Rum tax supporting USVI, Puerto Rico bonds raised
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The U.S. government permanently increased the rum taxes supporting bonds from the U.S. Virgin Islands’ Special Purpose Securitization Corp. and contingent vehicle instruments connected to Puerto Rico central government bonds.
The increase to $13.25 per proof gallon of rum from $10.50 was in the “One Big Beautiful Bill” President Trump signed on Independence Day.
U.S. Sen. Mike Crapo, R-Idaho, helped add the measure to the bill.
The USVI’s SPSC sold the bonds in 2022 with the assumption the tax rate would be $13.25. USVI Del. Stacey Plaskett worked unsuccessfully since then to get Congress to increase the rate permanently.
If the tax was held at the $10.50 level, it would cost the USVI government $60 million per year, USVI Sen. Janelle Sarauw said in 2023, adding it would threaten the financial stability of the USVI.
Bondholders have a first lien on the rum cover for payment of
“The reduced rum tax cover-over rate makes less money available to contribute to Government Employee Retirement System, and
Should GERS run out of assets, the island “cannot likely afford the cost of paying pensions in their entirety to retirees while concurrently delivering core governmental services and paying debt service,” Aaron said. “Since it is politically unlikely that the USVI would prioritize debt service over retiree pensions, lower contribution inflows to GERS are credit negative.”
KBRA in April l
The agency views the hike “favorably as it should allow for increased matching fund receipts and associated debt service coverage on matching fund bonds,” said KBRA Senior Director Peter Scherer. By making the hike permanent, he said, “a source of uncertainty previously present in the credit has been removed.”
“This marks an important step toward greater economic certainty and fiscal stability for the Virgin Islands,” said USVI Gov. Albert Bryan Jr. in late June after the higher rum cover rate was added to the bill. The cover-over revenues will fund GERS, public education, health care, law enforcement, infrastructure improvements, climate resilience projects and job creation, Bryan said.
The rum cover also supports contingent vehicle instrument payments to holders of restructured Puerto Rico central government bonds. The 2024 Puerto Rico fiscal plan included the payment of the CVI based on outperformance compared to goal.
The rum cover is used for other purposes in Puerto Rico’s government and Puerto Rico Resident Commissioner Pablo José Hernández said the increase would mean an annual increase of $110 million over what would otherwise be $400 million from the rum tax. “This change will have a direct economic impact on our public finances.”