The U.S. Congress did not include an increase in rum cover-over funds in its year-end $1.65 trillion Omnibus bill, a reality with potentially damaging consequences for the Government Employees’ Retirement System.

Rum cover-over funds are taxes collected by the U.S. Treasury on behalf of the V.I. Government on rum made in the USVI and sold on the mainland.

In late August, the U.S. Dept. of Interior announced $226.1 million in rum-over funds to the territory, representing 2023 estimated payments. The money is provided annually and used for a number of obligations, including some of the USVI’s covenants with bondholders. 

However, this year’s remittance was tens of millions of dollars less than the $273 million received in Sept. 2020, which represented estimated payments for 2021. That’s because the rum cover-over tax is now being assessed at $10.50 per proof gallon of rum, instead of the $13.25 for the past five years. 

Delegate to Congress Stacey Plaskett, after criticism from Senator Kurt Vialet, assured that the matter would be addressed by the end of 2022 and that the U.S. Treasury would retroactively pay the remainder of the funds. However, the increase was not included in the omnibus bill, with Ms. Plaskett suggesting it would have been more prudent for the local government to use the lower rate of $10.50, instead of the $13.25 as an estimate of potential revenue collection for the securitization deal.

“Because all tax extenders have been a contentious issue used for negotiation in both parties, and the cover over cliff was pending, our office had taken the position that it would be prudent to use the lower rate of cover over for any estimation of use or budgeting purpose,” she said. “Due to ongoing negotiations in Congress, there were no tax provisions (not even disaster tax) in the year-end federal government funding bill.”

Earlier this year, the Bryan administration reached a 30-year historic bond sale agreement that was billed as the savior of the Government Employees’ Retirement System, as it was expected to provide $3.8 billion to G.E.R.S. during a 30-year period. 

The agreement, which utilizes a special type of corporate entity called the Matching Fund Special Purpose Securitization Corporation, was specifically authorized by the Legislature to issue bonds based on rum tax revenues at a rate of $13.25 per proof gallon. However, the base rate as written into federal law is $10.50 per proof gallon, though the Virgin Islands and Puerto Rico have historically been provided with tax extenders that carry the tax rate to $13.25.

Following Hurricanes Irma and Maria, the USVI and PR received a five-year extender that expired in December 2021, and the Dept. of Interior in its recent remittance to the U.S. Virgin Islands calculated the tax rate at the base level of $10.50. This resulted in a shortfall of $59.2 million, according to Senator and Finance Committee Chairman, Kurt Vialet, funds slated to be provided to G.E.R.S. as part of the securitization deal to stabilize the pension system.

“Vialet’s main concern is the recent Special Purpose Vehicle which was structured at a rate of $13.25. Reimbursement based on a rate of $10.50 leaves a void of $59,233,700 which was earmarked for the Government Employees’ Retirement System,” Mr. Vialet’s office said in a statement in August.

Ms. Plaskett expressed confidence that the increase will be provided sometime next year. “Democrats in Congress have been fighting for tax benefits for families, like improvements to the Child Tax Credit, which put money in the pockets of parents for children last year, in exchange for tax benefits for businesses — but Republicans have not agreed — consequently all negotiations for tax provisions are at a standstill,” she said. “I and my team, along with our allies in Congress will keep pushing for full rum cover in revenue measures that may be taken up. We have been in this position before and eventually received the higher amount retroactive to the cliff, we will continue to work with the Governor and others to secure the higher amount.”

If the territory fails to recoup the lost revenue as a result of the lower rum cover-over tax collection, it would spell trouble for GERS, which is currently relying on the funds to stave off collapse.

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