GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Basic Financial Statements September 30, 2005 (With Independent Auditors’ Report Thereon) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Table of Contents Page Financial Section: Independent Auditors’ Report 1 Management’s Discussion and Analysis 5 Basic Financial Statements: Government-wide Financial Statements: Statement of Net Assets (Deficit) 15 Statement of Activities 17 Fund Financial Statements: Balance Sheet — Governmental Funds , 19 Statement of Revenue, Expenditures, and Changes in Fund Balances — Governmental Funds 20 Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances to the Statement of Activities — Governmental Funds 21 Statement of Revenue and Expenditures — Budget and Actual — Budgetary Basis — General Fund 22 Statement of Net Assets — Proprietary Funds 23 Statement of Revenue, Expenses, and Changes in Fund Net Assets — Proprietary Funds 24 Statement of Cash Flows — Proprietary Funds 25 Statement of Fiduciary Net Assets — Fiduciary Funds 26 Statement of Changes in Fiduciary Net Assets 27 Notes to Basic Financial Statements: Summary of Significant Accounting Policies 28 Component Units 46 Stewardship, Compliance, and Accountability 48 Cash and Cash Equivalents 50 Investments 51 Receivables 57 Interfund Transactions 59 Restricted Assets 62 Capital Assets 63 Long-Term Liabilities 68 General Tax Revenue 83 Commitments and Contingencies 83 Retirement Systems 88 Liquidity 90 Restatements of Net Assets and Fund Balances 92 Subsequent Events 92 2 KPMG LLP American International Plaza Suite 1100 250 Muhoz Rivera Avenue San Juan, PR 00918-1819 Independent Auditors’ Report The Honorable Governor of the Government of the _ United States Virgin Islands: We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the Government of the United States Virgin Islands (the Government), as of and for the year ended September 30, 2005, which collectively comprise the Government’s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the Government’s management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the following component units: The Virgin Islands Public Finance Authority (PFA), a blended component unit, which represents 100% of the assets, fund balance, and revenue of the PFA Debt Service Fund (a major fund); 100% of the assets, net assets, and revenue of the PFA Capital Projects Fund (a major fund); 100% of the assets, net assets, and revenue of the West Indian Company (a major fund); 1.29%, 1.29%, and 0.75% of the assets, net assets/fund balance, and revenue of the aggregate remaining fund information; 26.64%, 390.25%, and 18.64% of the assets, net assets, and revenue of the governmental activities; and 60.52%, 52.49%, and 23.17% of the assets, net assets, and revenue of the business-type activities, respectively. Virgin Islands Lottery (VI Lottery), a nonmajor enterprise fund, which represents 0.22%, 0.30%, and 3.21%, respectively, of the assets, net assets/fund balance, and revenue of the aggregate remaining fund information, and 3.73%, 8.15%, and 30.48%, respectively, of the assets, net assets, and revenue of the business-type activities. The Tobacco Settlement Financing Corporation, a blended component unit, which represents 0.13%, 0.16%, and 0.24%, respectively, of the assets, fund balance, and revenue of the aggregate remaining fund information, and 0.29%, 8.80%, and-0.11%, respectively, of the assets, net assets, and revenue of the governmental activities. The Virgin Islands Port Authority, Virgin Islands Water and Power Authority, Virgin Islands Housing Authority (VIHA), University of the Virgin Islands, Virgin Islands Public Television System, Virgin Islands Economic Development Authority (VIEDA), Magens’ Bay Authority, Virgin Islands Government Hospital and Health Facilities Corporation (Roy L. Schneider Hospital and Juan F. Luis Hospital and Medical Center), and the Virgin Islands Housing Finance Authority (VIHFA), discretely presented component units, which collectively represent 100% of the assets, net assets, and revenue of the aggregate discretely presented component units. These financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinions, insofar as they relate to the amounts included for the activities, funds, and component units indicated above, are based on the reports of the other auditors. KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative. mane We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Government’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our opinions. The report of the other auditors on the 2005 financial statements of VIHFA, a discretely presented component unit, was qualified because they were unable to obtain sufficient audit evidence to determine whether land held for sale amounting to $25.1 million was fairly stated. The report of the other auditors on the 2005 financial statements of VIEDA, a discretely presented component unit, was qualified because they were unable to obtain sufficient audit evidence to determine whether loan receivables of $1.7 million, other current liabilities of $348 thousand, and other noncurrent liabilities of $9.2 million were fairly stated. The report of the other auditors on the 2005 financial statements of the Juan F. Luis Hospital and Medical Center, a discretely presented component unit, was qualified because they were unable to obtain sufficient audit evidence to determine whether accounts payable amounting to $9.0 million was fairly stated. The report of the other auditors on the 2005 financial statements of the VI Lottery, a nonmajor enterprise fund, was qualified because they were unable to obtain sufficient audit evidence to determine whether capital assets of $215 thousand, net accounts receivables of $1.1 million, due to the general fund of $4.7 million, and other liabilities of $98 thousand were fairly stated. The basic financial statements do not include a liability for workers’ compensation claims. The Government’s records do not permit, nor is it practical to extend our auditing procedures sufficiently to determine the extent by which the business-type activities as of and for the year ended September 30, 2005 may have been affected by this condition. The Employees’ Retirement System of the Government of the Virgin Islands (GERS), a fiduciary component unit (pension trust fund), is recording contributions pursuant to the Early Retirement Act of 1994 as the cash is received which, in our opinion, should be accrued in order to conform with U.S. generally accepted accounting principles. If these contributions were accrued, contributions receivable and net assets held in trust for employees’ pension benefits would be increased by $6.7 million and the change in net assets would be decreased by $600 thousand. In addition, GERS maintains its real estate investment in the GERS complex related to the portion of the St. Thomas building held for lease based on historical cost. As of September 30, 2005, this real estate investment amounted to approximately $8.6 million. Such investment should be presented at fair value in accordance with U.S. generally accepted accounting principles. GERS has not performed a recent valuation of this real estate investment. Since fiscal year 2004, GERS has maintained its real estate investment in Havensight Mall based on historical cost less accumulated depreciation. As of September 30, 2005, the real estate investment in Havensight Mall amounted to $60.3 million. Such investment should be presented at fair value in accordance with U.S. generally accepted accounting principles. The most recent valuation performed by GERS of its real estate investment in Havensight Mall was September 1, 2003. Finally, we were unable to obtain sufficient audit evidence about the cash overdraft balance reported by GERS with the Department of Finance of $10.5 million in specially designated pooled accounts. 2 Rane Because of the matters discussed in the sixth and seventh paragraphs of this report, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the financial position of the business-type activities as of September 30, 2005 and the changes in financial position for the year then ended. In our opinion, based on our audit and the report of other auditors, except for: The effects of the adjustments, if any, as might have been determined to be necessary, had the other auditors been able to obtain sufficient audit evidence to determine whether 1) land held for sale amounting to $25.1 million in the financial statements of VIHFA; 2) loan receivables of $1.7 million, other current liabilities of $348 thousand, and other noncurrent liabilities of $9.2 million in the financial statements of VIEDA; and 3) accounts payable amounting to $9.0 million in the financial statements of the Juan F. Luis Hospital and Medical Center, respectively, were fairly stated, as described in paragraphs three, four, and five above, the financial statements referred to above present fairly, in all material respects, the financial position of the aggregate discretely presented component units of the Government of the United States Virgin Islands, as of September 30, 2005, and the respective changes in financial position thereof for the year then ended in conformity with U.S. generally accepted accounting principles; and The effects of (i) GERS not accruing contributions pursuant to the Early Retirement Act of 1994 and not recording its real estate investments in the GERS complex related to the portion of the St. Thomas building held for lease. and in Havensight Mall at fair value and (ii) the adjustments, if any, aS might have been determined to be necessary, had we been able to obtain satisfactory evidence with respect to the cash overdraft of GERS with the Department of Finance, as described in paragraph eight above, the financial statements referred to above present fairly, in all material respects, the financial position of the aggregate remaining fund information of the Government of the United States Virgin Islands, as of September 30, 2005, and the respective changes in financial position thereof for the year then ended in conformity with U.S. generally accepted accounting principles. Finally, in our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities and each major fund of the Government of the United States Virgin Islands, as of September 30, 2005, and the respective changes in financial position and, where applicable, cash flows thereof, and the respective budgetary comparison for the general fund for the year then ended in conformity with U.S. generally accepted accounting principles. ane The management’s discussion and analysis on pages 5 through 14 is not a required part of the basic financial statements, but is supplementary information required by the Governmental Accounting Standards Board. We and the other auditors have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. KPa LEP January 18, 2008 Stamp No. 2221990 of the Puerto Rico Society of Certified Public Accountants was affixed to the record copy of this report. GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2005 Introduction The following discussion and analysis presents an overview of the financial position and activities of the Government of the United States Virgin Islands (the Government) as of and for the fiscal years ended September 30, 2005 and 2004. Government-wide Financial Statements The government-wide financial statements are designed to present an overall picture of the financial position of the Government. These statements consist of the statement of net assets and the statement of activities, which are prepared using the economic resources measurement focus and the accrual basis of accounting. This means that current year’s revenue and expenses are included regardless of when cash is received or paid, producing a view of financial position similar to that presented by most private sector companies. The statement of net assets combines and consolidates the Government’s current financial resources with capital assets and long-term obligations. Both of the above-mentioned financial statements have separate sections for three different types of the Government programs or activities. These three types of activities are as follows: Governmental Activities~ The activities in this section are mostly supported by taxes and intergovernmental revenue (federal grants). Most services normally associated with the primary government (PG) fall into this category, including general government, public safety, health, public housing and welfare, education, transportation and communication, and culture and recreation. Business-Type Activities — These functions normally are intended to recover all or a significant portion of their costs through user fees and charges to external users of goods and services. These business-type activities of the Government include the operations of the (i) unemployment insurance program and (ii) the West Indian Company (WICO). Both these programs operate with minimal assistance from the governmental activities of the Government. Discretely Presented Component Units — These are operations for which the Government has financial accountability even though they have certain independent qualities as well. For the most part, these entities operate similar to private sector businesses and the business-type activities described above. The Government’s discretely presented component units are presented in two categories, major and nonmajor. This separation is determined by the relative size of the entities’ assets, liabilities, revenue, and expenses in relation to the total of all component units. As disclosed in note 1 to the financial statements, the Government adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 40, Deposit and Investment Risk Disclosure, an amendment of GASBS No. 3, during 2005. Fund Financial Statements Fund financial statements focus on the most significant (or major) funds of the Government. A fund is a separate accounting entity with a self-balancing set of accounts. The Government uses funds to keep track of sources of funding and spending related to specific activities. The Government uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. 5 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2005 A major fund is a fund whose revenue, expenditures or expenses, assets, or liabilities (excluding extraordinary items) are at least 10% of the corresponding totals for all governmental or enterprise funds and at least 5% of the aggregate amount for all governmental and enterprise funds for the same item. The general fund is always considered a major fund. In addition to funds that meet the major fund criteria, any other governmental or enterprise fund that the Government believes is particularly important to the financial statements may be reported as a major fund. All of the funds of the Government are divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental Funds Governmental funds are accounted for using the modified accrual basis of accounting, which measures cash and other assets that can be readily converted to cash. The governmental fund statements provide a detailed short-term view of the PG’s general governmental operations and the basic services it provides. The reconciliation following the fund financial statements explains the differences between the governmental activities, reported in the government-wide financial statements, and the governmental funds’ financial statements. The General Fund, the PFA Debt Service, and the PFA Capital Projects Fund are reported as major governmental funds. The General Fund is the PG’s primary operating fund. It accounts for all financial resources of the PG, except those required to be accounted for in another fund. The PFA Debt Service accounts for the resources accumulated, and payments made, for principal and interest on long-term general obligation debt issued by the Virgin Islands Public Finance Authority (PFA) on behalf of the Government. The PFA Capital Projects Fund accounts for bond proceeds of debt issued by the PFA on behalf of the Government. The bond proceeds have been designated for certain necessary public safety and capital development projects, which are accounted for in this fund. Proprietary Funds Services provided to outside (nongovernmental) customers are reported in enterprise funds. Enterprise funds are accounted for using the economic resources measurement focus and the accrual basis of accounting. These are the same business-type activities reported in the government-wide financial statements. The unemployment insurance fund and the WICO fund are major proprietary funds. The unemployment insurance fund is a federally mandated program to manage unemployment insurance. The WICO fund accounts for the activities of WICO, which owns a port facility including a cruise ship pier, and manages a shopping mall and a rental complex. Fiduciary Funds The Government is the trustee, or fiduciary, for several agency funds. 6 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2005 The fiduciary activities are reported in a separate statement of fiduciary net assets and a statement of changes in fiduciary net assets. Financial Analysis of the Government as a Whole The PG and its component units experienced an economic downturn following the slowdown of the U.S. economy in fiscal year 2002 and the events of September 11, 2001. As explained in note 14 to the basic financial statements, the Government initiated specific actions to improve its future cash flows through the issuance of long-term debt, the development of a series of detailed revenue enhancement and expenditure reduction initiatives, and the enactment of certain laws directed toward improving the Government’s financial situation. In fiscal year 2005, the Government issued the 2004 Series A Bonds amounting to $94 million to fund wastewater treatment and solid waste capital projects ofthe PG; and the Series 2005 Subordinate Lien Revenue Notes amounting to $6.35 million to finance the acquisition of a fleet of vehicles for the police department. In fiscal year 2004, the Government issued the 2003 Series A Revenue Bonds amounting to $268 million to repay the bond anticipation note and to fund necessary capital projects of the PG. Financial Analysis of the Primary Government Total assets of the Government as of September 30, 2005 and 2004 were $1.856 billion and $1.564 billion, respectively, an increase of approximately $292 million. Total liabilities as of September 30, 2005 and 2004 were $1.993 billion and $1.836 billion, respectively, an increase of approximately $157 million. For the year ended September 30, 2005, the PG net deficit of $137 million consisted of $247 million invested in capital assets, net of related debt; $189 million restricted by statute or other legal requirements that were not available to finance day-to-day operations of the Government; and an unrestricted net deficit of $573 million. For the year ended September 30, 2004, the PG net asset deficit of $272 million consisted of $239 million invested in capital assets, net of related debt; $173 million restricted by statute or other legal requirements and were not available to finance day-to-day operations of the Government; and an unrestricted net deficit of $684 million. For the fiscal year ended September 30, 2005, the PG earned program and general revenue amounting to $1.116 billion, and reported expenses of $981 million, resulting in a decrease in the net deficit of $134.8 million. For the fiscal year ended September 30, 2004, the PG earned program and general revenue amounting to $977 million, and reported expenses of $946 million, resulting in a decrease in the net deficit of $31 million. 7 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2005 Overall, revenue demonstrated an increase of approximately $139 million in fiscal year 2005, when compared to fiscal year 2004. The increase in tax revenue of $124.6 million is primarily due to expired income tax exemptions that were not renegotiated and to the audit efforts of the Internal Revenue Bureau over income tax exemptions claimed by the taxpayers. Expenses increased in fiscal year 2005 when compared to fiscal year 2004 by $35 million. The decrease noted in general government expenses of $10.2 million is primarily related to the recognition of a provision for landfill closure and post closure costs in the prior year of $28.8 million that did not occur in the current year. Excluding the provision for landfill closure and post closure costs that was recognized in the prior year, general government expenses increased by $18.6 million in the current year primarily due to a general increase in costs due to inflation. A summary of net assets (deficit) and changes in net assets (deficit) for the PG follows: Net Assets (Deficit) — Primary Government September 30, 2005 and 2004 (In thousands) Governmental activities Business-type activities Total 2005 2004 2005 2004 2005 2004 Assets Current assets $ 1,075,307 836,161 42,021 43,833 1,117,328 879,994 Capital assets 677,530 625,530 43,823 42,693 721,353 668,223 Other assets 16,545 15,421 407 437 16,952 15,858 Total assets 1,769,382 1,477,112 86,251 86,963 1,855,633 1,564,075 Liabilities Long-term debt outstanding 1,143,194 1,061,655 20,545 21,376 1,163,739 1,083,031 Other liabilities 818,520 743,737 10,843 9,610 829,363 753,347 Total liabilities 1,961,714 1,805,392 31,388 30,986 1,993,102 1,836,378 Net Assets Invested in capital assets, net of related debt 224,141 217,677 23,278 21,318 247,419 238,995 Restricted 156,663 131,496 31,838 41,375 188,501 172,871 Unrestricted (deficit) (573,136) (677,453) (253) _ (6,716) (573,389) (684, 169) Total net assets (deficit) $ (192,332) (328,280) 54,863 55,977 (137,469) (272,303) 8 | (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2005 Changes in Net Assets (Deficit) — Primary Government September 30, 2005 and 2004 (In thousands) Governmental activities Business-type activities Total 2005 2004 2005 “2004 2005 2004 Revenue: Program revenue: Charges for services $ 31,110 28,932 48,895 41,294 80,005 70,226 Operating grants and contributions 162,504 151,118 —_— — 162,504 151,118 Capital grants and contributions 8,459 9,553 —_ — 8,459 9,553 General revenue: Taxes 789,122 664,510 — _— 789,122 664,510 Interest and other 72,596 77,848 2,427 2,749 75,023 80;597 Other general revenue 1,094 1,102 — — 1,094 1,102 Total revenue 1,064,885 933,063 $1,322 44,043 1,116,207 977,106 Expenses: General government 371,052 381,282 — — 371,052 381,282 Public safety 54,101 55,677 — — $4,101 55,677 Health 99,681 92,694 — — 99,681 92,694 Public housing and welfare 67,228 62,712 — — 67,228 62,712 Education 205,419 186,122 — — 205,419 186,122 Transportation and communication 63,109 45,987 —_— — 63,109 45,987 Culture and recreation 9,879 7,549 — — 9,879 7,549 Interest on long-term debt 61,996 60,024 — — 61,996 60,024 Unemployment insurance — — 7,568 7,117 7,568 7,117 WICO — — 9,763 9,926 9,763 9,926 Workmen’s Compensation — —_ 9,112 8,431 9,112 8,431 V.I. lottery — _ 10,733 11,663 10,733 11,663 Other business-type activities — — 11,732 17,004 11,732 17,004 Total expenses 932,465 892,047 48,908 54,141 - 981,373 946,188 Increase (decrease) in net assets before transfers 132,420 41,016 2,414 (10,098) 134,834 30,918 Transfers 3,528 395 (3,528) (395) — —_ Change in net assets 135,948 41,411 (1,114) — (10,493) 134,834 30,918 Net assets (deficit), beginning of year, as previously reported (328,280) (369,691) 55,977 69,608 (272,303) (300,083) Restatements to beginning net assets — — — (3,138) —_— (3,138) Net assets (deficit), end of year, as restated $ 192,332 328,280) 54,863, 55,977 __ 137,469 272,303 9 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2005 The Virgin Islands Office of Management and Budget of the PG prepares an annual executive budget subject to approval by the Governor and the Legislature of the Virgin Islands. The executive budget is prepared on a budgetary basis similar to the cash basis of accounting. The executive budget includes only those funds that are subject to appropriation by law. More information regarding budgetary procedures is provided in note 3 of the basic financial statements. A summary of the budgetary report for the General Fund of the PG, included on page 19 of the financial statements, follows: Revenue and Expenditures — Budget and Actual — Budgetary Basis — General Fund Year ended September 30, 2005 (In thousands) Original Amended budget budget Actual Variance Total revenue $ 498,654 498,654 541,954 43,300 Total expenditures 571,510 640,377 575,545 (64,832) Excess of expenditures over revenue (72,856) (141,723) (33,591) 108,132 Other financing sources (uses) 72,967 71,767 90,602 18,835 Excess (deficiency) of revenue and other financing sources (uses) over (under) expenditures $ 111 (69,956) 57,011 126,967 For fiscal year 2005, the PG realized a revenue variance $43 million primarily due to an increase in tax revenues resulting from the expiration of tax exemptions of certain taxpayers resulting in an increase in the amount of taxes paid in the current year. The PG realized a $76 million variance in general government expenditures offset by opposite expenditure variances in all other functions. The $76 million variance in general government expenditures was primary due to the fact that the actual expenditures are reported on an accrual basis of accounting whereas budgeted expenditures is based on a cash basis. Overall, the PG realized a $65 million variance in expenditures due to controlled spending. The PG realized a $19 million variance in other financing sources due to the fact that transfers to the General Fund were higher than budgetary estimates. Capital Assets Capital assets additions during fiscal years 2005 and 2004 amounted to $70.9 million and $36 million, respectively for governmental activities, and $3.3 million and $1.6 million, respectively, for business-type activities. 10 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2005 The Government’s capital assets include land, land improvements, buildings, building improvements, machinery, equipment, infrastructure, and construction in progress as follows: Capital Assets — Primary Government (in thousands) Governmental activities Total Business-type activities 2005 2004 2005 2004 2005 2004 Land and improvements $ 188,798 188,523 5,317 5,357 194,115 193,880 Building and improvements 427,852 402,450 49,137 47,575 476,989 450,025 93,535 78,159 4,375 3,791 97,910 81,950 Machinery and equipment Infrastructure 127,471 126,249 — — 127,471 126,249 Construction in progress 52,461 24,578 1,757 809 54,218 25,387 Total assets 890,117 819,959 60,586 950,703 877,491 57,532 Less accumulated depreciation (212,587) (194,429) (16,763) (14,839) (229,350) (209,268) Total capital assets $ —— eet 677,530 625,530 43,823 42,693 721,353 668,223 —_—_—_—_—_oSeS=—_ O00 ]_ —_— 0S DUO «s_C0qHLjEe Note 9 provides detailed information regarding the capital assets of the PG and the component units of the Government. 11 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2005 Debt Administration The Government issues both general obligation bonds and revenue bonds. The Revised Organic Act [48 U.S.C. Section 1574 (b)(ii)] restricts the principal amount of general obligation debt that the Government may issue to no greater than 10% of the aggregate assessed valuation of taxable real property in the U.S. Virgin Islands. Following is a summary of bonds outstanding as of September 30, 2005: Primary Government — Bonds Payable (In thousands) Final Interest Bonds payable maturity rates (%) Balance 1998 Series A, C, D, and E Revenue and Refunding Bonds 2023 5.50to7.11 §$ 459,790 1999 Series A General Obligation Bonds 2010 6.50 4,765 1999 Series A Revenue Bonds 2033 4.20 to 6.40 278,570 2001 Series A Tobacco Bonds 2031 5.00 21,940 2002 Series Garvee Bonds 2009 2.50 to 5.00 12,940 2003 Series A Revenue Bonds 2033 4.00 to 5.25 268,020 2003 Series A Revenue Bonds 2024 4.00 to 5.25 94,000 Subtotal 1,140,025 Deferred amount on refundings (1,848) Bond premium 8,035 Bond discount (8,104) Bond accretion (764) Total $ 1,137,344 Note 10 provides detailed information regarding all bonds of the U.S. Virgin Islands. During fiscal year 2005, the 2004 Series A Revenue Bonds amounting to $94 million were issued. The PG made bond principal payments on all. outstanding general and special revenue bonds amounting to $24.4 million during fiscal year 2005, and $24.7 million during fiscal year 2004. 12 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2005 Other liabilities of the PG include: Primary Government — Other Liabilities September 30, 2005 and 2004 (In millions) 2005 2004 Accrued compensated absences $ 48 60 Retroactive union arbitration liability 396 384 Accrued litigation 23 15 Landfill closure and post closure costs 29 29 Accrued federal cost disallowances 6 6 Total other liabilities $ 502 494 Economic Condition and Outlook The PG ended fiscal year 2005 with a deficit amounting to $137 million, of which $573 million relates to an unrestricted deficit. The PG is working towards a recovery from the recession of 2002 through a combination of revenue initiatives and budgetary restraint on expenditures. Revenue Initiatives The PG collects income tax revenue under the “mirror” income tax system. The Government’s tax laws mirror the U.S. Internal Revenue Service (IRS) code, rules, and regulations. The 2003 and 2004 Tax Acts passed by U.S. Congress may have a negative impact on revenue due to changes in sourcing of revenue rules as defined for the U.S. Virgin Islands, restrictions on residency rules, a decrease in tax rates, expanded tax credits, and expanded tax deductions. In January 2006, the U.S. Treasury issued final tax regulations for the territories and possessions defining residency and source of income. The Government has responded to these changes through meetings with the U.S. Treasury and the final regulations on residency were subsequently revised in November 2006. In connection with a real property tax case instituted against the PG in the U.S. District Court of the Virgin Islands, the Government was enjoined for a four-month period in fiscal year 2003 from appraising and assessing any real property taxes until it modified its system of appraisal to comply with certain court mandates. As a result, effective August 2003, it has been using the 1998 assessment value to issue tax bills and collect taxes, and expects to continue to do so until a new appraisal system is implemented, which is intended to satisfy the court’s decision, or the decision is reversed on appeal. In fiscal year 2004, the Government retained a consultant to modify its system of appraisal and to comply with the court mandates. In fiscal year 2006, legislation has been introduced to Congress to move the control of property tax assessments from the federal government to the Government of the Virgin Islands. 13 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Management’s Discussion and Analysis September 30, 2005 The Government is currently in litigation challenging the computation of its corporate franchise tax. Of the four cases brought against the Government, one is currently before the Virgin Islands Territorial Court, and the remaining three cases are currently on appeal. Budgetary Control of Expenditures The PG faces the challenge of carryforward expenditures from prior fiscal years and increasing expenditures in the current fiscal year. Carryforward expenditures consist mainly of retroactive salary increases, which accumulated following Hurricanes Hugo, Marilyn, and Bertha in the years of 1990 through 1998. At September 30, 2005 and 2004, unpaid retroactive salary increases amounted to $396 million and $384 million, respectively, which are reported as a liability of the Government within other noncurrent liabilities. Current increasing governmental expenditures include increased health insurance premiums, pharmaceutical premiums, and salary expense. Expenditures are closely monitored and controlled through the budgetary process. Deficit Reduction Measures The PG has implemented a number of deficit reducing measures including: (i) withholding of local taxes on Government invoice payments; (ii) increasing local taxes such as the highway users tax and stamp tax; (iii) implementation of new local taxes including an excise tax on importation of personal goods and a petroleum tax; (iv) exerting greater control of expenditures through the budgetary process; and (v) implementation of tax amnesties for property and gross receipts taxes. These initiatives have reduced the PG deficit from $432 million for fiscal year 2002, to $137 million for fiscal year 2005, a reduction of $295 million. Contacting the Government’s Financial Management This financial report is designed to provide the Government’s citizens, taxpayers, customers, and investors and creditors with a general overview of the Government’s finances. If you have questions about this report, or need additional financial information, contact the Government of the United States Virgin Islands, Department of Finance, No. 2314 Kronprindsens Gade, St. Thomas, VI 00802. 14 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Net Assets (Deficit) September 30, 2005 (In thousands) Primary government Governmental Business-type Component activities activities Total units Assets: : Cash and cash equivalents $ 248,848 10,883 259,731 63,628 Investments 499,831 840 500,671 37,387 Receivables, net 262,172 ' 2,496 264,668 54,064 Internal balances 8,790 (8,790) — — Loans and advances — — — 1,588 Due from component units 30,880 — 30,880 -— Note receivable — — = 8,165 Due from primary government —_— — — 3,979 Due from federal government 23,516 — 23,516 5,884 Inventories — 459 459 25,894 Other assets 1,270 848 2,118 25,138 Restricted: Cash and cash equivalents — 35,285 35,285 38,468 Investments — — won 78,269 Other = _— — 46 Capital assets 677,530 43,823 721,353 779,513 Deferred and other expenses 16,545 407 16,952 20,437 Total assets 1,769,382 86,251 1,855,633 1,142,460 Liabilities: Current liabilities: Accounts payable and accrued liabilities 96,091 6,412 102,503 86,744 Tax refunds payable 86,608 _— 86,608 — Unemployment insurance benefits — 2,064 2,064 —_— Customer deposits — — — 17,198 Due to primary government — — — 30,880 Due to component units 3,979 — 3,979 — Due to federal government — — — 5,414 Interest payable 30,979 — 30,979 5,123 Unearned revenue 96,429 — 96,429 4,819 Other current liabilities 2,286 2,367 4,653 10,053 Due within one year: Loans payable 2,051 851 2,902 1,024 Bonds payable 27,520 — 27,520 8,860 Other liabilities 28,081 _— 28,081 — Noncurrent liabilities: Due in more than one year: Loans payable 3,799 19,694 23,493 8,070 Bonds payable 1,109,824 — 1,109,824 274,825 Other liabilities 474,067 — 474,067 28,941 Total liabilities 1,961,714 31,388 1,993,102 481,951 15 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Net Assets (Deficit) September 30, 2005 (In thousands) Primary government Governmental Business-type Component activities activities Total units Net assets: Invested in capital assets, net of related debt. $ 224,141 23,278 247,419 546,537 Restricted for: Unemployment insurance — 30,046 30,046 = Debt service 156,663 — 156,663 — Other purposes — 1,792 1,792 88,128 Unrestricted (deficit) (573,136) (253) (573,389) 25,844 Total net assets (deficit) $ (192,332) 54,863 (137,469) 660,509 See accompanying notes to basic financial statements. 16 (penunuoy) LI (659°9) — — — SUL VE €es‘sil Elv6CE 0S9°98b (99L'T) — _— _— OL7T sero 6SEE ocs‘zI (97€'8) _ _— _— TOL‘E 9S7‘0r aaal €77'99 (918‘b) _— — _ StCv 18¢‘LI 796°97 p8r'es 97S‘L —_ —_— — TLO‘TI SEZ‘0Z TEC bb €19°69 Sty‘z _ _— _— 856 _— ¥8787 L897 OvL‘v —_ _ —_— 966 _— Te9°691 L88‘S9T (990‘1) _— — — 6IZL _— SLE‘LE 099'Sb (9LE‘S) _— — _— eI? 9trTE Tz1‘s SEL ‘Or _— ~ (SOr‘0EL) (et) (Z6E‘0EL) 6S¢'8 v0s‘Z91 $00°08 ELE 186 _ aC?) 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WRISOIG (spuvsnoy} uy) SOIIANOY Jo JUOUID}ES syiun yuouodul0d [e}0 1 sylun Jusuoduios 19yIO spurysl UIA 94) JO AIsIOAIUQ fendsoyy sin] “J ueng [eidsoy s9prouyss “] Aoy ‘uore10dI0D santpoey yyeopy pur jeydsopy wWiajsAs 19}e AA WiaysAs 919919 :AWOWNY Jomo” pue Joye AA Spues] USI A, ALOYyNY YoOd spueys] wis. A Ayoy NY Suisnoy spurs] uss A :sylun juouoduoD qUoUTUIDAOS Areullid [e101 somlanoe odAj-ssoursng [e101 JOO AIOHO] TA uoljesuaduO Ss ,WSWy OM, Aueduios uerpuy sof goueimsul juoWAo}dwiouy ‘sontanjoe od4j-ssoutsng SONAR [BJUDUTUIOAOS [BIOL 1QOp W19}-Zu0j Uo Jso1OqUT worJeos991 pue ainyind UoTeoIUNUIWOS pue UOKeyodsueLL, uoneonpg a1eJJOM pue Sulsnoy sjqng weoH Mazes o1qnd JUDUIUWIOAOS [e1OUDyH ISOITANOV [PJUSUTTLIOAOH JUOUIWIOAOS ACUI g :suoyoun.y 81 605°099 ~— (69K'LET) $ €98'rS (ZEE‘761) $ 6zb°9S9 (€0€'ZLZ) LLO'SS (082'8Z€) 080°r ves vel (PIT‘T) 8P6'SET 6EL ‘01 6€7°S98 (OTT) OrE998 _ _ (8zS‘€) 8ZS‘€ —_— ¥60'T —_ ¥60°T 6EL‘0I €Z0°SL Lez 96S°7L _— 71 68L — 71 68L (659°9) (sor‘0€L) (i) (Z6€‘0EL) $ s}iun [830], SIITAHIV SIIPIAIIE yuauoduioa ad4)j-ssauisng [vy UIUIU.IIA0D yusuiu49A0s AIBULId S}aSsu JIU UI SasuLYyd puv (asuadxa) anuaao.s JaN (spuesnoyp uy) S007 ‘O€ 4oquia\deg popuo 329 x SOIJANOY JO JUoUIIe}¢ SGNV'SI NIDUIA SALVLS GALINA FHL AO INAANYAAOD “syUdUD]eIS [BIOURUTT dISeq 0} soJOU SuTAURdUODIR 90g JVOK JO pud “(WOIJOp) syosse JON (payejsos se) JeaXk Jo Suluulsoq “({OIJOp) Syosse ION (qlolfop) sjosse jou ul sosueyD siojsued) pue ONUSAD [VIOUS [210], yUSWUIDA03 Axeuttid JO Somsanjoe Jeusoyul — sloysuesy SIYBII JUSUD|ES ODDeQO |, JoujO pure jsolojUy Soxe], ‘ONUSADI [eIOUaH, syiun yuouoduros pure juowusoaod Arewd je1o], GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Assets Cash and cash equivalents Investments Receivables: Taxes Accrued interest and other Due from: Other funds Component units Federal government Other assets Total assets Liabilities and Fund Balances Accounts payable and accrued liabilities Tax refunds payable Due to: Other funds Component units Deferred revenue Other current liabilities Total liabilities Fund balances reserved for: Encumbrances Debt service Unreserved fund balance, reported in: General fund Special revenue funds Capital projects funds Total fund balances Total liabilities and fund balances $ Balance Sheet — Governmental Funds Amounts reported for governmental activities in the statement of net assets (deficit) are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. Bond issue costs are not financial resources and, therefore, are not reported in the funds. Because the focus of governmental funds is on short-term financing, some assets, primarily taxes receivable, will not be available to pay for current period expenditures. Those assets are offset by deferred revenue in the funds. Interest on long-term debt is not accrued in the funds, but rather is recognized as an expenditure when due. Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds. Deficit of governmental activities Sce accompanying notes to basic financial statements. September 30, 2005 (In thousands) PFA PFA debt capital Other Total General service projects governmental governmental 171,280 _— 43,984 33,584 248,848 141,438 174,791 171,949 11,653 499,831 206,189 55,157 _— — 261,346 689 — — 547 1,236 9,063 _ 313 12,038 21,414 30,880 — — _— 30,880 _ _— —_ 23,516 23,516 _— _ —_ 34 34 559,539 229,948 216,246 81,372 1,087,105 65,501 18 2,833 27,739 96,091 86,608 — — _ 86,608 9,446 — — 3,178 12,624 3,979 — — — 3,979 213,903 92,517 5,548 5,219 317,187 — _— = 2,286 2,286 379,437 92,535 8,381 38,422 518,775 49,430 _— — _ 49,430 — 137,413 _ 19,250 156,663 130,672 _— _— —_ 130,672 — _— _— 29,495 29,495 — — 207,865 (5,795) 202,070 180,102 137,413 207,865 42,950 568,330 559,539 229,948 216,246 81,372 677,530 16,545 221,584 (30,979) (1,645,342) $ 192,332 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Revenue, Expenditures, and Changes in Fund Balances —- Governmental Funds Revenue: Taxes Federal grants and contributions Charges for services Tobacco settlement rights Interest and other Total revenue Expenditures: Current: General government Public safety Health Public housing and welfare Education Transportation and communication Culture and recreation Capital outlays Debt service: Principal Interest Bond issuance costs Total expenditures Excess (deficiency) of revenue over (under) expenditures Other financing sources (uses): Bonds issued Loans issued Transfers from other funds Transfers to other funds Premium on bonds issued Total other financing sources (uses), net Net change in fund balances Fund balance, beginning of year Fund balance, end of year See accompanying notes to basic financial statements. $ Year ended September 30, 2005 (In thousands) PFA PFA debt capital Other Total General service projects governmental governmental 533,141 169,077 _ 18,445 720,663 — 3,648 — 167,315 170,963 22,883 — _— 8,227 31,110 —_ _— —_— 1,094 1,094 30,646 10,935 11,531 19,484 72,596 586,670 183,660 11,531 214,565 996,426 278,554 — 1,574 78,359 358,487 41,563 — _— 10,967 52,530 75,486 — 5,181 15,641 96,308 31,230 _ 1,218 34,780 67,228 151,303 — — 48,372 199,675 34,618 _— 4,162 19,793 58,573 6,282 _ — 3,326 9,608 5,849 _— 37,846 27,222 70,917 _— 21,620 500 2,805 24,925 _— 59,044 — 1,106 60,150 = 2,050 _ = 2,050 624,885 82,714. 50,481 242,371 1,000,451 (38,215) 100,946 (38,950) (27,806) (4,025) —_ 5,000 89,000 — 94,000 ae _— 6,350 _ 6,350 97,542 1,420 — 10,392 109,354 (6,940) (88,317) (569) (10,000) (105,826) _— 4,765 — = 4,765 90,602 (77,132) 94,781 392 108,643 52,387 23,814 55,831 (27,414) 104,618 127,715 113,599 152,034 70,364 463,712 180,102 137,413 207,865 42,950 568,330 20 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances to the Statement of Activities - Governmental Funds Year ended September 30, 2005 (In thousands) Net change in fund balances — total governmental funds $ Government funds report capital outlays as expenditures. However, in the statement of activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. Tax revenue in the statement of activities, which do not provide current financial resources, are not reported as revenue in the funds. The issuance of long-term debt provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of the governmental funds. These transactions have no effect on net assets. This is the amount by which bond and loan proceeds of $100,350 exceeded principal retirement of $24,925 in the current period. Some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. This is the amount by which the increase in certain liabilities reported in the statement of net assets of the previous year increased expenses reported in the statement of activities that do not require the use of current financial resources. Bond issue costs are expended in the governmental funds when paid, and are capitalized and amortized in the statement of activities. This is the amount by which current year bond issue costs exceeded amortization expense in the current period. Bond premiums and discounts are reported as other financing sources and uses in the governmental funds when the bonds are issued, and are capitalized and amortized in the government-wide financial statements. This amount represents the capitalization of premiums on bonds issued during the current year of $4,765 and the additional net interest expense of $1,349 reported in the statement of activities related to the amortization of premiums, discounts deferred refunding loss, and accreted interest on capital appreciation bonds during the current year. Certain interest reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in the governmental funds. This amount represents the increase in interest payable reported in the statement of net assets. Change in net assets of governmental activities $ See accompanying notes to basic financial statements. 21 104,618 52,000 68,459 (75,425) (6,868) 1,124 (6,114) (1,846) 135,948 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS ‘Statement of Revenue and Expenditures — Budget and Actual — Budgetary Basis — General Fund Year ended September 30, 2005 Revenue: Taxes Charges for services Interest and other Total revenue Expenditures: Current: General government Public safety Health Public housing and welfare Education Transportation and communication Culture and recreation Total expenditures Excess of expenditures over revenue Other financing sources (uses): Transfers from other funds Transfer to other funds Total other financing sources (uses), net Excess (deficiency) of revenue and other financing sources over (under) expenditures See accompanying notes to basic financial statements. (In thousands) Original Amended budget budget Actual Variance 470,006 470,006 511,247 41,241 9,146 9,146 9,193 47 19,502 19,502 21,514 2,012 498,654 498,654 541,954 43,300 148,240 176,806 252,470 (75,664) 58,572 58,797 40,713 18,084 54,118 86,843 70,581 16,262 43,850 45,850 31,043 14,807 200,123 200,573 145,253 55,320 46,657 51,168 33,597 17,571 19,950 20,340 1,888 18,452 571,510 640,377 575,545 64,832 (72,856) (141,723) (33,591) 108,132 79,467 79,467 97,542 18,075 (6,500) (7,700) (6,940) 760 72,967 71,767 90,602 18,835 111 (69,956) 57,011 126,967 22 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Net Assets — Proprietary Funds Assets: Current assets: . Cash and cash equivalents Investments at fair value Receivables, net: Premiums receivable Accrued interest and other Other receivables Due from other funds Inventories and other current assets Other assets Total current assets Noncurrent assets: Restricted cash and cash equivalents Capital assets Deferred expenses Total noncurrent assets Total assets Liabilities: Current liabilities: Accounts payable and accrued liabilities Due to other funds Unemployment insurance benefits Unearned revenue Loans payable related to capital assets Total current liabilities Noncurrent liabilities: Loans payable related to capital assets Total liabilities Net assets: Invested in capital assets, net of related debt Restricted Unrestricted (deficit) Total net assets See accompanying notes to basic financial statements. September 30, 2005 (In thousands) Business-type activities — enterprise funds West Unemployment Indian insurance Company Other Totals 21 6,132 4,730 10,883 — 840 —_ 840 822 — — 822 — 456 60 516 — — 1,158 1,158 — _ 300 300 — — 459 459 — 798 50 848 843 8,226 6,757 15,826 33,493 1,792 — 35,285 — 35,480 8,343 43,823 — 407 — 407 33,493 37,679 8,343 79,515 34,336 45,905 15,100 95,341 — 1,837 4,575 6,412 — 1,000 8,090 9,090 2,064 — — 2,064 2,226 —_ 141 2,367 —_— 851 —_ 851 4,290 3,688 12,806 20,784 — 19,694 — 19,694 4,290 23,382 12,806 40,478 — 14,935 8,343 23,278 30,046 1,792 —_ 31,838 — 5,796 (6,049) (253) 30,046 22,523 2,294 54,863 23 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Revenue, Expenses, and Changes in Fund Net Assets — Proprietary Funds Year ended September 30, 2005 (In thousands) Business-type activities — enterprise funds West Unemployment Indian insurance -__Company Other Total Operating revenue: Charges for services $ 1,898 11,358 35,639 48,895 Total operating revenue 1,898 11,358 35,639 48,895 Operating expenses: Cost of services 7,568 7,341 31,007 45,916 Depreciation and amortization — 1,475 570 2,045 Total operating expenses 7,568 8,816 31,577 47,961 Operating income (loss) (5,670) 2,542 4,062 934 Nonoperating revenue (expenses): Interest income 1,876 147 404 2,427 Interest expense = (947) — (947) Total nonoperating revenue (expenses), net 1,876 (800) 404 1,480 Income (loss) before operating transfers (3,794) 1,742 4,466 2,414 Transfers from other funds : — —_— 550 550 Transfers to other funds — (1,000) (3,078) (4,078) _ Change in net assets (3,794) 742 1,938 (1,114) Net assets, beginning of year 33,840 21,781 356 55,977 Net assets, end of year $ 30,046 22,523 2,294 54,863 See accompanying notes to basic financial statements. 24 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Cash Flows — Proprietary Funds Year ended September 30, 2005 (In thousands) Business-type activities — enterprise funds West Unemployment Indian insurance Company Other Total Cash flows from operating activities: Receipts from customers and users $ 2,209 12,008 35,687 49,904 Payments to beneficiaries (7,248) —_— — (7,248) Payments to suppliers and employees _— (6,494) (31,093) (37,587) Net cash provided by (used in) operating activities (5,039) 5,514 4,594 5,069 Cash flows from noncapital financing activities: Transfer from other funds — — 550 550 Transfers to other funds — (1,000) (1,287) (2,287) Net cash provided by (used in) noncapital financing activities — (1,000) (737) (1,737) Cash flows from capital and related financing activities: Acquisition and construction of capital assets —_— (1,334) (1,841) (3,175) Principal paid on long-term debt —_— (831) a (831) Interest paid on long-term debt — (947) =— (947) Net cash used in capital and related financing activities — (3,112) (1,841) (4,953) Cash flows from investing activities: Interest and dividends on investments 1,876 147 404 2,427 Purchase of investments — (840) — (840) Net cash provided by (used in) investing activities 1,876 (693) 404 1,587 Net increase (decrease) in cash and : cash equivalents (3,163) 709 2,420 (34) Cash and cash equivalents — beginning of year 36,677 7,215 2,310 46,202 Cash and cash equivalents — end of year $ 33,514 7,924 4,730 46,168 Reconciliation of operating income (loss) to net cash provided by (used in) operating activities: Operating income (loss) $ (5,670) 2,542 4,062 934 Adjustments to reconcile operating income (loss) to net cash provided by (used in) operating activities: Depreciation expense vee 1,475 570 2,045 Change in assets and liabilities: Receivables, net 314 635 (93) 856 Deferred charges — 30 — 30 Other assets — (15) (14) (29) Accounts payable and accrued expenses 320 847 (72) 1,095 Unearned revenue (3) =— 141 138 Net cash provided by (used in) operating activities $ (5,039) 5,514 4,594 5,069 Reconciliation of cash and cash equivalents to the statement of net assets: Cash and cash equivalents — current $ 21 6,132 4,730 10,883 Cash and cash equivalents — restricted 33,493 1,792 — 35,285 Cash and cash equivalents at end of year on statement of cash flows $ 33,514 7,924 4,730 46,168 See accompanying notes to basic financial statements. 25 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Fiduciary Net Assets — Fiduciary Funds September 30, 2005 (In thousands) Pension trust Agency funds funds Assets: Cash and cash equivalents: Unrestricted 100,673 4,193 Restricted 78 Investments 1,491,192 4,156 Receivables, net: Loans and advances 111,434 Accrued interest 5,078 Other 9,176 Other assets 6,251 Total assets 1,723,882 8,349 Liabilities: — Accounts payable and accrued liabilities 8,349 Cash overdraft with the Department of Finance 10,454 Cash overdraft with bank 422 Unsettled securities purchased 40,784 Securities lending collateral 221,849 Notes payable 10,000 Other liabilities 5,740 Total liabilities 289,249 8,349 Net assets held in trust for employees’ pension benefits $ 1,434,633 See accompanying notes to basic financial statements. 26 GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Statement of Changes in Fiduciary Net Assets Year ended September 30, 2005 (In thousands) Additions: Contributions: Employer $ Plan members Total contributions Investment income: Net appreciation of fair value of investments Interest, dividends, and other, net Real estate — rental income Less investment expense Net investment income Other income Total additions Deductions: Benefits paid Refunds of contributions Administrative and operational expenses Total deductions Change in net assets Net assets, beginning of year Net assets, end of year $ See accompanying notes to basic financial statements. 27 Pension trust funds 51,542 30,416 81,958 119,001 45,072 3,469 167,542 12,548 154,994 422 237,374 141,383 2,376 9,288 153,047 84,327 1,350,306 1,434,633 (1) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Summary of Significant Accounting Policies The Government of the United States Virgin Islands (the Government) is an unincorporated organized territory of the United States of America (United States). The powers of the Government are derived from and set forth in the Revised Organic Act of 1954, as amended. The Government assumes responsibility for public safety, health, public housing and welfare, education, transportation and communication, and culture and recreation. The accompanying basic financial statements of the Government have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) as prescribed by the Governmental Accounting Standards Board (GASB). The accompanying basic financial statements have been prepared primarily from accounts maintained by the Department of Finance of the Government. Additional data has been derived from reports prepared by other departments, agencies, and public corporations based on independent or subsidiary accounting ~ systems maintained by them. (a) Financial Reporting Entity The Government follows the provisions of GASB Statement No. 14, The Financial Reporting Entity, as amended by GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units. These standards require that the Government’s financial reporting entity be defined according to specific criteria. According to the standard for financial reporting purposes, the Government is a primary government (PG). The PG includes all Government departments, agencies, boards, and organizations that are not legally separate. In addition to the PG, the financial reporting entity includes blended and discretely presented component units. Component units include all ' legally separate organizations for which the Government’s elected officials are financially accountable, and other organizations for which the nature and significance of their relationship with the Government are such that exclusion would cause the basic financial statements to be misleading or incomplete. The criteria used to define financial accountability include appointment of a voting majority of an organization’s governing body and (i) the ability of the PG to impose its will on that organization or (ii) the potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the PG. The financial statements of the following component units are included in the financial reporting entity either as blended or as discretely presented component units in accordance with GAAP. (i) Blended Component Units The following public benefit corporations, while legally separate from the Government, meet the criteria to be reported as part of the PG because they provide services entirely or almost entirely to the Government: Virgin Islands Public Finance Authority The Virgin Islands Public Finance Authority (PFA) was created as a public corporation and autonomous governmental instrumentality by Act No.5365, the Government Capital Improvement Act of 1988, with the purpose of aiding the Government in the performance of its fiscal duties and in effectively carrying out its governmental responsibility of raising capital 28 (Continued) (ii) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 for essential public projects. Under the enabling legislation, PFA has the power, among other matters, to borrow money and issue bonds and to lend the proceeds of its bonds to the Government or any governmental instrumentality. The powers of PFA are exercised by a board of directors consisting of the Governor (Chairperson), the Commissioner of Finance, the Director of the Office of Management and Budget, and two representatives of the private sector appointed by the Governor with the advice and consent of the Legislature. PFA activities are blended within the PG because it is so intertwined with the Government that, in substance, they are the same. PFA has a component unit, the West Indian Company (WICO), which is presented as an enterprise fund in the Government’s basic financial statements as further described in note 1(d). Tobacco Settlement Financing Corporation The Tobacco Settlement Financing Corporation (TSFC) was created in September 2001 under Act No. 6428 as a separate and independent corporation of the Government to purchase the rights, title, and interest in tobacco settlement litigation awards and to issue revenue bonds supported by the tobacco settlement rights. The responsibility for the operations of TSFC is vested in a board of directors composed of three Government officials appointed by the Governor and two private citizens. The activities of TSFC are limited to activities conducted on behalf of the Government. Complete audited financial statements ofthe PFA and TSFC blended component units can be obtained directly by contacting their respective administrative offices: Administrative Offices of Blended Component Units Virgin Islands Public Finance Authority 2400 Honduras, 2nd Floor St. Thomas, VI 00802 Tobacco Settlement Financing Corporation 2400 Honduras, 2nd Floor St. Thomas, VI 00802 Discretely Presented Component Units The following component units, consistent with GASB Statements No. 14 and 39, are discretely presented in the basic financial statements because of the nature of the services they provide and the Government’s ability to impose its will. The component units are reported in a separate column to emphasize that they are legally separate from the PG and governed by separate boards. 29 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 (iii) Major Component Units Virgin Islands Housing Authority The Virgin Islands Housing Authority (VIHA) was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality by Act No. 903 on June 18, 1962 with the purpose of providing housing for low-income families. Up until August 2003, the powers of VIHA were exercised by a board of commissioners consisting of seven members as follows: the Commissioner of Housing and Community Renewal and six other members appointed by the Governor. In August 2003, the U.S. Department of Housing and Urban Development (HUD) determined that because of the severity of compliance violations, VIHA was declared to be in substantial default of its annual contributions contract (ACC) dated July 12, 1996 with HUD. The VIHA was placed in receivership and HUD assumed possession of all assets, projects, and programs. Given the nature of VIHA’s operations and the significance of its relationship with the Government, management believes that its exclusion from the financial reporting entity would cause the Government’s basic financial statements to be incomplete and misleading. Accordingly, VIHA continues to be reported as a major component unit of the Government even though the Government no longer appoints its commissioners. Virgin Islands Port Authority The Virgin Islands Port Authority (VIPA) was created as a body corporate and politic constituting a public corporation and autonomous government instrumentality by Act No. 2375 of December 23, 1968, with the purposes of owning, operating, and managing all types of air and marine terminals. The powers of VIPA are exercised by a board of governors consisting of the Commissioner of Economic Development and Agriculture (Chairperson), the Attorney General, the Commissioner of Public Works, the Director of the Small Business Development Agency, and five other persons appointed by the Governor with the advice and consent of the Legislature. Virgin Islands Water and Power Authority The Virgin Islands Water and Power Authority (WAPA) was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality by Act No. 1248 of August 13, 1964, with the purpose of operating the water production and electric generation plants in the U.S. Virgin Islands. The powers of WAPA are exercised by a governing board consisting of nine members, all appointed by the Governor with the advice and consent of the Legislature, from which three are heads of cabinet-level executive departments or agencies and six other persons, who shall not be employees of the Government. WAPA is required by its bond resolutions to maintain separate audited financial statements for each system (the Electric and Water Systems). 30 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Virgin Islands Government Hospital and Health Facilities Corporation The Virgin Islands Government Hospital and Health Facilities Corporation (VIGHHFC) was created by Act No. 6012 on August 23, 1994 and became active on May 1, 1999. Its purpose is to provide healthcare services and hospital facilities to the people of the U. S. Virgin Islands. The powers of VIGHHFC are exercised by a board of directors consisting of 15 members as follows: the Director of the Office of Management and Budget, the Commissioner of Finance, and 13 other members appointed by the Governor with the advice and consent of the Legislature. The VIGHHFC is composed of the Roy L. Schneider Hospital located in St. Thomas, and the Juan F. Luis Hospital and Medical Center located in St. Croix. Both entities issue separate audited financial statements. The Roy L. Schneider Hospital’s financial statements include its component units: the Myra Keating Smith Community Health Center (Health Center) of St. John, and the Charlotte Kimelman Cancer Institute (Cancer Institute) on St. Thomas. The Health Center and Cancer Institute are legally separate organizations for which the hospital is financially accountable. The Cancer Institute was under construction as of September 30, 2005. University of the Virgin Islands The University of the Virgin Islands (the University) was organized as an instrumentality of the Government under Act No. 852 of March 16, 1962, in accordance with Section 16(a) of the Revised Organic Act of 1954, as amended. The purpose of the University is the stimulation and utilization of the intellectual resources of the people of the U.S. Virgin Islands and the development of a center of higher education. The powers of the University are exercised by a board of trustees consisting of 17 members as follows: Chairman of the Board of Education, Commissioner of Education, and the President of the University, all serving as members ex-officio, nine other members appointed by the Governor with the advice and consent of the Legislature, two other members elected by the board of trustees, one representative of the student body, one alumnus of the University, and another of the teaching faculty. The University was not organized as a self-sustaining entity and therefore receives substantial financial and other support from the Government. The University’s financial statements include its component units: The Foundation for the University of the Virgin Islands, The Reichhold Foundation, and the University of the Virgin Islands Research and Technology Park. The Foundation for the University of the Virgin Islands is a not-for-profit corporation whose purpose is to assist and support the University in accomplishing its charitable and educational mission. The Reichhold Foundation is a not-for-profit corporation that supports the arts and provides financial assistance in operating the Reichhold Center for the Arts on St. Thomas. The University of the Virgin Islands Research and Technology Park is a nontaxable public corporation developed to promote economic growth, development, and diversification in the Virgin Islands. 31 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 (iv) Nonmajor Component Units Virgin Islands Economic Development Authority The Virgin Islands Economic Development Authority (EDA) was created by Act No. 6390 of December 21, 2000 as a body corporate and politic constituting a public corporation and semiautonomous instrumentality of the Government. EDA was created as an umbrella authority to assume, integrate, and unify the functions of the Economic Development Commission, the Small Business Development Administration, the Government Development Bank, and the Virgin Islands Industrial Development Park Corporation. The powers of EDA are exercised by a board of directors consisting of the members of the Virgin Islands Economic Development Commission, the Director of the Virgin Islands’ Bureau of Internal Revenue, and five members not employed by the Government, but appointed by the Governor with the advice and consent of the Legislature. Magens’ Bay Authority Magens’ Bay Authority (MBA) was created as a corporate instrumentality by Act No. 2085 on December 20, 1967, with the purpose of acquiring, improving, and operating parks and beaches. The powers of MBA are exercised by a board of directors consisting of the Governor and six members initially appointed by the Governor. The board of directors is responsible for the appointment and reappointment of subsequent board members except that the Governor, with the advice and consent of the Legislature may, by appointment, fill any vacancy on the board of directors remaining unfilled for sixty days. Virgin Islands Housing Finance Authority The Virgin Islands Housing Finance Authority (VIHFA) was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality of the Government by Act No. 4636 of October 20, 1981, with the purpose of stimulating low- and moderate-income housing construction and home ownership through the issuance of revenue bonds to obtain funds to be used for low-interest mortgage loans to qualified purchasers of low- and moderate-income housing. The powers of VIHFA are exercised by a board of directors consisting of the Commissioner of the Department of Housing, Parks, and Recreation (the Chairman), the Director of the Office of Management and Budget, and three persons not employed by the Government appointed by the Governor with advice and consent of the Legislature. Virgin Islands Public Television System The Virgin Islands Public Television System (PTS) was created as a body corporate and politic constituting a public corporation and autonomous instrumentality by Act No. 2364 on November 15, 1968, with the purpose of advancing the general welfare, education, cultural development, and awareness of public affairs of all the population of the U.S. Virgin Islands and to provide an effective supplement to the in-school education of children. The powers of PTS are exercised by a board of directors consisting of the Commissioner of Education, the Chairman of the Board of Education, three members appointed by the President of the Legislature, and four members, not more than two of whom should be employed by the 32 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Government and appointed by the Governor with the advice and consent of the Legislature. In addition, the Director of the Office of Management and Budget, the President of the University of the Virgin Islands, and the General Manager of PTS are ex-officio members of the board who are not entitled to vote. Complete audited financial statements of the discretely presented component units can be obtained directly by contacting their administrative offices: Administrative Offices of Discretely Presented Component Units Virgin Islands Housing Authority 402 Estate Anna’s Retreat PO Box 7668 St. Thomas, VI 00801 Virgin Islands Port Authority PO Box 301707 St. Thomas, VI 00803 Virgin Islands Water and Power Authority PO Box 1450 St. Thomas, VI 00804 Virgin Islands Government Hospital and Health Facilities Corporation 9048 Sugar Estate St. Thomas, VI 00802 University of the Virgin Islands 2 John Brewer’s Bay St. Thomas, VI 00802 Virgin Islands Economic Development Authority 1050 Norre Gade #5 St. Thomas, VI 00802 Magens’ Bay Authority PO Box 10583 St. Thomas, VI 00802 Virgin Islands Housing Finance Authority 3202 Demarara Frenchtown Plaza, Suite 200 St. Thomas, VI 00802 Virgin Islands Public Television System PO Box 7879 St. Thomas, VI 00801 33 (Continued) (6) (v) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 All financial statements of the discretely presented component units have a fiscal year-end of September 30, 2005, except for WAPA and VIHA that have a year-end of June 30, 2005 and December 31, 2004, respectively. Fiduciary Component Units The following public benefit corporation is legally separate from the Government, meets the definition of a blended component unit, and is presented in the fund financial statements along with other fiduciary funds of the Government. Fiduciary funds are not reported in the government-wide financial statements. Employees’ Retirement System of the Government of the Virgin Islands The Employees’ Retirement System of the Government of the Virgin Islands (known as GERS) was created as an independent and separate agency of the Government with the purpose of administering the Government’s defined benefit pension plan established on October 1, 1959. Component units of the Government also participate in the cost sharing, multiple employer defined benefit plan. The responsibility for the proper operation of GERS is vested in a board of trustees composed of seven members appointed by the Governor with the advice and consent of the Legislature. Employee and employer contributions to GERS are recognized as additions to net assets held in trust for employees’ pension benefits in the period in which employee services are performed, except for contributions pursuant to the Early Retirement Act of 1994, which are recorded as the cash is received. Benefits and refunds are recognized when due and payable in accordance with the terms at the plan, except for benefits pursuant to sections 8(a) and 8(b) of the Early Retirement Act of 1994, which are recorded when the subsidy provided by the Government is receivable and payable. Complete audited financial statements of this component unit can be obtained directly by contacting their administrative office: Employees’ Retirement System of the Government of the Virgin Islands 3438 Kronprindsens Gade St. Thomas, VI 00802 Government-Wide and Fund Financial Statements The government-wide financial statements (that is, the statement of net assets and the statement of activities) report information on all of the nonfiduciary activities of the PG and its component units. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenue, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. Likewise, the PG is reported separately from certain legally separate component units for which the PG is financially accountable. The statement of net assets (deficit) presents the reporting entities’ nonfiduciary assets and liabilities, with the difference reported as net assets. 34 (Continued) () GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 The statement of activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenue. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenue includes (i) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and (ii) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenue are reported instead as general revenue. Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. Measurement Focus, Basis of Accounting, and Financial Statement Presentation Government-wide Financial Statements The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenue is recorded when earned, and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenue in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements have been met. Governmental Fund Financial Statements The governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenue is recognized as soon as it is both measurable and available. Revenue is considered to be available when it is collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the Government considers most revenue to be available if collected within 90 days of the end of the current fiscal year-end. Specifically, gross receipts taxes, property taxes, and income taxes are considered to be available if collected within 30, 60, and 90 days, respectively, after the end of the current fiscal year-end. Grant revenue is considered to be available if collected within the 12 months after the end of the current fiscal year-end. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures are recorded only when payment is due. Income taxes, gross receipts taxes, real property taxes, and grant funding are all considered to be susceptible to accrual and so have been recognized as revenue of the current fiscal period to the extent they are considered available. All other revenue items are considered to be measurable and available only when cash is received by the Government. Proprietary Funds, Fiduciary Funds, and Discretely Presented Component Units Financial Statements — The financial statements of the proprietary funds, fiduciary funds, and discretely presented component units are reported using the economic resources measurement focus and the accrual basis of accounting, similar to the government-wide financial statements described above. 35 (Continued) (d) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Each proprietary fund has the option under GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities that Use Proprietary Fund Accounting, to elect and apply all Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989, unless these conflict with a GASB pronouncement. The PG and most blended and discretely presented component units have elected not to apply FASB pronouncements issued after November 30, 1989 for its proprietary fund types. VIPA has elected to follow the FASB’s pronouncements issued after November 30, 1989. Proprietary funds distinguish operating revenue and expenses from nonoperating items. Operating revenue and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. Fund Accounting The Government reports its financial position and results of operations in funds, which are considered separate accounting entities and discrete presentations of those component units, which are not required to be blended. The operations of each fund are accounted for within a set of self-balancing accounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with legal, financial, and contractual provisions. GASB No. 34, Basic Financial Statements — and Management’s Discussions and Analysis — for State and Local Governments, establishes criteria (percentage of the assets, liabilities, revenue, or expenditures/expenses of either fund category or the governmental and enterprise funds combined) for the determination of major funds. Indirect costs are automatically allocated and reported in the program expense for each fund. Nonmajor funds are combined in a single column in the fund financial statements. The Government reports the following major funds: . Governmental Funds The Government reports the following major governmental funds: e General Fund — The General Fund is the government’s primary operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. ° PFA Debt Service — The PFA Debt Service accounts for the resources accumulated, and payments made, for principal and interest on long-term general obligation debt issued by PFA on behalf of the Government. ° PFA Capital Projects Fund — The PFA Capital Projects Fund accounts for bond proceeds of debt issued by the PFA on behalf of the Government. The bond proceeds have been designated for certain necessary public safety and capital development projects, which are accounted for in this fund. 36 (Continued) (e) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Proprietary Funds These funds account for those activities for which the intent of management is to recover, primarily through user charges, the cost of providing goods or services to the general public. The government reports the following major proprietary funds: e Unemployment Insurance Fund — The unemployment insurance fund accounts for the collection of unemployment premiums from employers in the U.S. Virgin Islands, and the payment of unemployment benefits to eligible unemployed recipients. e West Indian Company — WICO, a component unit of PFA, accounts for the activities of a cruise ship pier and shopping mall complex on the island of St. Thomas. Fiduciary Funds Fiduciary funds are used to account for assets held by the Government in a trustee capacity, or as an agent for individuals, private organizations, and other governmental units. The following are the Government’s fiduciary funds: ° Pension Trust Fund- The pension trust fund accounts for the activities of the Employees’ Retirement System of the Government of the Virgin Islands, which accumulates resources for pension benefit payments to qualified employees. e Agency Fund — The agency fund is custodial in nature (assets equal liabilities) and does not involve measurement of the results of operations. Cash and Cash Equivalents The Government follows the practice of pooling cash. The balance in the pooled cash accounts is available to meet current operating requirements, and any excess is invested in various interest-bearing accounts and time deposits with eligible depository institutions. Cash equivalents of the proprietary funds and: discretely presented component units consist of demand accounts, money market accounts, certificates of deposit with maturities of not more than 90 days from the date of acquisition, short-term U.S. government and its agencies’ obligations and repurchase agreements with a U.S. commercial bank maturing within three months and collateralized by U.S. government obligations. Cash and cash equivalents of the discretely presented component units are maintained in separate bank accounts, from those of the PG, in their own names. Adoption of New Accounting Standard The primary Government and its component units adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 40, Deposit and Investment Risk Disclosures, an Amendment of GASB Statement No. 3 in the current fiscal year. GASB Statement No. 40 establishes and modifies disclosure requirements related to investment risks: credit risk (including © custodial credit risk and concentrations of credit risk), interest rate risk, and foreign currency risk. Investment note disclosures for the years ended September 30, 2005 have been prepared in accordance with GASB Statement No. 40. 37 - (Continued) (g) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Investment Policies Investment policies of the PG, its blended component units, major funds, and major component units are as follows: Primary Government Investment Policies — Title 33, Chapter 117 of the Virgin Islands Code (V.I. Code) authorizes the Government to invest in U.S. Government and agencies obligations, mortgage-backed securities, repurchase agreements, commercial paper, local government obligations, and corporate debt and equity obligations. As of September 30, 2005, the PG General Fund and Agency Fund had invested in certificates of deposit with a local bank. Investments are reported at fair value. Public Finance Authority Investment Policies — Under GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for Most External Investment Pools, investments of the PFA are reported at fair value. Various bond resolutions of the PFA restrict investments to direct obligations of the U.S. government, territories, possessions and states, specific bank obligations, investment agreements or similar funding agreements, shares or other interests in mutual funds, trusts or investment companies, corporate commercial paper, and money market portfolios consisting of any of the foregoing. The PFA has retained investment managers and investments are held in trust by a commercial bank on behalf of the PFA. The PFA handles investments for two major governmental funds of the Government, the PFA Debt Service Fund, and the PFA Capital Projects Fund. Tobacco Settlement Financing Corporation Investment Policies — Various bond resolutions of this blended component unit restrict investments to direct obligations of the U.S. government, territories, possessions and states, specific bank obligations, investment agreements or similar funding agreements, shares or other interests in mutual funds, trusts or investment companies, corporate commercial paper, and money market portfolios consisting of any of the foregoing. The TFSC has retained investment managers and investments are held in trust by a commercial bank on behalf of the TFSC. Investments are reported at fair value in the nonmajor governmental fund of the Government. West Indian Company Limited Investment Policies — This blended business-type major fund of the Government maintains an investment policy that 1) limits investments in bonds to a maximum remaining maturity of 30 years (or estimated average life on mortgage-backed issues), 2) limits fixed income securities to a maximum of 40% and a minimum of 30% of the overall assets of the WICO portfolio, 3) limits corporate bond exposure to 45% of the fixed income portfolio, and 4)has no provision which limits or restricts investments in U.S. government treasury or agency issues. WICO reports investments at fair value. Pension Trust Fund Investment Policies — The board of trustees of GERS have enacted policies that limit investments in certain investment categories and provide requisites for the institutions with which investment transactions may be entered into. Under those policies, GERS may invest in U.S. government and agencies’ obligations, bonds or notes of any state, territory or possession of the United States, municipal bonds and obligations, foreign bonds, bonds of domestic railroad corporations, public utility bonds, industrial corporate bonds or certificate trust certificates, common and preferred shares of foreign and domestic corporations, mutual funds, mortgage or personal loans to GERS members or retirees, and 38 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 mortgage and asset-backed securities. Investments in bonds are subject to rating restrictions of BBB and may not exceed 2% of the portfolio. Investments-in stock of a single corporation may not exceed 1% of the market value of the fund, or exceed 1% of the outstanding stock of the corporation. The aggregate amount of investments in stocks may not exceed 60% of the total investments of GERS. Any investment of 20% or more of the aggregate value of the portfolio must be approved by two-thirds of the membership of the board of trustees. The investments are administered by several professional investment managers and are held in trust by a commercial bank on behalf of the system. Investments in equity securities in the GERS pension trust fund are reported at quoted market values. Shares of mutual funds are reported at the net asset value of shares held by GERS at year-end. Purchases and sales are recorded on a trade-date basis. Realized gains and losses on securities are determined by the average cost method. Investment by GERS in the Havensight Mall is carried at historical cost less accumulated depreciation. Investment by GERS in the GERS facilities in St. Thomas and St. Croix are carried at historical cost net of accumulated depreciation and amortization on the portion of the facilities occupied by GERS. Virgin Islands Water and Power Authority Investment Policies — This major component unit is authorized under bond resolutions and the V.J. Code to invest in open accounts, time deposits, certificates of deposit, repurchase agreements, obligations of the United Stated government, and obligations of any state within the United States, mutual funds, and corporate commercial paper. Investments are reported at fair value. Virgin Islands Port Authority Investment Policies — This major component unit is authorized under bond resolutions and the V.I. Code to invest in open accounts, time deposits, certificates of deposit, repurchase agreements, obligations of the United States government, and obligations of any state within the United States, mutual funds, and corporate commercial paper. Investments are reported at fair value. University of the Virgin Islands Investment Policies — The board of trustees of this major component unit is responsible for the management of the University’s investments which consist of U.S. government securities and securities backed by the U.S. government or its agencies and instrumentalities, common and preferred stocks, and mutual funds. Currently, the University’s policies do not address risks associated with investments. Virgin Islands Government Hospital and Health Facilities Corporation Investment Policies — The board of trustees of this major component unit have not developed a formal investment policy. At September 30, 2005, investments were comprised of certificates of deposit, which were reported at fair value. Virgin Islands Housing Authority Investment Policies — This major component unit is required by the U.S. Department of HUD (HUD) to invest excess funds in obligations of the United States, certificates of deposit, or any other federally insured investment. HUD requires that deposits be fully collateralized at all times, and may be held by an unaffiliated bank or trust company for the account of the VIHA. 39 (Continued) (h) ) @ GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Receivables Taxes receivable represent amounts owed by taxpayers for individual and corporate income taxes, gross receipts taxes, and real property taxes. Tax revenue is recognized in the governmental fund financial statements when they become both measurable and available based on actual collections during the months subsequent to September 30. Federal government receivables represent amounts owed to the Government for reimbursement of expenditures incurred pursuant to federally funded programs. Accounts receivable are reported net of estimated allowances for uncollectible amounts, which are determined based upon past collection experience and current economic conditions. Subject to the provisions of the retirement law and subject to rules and regulations prescribed by the board of trustees of GERS, participants of the Pension Trust Fund have the right of obtaining loans from the Pension Trust Fund to finance a home, automobile, or other personal needs. The maximum mortgage loan that could be granted to members who have been contributing to the Pension Trust Fund for at least five years is $250,000. The interest rate on new first mortgages was 8% and on second mortgages, 9% throughout the year. Members may also borrow up to $50,000 to buy land. Members who have contributed to the Pension Trust Fund for at least five years can borrow up to $18,000 for the purchase of an automobile. The loans bear interest at 11% with a maximum term of four years. A member may also borrow up to 75% of their contributions to the Pension Trust Fund to a maximum borrowing of $20,000 as a personal loan. The interest rate offered on personal loans was 9% throughout the year. Member loans in the pension trust fund are valued at the outstanding loan principal balance less an allowance for estimated loan losses. The accounts receivable from nongovernmental customers of the discretely presented component units are net of estimated uncollectible amounts. These receivables arise primarily from service charges to users. Accounts receivable from the PG and other component units that arise from service charges do not have significant allowances for uncollectible accounts. Inventories In governmental fund types, the costs of inventories are recorded-as expenditures when purchased. The proprietary fund types and component units recognize an asset when the inventory is purchased and an expense when it is consumed. Inventories in proprietary fund types are primarily valued at the lower of cost or market using the first-in, first-out method. . Restricted Assets Restricted assets in the PG and discretely presented component units are set aside primarily for the payment of bonds, notes, construction funds, and other specific purposes. 40 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 (k) Capital Assets Capital assets, which include land, land improvements, buildings, building improvements, machinery and equipment, construction in progress, and infrastructure assets are reported in the applicable governmental, business-type activities, and component unit columns in the government-wide financial statements as well as in the applicable proprietary funds reported in the fund financial statements. The PG defines capital assets as assets that have an initial, individual cost, and useful lives of: (i) $5,000 for personal property with a useful life of five years; (ii) $50,000 for buildings and building improvements with an estimated useful lives of 40 and 20 years, respectively; (iii) $100,000 for land improvements; and (iv) $200,000 for infrastructure with an estimated useful life of 30 years. The value of all land acquired is capitalized. Capital assets purchased or acquired are carried at historical cost or normal cost. The normal costing method to estimate cost is based on replacement cost indexed by a reciprocal factor of the price increase from the appraisal date to the actual or estimated acquisition date and was used to estimate the historical cost of certain land, buildings, and building improvements because invoices and similar documentation were no longer available in certain instances. Donated capital assets are recorded at fair value at the time of donation. Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest costs are capitalized during the construction period only for business-type activities and various component units. The costs of routine maintenance and repairs that do not add value to the assets or materially extend asset lives are not capitalized. Capital assets utilized in the governmental funds are recorded as expenditures in the governmental fund financial statements. Depreciation expense is recorded in the government-wide financial statements, as well as the proprietary funds and component units’ financial statements. Capital assets of the PG are depreciated on the straight-line method over the assets’ estimated useful lives. There is no depreciation recorded for land and construction in progress. The capital assets of the component units are recorded in accordance with the applicable GASB and FASB statements and under their own individual capitalization thresholds. The estimated useful lives of capital assets reported by the component units are (i) 7 to 50 years for buildings and building improvements; (ii) 20 to 40 years for airports and marine terminals; and (iii) 3 to 20 years for vehicles and equipment. The Government chose the option available under GASB No. 34 to defer the recording of wastewater treatment facilities as information for this network of infrastructure assets was not available. These assets were deemed to be nonmajor relative to total infrastructure assets and are not reported. 41 (Continued) () (m) (n) (0) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Tax Refunds Payable During the calendar year, the Government collects individual income taxes through withholdings and payments from taxpayers. At September 30, the Government estimates the amount owed to taxpayers for overpayments during the first nine months of the calendar year. These estimated amounts and the actual tax refunds claimed for prior years but not paid at year-end are recorded as tax refunds payable and as a reduction of tax revenue. Deferred and Unearned Revenue Deferred revenue at the governmental fund level arises when potential revenue neither meets measurable nor available criteria for revenue recognition in the current period. Deferred revenue also arises when resources are received before the Government has a legal claim to them, as when grant moneys are received prior to incurring the qualifying expenditures. In subsequent periods, when the revenue recognition criteria is met, or when the Government has a legal claim to the resources, the liability for deferred revenue is removed from the balance sheet and the revenue is recognized. Unearned revenue at the government-wide and proprietary fund levels arises only when the Government receives resources before it has a legal claim to them. Long-Term Debt The liabilities reported in the government-wide financial statements include the Government’s bonds, long-term notes, and other long-term liabilities including vacation, retroactive union arbitration salaries, legal claims, and noncurrent federal fund cost disallowances related to expenditures of federal grants. Bond premiums and discounts, losses incurred on bond refundings, and debt issuance costs are deferred and amortized over the life of the bonds using the effective-interest method. Bonds payable are reported net of the applicable bond premiums or discounts and deferred refunding losses. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. In the fund financial statements, government fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Losses incurred on bond refundings are not recognized in the fund financial statements as the corresponding liability for the bonds is only recorded in the government-wide financial statements. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. Fund Equity In the fund financial statements, governmental funds report reservations of fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change. 42 (Continued) (p) @ (1) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Net Assets Net assets are reported in three categories: e Invested in Capital Assets, Net of Related Debt— These consist of capital assets, net of accumulated depreciation and amortization and reduced by outstanding balances for bonds, notes, and other debt that are attributed to the acquisition, construction, or improvement of those assets. Debt pertaining to significant unspent debt proceeds is not included in the calculation of invested in capital assets, net of related debt. The unspent portion of the debt is presented, net of the related debt, as restricted net assets for capital projects. ° Restricted Net Assets — These result when constraints placed on the use of net assets are either externally imposed by creditors, grantors, contributors, and the like, or imposed by law through constitutional provisions or enabling legislation. ° Unrestricted Net Assets — These consist of net assets, which do not meet the definition of the two preceding categories. Unrestricted net assets often are designated to indicate that management does not consider them to be available for general operations. Unrestricted net assets often have constraints on resources that are imposed by management, but can be removed or modified. When both restricted and unrestricted resources are available for use, generally it is the Government’s policy to use restricted resources first, then the unrestricted resources as they are needed. Postemployment Benefits In addition to the pension benefits described in note 13, the Government provides postretirement healthcare benefits, in accordance with the V.I.Code to all employees who retire from the Government on or after attaining age 55 with at least 30 years of service; except for policemen and firemen who can retire with at least 20 years of service. Currently, approximately 4,100 retirees meet those eligibility requirements. Healthcare benefits are provided through insurance companies whose premiums are paid by the retiree and the Government. The Government contributes three-fourths of the healthcare benefits’ premiums. The Government does not accrue a liability for postemployment benefit costs, which are recognized on a pay-as-you-go basis. During the year ended September 30, 2005, the cost of providing healthcare benefits amounted to approximately $18.8 million. Compensated Absences The vacation policy of the Government provides for the accumulation of four, six, or eight hours for each full biweekly pay period depending on the time of entry into government service. At the beginning of each calendar year, vacation leave is limited to 480 hours (60 days). However, the excess of 480 hours is considered by GERS for service credit towards the employees’ retirement. This vacation policy does not apply to professional educational personnel of the Virgin Islands Department of Education, who receive compensation during the school breaks. Upon retirement, an employee receives compensation for unused vacation leave at the employee’s base rate pay. As of September 30, 2005, the Government had accrued compensated absences amounting to 43 (Continued) (S) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 $47.8 million, including related benefits, of which $27.6 million was included in current liabilities in the government-wide financial statements. Employees accumulate sick leave at a rate of four hours for each full biweekly pay period up to a maximum of 180 days. Separated employees do not receive payment for unused sick leave, therefore, a provision for accumulated sick leave is not required. Compensated absences accumulation policies for the blended component units and discretely presented component units vary from entity to entity, depending upon negotiated bargaining agreements and other factors agreed upon between the management of these entities and its employees. Interfund and Intra-Entity Transactions The Government has the following types of transactions among funds: e Interfund Transfers — Transfers of resources between funds are reported as interfund transfers in (out) when incurred. ° Intra-Entity Transactions — These are transactions between the PG and its component units, and among the component units. Transfers between the PG and its blended component units are reported as interfund transfers, except for transfers within the same fund type. Similarly, receivables and payables between the PG and its blended component units are reported as amounts due to, and due from other funds. Transfers between the PG and discretely presented component units (and among those component units) are reported separately as revenue and expenses or expenditures. Amounts owed to and from discretely presented component units by the PG are reported separately from interfund payables and receivables. Risk Management With some exceptions, the Government does not carry general casualty or liability insurance coverage on its properties or acts of its employees. Instead, the Government believes it is more economical to manage its risks internally and set aside funds as needed for estimated current claim settlements and unfavorable judgments through annual appropriations and supplemental appropriations. The Government accrues a provision for legal claims and judgments based on historical experience of similar claims and judgments and facts and circumstances of the individual claims and judgments. As a result of an agreement with the Federal Emergency Management Agency (FEMA), with respect to properties and structures damaged by Hurricane Hugo and repaired with federal disaster assistance funds, the Government has obtained insurance for certain hospitals, schools, and other insurable public buildings that were repaired with such federal assistance. The Government also purchases commercial insurance covering physical losses or damages against its property. The limit of liability for all risks, excluding earthquake, windstorm, and flood, is $1 million for each and every occurrence except for windstorm and flood losses, which has a $45 million limit. For physical losses arising from earthquake, the insurance policy has a limit of $100 million for each and every occurrence and in the annual aggregate. Also, the Government has an enterprise fund that provides workers’ compensation to both public and private employees. 44 (Continued) (uw) (vy) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Under Title 33, Section 3411(c) of the V.I. Code, no judgment shall be awarded against the Government in excess of $25,000 for tort claims filed under Government statutes. In cases involving several survivors, each award must be construed separately for purposes of applying the limitation upon recovery imposed by the Tort Claims Act. Under Title 27, Section 166(e) of the V.I. Code, the Government’s waiver of immunity is expanded to $250,000 for medical malpractice actions, including actions for wrongful death based on malpractice. Under certain circumstances, as provided in Title 33, Section 3414 of the V.I. Code, the Government may assume the payment of a judgment entered against an officer or employee acted reasonably and within the scope of his employment. The Government may pay up to a maximum amount of $100,000 of the settlement. The Government does not maintain accounting records in support of individual claim liabilities or for claims incurred but not reported (IBNR). Accordingly, workers’ compensation claims are accounted for on a cash basis. As such, the basic financial statements do not include a liability for workers’ compensation claims outstanding, including related IBNR, as of September 30, 2005. Certain component units are exposed to various risks of loss related to their specialized operations, which are mitigated by purchasing commercial insurance. Future Adoption of Accounting Requirements GASB has issued the following statements that the Government or its component units have not yet adopted: GASB Adoption Statement required in No. fiscal year 42 Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries 2006 43 Financial Reporting for Postemployment Benefit Plans Other than Pension Plans 2007 44 Economic Condition Reporting: The Statistical Section — An amendment of NCGA Statement 1 2006 45 Accounting and Financial Reporting by Employers for Postemployment Benefits Other. Than Pensions 2008 46 Net Assets Restricted by Enabling Legislation — An amendment of GASB Statement No. 34 2006 47 Accounting for Termination Benefits 2006 48 Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues 2008 The impact of these statements has not yet been determined. Use of Estimates Management of the Government has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date 45 (Continued) (2) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 of the basic financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Component Units The basic financial statements include the financial statements of the following discretely presented component units: e Virgin Islands Housing Authority e Virgin Islands Port Authority e Virgin Islands Water and Power Authority e Virgin Islands Government Hospital and Health Facilities Corporation e University of the Virgin Islands e Economic Development Authority e Magens’ Bay Authority e Virgin Islands Housing Finance Authority e Virgin Islands Public Television System 46 (Continued) (penunuoD) LY 60S°099 BES9E Lv8°6L OLTE 6tr°7L 906° ZLIEOL €7Z‘6S7 818°€9 $ Syosse Jou [BIOL brs'sz (aes) €ee's (pSLb2) (p18) 7O8‘LI 6L791 6b7 81 (LIT) (OWSp) payoLysaru-) 8Z1°88 098'b 0SS‘8h _ 6£0°7 986L 6bL‘LI 068°9 oS PayoLtsay Les‘ons TITLE $96°SZ 0€0°8Z vO7 TL SII‘9I brl‘69 p80°rEZ 188°€9 IQ2P Poyeyer Jo you — sjasse yeyideo ul poysoauy ‘SJosse JON. 1S6 18h 881°9E 7199S Ele Le 78S°EZ ZLS9E ETS87Z 1L0°%S 060°TT SOHTEqe I] [EIOL 1v6'8Z 689°€Z 87 €@ SIE! _— _— _— €88'€ SonrTIqey] JoLNUOU JoyIO 760°6 88 9EL'T _— — — 009°S 016 _— aqeAed sueoy $89°€87Z SbLb 16L‘€b _ _— Clee’ 708°6S I ve0‘Cr _ a1qeAed spuog bles _— _— — — — oes _— vll JUSWIULIOAOS [eJopay 0} ONG 088°0€ bev _— 89161 69¢'L _ _ _— — yuouroao8 Areuruid 0) ang LE6‘ETI €99°% LSOIT 7181 S6L‘bI 6S7E 1Z8‘LS L716 €60°L sontiqey] WoL ‘sonmpiqery O9r'trT'T 920°EL 6Sr°9EI 685 0P 110°96 8Lb°8L 569 TEE POT IIE 806°bL Syasse [BIOL Lev‘0z _— 67L _— _— 80€'l S8L‘91 S19'T — sasuadxe pauayoq E1S‘6LL ves‘Ly brs‘ Ip 8ZE8Z 8L0°bL 8£9°8P oEr‘00z 080°SLZ -188°€9 you ‘sjasse jeydes €8LOII L68‘01 L78‘SE _— _— 668°8 8691S TIlE OsT‘T Sjasse payolnsoy p838‘s — €vS‘T 99S _— _ _ 68EI 98E'l JUOUMUIAAOS feIopay Woy ond 6L6E SE 86 _— _— — _— 996°7 _— juouruten08 Arewud woy ong v98°SIZ 09S‘r1 8E8‘bS $691 €€6°1Z €£9'61 78L°79 TEC ITZ 1608 $ sjesse JuaLND isjossy s}iun sannua Spurs] UIs, [eidsoyy [eIdsoyy WIa3sAS TEST. AWWOWNY AWIOWINY S}aSSB JIU UO UOHEULAOJUT yuauoduios BO ay} Jo sin] ‘yy uene Japruyss ADEA 91917, ywog Suisnoy [e10], AjIsadAluy 7] AoW spurjs] spurys] UOHRIOd.IOZ sane AWLIOUINY AIMOg pu UId.AIA, UIBALA, WeaH pur yeyidsoy AIJEAA SPULIS] WIBIIA JUIUIUAIAOL SPURS] UIBATA :(spuesnoy} ul pessoidxa) SMOT[O} sjtun yUsUOdUIOD payuesaid ApO}OIOSIP [Je JO UOIJVULIOFUI [eIOURUT] posuspuo_, S002 ‘OE sequiaydag SJUOUID}E}G [RIOULULY DIseg 0} SO}ON, SANV'ISI NIOUIA SALV.LS G4.LINN FHL AO INANNYAAOD (3) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Program revenue Operating Capital Total Information on statements Charges for grants and grants and component of activities Expenses services contributions contributions units Virgin Islands Housing Authority $ 46,136 5,121 31,426 4,213 (5,376) Virgin Islands Port Authority 45,660 37,375 7,219 (1,066) Virgin Islands Water and Power Authority: Electric System 165,887 169,631 ; 996 4,740 Water System 26,817 28,284 958 2,425 Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 69,613 44,232 20,235 12,672 7,526 Juan F. Luis Hospital 53,484 26,962 17,481 4,225 (4,816) University of the Virgin Islands 66,223 14,449 40,256 3,192 (8,326) Other component units 12,830 3,359 6,435 1,270 (1,766) Total activities $ 486,650 329,413 115,833 34,745 (6,659) General revenue: Interest and other 10,739 Changes in net assets 4,080 Net assets, beginning of year (as restated) 656,429 Net assets, end of year $ 660,509 Stewardship, Compliance, and Accountability (a) Budgetary Process and Control The V.I. Code requires the Governor to submit an annual balanced executive budget to be adopted by the Legislature for the ensuing fiscal year. The Governor is required by law to submit to the Legislature the annual executive budget no later than May 30. The annual executive budget is prepared essentially on a GAAP basis, except for encumbrances, which are reported as expenditures for budget reporting purposes, by the Virgin Islands Office of Management and Budget (OMB) working in conjunction with other Government offices and agencies. If the annual executive budget has not been approved before the commencement of any fiscal year, then the appropriations for the preceding fiscal year, insofar as they may be applicable, are automatically deemed reappropriated item by item. The annual executive budget, which includes those funds of the Government subject to appropriation pursuant to law, is composed of all proposed expenditures and estimated revenue for the Government. The Legislature enacts the annual executive budget through passage of lump-sum appropriations for each department. The Legislature may add, change, or delete any items in the annual executive budget proposed by the Governor. Upon passage by the Legislature, the annual executive budget is submitted to the Governor, who may veto the budget partially or in its entirety and return it to the Legislature with his objections. A veto by the Governor can be overridden only by a two-third majority of all members of the Legislature. The Legislature is obligated by law to pass a final annual executive budget no later than September 30, the last day of the fiscal year. Supplemental budgetary appropriations’ bills that are signed into law may be created during the year without the identification of a specific revenue source to finance them. In August 1999, the 48 (Continued) (6) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Legislature enacted the Financial Accountability Act (Act No. 6289). The purpose of the Financial Accountability Act is to require by law that the budget of the Government be balanced each year, and the appropriations in each fiscal year not exceed a verifiable revenue source. Once the budget has been enacted, fiscal control over expenditures made pursuant thereto is exercised by the Governor through the Director of OMB. During any fiscal year in which the resources available to the Government are not sufficient to cover the appropriations approved for such year, the Governor, through the Director of OMB, may take administrative measures to reduce expenditures. The Governor may also make recommendations to the Legislature for new taxes or any other necessary action to meet the estimated deficiency. Budgetary. control is exercised at the department level through an allotment process. Encumbrances and expenditures cannot exceed total allotment amounts. The Government’s department heads may make transfers of appropriations within the department. Appropriation transfers between departments and supplemental appropriations require executive and legislative branch approval. Unencumbered and unexpended appropriations, not designated, lapse at fiscal year-end. Also, encumbrances are established at fiscal year-end to pay certain expenditures for travel and utility costs payable against current year appropriation authority, but to be expended in the subsequent year. Budget/GAAP Reconciliation The following schedule presents comparisons of the General Fund legally adopted budget with actual data on a budgetary basis. Because accounting principles applied for purposes of developing data on a budgetary basis differ significantly from those used to present financial statements in conformity with GAAP, a reconciliation of timing and entity difference in the excess of revenue and other financing sources over expenditures and other financing uses for the year ended September 30, 2005 is presented below (expressed in thousands): Excess of revenue and other financing sources (uses) over expenditures — budget basis $ 57,011 Timing difference — change in encumbrances (8,253) Entity difference — excess of revenue and other financing sources over expenditures and other financing uses — activities with budgets not legally adopted 3,629 Excess of revenue and other financing sources over expenditures — GAAP basis $ 52,387 Controls over spending in special revenue funds and nonappropriated funds are maintained at the Department of Finance by use of budgets and available resources (revenue). The Government makes appropriations to authorize expenditures for various capital projects. Budgets for capital projects normally remain available until completion of the project unless modified or rescinded. 49 (Continued) (4) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Cash and Cash Equivalents (a) (b) (¢) Primary Government The PG and its blended component units consider all highly liquid investments purchased with an initial maturity of three months or less to be cash and cash equivalents. By law, banks, or trust companies designated as depository of public funds of the Government and are to maintain corporate surety bond or pledge collateral satisfactory to the Commissioner of Finance to secure all governmental funds deposited. At September 30, 2005, the PG held $260.0 million in unrestricted cash and cash equivalents, and $35.3 million in restricted cash and cash equivalents. Banco Popular de Puerto Rico held $229 million, or 87% of the PG’s cash and cash equivalents, which was fully collateralized. Pension Trust Fund The Government’s retirement system (GERS) considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. At September 30, 2005, GERS held $78.9 million in money market accounts, and $7.9 million in operational accounts. Component Units All component units of the Government consider all highly liquid investments purchased with an initial maturity of three months or less to be cash and cash equivalents. By law, banks, or trust companies designated as depository of public funds of the Government are to maintain corporate surety bond or pledge collateral satisfactory to secure all governmental funds deposited. At September 30, 2005, component units held $63.6 million in unrestricted cash and cash equivalents and $38.5 million in restricted cash and cash equivalents, of which $1.5 million was not insured, bonded, or collateralized as required for public funds of the Government. 50 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 (5) Investments (a) Primary Government Investments The PG and its component units adopted the provisions of GASB Statement No. 40, Deposit and Investment Risk Disclosures, an Amendment of GASB Statement No. 3 in the current fiscal year. Following is a summary of the investments of the PG, categorized by investment type and maturity as of September 30, 2005: Primary Government Investments (In thousands) Maturity (in years) Fair Less than 1to5 Over 5 value 1 year years years Investments with contractual maturities: , Certificates of deposit $ 97,570 97,570 — — Commercial paper 141,133 141,133 — — Corporate bonds 142 18 66 58 U.S. government agencies and notes 32,626 32,407 39 180 Total investments with maturities 271,471: $ 271,128 105 238 Investments without contractual maturities: Equity securities 451 Money market and mutual funds 228,749 Total primary government investments $ 500,671 Interest Rate Risk — Interest rate risk represents the exposure to fair market value losses arising from increasing interest rates. The PG does not have a formal investment policy that limits investment maturities as a means of managing such exposure. As a means of keeping the interest rate risk low, all investments held by the PG are short term in nature. Credit Risk — The authorizing legislation of the PG does not limit investments by credit rating categories. Authorizing legislation does limit the investment choices of the PG to: direct obligations or obligations guaranteed by the United States, obligations of states, territories, possessions, and commonwealths of the United States, obligations of international banking institutions, repurchase agreements, investment contracts, certificates of deposit, guaranteed investment contracts, shares in mutual funds, investment companies, corporate commercial paper, money market portfolio investments, and investment pools. 51 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 At September 30, 2005, the PG’s investment in money market funds were rated AAA by Standard & Poor’s, and Aaa by Moody’s Investor Service; PG’s investment in commercial paper were rated A-1 or A-1+ by Standard & Poor’s, and P-1 by Moody’s Investor Services; and the PG’s investment in U.S. government agencies were rated AAA by both Standard & Poor’s and Moody’s Investor Services. Concentration of Credit Risk — The PG places no limit on the amount that may be invested in one issuer. At September 30, 2005, more than 5% of the PG’s investments were invested in: Fidelity Treasury Money Market #696, Class 3 (25.55%), Banco Popular de Puerto Rico Certificates of Deposit (20.15%), Goldman Financial Securities Money Market 474 (12.88%), General Electric Capital Corporation Commercial Paper (10.55%), AIM Short Term Investment Money Market Treasury No. 2 (6.88%), Federal Home Loan Mortgage Corporation (5.27%), and Commoloco, Inc. Commercial Paper (5.19%). Custodial Credit Risk — The PG does not have a custodial risk policy. This is the risk that the PG will not be able to recover the value of its investments that are in the possession of an outside party. At September 30, 2005, $97.6 million of certificates of deposit of the PG were held in the name of the Government by Banco Popular de Puerto Rico, $402.3 million of investments were held in the name of The Bank of New York Trust Company, NA, as trustee for the Government, and $840 thousand were held in the name of Merrill Lynch, as trustee for the Government. 52 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 (b) Pension Trust Fund Investments The pension trust fund (GERS) has implemented GASB Statement No. 40 by establishing separate investment guidelines and restrictions for each investment manager. Following is a summary of pension trust fund investments as of September 30, 2005: Investments with contractual maturities: U.S. government and agency obligations $ U.S. Treasury notes U.S. Treasury bonds Corporate obligations Foreign bonds Government obligations — foreign Mortgage and asset-backed securities Total investments with maturities Investments without contractual maturities: Equity securities: Common stocks — U.S. Common stocks — foreign Preferred stocks — foreign Real estate investments: Real estate investment trusts Havensight Mall — U.S. Virgin Islands GERS Complex — U.S. Virgin Islands Securities lending short-term collateral investment pool Mutual funds Total pension fund investments $ Pension Trust Fund Investments (In thousands) Maturity (in years) Fair Less than 1to5 6 to 10 More than value 1 year years _ years 10 years 30,103 8,073 2,830 18,249 951 109,188 — 90,098 19,090 — 8,064 — —_— — 8,064 35,610 — 16,687 13,014 5,909 2,407 — — 2,407 — 87,898 —~ — — 87,898 119,581 — 2,288 2,883 114,410 392,851 $ 8,073 111,903 55,643 217,232 655,407 136,278 1,049 792 60,339 13,023 221,849 9,604 1,491,192 53 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Interest Rate Risk — Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. GERS does not have a specific policy to manage interest rate risk, but requires investment managers to diversify by issue, maturity, sector, coupon, and geography. Investment managers retained by GERS follow specific investment guidelines and are evaluated against specific marker benchmarks that represent their investment style. Any exception from general guidelines requires approval from the GERS’ board of trustees. Credit Risk — GERS’ investment policy is designed to minimize credit risk by restricting authorized investments to only those investments permitted by statute, subject to certain additional limitations. These additional limitations consist of prohibitions against investments in derivative securities, options, futures, or short positions. GERS’ investment policy allows investments in mortgage pass-through securities. The credit ratings of GERS debt and equity securities include: Pension Trust Fund Investment Credit Ratings (In thousands) Credit ratings Standard and Fair value __ poor Moody’s U.S. government and agency obligations $ 10,842 AA- AA2 U.S. government and agency obligations 5,763 AAA Not rated U.S. government and agency obligations 13,498 Not rated Not rated U.S. Treasury notes 109,188 AAA AAA U.S. Treasury bonds 8,064 AAA AAA Corporate obligations 35,610 BBB to AAA BAA] to AAA Foreign bonds 2,407 AA AA2 Government obligations — foreign 57,128 AAA AAA Government obligations — foreign 10,842 AA- AA2 Government obligations — foreign 6,434 AAA Not rated Government obligations — foreign 13,494 Not rated Not rated Mortgage and asset backed securities 88,268 AAA AAA Mortgage and asset backed securities 31,313 Not rated Not rated Common stocks — U.S. 655,407 Not rated Not rated Common stocks — foreign 136,278 Not rated Not rated Preferred stocks — foreign 1,049 Not rated Not rated Real estate investment trust 792 Not rated Not rated Real estate holdings — U.S. Virgin Islands 73,362 Not rated Not rated Securities lending short-term collateral investment pool 221,849 Not rated Not rated Mutual funds 9,604 Not rated Not rated Total investments $ 1,491,192 54 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Concentration of Credit Risk — Concentration of credit risk is the risk of loss attributed to the magnitude of the GERS investment in a single issuer of securities. GERS investment policies place limitations on portfolio composition by investment type to limit its exposure to concentration of credit risk. The investment policy provides that a maximum of 60% of GERS investment portfolio be invested in equity stocks and a minimum of 40% be invested in fixed income investments. At September 30, 2005, there were no investments in any one issuer that represent 5% or more of total investments. Custodial Credit Risk — The custodial credit risk for investments is the risk that, in the event of the failure of a counterparty to a transaction, GERS will not be able to recover the value of an investment or collateral securities that are in the possession of an outside party. With the exception of underlying securities on loan secured by noncash collateral, the investment portfolio of GERS was held with a single third-party custodian on behalf of GERS as of September 30, 2005. The fair value of underlying securities on loan secured by noncash collateral amounted to $6.02 million at September 30, 2005. Foreign Currency Risk — Foreign currency risk is the risk of holding investments in foreign currencies and the risk that those foreign currencies may devalue. As of September 30, 2005, $227.7 of GERS portfolio was held in foreign currencies, with $68.6 million held in Japanese yen, $62.9 million held in Euro currency, $30 million held in pound sterling, $17.8 million held in Canadian dollars, $15 million held in Australian dollars, and $12.3 million held in Swiss francs. GERS entered into various forward currency exchange contracts to manage exposure to changes in foreign currency exchange rates, and to facilitate the settlement of foreign security transactions. Risks associated with foreign exchange contracts include the movement in the value of foreign currency relative to the U.S. dollar and the ability of the counterparty to perform in accordance with the terms of the contract. Changes in the market value of open and closed forward contracts are reported with interest, dividends, and other income or losses reported at fair value. During the fiscal year ended September 30, 2005, GERS reported $26.7 million in forward currency purchases, $26.8 million in forward currency sales, and a foreign exchange loss of $1.3 million. Securities Lending Transactions — The Government’s statutes permit GERS to participate in securities lending transactions, and GERS has, via a securities lending authorization agreement (the Agreement), authorized State Strect Bank and Trust Company (the Custodian) to lend its securities to broker-dealers and banks pursuant to a form of loan agreement. Lent securities are collateralized with cash, securities issued or guaranteed by the U.S. government, or irrevocable bank letters of credit. GERS does not have the ability to pledge or sell collateral securities delivered absent a borrower default. No restrictions were imposed during 2005 as to the amount of loans the Custodian can make on behalf of the GERS. Under the terms of the Agreement the Custodian must indemnify the Government for losses attributable to violations by the Custodian under the “standard of care” clause described in the Agreement. There were neither such violations during the fiscal year 2005 nor losses resulting from the default of the borrowers or the Custodian. Loans are generally terminable on demand. The collateral received shall, in the case of loaned securities denominated in U.S. dollars or whose primary trading market is located in the U.S. or sovereign debt issued by foreign governments, have a market value of 102% of the market value of the security for domestic borrowers and 105% for foreign borrowers at the inception of the securities 55 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 lending transaction. Such collateral should be kept at a minimum of 100% of the market value of the security for all borrowers throughout the outstanding period of the transaction. At September 30, 2005, approximately $221.8 million of U.S. government and agency securities, fixed income, and equity corporate securities were on loan. The cash collateral received with a corresponding liability of an equal amount, is recorded in the statement of fiduciary net assets. The cash collateral received on each loan was invested, together with the cash collateral of other lenders, in a collective investment pool. As of September 30, 2005, such investment poo! had a weighted average maturity of 40 days and an average expected maturity of 410 days. Because the loans were terminable at will, their duration did not generally match the duration of the investments made with cash collateral. (c) Component Unit Investments Following is a summary of component unit investments, and maturities, as of September 30, 2005: Component Unit Investments (In thousands) Maturity (in years) Fair Less than 1to5 6 to 10 Over 10 value 1 year _years years years Investments with contractual maturities: Certificates of deposit $ 2,605 2,605 — — — Mortgage-backed securities 4,498 —_— —_— — 4,498 Corporate bonds 4,391 — — — 4,391 U.S. government agencies and notes 36,425 2,681 32,079 831 834 Investments with contractual . maturities 47,919 $ 5,286 32,079 831 9,723 Investments without contractual maturities: Common stock 9,001 Foreign investments 87 Mutual funds 38,211 Investment contracts 19,418 Other investments 1,020 Total component unit investments $ 115,656 Interest Rate Risk — Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The component units of the Government have not established formal policies, which limit investment maturities as a means of managing such exposure and have some exposure to interest rate risk. 56 (Continued) (6) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Credit Risk. The authorizing legislation of the component units does not limit investments by credit rating categories. Authorizing legislation limits the investment choices of the component units, as described in note 1(g). The WAPA Electric System investments include a $19.4 million guaranteed investment contract with the Royal Bank of Canada. The investment contract is rated Aa3 by Moody’s and AA- by Standard & Poor’s. The University of the Virgin Islands investments include corporate bonds amounting to $1.8 million with a rating of AAA by Standard & Poor’s. Concentration of Credit Risk. The component units have no limits on the amount that may be invested in one issuer of securities. As of the fiscal year-end, the component units reported $36.4 million in U.S. government and agency securities issued or explicitly guaranteed by the U.S. government, and $38.2 million in mutual funds, which are excluded from concentration of credit risk. As of June 30, 2005, WAPA Electric held a guaranteed investment contract with the Royal Bank of Canada in the amount of $19.4 million, which represented 16.79% of component unit investments. Custodial Credit Risk. The component units of the Government do not have custodial credit risk policies. This is the risk that the component unit will not be able to recover the value of its investments that are held in the possession of an outside party. At September 30, 2005, $2.3 million of VIPA investments were held in the name of HSBC Bank USA, as trustee, and $19 million of University of the Virgin Islands mutual funds were held by a third party on behalf of the university. Receivables Receivables at September 30, 2005 consist of the following (expressed in thousands): General PFA debt fund service fund Total Income taxes $ 159,194 — 159,194 Real property taxes 46,995 — 46,995 Gross receipts taxes — 55,157 55,157 Tax receivables $ 206,189 55,157 261,346 Other long-term receivables — tobacco settlement rights 826 Total receivables reported in the statement of net assets $ 262,172 The Naval Appropriations Act created a separate tax structure for the U.S. Virgin Islands that mirrors the Internal Revenue Code of 1986, as amended. Income taxes are due from every corporation, partnership, individual, association, estate, or trust that meets the filing requirements of the U.S. Internal Revenue Code. A U.S. taxpayer who is a permanent resident of the U.S. Virgin Islands satisfies his Virgin Islands income tax obligations by filing his return with and paying income taxes to the Government. Virgin Islands residents are taxed by the Virgin Islands on their world-wide income. A nonresident of the U.S. Virgin Islands pays income taxes on his U.S. Virgin Islands source income to the Government. The revenue is recognized in the General Fund in the fiscal period for which the income tax return was filed. The revenue 57 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 from income tax withholding and estimated payments is recognized in the General Fund as collected, net of estimated tax refunds. Corporate income taxes are due by the 15th day of the third month following the close of the fiscal year and become delinquent if not paid on or before the due date. Partnership and trust income taxes are due by April 15 of the following year for which the income tax was levied. Trust income taxes must be paid by the tax filing date. Property taxes are levied each calendar year on all taxable real property located in the U.S. Virgin Islands. The revenue is recognized in the General Fund and in the fiscal period for which the property tax was levied, provided the tax is collected within 60 days subsequent to fiscal year-end, unless the facts justify a period greater than 60 days. The Office of the Tax Assessor is responsible for the assessment of all taxable real property. Noncommercial real property subject to taxation is reassessed once every five years and commercial real property subject to taxation is reassessed biannually. The tax assessor prepares an annual assessment roll and schedule of collections for each parcel of real property that is used by the Department of Finance, as the basis for issuing tax bills to all taxpayers in the U.S. Virgin Islands. Property taxes are to be levied by May 15 of each year in the name of the record owner on January 15 of the same year. The taxes are due on September 30 and become delinquent if not paid by October 30. For businesses with gross receipts of $120,000 per annum or less, gross receipts taxes are levied on an annual basis, based on 4% of gross receipts in excess of $5,000. Businesses with annual gross receipts greater than $120,000 and up to $150,000 are levied on a monthly basis, based on 4% of gross receipts in excess of $5,000 per month. Businesses with annual gross receipts of more than $150,000, lose the $5,000 monthly exemption and are levied on a monthly basis of 4% of gross receipts. The gross receipts tax is due within 30 calendar days following the last day of the calendar month collected. Component unit receivables at September 30, 2005, consist of the following (expressed in thousands): Utility service charges $ 26,654 Port fees 3,237 Students 3,452 Patients 19,196 Other 1,525 Total $ 54,064 58 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Loans and advances receivable at September 30, 2005, consist of the following (expressed in thousands): Fiduciary funds Component pension trust units Mortgage loans $ 18,928 — Personal loans 94,903 — Other loans and advances 603 1,638 Subtotal 114,434 1,638 Less allowance for uncollectible accounts (3,000) (50) Loans and advances, net $ 111,434 1,588 (7) Interfund Transactions (a) Interfund Transfers Interfund transfers constitute the transfer of resources from the fund that receives the resources to the fund that utilizes them. The most significant transfers to the General Fund from other governmental funds include a $86 million transfer from the PFA Debt Service representing gross receipt tax revenue in excess of bond service requirements, and a $10 million transfer from the nonmajor debt service fund representing $10 million of property tax revenue in excess of debt service requirements. Significant transfers made from the General Fund include a transfer of $4.4 million to the Emergency Molasses Fund (a nonmajor governmental fund), a transfer of $1 million to the Crisis Intervention Fund (a nonmajor governmental fund), and a transfer of $1.4 million to the PFA Debt Service Fund. Significant transfers from the PFA Debt Service Fund include transfers of $2.2 million to the PFA Operating Account. Transfers from the Virgin Islands Lottery (a nonmajor business-type fund) include transfers of $459 thousand to the General Fund, $1.5 million to the Pharmaceutical Assistance to the Aged Fund (a nonmajor governmental fund), and $1.1 million to the Virgin Islands Educational Initiative Fund (also a nonmajor governmental fund). 59 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Interfund transfers for the year ended September 30, 2005 consisted of the following (expressed in thousands): PFA PFA Enterprise debt capital Nonmajor fund — West Nonmajor General service projects governmental Indian enterprise Transfer to fund fund fund funds Company funds Total General fund _ 86,083 _ 10,000 1,000 459 97,542 PFA debt service fund 1,420 — — — — — 1,420 Nonmajor governmental funds 5,520 2,234 19 — —_ 2,619 10,392 Nonmajor enterprise funds — — 550 — — = 550 Total 6,940 88,317 569 10,000 1,000 3,078 109,904 Transfer from General fund ao 1,420 — 5,520 _ _ 6,940 PFA debt service fund 86,083 — ~ 2,234 — ~ 88,317 PFA capital projects fund _— _— — 19 _— 550 569 Nonmajor governmental funds 10,000 — — = _— — 10,000 Major enterprise fund - WICO 1,000 —_ — oe — — 1,000 Nonmajor enterprise funds 459 — = 2,619 _— — 3,078 Total 97,542 1,420 _ 10,392 — 550 109,904 60 (Continued) (5) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Due from/to Other Funds The following table summarizes interfund receivables and payables at September 30, 2005 (expressed in thousands): PFA Enterprise capital Nonmajor fund — West Nonmajor General projects governmental Indian enterprise Due to fund fund funds Company funds Total General fund $ _— — 3,178 1,000 4,885 9,063 PFA capital projects fund _ _ _ _ 313 313 Nonmajor governmental funds 9,146 — — — 2,892 12,038 Total govern- mental funds 9,146 — 3,178 1,000 8,090 21,414 Propriety fund — nonmajor enterprise fund 300 — _— —_ — 300 Total $ 9,446 _— 3,178 1,000 8,090 21,714 Due from General fund $ _ _— 9,146 — 300 9,446 Nonmajor governmental funds 3,178 —_— —_— — — 3,178 Total govern- mental funds 3,178 —~ 9,146 _ 300 12,624 Enterprise fund — West Indian Company 1,000 —_ —_— —_ — 1,000 Nonmajor enterprise funds 4,885 313 2,892 — -— 8,090 Total enter- prise funds 5,885 313 2,892 — — 9,090 Total $ 9,063 313 12,038 — 300 21,714 The due from/to other funds include $4.9 million due from the General Fund to the Emergency Molasses Fund (nonmajor governmental fund) from unpaid appropriations. Other balances composing the due from/to other funds include $2.7 million from the bond proceeds fund (nonmajor governmental fund) to the General Fund and $2.2 million from the General Fund to the PFA Operating Fund (a nonmajor governmental fund). The due to the General Fund from the nonmajor enterprise fund amounting to $ 4.9 million is mainly composed of the amount owed by the Virgin Islands Lottery to the General Fund amounting to $4.7 million, consisting primarily of 8% of the total lottery revenue that is required to be transferred to the General Fund. The due to nonmajor governmental funds from the nonmajor enterprise fund amounting to $2.9 million is mainly composed of the amount of $1.5 million due from the Virgin Islands Lottery to the Pharmaceutical Assistance to the Aged Fund, and $973 thousand due to the VI Educational Initiative Fund, 61 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 consisting primarily of 15% and 25% of total lottery revenue that is required to be transferred to these funds. (8) — Restricted Assets (a) Primary Government Restricted assets of proprietary funds and business-type activities include cash and cash equivalents as follows (expressed in thousands): Restricted Assets — Proprietary Funds and Business-type Activities Unemployment insurance funds $ 33,493 WICO debt service funds 1,792 Total restricted assets of proprietary funds and business-type activities $ 35,285 (b) Component Units Restricted assets of component units include cash and cash equivalents, investments, and receivables as follows (expressed in thousands): Restricted Assets —- Component Units Debt service and sinking fund requirements $ 15,325 Construction funds 85 Endowment funds 16,614 HUD project funds 1,150 Revolving loan funds 4,830 Other 464 Total cash and cash equivalents 38,468 Investments: Debt service and sinking fund requirements 22,674 Construction funds 22,101 Endowment funds 19,214 Renewal and replacement funds 8,763 Revolving loan funds 5,517 Total investments 78,269 Other: Accrued interest receivable 46 Total restricted assets of component units $ 116,783 62 (Continued) (9) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Capital Assets (a) Primary Government The capital assets activity for the governmental activities for the year ended September 30, 2005, is summarized as follows (expressed in thousands): Capital assets, not being depreciated: Land $ Construction in progress Total capital assets, not depreciated Capital assets, being depreciated: Land improvements Infrastructure Buildings and improvements Machinery and equipment Total capital assets, being depreciated Less accumulated depreciation for: Land improvements Infrastructure Buildings and improvements Machinery and equipment Total accumulated depreciation Total capital assets, being depreciated, net Governmental activities capital assets, net $ Beginning Ending balance Additions Reductions balance 184,939 275 — 185,214 24,578 57,714 29,831 52,461 209,517 57,989 29,831 237,675 3,584 — —_— 3,584 126,249 1,222 — 127,471 402,450 253402 — 427,852 78,159 16,135 759 93,535 610,442 42,759 759 652,442 1,659 153 — 1,812 17,577 4,287 — 21,864 129,043 5,939 — 134,982 46,150 8,470 691 53,929 194,429 18,849 691 212,587 416,013 23,910 68 439,855 625,530 81,899 29,899 677,530 63 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Capital assets activity for the business-type activities for the year ended as of September 30, 2005, is summarized as follows (expressed in thousands): Beginning Ending balance Additions Reductions balance Capital assets, not being depreciated: Land and land improvements $ 5,357 — 40 5,317 Construction in progress 809 1,045 97 1,757 Total capital assets, not depreciated 6,166 1,045 137 7,074 Capital assets, being depreciated: Buildings and improvements 47,575 1,593 31 49,137 Machinery and equipment 3,791 723 139 4,375 Total capital assets, being depreciated 51,366 2,316 170 53,512 Less accumulated depreciation for: Buildings and improvements 13,028 1,851 — 14,879 Machinery and equipment 1,811 194 121 1,884 Total accumulated depreciation 14,839 2,045 121 16,763 Total capital assets, being depreciated, net 36,527 271 49 36,749 Business-type activities capital assets, net $ 42,693 1,316 186 43,823 64 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Depreciation and amortization expense was charged to functions/programs of the PG for the year ended September 30, 2005 as follows (expressed in thousands): Governmental activities: General government $ 3,619 Public safety 1,544 Health 3,315 Education 5,647 Culture and recreation 265 Transportation and communication 4,459 Total depreciation expense — governmental activities $ 18,849 Business-type activities: WICO (major enterprise fund) — depreciation and amortization $ 1,475 Nonmajor enterprise fund — depreciation 570 Total depreciation and amortization — business-type activities $ 2,045 65 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 The capital assets activity for the discretely presented component units for the year ended September 30, 2005 is summarized as follows (expressed in thousands): Beginning balance Ending (as restated) Additions Reductions balance Capital assets, not being depreciated: Land $ 92,003 17,925 593 109,335 Construction in progress 76,602 47,596 68,485 55,713 Total capital assets, not depreciated 168,605 65,521 69,078 165,048 Capital assets being depreciated: Buildings and improvements 1,126,558 62,176 1,505 1,187,229 Airport and marine terminal facilities 102,665 5,377 — 108,042 Personal property and equipment 91,997 4,386 11,949 84,434 Total capital assets being depreciated 1,321,220 71,939 13,454 1,379,705 Less accumulated depreciation: Buildings and improvements 604,631 44,094 6,701 642,024 Airport and marine terminal facilities 65,227 4,138 — 69,365 Personal property and equipment 51,456 5,748 3,353 53,851 Total accumulated depreciation 721,314 53,980 10,054 765,240 Total capital assets being depreciated, net 599,906 17,959 3,400 614,465 Component unit capital assets, net $ 768,511 83,480 72,478 779,513 Beginning balances of component unit capital assets were restated due to the elimination of $50 million of fully depreciated assets by the Virgin Islands Housing Authority and an increase in the opening balance of construction in progress of the Virgin Islands Housing Authority of $3 million. The net restatement of beginning balances of component unit capital assets was $4.186 million. 66 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Depreciation expense charged to each component unit for the year ended September 30, 2005 was as follows (expressed in thousands): Virgin Islands Housing Authority $ 11,161 Virgin Islands Port Authority 15,168 Virgin Islands Water and Power Authority: Electric system 15,398 Water system 2,704 Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 3,957 Juan F. Luis Hospital 2,307 University of the Virgin Islands 2,065 Other component units 1,220 Total depreciation — component units $ 53,980 67 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 (10) Long-Term Liabilities Long-term liabilities activities for the year ended September 30, 2005 were as follows (expressed in thousands): Governmental activities: Bonds payable: 1998 Series Revenue and Refunding Bonds 1999 Project Revenue Bonds 1999 General Obligation Bonds, Series A 1999 Series A Revenue Bonds 2001 Series A Tobacco Bonds 2002 Series Garvee Bonds 2003 Series A Revenue Bonds 2004 Series A Revenue Bonds Subtotal bonds payable Less: Deferred amount on refundings Bonds premium Bonds discount Bonds accretion’ Total bonds payable, net Loans payable: Series 2005 Note Total loans payable Other liabilities: Accrued compensated absences Retroactive union arbitration Litigation Landfill closure and postclosure costs Accrued disallowed costs Total other liabilities Total governmental activitics Business-type activities: Notes payable: WICO Fiduciary activities: Note payable Pension trust fund Amounts Amounts Beginning Ending due within due balance Additions Reductions balance one year thereafter $ 473,745 —_— (13,955) 459,790 14,765 445,025 1,550 —_ (1,550) — —_ —_— 5,650 —_ (885) 4,765 945 3,820 283,335 —_— (4,765) 278,570 5,005 273,565 22,310 — (370) 21,940 _— 21,940 15,840 — (2,900) 12,940 3,000 9,940 268,020 —_— — 268,020 2,875 265,145 —_ 94,000 —_— 94,000 2,295 91,705 1,070,450 94,000 (24,425) 1,140,025 28,885 1,111,140 (2,464) — 616 (1,848) (616) (1,232) 3,819 4,765 (549) 8,035 549 7,486 (9,052) —_ 948 (8,104) (948) (7,156) (1,098) a 334 (764) (350) (414) 1,061,655 98,765 (23,076) 1,137,344 27,520 1,109,824 — 6,350 (500) 5,850 2,051 3,799 — 6,350 (500) 5,850 2,051 3,799 60,210 —_— (12,425) 47,785 27,631 20,154 384,258 11,758 —_— 396,016 —_— 396,016 15,175 7,868 —_— 23,043 450 22,593 28,821 469 — 29,290 _— 29,290 6,014 —_ —_— 6,014 — 6,014 494,478 20,095 (12,425) 502,148 28,081 474,067 $ 1,556,133 125,210 (36,001) 1,645,342 57,652 1,587,690 $ 21,376 — (831) 20,545 851 19,694 $ 6,781 10,000 (6,781) 10,000 10,000 — Accrued compensated absences, retroactive union arbitration liabilities, accrued litigation, and the landfill closure and post-closure costs are generally expected to be liquidated with resources derived from the General Fund. Accrued disallowed costs are generally expected to be liquidated with resources derived from the General Fund. 68 (Continued) (a) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Debt Margin Pursuant to 48 U.S.C. Section 1574(b)(i) of the Revised Organic Act, the Government may issue revenue bonds for public improvements or undertakings authorized by an act of the Legislature, without limitation as to principal amount. Such revenue bonds are payable solely from the revenue directly derived from and attributable to such public improvements or undertakings. Pursuant to 48 U.S.C. Section 1574(b)(ii), the Government is authorized to issue general obligation bonds for any public purpose provided that no such indebtedness is in excess of 10% of the aggregate assessed valuation of the taxable real property in the U.S. Virgin Islands. In addition, pursuant to 48 U.S.C. Section 1574(a) (Public Law 94-932), the U.S. Virgin Islands is authorized to cause to be issued bonds or other obligations in anticipation of the matching funds to be received from the federal government pursuant to 26 U.S.C. Section 7652(b)(3). There is no legal limit on the value of bonds that the Government may issue pursuant to 48 U.S.C. Section 1574(a). The Legislature of the U.S. Virgin Islands must authorize all bond issuances. PFA is authorized to issue bonds for the purpose of financing any project or for the purpose authorized by the Legislature. Given that PFA’s powers to issue bonds are derived from 48 U.S.C. Section 1574(b), the bonds issued by PFA are subject to the limitations of said 48 U.S.C. Section 1574(b). On August 23, 1999, the Legislature amended the V.I. Code to add a mandatory balanced budget provision. Such provisions, specifically Title 2 of the V.I. Code Section 256, provide that the amount of debt of the Government existing on October 1, 2000 shall be the debt limit of the Government, exclusive of bond principal and interest that may become due. The debt limit specified under Title 2 of the V.I. Code Section 256 does not include bonds authorized by law for which a specific source of revenue is identified and committed to retiring those bonds. As used in Title 2 of the V.I. Code Section 256, the term “debt” means the total accumulated unpaid obligations that are due and payable, including unpaid income tax refunds, amounts owed to vendors, and current year unpaid debt service obligations, if any. As used in the statute, the term “debt” does not include that portion of principal or interest on bonds that is not yet due and payable. 69 (Continued) (5) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Bonds Payable Bonds payable outstanding at September 30, 2005 are comprised of the following (expressed in thousands): Primary Government — Bonds Payable Final Interest Bonds payable maturity rates (%) Balance 1998 Series A, C, D, and E Revenue and Refunding Bonds 2023 5.50-7.11 § 459,790 1999 Series A General Obligation Bonds 2010 6.50 4,765 1999 Series A Revenue Bonds - 2033 4.20 — 6.50 278,570 2001 Series A Tobacco Bonds 2031 5.00 21,940 2002 Series Garvee Bonds 2009 2.50 — 5.00 12,940 2003 Series A Revenue Bonds 2033 4.00 — 5.25 268,020: 2004 Series A Revenue Bonds 2024 4.00 — 5.25 94,000 Subtotal 1,140,025 Less: Deferred amount on refundings (1,848) Bonds premium 8,035 Bonds discount (8,104) Bonds accretion (764) Total $ 1,137,344 On May 1, 1998, PFA issued the revenue and refunding bonds Series 1998 A, B, C, D, and E amounting to $541.8 million, secured by general obligation notes issued by the Government. These bonds were issued for the purpose of, among other things, advance refunding of previously issued bonds in order to obtain lower interest rates. The proceeds of the 1998 Series A and B Bonds were placed in an irrevocable trust account to provide for all future debt service payments on the Highway Revenue Bonds Series 1989, Series 1991, Series 1992, Series 1993, and Series 1994 Bonds. At September 30, 2005, $182.8 million of the above-mentioned defeased bonds were outstanding. The proceeds of the Series 1992 Revenue Bonds were placed.in an irrevocable trust to provide for all future debt service payments on the Series 1989 Revenue Bonds. At September 30, 2005, $159.9 million of defeased bonds were outstanding. All assets held by irrevocable trusts for refunding of prior outstanding debt and the corresponding liabilities are not included in the Government’s basic financial statements. 70 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 The 1998 Series C Bonds and the 1998 Series D Bonds were issued to pay, on behalf of the Government, the full principal balance and interest due and payable on the Revenue Anticipation Note, issued in February 1998. The remaining balance of the 1998 Series D Bonds amounting to approximately $11.6 million was primarily provided to the Government for additional working capital. The net proceeds of the 1998 Series E Bonds amounting to $104 million were primarily designated to fund the construction of certain capital projects amounting to $94 million. The remaining $10 million was deposited in a debt service reserve account. The U.S. Department of the Treasury makes certain transfers to the Government of substantially all excise taxes imposed and collected under the Internal Revenue laws of the United States in any fiscal year on certain products produced in the U.S. Virgin Islands (primarily rum) and exported to the United States from the Virgin Islands. The amount required to be remitted to the Government by the U.S. Department of the Treasury is an amount no greater than the total amount of local revenue (primarily taxes) collected by the Government in each fiscal year. As a result, the term “matching fund revenue” is used to denote these payments. The Government has pledged the matching fund revenue, as described above, to the timely payment of principal and interest on the 1998 Series A, B, C, D, and E Bonds. Thus, amounts to be received by the Government from federal excise taxes, mostly in rum, are deposited directly in a trust account until the 1998 Bonds are paid in accordance with the indenture of trust. Estimated prepayments of matching fund revenue are made to the Government prior to the beginning of each fiscal year, subject to adjustment for the amount of local revenue actually collected by the U.S. Department of the Treasury during such year. Prepayments of matching fund revenue are recorded as deferred revenue in the accompanying statement of net assets and the balance sheet of the governmental funds and reversed against revenue in the following year. The adjustments for actual collections made to the estimated prepayments are recorded in the year determined. In November 1999, the U.S. Congress approved an increase in the rate of federal excise taxes on rum transferred to the Government from $10.50 to $13.25 per proof gallon. The increase was retroactive to July 1999. The increase in rate has subsequently been extended two times and in December 2005, Congress again extended the $13.25 per proof gallon rate to December 31, 2006. Interest on the Revenue and Refunding Bonds Series 1998 A, B, C, D, and E and 1999 Bonds are payable semiannually on April 1 and October 1, and principal is payable annually on October 1. The Government is responsible for all principal and interest payments on the 1998 Series bonds. The principal due on October 1 and interest payments due on October 1 and April 1, are funded by the matching fund revenue and deposited into the debt service reserve accounts. On April 13, 1999, a loan agreement was made between and among the Government, the PFA, International Business Machine Corporation (IBM), Banco Popular de Puerto Rico, and U.S. Trust Company of New York (Y2K Loan). The purpose of this loan was to finance certain costs of compliance by the Government with Year 2000 computer system issues. The loan was evidenced by the Government’s issuance of General Obligation Bonds Series 1999 A amounting to $18 million. Principal and interest are payable semiannually on January 1 and July 1. On July 9, 2001, the Government paid the outstanding IBM portion of the bonds amounting to $7.4 million. 71 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 The bonds are secured by the full faith and credit and taxing power of the Government, including a pledge on annual real property tax revenue from its taxation of the Hovensa Oil Refinery (the Refinery), which revenue is deposited in the Hovensa Property Tax Fund, and a contingent pledge of all franchise taxes on foreign sales corporations collected by the Government (Franchise Tax Revenue). Pursuant to the Hovensa Oil Contract, the Refinery agreed to pay $14 million annually of real property taxes on the Refinery properties. Foreign sales corporations qualified to do business in the Virgin Islands must pay a franchise tax of $1.50 for each thousand dollars of capital stock issued (Franchise Tax). On April 13, 1999, PFA also issued Project Revenue Bonds (the 1999 Project Revenue Bonds), amounting to $13.5 million on behalf of the Government, to finance a portion of the Government’s Year 2000 (Y2K) compliance efforts, including the costs related to transportation, installation, and related hardware, software, consulting services, and related expenses. The 1999 Project Revenue Bonds are secured by lease payments made by the Government to PFA pursuant to a municipal lease purchase agreement, dated April 13, 1999. Such lease payments shall be funded by appropriation from the real property taxes deposited in the Hovensa Property Tax Fund and all franchise taxes on a subordinated basis and subject to any superior rights of the Series 1999 A General Obligation Bonds. The 1999 Project Revenue Bonds matured on January 1, 2005. On November 16, 1999, PFA issued the 1999 Series A Revenue Bonds amounting to $299.9 million. These bonds were issued to (i) pay certain working capital obligations of the Government, (ii) repay the Government outstanding tax and revenue anticipation notes, (iii) fund the Series debt service accounts, and (iv) pay certain costs of issuing the bonds. The Government pledged gross receipts taxes for the timely payment of the principal and interest on the 1999 Series A Bonds. Interest is payable semiannually on April 1 and October 1, and principal is payable annually on October 1. Gross receipts revenue amounted to $129 million for the year ended September 30, 2005. As discussed in note 16, on September 28, 2006, a portion of the 1999 Series A Revenue Bonds were refunded with the issuance of the 2006 Series Gross Receipts Revenue Bonds. On November 20, 2001, TSFC issued Tobacco Settlement Asset-Backed Bonds amounting to $23.6 million of the aggregate principal. The proceeds were used for the purpose of (i) purchasing all rights, title, and interest in certain litigation awards under the master settlement agreement (MSA) entered into by participating cigarette manufacturers, (ii) issuance of Tobacco Settlement Asset-Backed Bonds to pay the purchase price for the rights, and (iii) to provide funds for hospital and healthcare projects in the U.S. Virgin Islands. Interest on the 2001 Bonds is payable semiannually on each May and November 15, beginning with May 2002 for the term bonds amounting to $15.5 million and convertible capital appreciation bonds amounting to $8.2 million, with a nominal value of $6.2 million. The convertible capital appreciation bonds accrete interest prior to November 15, 2007 and accrue interest subsequent to that date. Interest on the capital appreciation bonds will compound on May 15th and November 15th. 72 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Bonds payable at September 30, 2005, amounted to $21.9 million with accumulated accretion of $764 thousand. Under early redemption provisions, any MSA payments exceeding annual debt service requirements of the 2001 Series A Tobacco Bonds must be applied to early redemption of principal. MSA payments and interest earnings on the trust funds during the year ended September 30, 2005, resulted in early redemption of $370 thousand during fiscal year 2005. On October 1, 2002, PFA issued the Series 2002 Revenue Bonds (Garvee Bonds), the proceeds of which amounted to $20.8 million. The Garvee Bonds are special, limited obligations, secured solely by the pledge and assignment of the Government’s security interest in Federal Highway Reimbursement Revenues. The bonds were issued to (i) fund construction costs related to renovation and construction of two sea docks, (ii) fund the Debt Service Reserve Accounts, and (iii) pay certain costs of issuing the bonds. The Series 2002 Bonds are not subject to redemption prior to maturity. Interest and principal on the Series 2002 Revenue Bonds are payable semiannually on March 1 and September 1. As of September 30, 2005, the outstanding 2002 Revenue Bonds amounted to $12.9 million. On February 28, 2003, PFA entered into a swaption contract that provided PFA with an up front payment of $8.3 million. PFA has outstanding $278,570,000 Series of 1999A Bonds with maturities from 2011 to 2029. The 1999A Bonds are callable by PFA on October 1, 2010 at 101%. Having been advised by its underwriters and financial advisor that there were no net present value savings available to it by issuing conventional advance refunding bonds, PFA sold a LIBOR-based swaption to Lehman Brothers Special Financing, Inc. on the 2024 and 2029 maturities, totaling $162,870,000. Lehman purchased the swaption for $8.3 million and it is exercisable on July 1, 2010 only. The objective of PFA was to monetize the economics of the Series of 1999A Bonds call option and lock in the favorable interest rates prevailing on February 28, 2003 without currently issuing refunding bonds. The swaption was the most efficient mechanism available to PFA to effect savings from the Series 1999A Bonds at that time. As a synthetic refunding of its 1999 Series A Bonds, this payment represents the risk-adjusted, present-value savings of the refunding as of October 1, 2010, without issuing refunding funds at February 2003. The swaption gave the counterparty the option to make PFA enter into a pay-fixed, receive-variable interest rate swap. If the option is exercised, PFA would then expect to issue variable rate refunding bonds. The $8.3 million payment was based on a notional amount of $174.9 million. The counterparty has the option to exercise the agreement on October 1, 2010 — PFA’s 1999 Bonds’ first call date. If the swap is exercised, it will also commence on October 1, 2010. The fixed swap rate (5.27%) was set at a rate that, when added to an assumption for remarketing and liquidity costs, will approximate the coupons of the refunded bonds. The swap’s variable payment would be 64% of the London Interbank Offered Rate (LIBOR). The up front payment of $8.3 million was received by PFA on behalf of the PG. The Government has deferred the recognition of revenue from the $8.3 million received in advance, and is amortizing it into income through October 1, 2010, which is the exercise date of the swaption. The up front payment was restricted to capital expenditures. In 2004, PFA authorized the use of $2 million of the up front payment for a Micro Loan Financing Program, which is managed by the Economic 73 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 Development Authority. As of September 30, 2005, the PFA had expended $257 thousand on capital projects and $639 thousand on micro-loans. As of September 30, 2005, the swap had a negative fair value of approximately $29.3 million in favor of the counterparty estimated using the zero-coupon method. This method calculated the future net settlement payments required by the swap, assuming that the current forward rates implied by the yield curve correctly anticipated future spot interest rates. These payments were then discounted using the spot rates implied by the current yield curve for the hypothetical zero-coupon bonds due on the date of each future net settlement on the swap. On September 28, 2006, in conjunction with the defeasance of a portion of the Series 1999A Revenue Bonds, the PG terminated the 2003 Swap Agreement. Due to the negative fair value of the hedging transaction, the PG paid a termination fee of $26.9 million to Lehman Brothers to terminate the hedging agreement. On December 17, 2003, PFA issued the Series 2003A Revenue Bonds, the proceeds of which amounted to approximately $268 million. The bonds were issued to: (i) repay the Government outstanding Revenue Bond Anticipation Notes, Series 2003, (ii) fund certain necessary public safety and other public sector capital development projects, (iii) fund debt service accounts for the bond issuance, and (iv) to pay certain costs of issuing the bonds. The Government has pledged gross receipts taxes for the timely payment of the principal and interest on the Series 2003A Revenue Bonds. Interest is payable semiannually on April 1 and October 1, and principal is payable annually on October 1, beginning October 1, 2005. The Series 2003A Revenue Bonds are not subject to optional redemption prior to October 1, 2014. On December 1, 2004, PFA issued the 2004 Series A Bonds, the proceeds of which amounted to $94 million. The Government has pledged the matching fund revenues to the timely payment of principal and interest on the 2004 Series A Bonds. The bonds bear interest at 4.00% to 5.25% and mature from 2005 to 2024. The proceeds of the bonds were issued to: (i) finance the planning, development, constructing, renovating and equipping of wastewater treatment facilities and collection systems on St. Thomas and St. Croix, (ii) finance the repairs, renovations, and construction of solid waste facilities in the territory, (iii) finance the repair and construction of public roads in the territory, (iv) provide start-up capital for the Virgin Islands Waste Management Authority, (v) fund the Series 2004A Senior Lien Debt Service Reserve Subaccount, and (vi) pay certain costs of issuing the Series 2004A Bonds. The Series 2004A Bonds are not subject to optional redemption prior to October 1, 2014. 74 (Continued) (6) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 GERS is a blended component unit included in the financial reporting entity and is presented as a pension trust fund of the PG. GERS issues a publicly available financial report that includes financial statements and required supplementary information. That report may be obtained by writing to Employees’ Retirement System of the Government of the Virgin Islands, 3438 Kronprindsens Gade, Veterans Drive, St. Thomas, VI 00802. Funding Policy Contributions to GERS are made by the Government and the members. Government and members’ contributions are not actuarially determined but are set by statute. The Government and members’ contributions together with the income of GERS should be sufficient to provide an adequate actuarially determined reserve for the benefits prescribed by the VI Code. The contributions required to fund GERS on an actuarial reserve basis are calculated periodically by the GERS actuarial consultant. The actuarial valuation as of September 30, 2003 indicates that the current combined statutory employer and employee contribution rates are not sufficient to meet the cost of GERS on an actuarial basis. The Government’s required contribution for the year ended September 30, 2005 was 14.5% of the member’s annual salary. Since April 1, 1991, required member contributions are 8% of annual salary for regular employees, 9% for senators, and 10% for Act 5226 eligible employees. Through September 30, 2000, member contributions were refundable without interest upon withdrawal from employment before retirement. Subsequent to September 30, 2000, legislation was passed that provided for 4% annual interest on refunded contributions. The Government’s contractually required contributions, actual contributions made, and percentage contributed to the plan for the years ended September 30, 2005, 2004, and 2003, are as follows (expressed in thousands): Contractually required Contributions Percentage contributions made contributed 2003 $ 51,588 51,588 100% 2004 54,085 54,085 100 2005 51,542 51,542 100 In August 1994, legislation providing an early retirement incentive was passed. The legislation was subsequently amended on October 13, 1994, December 30, 1994, and December 5, 1995. Among other matters, the legislation allows a member of GERS who has a combined aggregate number of years of credited service plus number of years of age, equal to at least 75 years as of the date of the legislation, to retire without reduction of annuity. Members, who have attained the age of 50 with at least 10 but less than 30 years of credited service, may add an additional three years to their age for this computation. Members with 30 years of service or who can retire without penalty under the V.I. Code shall have their average compensation increased by four percentage points. 89 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 For each employee electing to retire pursuant to Section 8(a) of the Early Retirement Act of 1994 (the Act), the Government contributes to GERS, on a quarterly basis, an amount equal to the employer and employee contributions that would have been made until the employee reached the age of 62 had the employee not elected to retire under this provision. For employees electing to retire under Section 8(b) of the Act, the Government contributes to GERS a sum equal to the additional contribution the employer and employee would have made had the employee received a salary 4% higher during the three years used to compute the employee’s average compensation figure plus a sum of $5,000. Based on this calculation, the amount was $25.7 million as of September 30, 2005. As of September30, 2005, GERS has received $18.9 million, and the Government has accrued a liability of $6.8 million in the accompanying basic financial statements. The actuaries of GERS have determined that the specific funding provided under the Act is inadequate to cover the costs of the program. GERS is seeking to recover any unfunded costs of the program under a newly enacted provision of the retirement law, which provides that the employer will compensate GERS for the costs of any special early retirement program. The University has two retirement plans in which all eligible employees are required to participate. The Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) is a defined contribution pension plan covering participating, full-time faculty members, and other exempt employees, under which the contributions, including employees’ contributions, are used to purchase annuities. There are no unfunded past service costs, and vested benefits are equal to the annuities purchased under TIAA-CREF. As of September 30, 2005, 219 faculty members and other employees were TIAA-CREF participants. The number of active participants from the University participating in GERS as of September 30, 2005 was 272. Total contributions made by the University to TIAA-CREF and GERS participant accounts amounted to $1.7 million and $1.1 million, respectively. (14) Liquidity At September 30, 2005, the Government had a net deficit in the governmental activities amounting to $192.3 million, mostly attributable to approximately $268 million in long-term debt that was issued to provide resources for working capital and other noncapital related purposes. The Government has initiated specific actions to improve its future cash flows through the issuance of long-term debt, engaging a consulting firm to assist it in its efforts to develop a series of detailed revenue enhancement and expenditure reduction initiatives and the enactment of certain laws directed toward improving the Government’s financial situation. In October 1999, the Government and the U.S. Department of Interior (DOD entered into a memorandum of understanding (the MOU) whereby the Government agreed to use its best efforts to undertake certain deficit reduction initiatives. As a condition to certain new and additional federal financial and technical assistance included in or being proposed by federal appropriations or other legislation, certain financial performance and accountability standards were agreed upon by the Government, which the DOI believes are necessary for the Government to achieve long-term economic recovery. Pursuant to the MOU, the release of such new and additional federal funds to the Government is subject to compliance with such performance and verifiable objectives agreed upon in such agreement. The accountability and financial performance standards agreed upon in the MOU include: (i) preparation of 90 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 five-year financial recovery plan to be provided to DOI within 90 days of the date of the MOU; (ii) a fiscal year 2000 budget mandating substantial reductions in departmental budgets and overall General Fund fiscal year 2000 expenditures not to exceed $432.1 million; (iii) absent extraordinary circumstances to maintain balanced budgets after fiscal year 2003 with any generated surpluses applied to the reduction of the accumulated deficit and unfunded obligations; (iv) annual preparation of financial reports; and (v) efforts to reduce the outstanding debt of the Government. On October 29, 1999, the DOI and the Government entered into an amendment of the MOU, which amended the Government’s requirement to seek change in the Virgin Islands public labor relations law to comply with federal labor law. Pursuant to such amendment, the Government, in collaboration with union representatives, is encouraged to pursue reform initiatives through collective bargaining to bring fiscal solvency to the Government. In addition to the financial performance standards set forth in the MOU, the MOU further provides for the DOI and the Government to enter into a program of preservation and enhancement of the natural, cultural, and historic resources.of the U.S. Virgin Islands to stimulate local economic growth through sustainable tourism. The Government is discussing with DOI certain events of noncompliance, remedial actions necessary to comply with the provisions of the MOU, and its effect on the Government’s financial condition and results of operations. In April 2000, the Economic Recovery Task Force submitted the five-year operating and strategic financial plan to the Governor for action. The plan provides over 200 recommendations that propose to reduce and eventually eliminate the structural budget deficit by restructuring and reforming Government operations and forging a partnership with the private sector intended to result in sustained growth. In January 2003, the U.S. Department of Interior issued an audit report concluding that all criteria of the (the proposed MOU) were partially or substantially achieved except: (i) implementation of collective bargaining reforms to assist the fiscal solvency of the Government and (ii) completion of comprehensive annual reports within 120 days of year-end and single audits within nine months of year-end. As part of the MOU, the Government has committed to maintaining balanced budgets after the fiscal year ended September 30, 2003, with any surpluses applied to liquidating outstanding debt. The U.S. Department of Interior acknowledged that it had not achieved its objective of providing funding for the V.I. Conservation Fund and committed to providing funds for capital improvements, technical assistance, and other assistance once the Government has achieved substantial compliance. 91 (Continued) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 (15) Restatements of Net Assets and Fund Balances (a) Component Units Beginning net assets of four discretely presented component units were restated to correct errors identified in previously reported balances related to receivables, loans and advances, investments, capital assets, and accounts payable and accrued expenses. The restated beginning net asset balances are as follows (expressed in thousands): Beginning net assets As previously Prior period As Component unit reported adjustment restated University of the Virgin Islands $ 76,471 6,723 83,194 Virgin Islands Housing Authority 63,802 4,679 68,481 WAPA Water 38,895 379 39,274 WAPA Electric 96,116 1,134 97,250 Other component units 368,230 — 368,230 Net assets $ 643,514 12,915 656,429 (16) Subsequent Events (a) Primary Government In September 2005, the U.S. Department of Education extended indefinitely the three-year compliance agreement entered with the PG in 2002 to address problems in administering federal education grants; and imposed the requirement that the PG designate a third-party fiduciary to administer U.S. Department of Education grants. In August 2006, the PG entered into a contract with a private firm to be the designated third-party fiduciary. In December 2005, Congress passed legislation extending the excise tax on rum of 13.5 cents per gallon to December 31, 2006. The rate was set to expire on December 31, 2005. In January 2006, the U.S. Department of the Treasury issued final regulations determining residency for U.S. territories and possessions as required by the American Jobs Creation Act which was passed in October 2004. The PG has retained an independent consultant to evaluate the effect of the regulations on the economy of the territory and to pursue revisions of the final regulations through congressional intervention. In November 2006, the final regulations were revised by the U.S. Department of the Treasury. The PG continues to pursue further revisions to these regulations. In March 2006, the TSFC issued the :2006 Tobacco Settlement Financing Corporation Asset-Backed Bonds amounting to $7.29 million, the proceeds of which will be used to finance hospital capital improvements. In June 2006, the PFA approved the issuance of $104 million in private activity bonds to be issued on behalf of the HOVENSA oil refinery. HOVENSA plans to use the proceeds to refinance outstanding loans and for capital improvements. 92 (Continued) (b) GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS Notes to Basic Financial Statements September 30, 2005 In August 2006, Moody’s Investors Services gave the PG an investment grade rating of Baa3 on its outstanding bonds. In September 2006, Standard and Poor provided the government a rating of BBB-. The investment grade ratings will enable the PG to access new capital markets and to reduce the costs of future bond issuances. In September 2006, the Public Finance Authority refinanced portions of the 1999 Series A Revenue Bonds through the issuance of the 2006 Series Gross Receipts Revenue Bonds (2006 Series Bonds). The 2006 Series Bonds have a notional amount of $219.49 million, and resulted in realized interest savings on the defeasance of $21 million. The proceeds of the bonds will be used to (i) refund a portion of the Series 199A Revenue Bonds ($162.8 million), (ii) pay the costs of a termination fee in connection with an outstanding swap option agreement, (iii) fund certain capital projects, (iv) fund the debt service account, and (v) pay costs associated with issuing the 2006 Series Bonds. In September 2006, the Public Finance Authority issued the Series 2005 Subordinate Lien Revenue Notes in the amount of $6.35 million. The proceeds will be used to finance acquisition of a fleet of vehicles for the fire department of the PG. Component Units In September 2005, the Legislature of the PG appropriated $16.1 million for operating expenses of the Waste Management Authority (WMA). The creation of the WMA was approved in January 2004 as a separate and independent corporation of the Government for the purpose of meeting environmental requirements of waste treatment in the U.S. Virgin Islands. The responsibility for the operations of WMA is vested in a board of seven directors composed of three Government officials including the Commissioner of the Department of Public Works, and four private citizens appointed by the Governor. The activities of WMA are limited to activities conducted on behalf of the Government. WMA became operational in fiscal year 2006. In October 2005, the Governor Juan Luis Hospital and Medical Center entered into a payment agreement with the WAPA Electric System and WAPA Water System to pay off outstanding utility bills amounting to $3.7 million over a four-year period. 93