March 6, 2018

Hagåtña — Earlier today, S&P Global Ratings announced that it placed bond ratings for the Government of Guam’s General Obligation and certificates of participation on “Credit Watch with negative implications.”

According to S&P Global Ratings:
“The CreditWatch 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. The CreditWatch placement affects about $10 million of GO bonds and $177 million of COPs outstanding.”

The S&P statement acknowledges Guam’s growing economy, bustling tourism and military construction projects that are coming down the pike.

However, the S&P statement also takes note of GovGuam’s sometimes tumultuous financial history. No matter how much we’ve worked to improve our economy and how well we’re doing now, that bond rating history is always there – and anyone who has struggled to improve their personal credit rating score would understand the work needed to overcome that history and maintain, if not improve, that credit score. GovGuam can do no less.

As it stands, to avoid a downgrade in bond ratings, which would have a devastating impact on the next administration and the future of this island, the LEADERS of this island must take IMMEDIATE ACTION. The S&P statement reads:

“If we don’t receive evidence from Guam officials addressing these rating considerations, we will likely lower the ratings … We expect to resolve the CreditWatch placement following an analysis of management’s plan to address the territory’s current liquidity challenges as well as its overall financial position.” (emphasis added)

What does this mean?
This means that senators need to put politics aside and focus on the issue at hand — passing a bill that addresses the $67 million shortfall in revenues for this fiscal year.

A failure to find a solution would have immense negative impact to government and community today as well as in the future: 
-For the here and now, thousands of GovGuam employees will be furloughed and out of paycheck. Government services would be effected if we can’t pay government employees or pay for costs of operations. 
-It would mean a downgrade in bond ratings for the General Obligation bonds and COPs, which would make it harder for future administrations to utilize bonds as a tool to manage resources to the best interest of the island community.

While we’re at it, we should address other areas that require financial support – we must remember the Guam Memorial Hospital – our island’s only public hospital – requires a dedicated funding source, and our public schools need funding for maintenance, repairs and renovation of school buildings.

We should ensure any solution also encompasses the anticipated shortfall for Fiscal Year 2019.

Could this have been avoided? 
Absolutely. Instead of Senators stalling for whatever reason, worrying about November elections, or going off island before a resolution was found, we should have been seated together and focused on reaching a solution.

And yes, we are pointing out political games. Isn’t it peculiar that even though EVERYONE AGREED THERE WAS A PROBLEM no one could agree on a solution? The governor provided bills that based the revenue enhancement on BPT or sales tax. None passed. One of the recent bills sent was based on sales tax (which everyone said was more palatable to everyone) AND it included amendments from Republicans and Democrats that would ensure accountability. Yet, very few amendments could garner more than 5 votes.

Yes. We’re also pointing out that leaders of the legislature left while we’re in the middle of an incredible fiscal crisis. The Governor canceled a working trip to Washington D.C. because this situation was too critical for him to leave without our government reaching a solution. Yet Speaker BJ Cruz and Sen. Mike San Nicolas felt it was OK to up and leave?

S&P: “…no legislative vote is imminent.”
The S&P took notice of the failed efforts at the Legislature to pass a bill with a solution and even takes note of delays: 
“In an effort to shore up the impact, but also to provide Guam Memorial Hospital (GMH) with a permanent, dedicated funding source (rather than rely on annual general fund contributions), Gov. Eddie Calvo introduced Bill 245-34, which proposed to raise Guam’s business privilege tax (the island’s second-largest general fund revenue source) to 6.0% from its current 4.0% rate. However, in a Feb. 28 legislative session, the bill was defeated by a 10-to-4 vote. Half the funds raised would have been directed to the general fund to cover the deficit, while the balance would have flowed to the Guam Department of Education (DOE) and GMH. The tax increase would have dipped to a 4.75% rate after 24 months, with the remaining tax increase to serve as a dedicated source of funding for GMH. We estimate the rate increase to 6.0% would have generated about $10 million per month in additional revenues for the remainder of fiscal 2018, or approximately $120 million per fiscal year. The government is now considering other revenue-raising measures with a similar or even greater impact, including a 2.0% sales tax and 6.0% internet sales tax. No public hearing on the sales tax measures is planned until March 8, so it is likely that no legislative vote is imminent.”(emphasis added)

What if we can’t find a solution? And how much time do we have? 
There is a 50% chance that WITHIN the next 90 days the rating MAY change unless a bill is passed into law. It should address the short term (current fiscal year) and long term (next fiscal year)shortfall because ratings are evaluated annually.
In addition, we will need to show AT LEAST ONE MONTH OF POSITIVE COLLECTION in order to convince S&P not to downgrade the rates. WE NEED TO ACT NOW!! 
We implore senators, once again, to please reach a consensus.

If our economy was doing well, and the administration was managing finances as it should, then what happened? What caused this CreditWatch? 
As per S&P, CreditWatch focuses on identifiable events and short-term trends that cause ratings to be placed under special surveillance by S&P Global Ratings’ analytical staff. S&P acknowledges that the cause of this fiscal crisis for Guam is The Tax Cuts and Jobs Act of 2017 and its negative immediate impact of reducing revenue by $67 million.

Does This Mean Bond Rating Will Change?
A CreditWatch listing does not mean a rating is changed or that a downgrade is inevitable. It means it MAY BE lowered IF NO ACTION is taken to address the issue that drew the bond rating agency’s concern, which for us means addressing the $67 million shortfall.

Is There Hope to maintain our good standing? 
Yes. This is not a final decision – more of a caution for us. S&P understands that the $67M in revenue shortfall is CAUSED BY FEDERAL TAX CUTS and not because we have missed bond payments or did anything wrong.

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