S&P Global Ratings has placed the government of Guam under credit watch, affecting about $10 million in general obligation bonds and $177 million in certificates of participation.
“Guam has a history of structural imbalance in its general fund, including recurring deficits, a very large negative general fund balance, and massive long-term liabilities,” S&P said.
Citing the projected $67-million revenue shortfall resulting from President Trump's federal tax cuts, S&P gave GovGuam’s general obligation debt a BB rating, and a B plus rating on the government's various certificates of participation on CreditWatch "with negative implications" and at risk for further doing down.
The rating agency’s report came amid the administration and the legislature’s failure to break the deadlock on the governor’s proposed 50 percent increase in business privilege tax. The defeated tax hike proposal was anticipated to generate new cash to cover the revenue gap caused by the Tax Cuts and Jobs Act of 2017, signed into law by President Trump on Dec. 22, 2017.
“The credit watch placement reflects the government's disclosure that its cash flow will be extremely constrained over the next several months, and perhaps even longer, and also reflects our view that the government's ability to meet its ongoing obligations could be impaired,” states the S&P’s March 5 report, a new weapon grabbed by the administration to pressure the legislature to reconsider its position on the governor's tax bills.
“If we don't receive evidence from Guam officials addressing these rating considerations, we will likely lower the ratings. Guam's financial position continues to be weak, in our view,” S&P said.
The negative CreditWatch placement, the rating agency said, reflects the possibility that GovGuam’s challenges will further diminish the general government's ability to meet its operational responsibilities and address its ongoing obligations, including debt payments.
GovGuam has indicated it might be difficult to meet payroll in May 2018, and its ability to meet payroll in subsequent months is also uncertain.
On Monday, the administration shut down police precincts and fire stations in Piti and Dededo, as it attempted desperately, but failed, to build a case for Gov. Eddie Calvo’s proposal to raise BPT from 4 percent to 6 percent.
S&P estimated the BPT increase to generate about $10 million per month in additional revenues for the remainder of fiscal 2018, or approximately $120 million per fiscal year.
The expected revenue from this defeated proposal would have been used to bridge the government’s funding gap and meet the needs of the Guam Memorial Hospital and Guam’s public school system.
“If we don't receive evidence from Guam officials addressing these rating considerations, we will likely lower the ratings. Guam's financial position continues to be weak, in our view,” S&P said.
“While the government has reaffirmed its commitment to treating debt service payments as its highest priority, we nevertheless believe that full and timely payment of debt service could be challenging,” the report states.
S&P noted that the government's total general fund balance was negative $106 million based on fiscal 2016 audit— equal to negative 14 percent of expenditures, with the unreserved or unassigned portion growing for a third-consecutive year to negative $215 million.
“We have implemented cost-cutting measures and have proposed alternative revenue enhancements that would restore budget balance and ensure that all of our obligations can be met, including pressing needs in our public health care system,” Gov. Eddie Calvo said in a statement. “We continue to press the legislature to support us in this effort, to provide a longterm solution that will address the identified revenue shortfall.”
While preparing to defend a new proposal to implement a 2 percent sales tax and 6 internet sales tax, the administration has implemented cost-cutting measures included a hiring freeze except for public safety and public health, and initiated cost-containment measures in utilities, fuel consumption, procurement, training, and travel, among other areas.
“The governor is committed to ensuring the Legislature provides a solution to the revenue shortfall caused by the Trump Tax Act, to ensure the Government of Guam remains on a strong financial footing established in the past few years. He will continue to call the Legislature in Special Session until he is satisfied that all our financial obligations, to include dedicated funding sources for critical services, are addressed” said Jay Rojas, administrator of the Guam Economic Development Authority.