: 11.419 Award #: Various Award Year: 10/01/2014 - 09/30/2015 Department of Planning and Natural Resources (DPNR) Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 174 Finding 2015-042 and 2014-040: Allowable Costs/Cost Principles - Payroll Activities Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: Adjustment vouchers, though minimal, continue to be processed on a bi-weekly basis. Finding 2015-043 and 2014-041: Equipment and Real Property Management Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: DPNR continues to work with P&P staff to reconcile all equipment purchases within the department. Finding 2015-044 and 2014-042: Matching, Level of Effort, and Earmarking Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: Due to continued discussions, the federal grantor agency subsequently approved the waiver of the matching requirement for the grant awarded to the Territory in fiscal year 2018. Finding 2015-045: Reporting Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 175 Corrective Action Plan: DPNR will monitor closely the grantor’s electronic system for reporting, so that accessibility issues can be noted early enough to allow for a resolution that will enable timely submission of financial, programmatic, and special reports. Program: Government Department/Agency: U.S. Department of Commerce Coral Reef Conservation Program CFDA #: 11.482 Award #: NA11NOS4820004/NA13NOS4820011 Award Year: 10/01/2014 – 09/30/2015 Department of Planning and Natural Resources (DPNR) Finding 2015-046 and 2014-044: Allowable Costs/Cost Principles - Payroll Activities Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: DPNR completed time and effort certifications for the periods ending March 2017 and August 2017. Finding 2015-047: Equipment and Real Property Management Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: DPNR continues to work with P&P staff to reconcile all equipment purchases within the department. Finding 2015-048 and 2014-045: Matching, Level of Effort, and Earmarking Current Status: Ongoing implementation. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 176 Corrective Action Plan: DPNR continues to have discussions with the federal grantor agency regarding the match reduction. Currently, a manual log of volunteer hours is used to track the hours provided to the program from partnerships with outside entities that provide additional personnel support included as part of the match. Time Distribution for the CZM Director, Accountant, and Grant Manager is also used to track the in-kind match associated with this award. Program: Government Department/Agency: U.S. Department of the Interior Economic, Social, and Political Development of the Territories CFDA #: 15.875 Award #: Various Award Year: Various Various Finding 2015-062 and 2014-051: Cash Management Current Status: Repeated. Finding 2017-074. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Government will continue to exercise due diligence in requesting Federal funds as specified under the CMIA agreement with respect to reimbursable funding for expenditures incurred. Finding 2015-063 and 2014-053: Equipment and Real Property Management Current Status: Repeated. Finding 2017-075. Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: DPP continues to work with Munis and DOF to implement the ERP Assets Module and gain one hundred percent compliance with federal regulations. Finding 2015-064: Procurement, Suspension, and Debarment Current Status: Repeated. Finding 2017-076. Government of the United States Virgin Islands Appendix A: Status of Prior Audit Findings Year Ended September 30, 2017 177 Reason for Recurrence: The Government is focused on improving its procedures. There are areas that were addressed and other areas that are still in the process of implementing new internal controls and procedures. Further, various employee transition issues have impacted the continued progression towards completed remediation. Corrective Action Plan: The Government’s Procurement Process, Overview and Guide Policy were revised and updates were made. The updated version was posted to DPP’s website and training to User Agencies was conducted. OMB will continue to work in tandem with DPP. Corrective Action Plan Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 178 Page Number Finding Contact Estimated Completion Date Corrective Action 32 32 33 33 2017-001: Financial Position • Deficits in Unrestricted Net Position • Plan Funding Considerations • Government Insurance Fund • Other Post- Employment Benefits Obligation The Governor’s Financial Team The management team of the Office of the Governor, Office of Management and Budget, Department of Finance, and Government Employees’ Retirement System The Governor, President, V.I. Legislature and Commissioner, and Department of Finance The Department of Finance, Executive Assistant Commissioner and Director of Accounting On-going Fiscal Year 2020 Fiscal Year 2020 Fiscal Year 2020 The Government is continuing with its recovery efforts of working with federal partners, attracting new industries, improving financial controls, monitoring cash flows and rebuilding equity. In prior fiscal years, the Government allocated the relevant resources to conduct comprehensive studies and recommend revisions to benefits as well as establish funding policies to ensure the minimum ARC obligations are met each year. Much of the efforts put forth are now being deliberated by the Legislature for approval and submission to the Governor. The Executive and Legislative branches of Government will collaborate to implement various recommendations of its actuary in an effort to provide for the long-term financial viability of the Fund. We are working with the actuary to implement this Standard; explicitly, the calculation of the net OPEB liability for the fiscal year ended September 30, 2018. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 179 Page Number Finding Contact Estimated Completion Date Corrective Action 34 35 2017-002: Accounting in the Aftermath of Disasters • Capital Asset Impairment Process • Formalize Emergency Payroll Procedures Various designated individuals within the Department of Property and Procurement and the Department of Public Works to formulate a Capital Assets team The management team of the Division of Personnel and Department of Finance; specifically, Director of Payroll Immediately Fiscal Year 2019 In an effort to implement a formal process whereby a periodic impairment assessment is conducted and to ensure that all disposals and retirements are consistently processed, the Government will identify key personnel from various departments and agencies to form a Capital Assets team in addition to full implementation of the fixed assets module within the Enterprise Resource Planning (ERP) system. The Department of Finance has a draft policy on disaster related payroll processing. We have been and continue to engage in providing information to the Division of Personnel since September 14, 2017, so that records can be kept current, in the event we have to move to another “Straight 80.” 36 2017-003: Year-End Close Process • Timeliness and Methodology of Close Process The management team of the Department of Finance; specifically, the Assistant Commissioner and the Directors of Accounting, Treasury, and Payroll Immediately In an effort to develop reliable and timely interim and year-end financial statements, all accounts, accruals, and reconciliations will be reviewed on a quarterly basis. Any unreconciled differences will be identified and resolved, with any applicable journal entries, recorded in the financial system of the Government. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 180 Page Number Finding Contact Estimated Completion Date Corrective Action 37 • Journal Entries Department of Finance management, specifically the Director of Accounting and Financial Reporting Immediately The Accounting Director, with oversight from the Assistant Commissioner, will continue to enforce the closing procedure(s) whereby all post-closing and audit adjustments maintained in the manual excel working trial balance are reviewed, ratified, and recorded in the financial management system throughout the audit engagement, such that the general ledger reflects audited balances and the correct opening balances for the upcoming fiscal year. As for more detail reconciliations between accounts that are not visible on a higher reconciliation overview, such as accurate federal classifications, or incorrect postings to grants, this will require additional human resources, to include the option of contractual agreement(s) to ensure that a more detail reconciliation is being completed. The Government will begin to assess the needs and take the necessary steps to provide necessary one on one meetings to identify the lack or needs. In an effort to maintain a desirable separation of duties, management has updated the policy by implementing controls whereas, the individual that creates a journal entry will not approve or post that journal. This was only available to limited staff at the Department of Finance and the policy has been made effective immediately. We are continuing to find these rare occurrences and reach out to those employees to follow Munis and system permissions. We also have to work with Munis to see if the names generated in the entry and posting area indeed denote no separation of duties. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 181 Page Number Finding Contact Estimated Completion Date Corrective Action 38 38 39 39 2017-004: Revenue and Receivables • Reconciliation of Subsidiary Registers • Allowance for Doubtful Accounts • Real Property Tax • Other Revenues Assistant Chief of Processing and the designated staff in collaboration with Director of Treasury and as needed, the Director of Accounting The management team of the Department of Finance, Lieutenant Governor’s Office, and Bureau of Internal Revenue; specifically, the Director of Accounting and Tax Assessor and/or the Chief of Staff The management team of the Lieutenant Governor’s Office; specifically, the Tax Collector and/or the Chief of Staff Department of Finance management, specifically the Treasury Director and Assistant Director Fiscal Year 2020 Fiscal Year 2020 Fiscal Year 2020 Fiscal Year 2020 For purposes of interim financial reporting, the Bureau of Internal Revenue and the Department of Finance will conduct quarterly reconciliation meetings to reduce end of year adjustments, reconcile NSF checks in timely manner, and implement internal safeguards to allow for more efficient reconciliation. For purposes of interim financial reporting, the Bureau of Internal Revenue will review and implement a new formula for doubtful accounts. We will continue to look at the rare cases of this impact. In an effort to provide adequate supporting documentations for sampled items, the Government will review, revise, and redistribute its records retention policy to departments and agencies. In an effort to provide adequate supporting documentations for sampled items, the Government will ensure that the procedures to attach the documents are fully adhered to. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 182 Page Number Finding Contact Estimated Completion Date Corrective Action We will conduct spot checks to ensure employees are adhering to this process. 40 2017-005: Grants Management • Control Systems Over the Schedule of Expenditures of Federal Awards For the Grants Management Module, the Director, Office of Management and Budget and with respect to the SEFA, the Commissioner, Department of Finance Immediately The SEFA is prepared by the Department of Finance via a customized report that extracts information from the ERP system. However, the reconciliation of grant expenditures is ostensibly decentralized at the departmental/agency level. As such, departments/agencies are primarily responsible for performing the reconciliation function between grant expenditures and federal financial reports; which, in the long run, will improve the reliability of the SEFA and reporting to grantor agencies. Therefore, in an effort to enhance the monthly reconciliation function, the Office of Management and Budget will fully implement the Grants Management Module, per the ERP system. Given that certain financial data related to the SEFA is provided to the Department of Finance by certain third- parties using separate financial systems, the Department of Finance will continue to coordinate with said parties – through the respective department/agency – in order to mitigate the prospect of duplicating entries by documenting the roles, responsibilities, and timelines associated with posting financial data onto the central Government’s ERP system. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 183 Page Number Finding Contact Estimated Completion Date Corrective Action 41 • Federal Grants and Contributions The Director, Office of Management and Budget and Director of Accounting Fiscal Year 2020 In an effort to more accurately account for Federal receivables and related transactions, the OMB will collaboratively work with the Department of Finance to fully implement the Grants Management Module, per the ERP system. In addition, the Government will conduct research to examine the need for training and proper oversight, to ensure that individuals are reconciling and properly classifying federal expenditures. This could also entail outsourcing this responsibility or developing a unit to address the oversight. 43 43 2017-006: Capital Assets and Related Expenditures • Record Keeping • Reconciliation and Review of Subsidiary Registers The Commissioner, Department of Property & Procurement Various designated individuals within the Department of Property and Procurement and the Department of Public Works to formulate a Capital Assets team Immediately Fiscal Year 2020 The Department of Property & Procurement will spearhead the monitoring and review of the Government’s capital assets and ensure reconciliation of supporting registers to its primary register. As the lead agency for managing the property of the Government, the Department of Property & Procurement will coordinate and communicate amongst all Government departments and/or agencies that are responsible for handling and managing capital assets. In an effort to verify that all assets in the subsidiary register are reviewed and updated with sufficient descriptions, corrected acquisition dates, and recalculated accumulated depreciation, the Government’s Capital Assets team will be responsible for reconciling the general ledger accounts to the detailed records on a quarterly basis. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 184 Page Number Finding Contact Estimated Completion Date Corrective Action 45 46 • Construction in Progress (CIP) Monitoring • Capital Assets – Business-Type Activities The Commissioner, Department of Property & Procurement The Commissioner, Department of Property & Procurement Immediately Immediately The Department of Property & Procurement will spearhead the monitoring and review of the Government’s capital assets and ensure reconciliation of supporting registers to its primary register. As the lead agency for managing the property of the Government, the Department of Property & Procurement will coordinate and communicate amongst all Government departments and/or agencies that are responsible for handling and managing capital assets. The Department of Property & Procurement will spearhead the monitoring and review of the Government’s capital assets and ensure reconciliation of supporting registers to its primary register. As the lead agency for managing the property of the Government, the Department of Property & Procurement will coordinate and communicate amongst all Government departments and/or agencies that are responsible for handling and managing capital assets. 47 2017-007: Recording of Liabilities • Retroactive Pay Liability The management team of the Division of Personnel; specifically, the Information Technology Manager, Personnel Records Supervisor, OMB Director, and Senior Budget Analysts Fiscal Year 2020 The Division of Personnel (DOP) will work with the Office of Collective Bargaining (OCB) and the Office of Management and Budget (OMB) to develop a master file that will serve as a clearinghouse for collective bargaining agreements and negotiated pay rates for unionized public sector workers. The Government’s Chief Negotiator will take the lead in developing the master file containing negotiated pay rates. OCB management will coordinate with the Division of Personnel’s staff, to include the Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 185 Page Number Finding Contact Estimated Completion Date Corrective Action 47 48 • Medical Malpractice Liability • Accounts Payable The Commissioner, Department of Health The management team of the Department of Finance; specifically, the Assistant Commissioner and Director of Accounting Fiscal Year 2020 Immediately Director and Information Technology and Records Management staff, along with senior budget analysts from OMB to first develop a firm number with regard to the Government’s retroactive obligation. This process has already started. Additionally, on a bi-annual basis, the team will meet in order to compare negotiated employee salary rates to those contained in the official personnel records within the ERP system database. It must be noted that DOP functions as a facilitator with regard to the hiring process and relies on official financial information from OCB and OMB. OCB negotiates and interprets contract language for unionized public sector workers while OMB certifies the availability of funding for the purpose of wage implementation. DOP then reviews, audits, and implements newly negotiated wages. The Department of Health will allocate the requisite resources to properly evaluate the necessary information, which can then be provided to an actuarial service provider for purposes of facilitating the Government in calculating the year-end medical malpractice liability. At present, the ERP system does not allow departments/agencies to enter vendor invoices unless a sufficient allotment is approved by OMB. As a result of this system functionality, certain vendor invoices are set- aside, rather than entered (or accrued for immediately), until OMB provides for a periodic allotment – which may occur several months after year-end. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 186 Page Number Finding Contact Estimated Completion Date Corrective Action 48 49 • Landfill Closure and Post Closure Costs Liability • Quality of Census Data Waste Management Authority Management Team The management team of the Government Employees’ Retirement System and Division of Personnel; specifically, Administrator, Director, Member Services, and Director of Information Technology Fiscal Year 2020 Fiscal Year 2020 Therefore, given that the OMB allotment process is the underlying controlling mechanism for entering vendor invoices, the Department of Finance must perform a manually intensive review of year-end transactions that are posted in a subsequent year. The Department of Finance will proactively collaborate with the software vendor supporting its ERP Accounts Payable module to ascertain whether a reduction in the existing manual efforts can be achieved. On-going training and employee development will be made available for all users of the accounts payable module and continuous development of the standard operating policies will be enhanced. The Government will work with its consultants to implement monitoring controls and ensure that all calculations are reviewed timely. For the past three (3) years, since the implementation of the new Benefits system (V3), the Government Employees’ Retirement System (GERS) has been allocating resources to identify and correct inaccurate member data in the census database that is provided to our actuaries. Additionally, GERS will allocate displaced employees due to the suspension of the Loan Program to assist with the due diligence on the accuracy of the member information in the census database. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 187 Page Number Finding Contact Estimated Completion Date Corrective Action The Division of Personnel will coordinate with the GERS Administrator to discuss how both agencies can collaborate to effectively improve the quality of the census data. It is anticipated that the GERS and the Division of Personnel will do an annual comparative analysis of the employee and retiree related data held by both entities. During this process, data will be reconciled in both databases. After the initial reconciliation is completed, an annual review will be done to ensure that relevant information is synchronized within both systems. Information Technology and Records Management personnel from both agencies will be intimately involved in these meetings. 50 2017-008: Management of the Medicaid Program • Cost Report Audits and System Security Review The Commissioner, Department of Human Services Chief Financial Officer and the Program Administrator On-going The Medicaid Program is presently in an active contract with a vendor who is providing the cost audits and reconciliations as required by the Federal regulations. The audits were delayed due to the passage of the hurricanes in September 2017. Presently, the auditor is wrapping up the audits inclusive of fiscal year 2017 and anticipates completion by the end of calendar year 2019. With respect to VIBES, a contract was issued to Public Consulting Group who has now tested the implementation, verification, and validation (IV&V) as mandated by the Centers for Medicare & Medicaid Services (CMS). Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 188 Page Number Finding Contact Estimated Completion Date Corrective Action 51 • Utilization Control and Medicaid Fraud Control Unit Program Administrator, Department of Human Services Immediately Subsequent to fiscal year-end and during 2018, the V.I. Medicaid Fraud Control Unit (MFCU) was established through a Memorandum of Understanding. The unit is located within the Department of Justice. The MFCU has Territory-wide authority to investigate and criminally prosecute (or refer for prosecution) cases of Medicaid fraud and patient abuse or neglect in residential care facilities. The MFCU may also bring civil actions to recover false Medicaid claims. The MFCU has a memorandum of understanding with the Virgin Islands Medicaid Program which describes the agencies' working relationship. Further, as the Medicaid Fraud Control Unit has been created, the program is in the process of developing its own internal controls in an effort to prevent unnecessary utilization of care and services. The Medical Assistance Program continues to conduct clinical reviews of all inpatient stays over ten days, including a clinical review of the Patient Care Plans. 52 2017-009: Unemployment Insurance Trust Fund • Account Reconciliation Process Commissioner, Virgin Islands Department of Labor Fiscal Year 2020 The Virgin Islands Department of Labor (VIDOL) recognizes the need to properly report the activities of the Unemployment Insurance Trust Fund. VIDOL has requested and received approval from the Virgin Islands Office of Management and Budget for the hiring of accountants, whose responsibilities will be to record the activities of the Fund in accordance with generally accepted accounting practices. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 189 Page Number Finding Contact Estimated Completion Date Corrective Action In addition, as part of the year-end financial reporting process related to the Government’s financial statement preparation, VIDOL will work with the Department of Finance to ensure that it receives the Unemployment Insurance Trust Fund information timely. 53 2017-010: Workers Compensation Program • Accuracy of the Program Loss Reserves The management team of the Virgin Islands Department of Labor and Department of Finance; specifically, the WCA Director, and VIDOL IT personnel Immediately Workers Compensation claims are handled manually; therefore, assumptions of existing claim losses are unpredictable as it takes on claim (severe injury) to change future claims costs and/or payouts as healthcare rates vary and based on the availability of funds. Projection is made based on previous year’s history. VIDOL purchased the ERIC System Risk Management software. 54 2017-011: Payroll, Related Accruals, and Other Expenditures • Payroll Expenditures The management team of the Division of Personnel and Department of Finance; specifically, Director of Payroll Fiscal Year 2020 We will enhance monitoring of deactivating employees from the system and we will closely review reports for appropriate and accurate information. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 190 Page Number Finding Contact Estimated Completion Date Corrective Action 54 55 • Transactions with Personnel • Supporting Documentation for Expenditures The management team of the Office of the Governor and Department of Finance The Department of Finance, Executive Assistant Commissioner and Director of Accounting Fiscal Year 2020 On-going The Department of Finance will coordinate with the Office of the Governor to strengthen, recommunicate, and monitor the reimbursement policy of the Government. Furthermore, we are exploring systems for automatic reconciliations and will consider hiring someone to work at the Department of Finance, specifically to handle credit card payments. We will continue to enforce the Standard of Operating Procedures and Policies (SOPP) that all invoices are attached in the ERP system and closely examine the invoice approval process. As part of the invoice approval, invoices are closely reviewed and supported in the Accounts Payable module. 56 2017-012: Bank Accounts • Strengthen Controls Over Bank Reconciliations The management team of the Department of Finance; specifically, the Assistant Commissioner and Director of Treasury Fiscal Year 2020 The Treasury Director, with oversight from the Assistant Commissioner will reexamine the process to include reviewing outstanding checks and other reconciling items that have not cleared a specific bank account for more than one year. Upon identifying negotiable instruments that exceed the one-year threshold, the Treasury Director will develop an annual procedure to further research and validate the status of the reconciling items in an effort to ascertain whether they can be properly removed from on-going bank reconciliations, with the original transaction(s) reversed. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 191 Page Number Finding Contact Estimated Completion Date Corrective Action 56 • Cash Pooling and Allocation(s) The management team of the Department of Finance; specifically, the Assistant Commissioner and Director of Treasury Fiscal Year 2020 and 2021 The Treasury Director, with oversight from the Assistant Commissioner, will enhance the documentation provided to support the pooling and subsequent allocation of the cash accounts. Additional human capital has been provided to ensure that bank reconciliations are prepared timely as we continue to strive to improve the link between the confirmed cash account balances and cash balance per fund presented within the year-end financial statements. 58 2017-013: Information Technology Environment The management team of the Bureau of Internal Revenue (including the Director of Processing and IT), Lieutenant Governor’s Office, Department of Labor, specifically, the IT Director, the management team of Division of Family Assistance of the Department of Human Services, and the Department of Finance Fiscal Year 2020 Action Plan I: The Bureau of Internal Revenue (the Bureau) acknowledges that there are issues surrounding the IT area that must be addressed to ensure the integrity and protection of the systems. The Bureau will establish change management policies and procedures that would require formal notice of approval of changes, followed by accepted processes for the migration of changes into production. The Bureau will research the ability to change system applications from universal administrative credentials to a user specific/rule specific credential model and establish and implement policies to prevent segregation of duties conflicts. Action Plan II: The Virgin Islands Department of Labor (VIDOL) will adapt standards prescribed by the National Institute of Standards and Technology that directly relate to change and configuration management. As this endeavor seeks to retrain the thought process of technical and program staff to work in harmony, a project plan will need to be created and implemented. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 192 Page Number Finding Contact Estimated Completion Date Corrective Action The change management plan will provide the timeline, milestones, resources, and framework to identify needed tasks and produce required outcomes. Data and program code integrity as well as segregation of duties are critical to the reduction of risk for the VIDOLA$ application. VIDOL will focus on mitigating risks of fraud by ensuring that no single individual has the authority to execute program changes without checks and balances. VIDOL will implement structured program change procedures in accordance with best practices and established industry standards. Segregation of duties guidelines and policies will be included in the change management process. VIDOL is working to create a functional test environment for the VIDOLA$ application. VIDOL is working in conjunction with the Bureau of Information Technology (BIT) to obtain the needed hardware to upgrade the production application server and leverage the same hardware to implement a test server. The project is moving forward as both agencies are working out details on hardware and related software licensing. Partnering with BIT will provide VIDOL with the ability to utilize the latest in virtualization technology to maximize all aspects of test environment snapshots, deployment procedures, cloning, and performance analysis. Policies and guidelines will be created to govern the security of information systems related to administrative access to systems. Described in these policies will be the least level of access needed for individuals to complete needed tasks. Additionally, the root level access to the operating system will be terminated for programmers. Audit, authorization, and accountability logs will be maintained for review, action, and accountability. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 193 Page Number Finding Contact Estimated Completion Date Corrective Action Action Plan III: Policies and guidelines will be created to govern the security of information systems related to administrative users. Described in these policies will be a list of persons who should have administrative control and authority over the system. Additionally, any person with administrative access who is not entitled to, it will be removed immediately. Audit, authorization, and accountability logs will be maintained for review, action, and accountability. Action Plan IV: Policies and guidelines will be created to govern the use of developing stronger passwords combinations. 60 2017-014: Landfill Consent Decrees Office of the Governor, Chief of Staff, and the Waste Management Authority Management Team Fiscal Year 2020 The Government of the Virgin Islands is currently seeking funding, through the Virgin Islands Legislature, to address the funding concerns and to organize the work flow to timely complete reports to meet EPA decrees concerning the various issues. 61 2017-015: Establishment of a Medical Malpractice Trust Fund Commissioner, Department of Health and Medical Malpractice Action Review Committee. Fiscal Year 2020 The Department of Health will continue to closely monitor the applicable laws related to professional medical malpractice by setting up a separate trust fund to be managed by a licensed broker or brokerage firm and to set up an investment plan approved by the Medical Malpractice Action Review Committee. 62 2017-016: Procurement Regulations Department of Property and Procurement Management Team Fiscal Year 2020 The Government will continue to take necessary measures to address noncompliance and perform periodic reviews of purchase orders and contracts to ensure that regulations are being adhered to by providing justification letters that meet the requirements. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 194 Page Number Finding Contact Estimated Completion Date Corrective Action 63 2017-017: Casino Control Commission The Department of Finance, Executive Assistant Commissioner and Director of Accounting Fiscal Year 2020 The Government will request reporting from the Casino Control Commission on a quarterly basis as covered by the V.I. Code. We will review, request, and establish a working document on how this process will be conducted proceeding forward. 64 2017-018: Allowable Costs/Cost Principles – Payroll Activities Director, Special Nutrition Programs – DOE Fiscal Year 2019 and On-Going The Financial Control Officer for the Special Nutrition Programs will ensure that all expenditures are charged to the correct grants. All records will be kept and filed safely to ensure that they are available upon request from reviewers. In addition, all records relating to expenditures will be effectively reviewed on a regular basis for completeness, accuracy, and allowability. The Special Nutrition Programs will ensure that the responsible entity reviews the NOPAs of employees under their supervision for accuracy to determine that employees are being paid from correct funding sources. 65 2017-019: Allowable Costs/Cost Principles – Indirect Cost Activities Director, Special Nutrition Programs – DOE Fiscal Year 2019 and On-Going The Special Nutrition Programs utilizes prevailing rates for prior years until the new rates are negotiated and received. There are instances where adjustments are done in-house or forwarded to the Department of Finance for processing. Considering that the expenditures reviewed fell within the fiscal year of Hurricanes Irma and Maria when the ERP system was inoperable for some time, and most adjustments are completed towards the end of the fiscal year, this may have been an oversight. Nonetheless, the Program will ensure that the correct indirect cost rate is utilized once it is negotiated and received and will make adjustments as necessary. The Special Nutrition Programs will also follow-up with the Department of Finance with any adjustments that may have been forwarded for processing. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 195 Page Number Finding Contact Estimated Completion Date Corrective Action 66 2017-020: Cash Management Director, Special Nutrition Programs – DOE Fiscal Year 2019 and On-Going The Special Nutrition Programs will ensure that all drawdowns are carried out within the timeframe of the Cash Management Improvement Act of 1990 (CMIA) Agreement. 67 2017-021: Equipment and Real Property Management Director, Special Nutrition Programs – DOE Fiscal Year 2019 and On-Going The Special Nutrition Programs will maintain complete and accurate records pertaining to the location and distribution of all fixed assets in coordination with DPP. 68 2017-022: Matching, Level of Effort, and Earmarking Director, Special Nutrition Programs – DOE Fiscal Year 2019 and On-Going The Special Nutrition Programs will ensure that the responsible entity for the approval of employee timesheets under its supervision is cognizant that all timesheets must be signed and approved prior to submitting to the Payroll Division for processing and for the match requirement. Additionally, the Payroll Division should ensure that signatures are affixed to all timesheets requesting payment. 69 2017-023: Period of Performance Director, Special Nutrition Programs – DOE Fiscal Year 2019 and On-Going The Program will work with the responsible entity to ensure that all expenditures are properly reviewed prior to approval to ensure that they occurred within the period of performance as stipulated by the applicable Grant Award Document. 70 2017-024: Procurement, Suspension, and Debarment Director, Special Nutrition Programs – DOE Fiscal Year 2019 and On-Going The Special Nutrition Programs will work with both District School Food Authorities, as well as communicate with the DPP to ensure that all necessary language and attachments are included in all contracts prior to final approval. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 196 Page Number Finding Contact Estimated Completion Date Corrective Action 71 2017-025: Allowable Cost/Cost Principles – Payroll Activities Human Resources and Payroll Office - DHS October 2019 DHS is restructuring its internal operations to ensure reconciliations of the payroll cycles ensuring accuracy with charges to the Federal grants. Prior to Hurricanes Irma and Maria, time and attendance reports were approved and electronically transmitted in the ADI time and attendance management system requiring various levels of managerial/supervisory approvals. Additionally, payroll time continues to be uploaded into the ERP system, requiring several additional levels of internal approval inclusive of the CFO and the Commissioner, prior to the batches (files) being electronically released to the Department of Finance for final processing. After the passage of the hurricanes, the ADI system was completely disabled. Access to the system was impossible; stored information of data files was limited, with certain periods a total loss, due to a compromised file server. However, DHS has moved away from the ADI system and is in the process of implementing the Government’s STATS system. 73 2017-026: Allowable Costs/Cost Principles – Indirect Cost Activities Chief Financial Officer - DHS First Quarter of Fiscal Year 2020 Operations were severely disrupted for months in the 4th quarter of 2017 with the passage of Hurricanes Irma and Maria. DHS recently implemented a reconciliation process wherein an indirect cost analysis is performed at the end of each quarter ensuring accurate cost reporting on the Federal financial report. 74 2017-027: Cash Management Chief Financial Officer – DHS On-going While this is a common finding throughout the Government, DHS continues to strive to ensure that proper financial controls are put in place to prevent further occurrences. Additionally, DHS is reorganizing the Fiscal office which further assures the separation of duties coupled with proper authorizations. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 197 Page Number Finding Contact Estimated Completion Date Corrective Action 75 2017-028: Equipment and Real Property Management Chief Financial Officer and Program Administrator – DHS On-going While this is a common finding throughout the Government, DHS continues to collaborate its efforts with DPP in ensuring Federal and Local regulations over equipment and real property management are met. 76 2017-029: Period of Performance Chief Financial Officer and Program Administrator - DHS October 2019 DHS is in the process of restructuring its policies and procedures to include comprehensive reconciliations. The reconciliation process will include a liquidation journal to ensure compliance with period of performance requirements. 77 2017-030: Procurement, Suspension, and Debarment Department of Property and Procurement On-going DPP now reviews vendors’ debarment status on Sams.gov and prints a debarment of suspension certification to ensure that all contractors that are awarded Government contracts using Federal funds are not debarred. DPP now requires contractual services to provide documentation to show that full and open competition was conducted with a cost or price analysis. These documents will then be stored in the contract file. DHS will work in tandem with DPP, requiring a review of documents to ensure compliance. 78 2017-031: Special Tests and Provisions – EBT Card Security Program Administrator - DHS Second Quarter of Fiscal Year 2020 The Program Administrator will prepare an SOPP specific to the handling of the EBT cards. Staff will be trained and cross trained to ensure adherence to the policy. Additional level of approvals will be implemented in the process to adequately safeguard the EBT cards, and the issuance process is in full compliance with Federal mandates. Additionally, its noteworthy to state that cards provided by the vendor (FIS) remain inactive until it is activated in the contractor’s system. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 198 Page Number Finding Contact Estimated Completion Date Corrective Action 79 2017-032: Special Tests and Provisions – EBT Card Reconciliation Program Administrator – DHS Second Quarter of Fiscal Year 2020 The Program Administrator will prepare an SOPP specific to the handling of the EBT cards and monthly reconciliations. Staff will be trained and cross trained to ensure adherence to the policy. DHS intends on hiring an Internal Auditor to assist in ensuring the reconciliation processes are completed in order to allow for full Federal compliance. 80 2017-033: Special Tests and Provisions – ADP System for SNAP- Recertifications Program Administrator – DHS Second Quarter of Fiscal Year 2020 The SNAP system will be moving to the implementation of the new Virgin Islands Benefits Eligibility System (VIBES). This process will improve monitoring and controls. This process will offer program changes for better oversight of electronic controls. 81 2017-034: Cash Management Office Manager, WIC Program On-going The WIC Program will ensure that all drawdowns are carried out within the timeframe of the Cash Management Improvement Act of 1990 (CMIA) Agreement. 82 2017-035: Eligibility Certifying officials for WIC Program May 2018 This condition has been corrected with the update of the WIC IT system for EBT. This form is generated by the WIC IT system which ensures that proper review and approvals are complete before issuance of certifications. 83 2017-036: Equipment and Real Property Management Director of WIC Program October 2019 The program will address this finding with the appropriate DOH, DPP, and management officials for intervention to improve the policies and procedures for equipment and real property management. 84 2017-037: Procurement, Suspension, and Debarment Office Manager for WIC Program July 2019 The required justification documents will be obtained related to future pronouncements in accordance with established policies. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 199 Page Number Finding Contact Estimated Completion Date Corrective Action 85 2017-038: Special Tests and Provisions – Review of Redeemed Food Instruments and Cash-Value Vouchers Vendor Monitor for WIC Program May 2018 This is resolved in fiscal year 2018 with the implementation of EBT since these queries are recorded electronically. 86 2017-039: Allowable Costs/Cost Principles – Payroll Activities Human Resources and Payroll Office - DHS October 2019 Prior to Hurricanes Irma and Maria, time and attendance reports were approved and electronically transmitted in the ADI time and attendance management system requiring various levels of managerial/supervisory approvals. Additionally, payroll time continues to be uploaded into the ERP system, requiring several additional levels of internal approval inclusive of the CFO and the Commissioner, prior to the batches (files) being electronically released to the Department of Finance for final processing. After the passage of the hurricanes, the ADI system was completely disabled. Access to the system was impossible; stored information of data files were limited, with certain periods a total loss, due to a compromised file server. However, DHS has moved away from the ADI system and is in the process of implementing the Government’s STATS system. 87 2017-040: Cash Management Chief Financial Officer - DHS October 2019 While this is a common finding throughout the Government, DHS continues to strive to ensure that proper financial controls are put in place to prevent further occurrences. Additionally, DHS is reorganizing the Fiscal office which further assures the separation of duties coupled with proper authorizations. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 200 Page Number Finding Contact Estimated Completion Date Corrective Action 88 2017-041: Equipment and Real Property Management Chief Financial Officer and Program Administrator - DHS On-going While this is a common finding throughout the Government, DHS continues to collaborate its efforts with DPP in ensuring Federal and Local regulations over equipment and real property management are met. 89 2017-042: Matching, Level of Effort, and Earmarking Chief Financial Officer and Program Administrator - DHS October 2019 DHS is in the process of restructuring its policies and procedures to include comprehensive reconciliations. The reconciliation process will include a matching journal to ensure compliance to the local match requirements. 90 2017-043: Period of Performance Chief Financial Officer and Program Administrator - DHS October 2019 DHS is in the process of restructuring its policies and procedures to include comprehensive reconciliations. The reconciliation process will include a liquidation journal to ensure compliance with period of performance requirements. 91 2017-044: Activities Allowed or Unallowed Chief Financial Officer and Program Administrator - DHS October 2019 The program staff and the Internal Auditor, will perform regularly scheduled sampling of claims to ensure that providers are paid based on the negotiated rate allowing for corrections within a reasonable time period. Special attention will be given to cases that require out of state providers. The Program is seeking assistance from the claims processing contractor in rectifying deficiencies. 92 2017-045: Cash Management Chief Financial Officer – DHS On-going While this is a common finding throughout the Government, DHS continues to strive to ensure that proper financial controls are put in place to prevent further occurrences. Additionally, DHS is reorganizing the Fiscal office which further assures the separation of duties coupled with proper authorizations. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 201 Page Number Finding Contact Estimated Completion Date Corrective Action 94 2017-046: Eligibility Program Administrator – DHS Second Quarter of Fiscal Year 2020 The Virgin Islands Benefits Eligibility System (VIBES) was implemented which has improved monitoring and controls. Additionally, a SOPP is being developed requiring the Eligibility Supervisor’s review of case files. Management will also conduct random case sampling to ensure compliance. It is noteworthy of stating that the passage of Hurricanes Irma and Maria severely impacted the ongoing process of scanning files into the electronic filing system. The MAP Eligibility unit suffered severe flooding causing extensive damage to a large majority of eligibility files that were stored in boxes. 96 2017-047: Matching, Level of Effort, and Earmarking Program Administrator – DHS October 2019 DHS is in the process of restructuring its policies and procedures to include comprehensive reconciliations. The reconciliation process will include a matching journal to ensure compliance to the local match requirements. 97 2017-048: Procurement, Suspension and Debarment Department of Property and Procurement On-going DPP now reviews vendors’ debarment status on Sams.gov and prints a debarment of suspension certification to ensure that all contractors that are awarded Government contracts using Federal funds are not debarred. DPP now requires contractual services to provide documentation to show that full and open competition was conducted with a cost or price analysis. These documents will then be stored in the contract file. DHS will work in tandem with DPP, requiring a review of documents to ensure compliance. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 202 Page Number Finding Contact Estimated Completion Date Corrective Action 98 2017-049: Reporting Chief Financial Officer - DHS October 2019 DHS is in the process of restructuring its fiscal operations to include comprehensive reconciliations. The process will include a process of ensuring Schedule of Expenditures of Federal Awards are reconciled to the Federal financial reports on a quarterly basis. The difference between the Schedule of Expenditures of Federal Awards and the CMS reports will be reconciled periodically as MAP functions on the cash basis rather than the standard Government accrual basis. 99 2017–050: Special Tests and Provisions – Federal Financial Participation Refunds Chief Financial Officer - DHS October 2019 DHS will continue to work with the Department of Finance's Treasury Division to allow for quarterly uncashed check reports to be incorporated into the required reconciliation package. 100 2017–051: Special Tests and Provisions – Provider Eligibility Program Director and Chief Financial Officer - DHS June 2019 and On-going The program staff and the Internal Auditor, will perform regularly scheduled sampling of claims to ensure that providers are paid based on the negotiated rate, allowing for corrections within a reasonable time period. DHS will also ensure that providers who are required to provide disclosure information, do so before enrollment. Special attention will be given to cases that require out-of-state providers. The Program is seeking assistance from the claims processing contractor in rectifying deficiencies. Additionally, DHS has implemented a SharePoint consisting of various functions inclusive of a tracking feature for provider agreements. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 203 Page Number Finding Contact Estimated Completion Date Corrective Action This feature flags expired Provider Agreements, alerting the Program for immediate action. If necessary, the provider’s payments will be barred from processing until the agreement is renewed. 101 2017–052: Special Tests and Provisions – Inpatient Hospital and Long-Term Care Program Director - DHS On-going The Medicaid Program is presently in an active contract with a vendor who is providing the cost audits and reconciliations as required by the Federal regulations. The audits were delayed due to the passage of 2 major hurricanes in September 2017. Presently, the auditor is wrapping up the audit inclusive of fiscal year 2017 and anticipates completion by the end of calendar year 2019. 102 2017-053: Special Tests and Provisions – Medicaid Fraud Control Unit Program Director - DHS January 2019 Subsequent to fiscal year-end and during 2018, the V.I. Medicaid Fraud Control Unit (MFCU) was established through a Memorandum of Understanding. The unit is located within the Department of Justice. The MFCU has Territory-wide authority to investigate and criminally prosecute (or refer for prosecution) cases of Medicaid fraud and patient abuse or neglect in residential care facilities. The MFCU may also bring civil actions to recover false Medicaid claims. The MFCU has a memorandum of understanding with the Virgin Islands Medicaid Program which describes the agencies' working relationship. 103 2017-054: Special Tests and Provisions – ADP Risk Analysis and System Security Review Program Director - DHS Fiscal Year 2020 With respect to VIBES, a contract was issued to Public Consulting Group who has now tested the implementation, verification, and validation (IV&V) as mandated by the Centers for Medicare & Medicaid Services (CMS). Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 204 Page Number Finding Contact Estimated Completion Date Corrective Action 104 2017-055: Special Tests and Provisions – Utilization Control and Program Integrity Program Director - DHS On-going As the Medicaid Fraud Control Unit has been created, the program is in the process of developing its own internal controls in an effort to prevent unnecessary utilization of care and services. The Medical Assistance Program continues to conduct clinical reviews of all inpatient stays over ten days, including a clinical review of the Patient Care Plans. 106 2017-056: Activities Allowed or Unallowed Program Administrator and Chief Financial Officer – DHS On-going The program staff and the Internal Auditor will perform regularly scheduled sampling of claims to ensure that providers are paid based on the negotiated rate allowing for corrections within a reasonable time period. Special attention will be given to cases that require out of state providers. The Program is seeking assistance from the claims processing contractor in rectifying deficiencies. Additionally, DHS has implemented a SharePoint consisting of various functions inclusive of a tracking feature for provider agreements. This feature flags expired Provider Agreements, alerting the Program for immediate action. If necessary, the provider’s payments will be barred from processing until the agreement is renewed. 107 2017-057: Cash Management Chief Financial Officer – DHS On-going While this is a common finding throughout the Government, DHS continues to strive to ensure that proper financial controls are put in place to prevent further occurrences. Additionally, DHS is reorganizing the Fiscal office which further assures the separation of duties coupled with proper authorizations. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 205 Page Number Finding Contact Estimated Completion Date Corrective Action 108 2017-058: Matching, Level of Effort, and Earmarking Chief Financial Officer – DHS October 2019 DHS is in the process of restructuring its policies and procedures to include comprehensive reconciliations. The reconciliation process will include a matching journal to ensure compliance to the local match requirements. 109 2017-059: Reporting Chief Financial Officer – DHS October 2019 DHS is in the process of restructuring its fiscal operations to include comprehensive reconciliations. The process will include a process of ensuring Schedule of Expenditures of Federal Awards are reconciled to the Federal financial reports on a quarterly basis. The difference between the Schedule of Expenditures of Federal Awards and the CMS reports will be reconciled periodically as MAP functions on the cash basis rather than the standard Government accrual basis. 110 2017-060: Cash Management Senior System Analyst and Director of Federal Grants - DOH Second Quarter of Fiscal Year 2020 The Department of Health’s Office of Federal Grants has Standard Operating Procedures which outlines the cycle of cash management procedures for the Department. Improvements in documentation procedures of the forms for Cash Requests and Cash-draw confirmation in the operating cycle for the Cash Management will be performed by the Senior System Analyst. Training improvements in the Standard Operating Procedures, and actual operations will begin by the second quarter of the fiscal year 2020. The Director of Federal Grants will ensure the documentation processes are reviewed and carried through. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 206 Page Number Finding Contact Estimated Completion Date Corrective Action 111 2017-061: Equipment and Real Property Management Program Director - DOH October 2019 The Department of Health will maintain a complete listing of all equipment purchased by Federal funds. Once a year, the Department of Health will compare its listing with Property and Procurement to make sure all equipment is captured and all the pertinent information are listed. 112 2017-062: Reporting Program Director and Deputy Commissioner - DOH First Quarter of Fiscal Year 2020 The Virgin Islands Department of Health’s program submitted an annual performance report within the agency portal. The signature confirmation was not included in review. The Virgin Islands Department of Health Deputy Commissioners will ensure programmatic reports are submitted by the Program Directors within the proper submission/confirmation standards. The report and confirmation will be printed and filed for proof of submission, within proper standard submission practices. The Virgin Islands Department of Health will educate staff by sending out a memo on standard programmatic report submission and enforce this practice by the up-coming fiscal year. 113 2017-063: Allowable Costs/Cost Principles – Payroll Activities PCSD Director, Assistant Director and Federal Grants Coordinator – DOJ First Quarter of Fiscal Year 2020 PCSD-DOJ will ensure that charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. A full review of all NOPAs will be executed upon issuance. NOPAs will be reviewed by the fiscal officer and a report will be given to the Director. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 207 Page Number Finding Contact Estimated Completion Date Corrective Action 114 2017-064: Allowable Costs/Cost Principles – Indirect Cost Activities PCSD Director and Federal Grants Coordinator - DOJ On-going PCSD will revisit and amend its Standard Operating Procedures, if necessary. PCSD will also review and reconcile cost allocations to ensure accuracy, as recommended. 115 2017-065: Cash Management PCSD Director and Federal Grants Coordinator – DOJ On-going The Director of PCSD has implemented a policy of reviewing, initialing and dating the supporting documents before a payment and/or drawdown request is made. Policies and procedures are presently in place to ensure compliance with the Uniform Guidance. The Federal Grants Coordinator will comply with the CMIA agreement and will use a clearance pattern of 4 days or less. Standard Operating Procedures have been established. 117 2017-066: Equipment and Real Property Management PCSD Director and Federal Grants Coordinator – DOJ On-going The MIS unit at DOJ/PCSD will work in conjunction with DPP and inventory all PCSD’s equipment and will forward this inventory listing to DPP so that DPP’s records reconcile with PCSD’s records of equipment. This is a common finding throughout the Government. Standard Operating Procedures have been established. 118 2017-067: Matching, Level of Effort, and Earmarking PCSD Director and Federal Grants Coordinator – DOJ On-going PCSD Director will review, initial and date all supporting documents before a request for payment is made. Adequate policies and procedures are in place to ensure compliance with the matching requirement is met. PCSD will develop a Matching Requirement Report to monitor. Standard Operating Procedures have been established. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 208 Page Number Finding Contact Estimated Completion Date Corrective Action 119 2017-068: Reporting PCSD Director and Federal Grants Coordinator – DOJ On-going PCSD will reevaluate its policies and procedures to ensure proper monitoring and review of the required reports by the Director. This will ensure the information submitted is complete, accurate, consistent, and submitted within the required timeframe, as recommended. Standard Operating Procedures will be amended accordingly. PCSD has contracted a vendor which will monitor the system. 120 2017-069: Cash Management Assistant Director of Administration – DPW Fiscal Year 2018 DPW along with OMB and Finance worked with the Federal Government to have the department removed from the CMIA agreement. The program is a manually reimbursable program, making it impossible to meet the time threshold. As of fiscal year 2018, the Department has been removed from this requirement while we work with FHWA to implement an electronic system. 121 2017-070: Equipment and Real Property Management Highway Program Manager – DPW March 2020 DPW is working with the Department of Property & Procurement so that all equipment is registered, properly tagged, and reviewed by DPP in a prescribed required timeframe. The Department is also implementing its own asset management system to facilitate the tracking of all of its assets internally. 122 2017-071: Activities Allowed or Unallowed UI Director and Commissioner of Labor Fiscal Year 2020 The Virgin Islands Department of Labor (VIDOL) recognizes the need to properly report the activities of the Unemployment Insurance Trust Fund. VIDOL has requested and received approval from the Virgin Islands Office of Management and Budget for the hiring of accountants, whose responsibilities will be to record the activities of the Fund in accordance with generally accepted accounting practices. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 209 Page Number Finding Contact Estimated Completion Date Corrective Action In addition, as part of the year-end financial reporting process related to the Government’s financial statement preparation, VIDOL will work with the Department of Finance to ensure that it receives the Unemployment Insurance Trust Fund information timely. 123 2017-072: Cash Management Business & Administration Director and Commissioner of Labor September 2020 The VIDOL currently has an effective Cash Management and Drawdown Policy in place. A policy refresher will be conducted with the respective staff. 124 2017-073: Eligibility Business & Administration Director and Commissioner of Labor September 2020 VIDOL will implement a schedule for regular file review and work to strengthen its Benefits Payment Control Unit to prevent such discrepancies. 125 2017-074: Cash Management Associate Director of Auditing and Reporting - OMB On-going The Government will continue to exercise due diligence in requesting federal funds as specified under the CMIA agreement with respect to reimbursable funding for expenditures incurred. 126 2017-075: Equipment and Real Property Management Deputy Commissioner of Property – DPP, Fixed Assets Manager – DPP and the Associate Director of Auditing and Reporting – OMB On-going DPP will continue to work with Munis and DOF to implement the ERP Assets Module and gain one hundred percent compliance with federal regulations. 127 2017-076: Procurement, Suspension, and Debarment Deputy Commissioner of Property – DPP On-going The Government’s Procurement Process, Overview and Guide Policy were revised, and updates were made. The updated version was posted to DPP’s website and training to User Agencies was conducted. OMB will continue to work in tandem with DPP. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 210 Page Number Finding Contact Estimated Completion Date Corrective Action 128 2017-077: Allowable Costs/Cost Principles Director, Administration and Business Management - OTAG January 2020 New policies and procedures have been created to address the payroll process of authorizing and moving grant funded personnel to the current-year grant. 130 2017-078: Cash Management Director, Administration and Business Management - OTAG Fiscal Year 2018 The Office of Management and Budget has expressed to the Department of Finance through correspondence that OTAG be removed from the Treasury State Agreement (TSA) effective Fiscal Year 2018. The request has been accepted and OTAG will no longer fall under the CMIA. 132 2017-079: Matching, Level of Effort, and Earmarking Director, Administration and Business Management - OTAG January 2020 The Master Cooperative Agreement (MCA) through the appendices identifies the cost share and what is required by persons performing management functions. OTAG has developed a new policy and procedure manual that includes tracking the match fulfillment for each expenditure. 133 2017-080: Period of Performance Director, Administration and Business Management - OTAG January 2020 OTAG has developed new policies and procedures to track expenditures for each grant while improving the review and approval of those expenditures. It also addresses the completion of the close out process within 90 days. 134 2017-081: Reporting Director, Administration and Business Management - OTAG January 2020 OTAG has developed a new policy and procedures manual to address the preparation and submittal of SF-270’s. In addition, a Chief Financial Officer has been put in place to ensure separation of duties in Financial reporting. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 211 Page Number Finding Contact Estimated Completion Date Corrective Action 135 2017-082: Allowable Costs/Cost Principles – Indirect Cost Activities Grant Manager - DPNR October 2019 and On-going The program will ensure that all indirect calculations are properly allocated and reviewed by senior staff to prevent this finding from recurring. 136 2017-083: Cash Management BDAS Director and Grant Manager - DPNR October 2019 and On-going DPNR will ensure that all drawdowns are carried out within the timeframe of the Cash Management Improvement Act of 1990 (CMIA) Agreement. All drawdowns and other documentation must be submitted to US EPA for review which normally takes a longer time than the CMIA agreement. 137 2017-084: Equipment and Real Property Management Divisional Administrative Staff - DPNR and DPP August 2019 and On-going The physical conditions of the vehicles were as a result of Hurricanes Irma and Maria. The funding to repair the vehicles was issued to a Project Worksheet through VITEMA from FEMA, following a satisfactory review and approval of DPNR’s documentation to support the claim. However, to date, the funding has not been released. The Program will continue to enhance its maintenance of vehicles by ensuring that funding is made more readily available to repair vehicles when damages occur. Vehicles are parked in an enclosed and locked facility with nightly security. The program has made intentional efforts to ensure its inventory is current and complete. The Program began its physical inventory in August 2019 and is working closely with DPP to ensure that both departments’ inventory records are accurate, complete, and reconciled. Government of the United States Virgin Islands Appendix B: Corrective Action Plan Year Ended September 30, 2017 212 Page Number Finding Contact Estimated Completion Date Corrective Action 138 2017-085: Matching, Level of Effort, and Earmarking Grant Manager and Accountant - DPNR October 2019 and On-going The Program will ensure that appropriate measures are put in place to accurately account and track the matching amounts in order to ensure full compliance. 139 2017-086: Procurement, Suspension, and Debarment Divisional Administrative Staff - DPNR and DPP October 2019 and On-going The Program agrees that the evidence was not present to indicate that DPP reviewed the Excluded Parties List System (EPLS). The Program however, conducted its review of the EPLS to ensure that the vendors it conducts business with are not debarred or suspended; though the evidence was not printed and filed. Going forward, the Program will ensure that the necessary documents are filed properly for each search conducted. 140 2017-087: Reporting Internal Auditor – DPNR October 2019 and On-going Going forward, the Program will communicate with US EPA relative to this matter, and formulate a plan of action relative to evidence needed for review of reports and implement it in the immediate future. 141 2017-088: Data Collection Form and Single Audit Reporting Package Associate Director - OMB Fiscal Year 2020 The Government agrees that the Data Collection Package was not provided timely. However, the Government will set up appropriate measures to ensure that the data collection form and reporting package is submitted to the FAC on the required due date for the next audit period.