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March 14, 2018

Hagåtña — Without a legislative solution to $67 million shortfall in revenues, Moody’s assigned a negative outlook for the Government of Guam’s issuer rating, and Guam Waterworks Authority revenue bonds.

Similar to S&P Global Ratings, Moody’s stated concerns regarding the negative impact of the federal Tax Cuts and Jobs Act of 2017 to our local government. The federal policy caused an immediate financial shortfall for the current year and the lack of a solution heightened their concerns. Moody’s states:

“The change in outlook is triggered by the significant budget gap and liquidity pressures resulting from a reduction in Guam’s income tax revenues, driven by the enactment of the federal tax cuts in December. Guam’s individual and corporate tax rates are tied directly to the federal rates. The most recent estimate is that revenues for the current fiscal year, 2018, will fall short of budget by approximately $67 million or 9.7% of budgeted general fund revenues. While the government has enacted some spending cuts to offset the shortfall, it has not yet adopted tax increases needed to close the budget gap completely. Moreover, as tax withholdings have come in short of budgeted amounts, the government’s liquidity has deteriorated rapidly.”

Is this a downgrade? If not, then what does it mean?
This is NOT a downgrade. The negative outlook from Moody’s means that our ratings WILL BE LOWERED IF THERE IS NO SOLUTION to the $67 million shortfall caused by the federal Tax Cuts and Jobs Act of 2017.

Could this have been avoided? 
Yes. In the last few weeks, the Governor has called senators to session 8 times to discuss bills introduced by the administration and by senators.

“Bills could have easily been passed the last few weeks, but because of legislative inaction, there has been uncertainty, leading to first a negative credit watch from S&P, and now a negative outlook from Moodys,” Governor Calvo stated.

“Yesterday it felt like we were finally getting closer to the passage of a bill that would have covered the $67 million shortfall in revenue for the fiscal year. Having said that, the credit rating agencies and investors only want to see stability, or at the very least, action towards re-gaining stability.”

How can we fix this? 
The first step to that is to pass a bill that will help bridge the financial shortfall of $67 million. Only the Legislature can pass a bill, as policy makers this is entirely in their hands. On the other side of revenue enhancement, the Governor has committed to reducing expenditures through, among other things, reorganizing the government.

Strong economy
Tourism numbers continue to grow, buildup projects are starting, and the private sector continues to flourish — all the economic fundamentals remain strong. The island continues to attract investments (we’ve all been talking about Olive Garden and Red Lobster opening by the end of the year).

To maintain this bullish projection, we have to ensure that our government is stable. Because without government stability – we have 11,000 GovGuam employees and their thousands of family members who will be less inclined to have a dinner out with friends, or to take their family to the movie theaters – in other words spend money in the economy. Additionally, future efforts to float bonds would mean higher interest rates.

Impact on other bonds
Unfortunately, the Moody’s negative outlook designation impacts the Guam Waterworks Authority, and it will likely affect other autonomous agencies. Moody’s states:

“This rating serves as a reference point for the ratings on the revenue bonds of the territory’s enterprise authorities: the Guam Waterworks Authority, the Guam Power Authority, and the A. B. Won Pat International Airport Authority.”

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.

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

If our economy is doing well, and the administration was managing finances as it should, then what caused this shift from Stable to Negative Outlook? 
Moody’s states: 
The change in outlook is triggered by the significant budget gap and liquidity pressures resulting from a reduction in Guam’s income tax revenues, driven by the enactment of the federal tax cuts in December.

Guam’s individual and corporate tax rates are tied directly to the federal rates, and those rates DECREASED by approximately 18% and 40%, respectively, when the federal tax cuts became law. 
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