=== page 1 === 1406-1263767 B A S I C F I N A N C I A L S T A T E M E N T S A N D O M B C I R C U L A R A - 1 3 3 R E P O R T O N F E D E R A L F I N A N C I A L A S S I S T A N C E P R O G R A M S Government of the United States Virgin Islands Year Ended September 30, 2013 With Report on Independent Auditors === page 2 === 1406-1263767 Government of the United States Virgin Islands Basic Financial Statements and OMB Circular A-133 Report on Federal Financial Assistance Programs Year Ended September 30, 2013 Contents Page Report of Independent Auditors ...................................................................................................................... 1 Management's Discussion and Analysis (MD&A) ......................................................................................... 6 Basic Financial Statements Government-wide Financial Statements: Statement of Net Position (Deficit) ..................................................................................................... 19 Statement of Activities ........................................................................................................................ 21 Fund Financial Statements: Balance Sheet - Governmental Funds ................................................................................................. 23 Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds ........................................................................................................................ 24 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities - Governmental Funds ........................................................................................................................ 25 Statement of Revenues and Expenditures - Budget and Actual - Budgetary Basis - General Fund ........................................................................................................................ 26 Statement of Net Position (Deficit) - Proprietary Funds ..................................................................... 27 Statement of Revenues, Expenses, and Changes in Fund Net Position (Deficit) - Proprietary Funds ........................................................................................................................... 28 Statement of Cash Flows - Proprietary Funds ..................................................................................... 29 Statement of Fiduciary Net Position - Fiduciary Funds ...................................................................... 30 Statement of Changes in Fiduciary Net Position - Fiduciary Funds ................................................... 31 Notes to Basic Financial Statements ................................................................................................... 32 Required Supplementary Information (other than MD&A): Employees’ Retirement System of the Government of U.S. Virgin Islands Schedule of Funding Progress ............................................................................................................. 145 Schedule of Employer Contributions .................................................................................................. 148 Report on Internal Control: Report of Independent Auditors on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards ....................................................... 149 Single Audit Report Section: Report of Independent Auditors on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Required by OMB Circular A-133 ............................. 152 Schedule of Expenditures of Federal Awards ........................................................................................ 157 Notes to Schedule of Expenditures of Federal Awards .......................................................................... 164 Schedule of Findings and Questioned Costs .......................................................................................... 166 Summary Schedule of Prior Audit Findings .......................................................................................... 232 === page 3 === 1406-1263767 Basic Financial Statements === page 4 === A member firm of Ernst & Young Global Limited 1406-1263767 1 Report of Independent Auditors The Honorable Governor of the Government of the United States Virgin Islands: Report on the Financial Statements 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, 2013, and the related notes to the financial statements, which collectively comprise the Government’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor’s Responsibility 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 Lottery (V.I. Lottery), a nonmajor enterprise fund, which represents 0.3% and 3.4%, respectively, of the assets, and revenues/additions of the aggregate remaining fund information, and 4.9%, 7.3%, and 18.7%, respectively, of the assets, net position, and revenue of the business-type activities. The V.I. Lottery net deficit represents $2.9 million of the $1.3 billion net position/fund balance of the aggregate remaining fund information.  The Employees’ Retirement System of the Government of the Virgin Islands (GERS), a fiduciary component unit (pension trust fund), which represents 27.5%, 93.7%, and 37.2%, respectively, of the assets, net position/fund balance, and revenue of the aggregate remaining fund information.  The Virgin Islands Port Authority (VIPA), the Virgin Islands Water and Power Authority (WAPA), The Virgin Islands Housing Authority (VIHA), Virgin Islands Public Television System (VIPTS), Virgin Islands Economic Development Authority (VIEDA), Magens Bay Authority (MBA), 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 81.9%, 74.7%, and 84.7%, respectively, of the assets, net position, and revenue of the aggregate discretely-presented component units. Ernst & Young LLP 1000 Scotiabank Plaza 273 Ponce de León Avenue San Juan, PR 00917-1951 Tel: +1 787 759 8212 Fax: +1 787 753 0808 ey.com === page 5 === A member firm of Ernst & Young Global Limited 1406-1263767 2 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 solely on the reports of other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Because of the matters described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the Business-type Activities and the Aggregate Remaining Fund Information. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Summary of Opinions Opinion Unit Type of Report Governmental Activities Qualified Business-type Activities Disclaimer General Fund Unmodified Debt Service Fund Unmodified Capital Projects Fund Unmodified West Indian Company Fund-enterprise Fund Unmodified Unemployment Insurance-enterprise Fund Unmodified Aggregate Remaining Fund Information Disclaimer Aggregate Discretely-presented Component Units Qualified === page 6 === A member firm of Ernst & Young Global Limited 1406-1263767 3 Basis for Qualified Opinion on Aggregate Discretely-Presented Component Units The report of other auditors on the 2013 financial statements of VIPTS, a discretely-presented component unit, was qualified because the auditors were unable to obtain sufficient audit evidence to determine whether capital assets of $6.4 million were fairly stated. The financial statements of WMA and the Virgin Islands Research and Technology Park (RTPark), nonmajor discretely-presented component units, have not been audited, and we were not engaged to audit the WMA and RTPark financial statements as part of our audit of the Government’s basic financial statements. WMA and RTPark’s financial activities are included in the Government’s basic financial statements as a discretely-presented component units and represents 9%, 15%, and 6% of the assets, net position, and revenues, respectively, of the Government’s aggregate discretely-presented component units. Basis for Qualified Opinion on Governmental Activities The Government did not maintain the requisite documentation to support its accrued retroactive liability of $195.3 million as of September 30, 2013 and for fiscal year 2013. As a result, we were unable to obtain sufficient audit evidence to determine whether adjustments to these balances in the governmental activities were required. Qualified Opinion In our opinion, based on our audit and the report of other auditors, except for the possible effects of the matters described in the Basis for Qualified Opinion on Aggregate Discretely-Presented Component Units paragraph, the financial statements present fairly, in all material respects, the respective financial position of the governmental activities and the aggregate discretely- presented component units of the Government of the United States Virgin Islands at September 30, 2013, and the respective changes for financial position thereof for the year then ended in conformity with U.S. generally accepted accounting principles. Basis for Disclaimer Opinion on Business-type Activities and on the Aggregate Remaining Fund Information The basic financial statements do not include a liability for medical malpractice claims in the reciprocal insurance fund (a non-major enterprise fund) and, accordingly, the Government has not recorded an expense for the current period change in that liability. The Government’s records do not permit it, nor is it practical to extend our auditing procedures sufficiently to determine the extent by which the Business-type Activities and Aggregate Remaining Fund Information as of and for the year ended September 30, 2013 may have been affected by this condition. === page 7 === A member firm of Ernst & Young Global Limited 1406-1263767 4 The report of other auditors on the 2013 financial statements of GERS, a fiduciary component unit (pension trust fund), was qualified because GERS maintained investments in a limited partnership valued at $41.2 million whose fair value has been estimated in the absence of a readily determinable fair value. GERS’ estimate was based on information provided by the general partner of the limited partnership. The effect on the financial statements as a result of GERS’ inability to document its procedures for determining fair value of the investment was not determinable. Disclaimer of Opinion Because of the significance of the matters discussed in the Basis for Disclaimer Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financial statements of the Business-type Activities and on the Aggregate Remaining Fund Information. Accordingly, we do not express an opinion on these financial statements. Unmodified Opinions 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 each major fund of the Government of the United States Virgin Islands, as of September 30, 2013, and the respective changes in financial position and budgetary comparison for the general fund for the year then ended in conformity with U.S. generally accepted accounting principles. Restatement of the 2012 Aggregate Discretely-Presented Component Units As described more fully in Note 18 to the financial statements, the beginning net position of the discretely-presented component units as of September 30, 2012, was restated by $17.1 million. Our opinion is not modified with respect to this matter. Required Supplementary Information U.S. generally accepted accounting principles require that management’s discussion and analysis and the schedules of funding progress and employer contributions listed on pages 6 through 18 and 145 through 148 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board which considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. === page 8 === A member firm of Ernst & Young Global Limited 1406-1263767 5 Supplementary Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Government’s basic financial statements. The accompanying Schedule of Expenditures of Federal Awards as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, on page 157, is presented for purposes of additional analysis and is not a required part of the basic financial statements. The Schedule of Expenditures of Federal Awards is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States. In our opinion, the schedule of expenditures of federal awards is fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated June 30, 2014, on our consideration of the Government’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Government’s internal control over financial reporting and compliance. ey June 30, 2014 === page 9 === Government of the United States Virgin Islands Management’s Discussion and Analysis September 30, 2013 1406-1263767 6 Introduction The following management’s 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, 2013 and 2012. 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 position 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 and changes in financial position similar to that presented by most private-sector companies. The statement of net position 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 of these programs operate with minimal assistance from the governmental activities of the Government. === page 10 === Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1406-1263767 7 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 non-major. 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. 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. 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 funds 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 fund and the PFA capital projects fund are reported as major governmental funds. === page 11 === Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1406-1263767 8 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 fund accounts for the resources accumulated, and payments made, for principal and interest on long-term general obligation debt issued by the 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. The governmental fund activities are reported in a separate balance sheet and statement of revenues, expenditures, and changes in fund balances. Additionally, the government presents a reconciliation of the statement of revenues, expenditures, and change in fund balances, to the statement of activities. 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 West Indian Company (WICO) fund and the Unemployment Insurance Fund are major proprietary funds. The WICO fund accounts for the activities of WICO, which owns a port facility including a cruise ship pier, and manages a shopping mall complex on the island of St. Thomas. The Unemployment Insurance Fund is a federally mandated program to manage unemployment insurance. The proprietary fund activities are reported in a separate statement of net position, statement of revenues, expenditures, and changes in net position and statement of cash flows. Fiduciary Funds The fiduciary activities are reported in a separate statement of fiduciary net position and a statement of changes in fiduciary net position. === page 12 === Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1406-1263767 9 Financial Analysis of the Government as a Whole The PG and its component units continue to experience a downturn in the economy following the economic recession of 2008. The Government has initiated several actions to offset the negative impact of these financial challenges. The Government continues to promote environmentally safe industries into the USVI. The Government is participating in the American Recovery and Reinvestment Act, obtaining federal grants for energy, health, education and other construction projects, and other federal tax initiatives. To improve cash flow, the PG overhauled the property tax assessment and valuation systems of the Territory, proposed increases to locally assessed taxes, initiated tax compliance programs, and enacted expenditure reduction initiatives. In fiscal year 2013, the Government issued the Series 2013A Revenue Refunding Bonds in the amount of $36 million, to provide a partial advance refunding of the Series 2009B Bonds, the Series 2004A Bonds, and the Series 2009A-1 Bonds. The Government issued the 2012 Series A and B Revenue and Refunding Bonds in the amount of $228.8 million to current refund the Series 1999A Bonds, the Series 2010A-1 an A-2 Notes, and the Series 2011A Note. The Government issued the Series 2012C Bonds in the amount of $35.1 million to finance energy projects in the Territory. The Government issued the Series 2013A Note in the amount of $2.6 million to purchase police vehicles, and the Series 2013B Note in the amount of $40 million for certain working capital and operating expenditures. The Government also borrowed $38 million from the U.S. Treasury to fund deficits in the Virgin Islands Unemployment Trust Fund. Financial Analysis of the Primary Government Total assets of the PG as of September 30, 2013 and 2012, were approximately $1.9 billion, respectively, and total liabilities both years were approximately $3.3 billion. As of September 30, 2013, the PG net position was a deficit of $1.3 billion that consisted of $278.7 million invested in capital assets, net of related debt; $289.6 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 $1.9 billion. As of September 30, 2012, the PG net deficit of $1.4 billion consisted of $178.4 million invested in capital assets, net of related debt; $226.9 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 $1.8 billion. For the fiscal year ended September 30, 2013, the PG earned program and general revenue amounting to $1.3 billion and reported expenses of $1.3 billion, resulting in an increase in net deficit position of $1.2 million. === page 13 === Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1406-1263767 10 For the fiscal year ended September 30, 2012, the PG earned program and general revenue amounting to $1.2 billion and reported expenses of $1.4 billion, resulting in an increase in net deficit of $164.0 million. Overall, revenue increased by approximately $46.1 million in fiscal 2013, when compared to fiscal 2012, mainly due to increases in tax revenues of $114.6 million, offset by decreases in charges for services of $19.9 million and in federal grants of $51.7 million. Increases in tax revenues mainly included increases in rum excise taxes (matching funds) of $59.9 million, property taxes of $4.0 million, and income taxes of $4.8 million. Expenses decreased in fiscal 2013 by $117.2 million when compared to fiscal 2012, mainly due to decreases in general government expenses of $12.7 million due to budgetary controls and employees electing early retirement and due to a decrease in transportation and communication expenses of $37.0 million. Health expenses decreased by $49.2 million due to the transfer of the Supplemental Nutrition Assistance Program (Food Stamps) program to the public housing and welfare function (Department of Human Services) of the primary Government. A summary of net position and changes in net position for the primary government follows: 2013 2012 2013 2012 2013 2012 Current assets 1,030,660 $ 984,766 $ 6,107 $ 5,793 $ 1,036,767 $ 990,559 $ Capital assets 784,258 753,059 102,481 69,183 886,739 822,242 Other assets 46,652 41,743 – 66 46,652 41,809 Total assets 1,861,570 1,779,568 108,588 75,042 1,970,158 1,854,610 Long-term debt outstanding 2,691,892 2,616,014 41,983 35,145 2,733,875 2,651,159 Other liabilities 532,273 500,106 103,168 101,255 635,441 601,361 Total liabilities 3,224,165 3,116,120 145,151 136,400 3,369,316 3,252,520 Invested in capital assets 197,458 138,617 81,293 39,849 278,751 178,466 Restricted 277,752 221,897 11,864 5,098 289,616 226,995 Unrestricted (1,837,805) (1,697,066) (129,720) (106,305) (1,967,525) (1,803,371) Total net position (deficit) (1,362,595) $ (1,336,552) $ (36,563) $ (61,358) $ (1,399,158) $ (1,397,910) $ Assets Liabilities Net Position Net Position (Deficit) – Primary Government September 30, 2013 and 2012 (In thousands) Governmental activities Business-type activities Total === page 14 === Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1406-1263767 11 2013 2012 2013 2012 2013 2012 Revenue: Program revenue: Charges for services 20,491 $ 38,932 $ 59,649 $ 61,144 $ 80,140 $ 100,076 $ Operating grants and contributions 214,646 281,100 15,944 23,294 230,590 304,394 Capital grants and contributions 26,755 25,157 28,774 7,742 55,529 32,899 General revenue: Taxes 895,004 780,315 – – 895,004 780,315 Interest and other 44,199 46,933 5,467 142 49,666 47,075 Other general revenue 2,134 2,134 – – 2,134 2,134 Total revenue 1,203,229 1,174,571 109,834 92,322 1,313,063 1,266,893 Expenses: General government 613,282 626,050 – – 613,282 626,050 Public safety 53,873 56,251 – – 53,873 56,251 Health 48,350 97,590 – – 48,350 97,590 Public housing and welfare 153,895 138,589 – – 153,895 138,589 Education 229,021 236,612 – – 229,021 236,612 Transportation and communication 17,938 54,991 – – 17,938 54,991 Culture and recreation 7,613 7,356 – – 7,613 7,356 Interest on long-term debt 106,000 103,005 – – 106,000 103,005 Unemployment insurance – – 21,167 57,407 21,167 57,407 West Indian Company – – 9,820 8,983 9,820 8,983 Workmen’s compensation – – 9,297 14,790 9,297 14,790 VI Lottery – – 20,061 15,150 20,061 15,150 Other – – 23,994 14,747 23,994 14,747 Total expenses 1,229,972 1,320,444 84,339 111,077 1,314,311 1,431,521 Changes in net position before transfers (26,743) (145,873) 25,495 (18,755) (1,248) (164,628) Transfers 700 700 (700) (700) – – 700 700 (700) (700) – – Change in net position (26,043) (145,173) 24,795 (19,455) (1,248) (164,628) Net position (deficit) at beginning of year (1,336,552) (1,191,379) (61,358) (41,903) (1,397,910) (1,233,282) Net position (deficit) at end of year (1,362,595) $ (1,336,552) $ (36,563) $ (61,358) $ (1,399,158) $ (1,397,910) $ Changes in Net Position - Primary Government September 30, 2013 and 2012 (In thousands) Governmental Activities Business-type Activities Total === page 15 === Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1406-1263767 12 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 26 of the financial statements, follows: Original Amended Budget Budget Actual Variance Total revenues 604,109 $ 604,109 $ 682,106 $ 77,997 $ Total expenditures 674,835 695,825 801,252 (105,427) Deficiency of revenues under expenditures (70,726) (91,716) (119,146) (27,430) Other financing sources, net 91,716 91,716 98,420 6,704 Excess (Deficiency) of revenues and net other financing sources over expenditures 20,990 $ – $ (20,726) $ (20,726) $ Revenue and Expenditures – Budget and Actual – Budgetary Basis – General Fund Year Ended September 30, 2013 (In thousands) For fiscal 2013, the general fund realized an unfavorable budgetary variance of $20.7 million mainly due to the general government function of government. The general fund realized an favorable revenue variance of $77.9 million due to the increase in tax revenues and federal grants and contributions. The PG realized a negative expenditure variance of $105.4 million due to the increase in general government expenditures. Some of those expenditures responsible for the increase are operational expenditures like utilities, pension liabilities, and other carryforward liabilities with the loss of ARRA federal grant revenues. === page 16 === Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1406-1263767 13 Capital Assets Capital assets additions during fiscal 2013 amounted to $64.2 million for governmental activities and $38.1 million for business-type activities. Capital assets additions during fiscal 2012 amounted to $36.3 million for governmental activities and $17.6 million for business-type activities. The Government’s capital assets include land, land improvements, buildings, building improvements, machinery and equipment, infrastructure, construction in progress, and intangibles as follows: 2013 2012 2013 2012 2013 2012 Land and improvements 199,325 $ 198,342 $ 5,495 $ 5,495 $ 204,820 $ 203,837 $ Building and improvements 458,997 440,906 67,955 67,517 526,952 508,423 Machinery and equipment 160,217 156,472 14,181 11,766 174,398 168,238 Infrastructure 251,675 240,167 – – 251,675 240,167 Construction in progress 123,495 102,467 47,435 12,303 170,930 114,770 Intangible – – 8,117 8,064 8,117 8,064 Total capital assets 1,193,709 1,138,354 143,183 105,145 1,336,892 1,243,499 Less accumulated depreciation (409,451) (385,295) (40,702) (35,962) (450,153) (421,257) Total capital assets, net 784,258 $ 753,059 $ 102,481 $ 69,183 $ 886,739 $ 822,242 $ Capital Assets – Primary Government (In thousands) Governmental Activities Business-type Activities Total Note 10 provides detailed information regarding the capital assets of the primary government and the component units of the Government. === page 17 === Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1406-1263767 14 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, 2013: Primary Government – Bonds Payable (In thousands) Bonds Payable Maturity Rates (%) Balance 2013 Series A Revenue Refunding Bonds 2024 5.00 - 5.25 36,000 $ 2012 Series C Revenue Bonds 2042 4.00 - 5.00 35,115 2012 Series A & B Revenue & Refunding Bonds 2032 2.25 - 5.25 228,805 2012 Series A Revenue Bonds 2032 4.00 - 5.00 142,640 2010 Series A & B Revenue Bonds 2029 4.00 - 5.25 397,060 2009 Series A Revenue Bonds (Cruzan) 2039 3.00 - 6.00 37,490 2009 Series A-1, A-2, B & C Revenue and Refunding Bonds 2040 3.00 - 5.00 396,585 2009 Series A Revenue Bonds (Diageo) 2038 6.00 - 6.75 250,000 2006 Series A Revenue Bonds 2029 3.50 - 5.00 208,875 2006 Series A,B,C & D Tobacco Turbo and Capital Appreciation Bonds 2035 6.25 - 7.625 7,290 2004 Series A Revenue Bonds 2024 4.00 - 5.25 67,435 2003 Series A Revenue Bonds 2033 4.00 - 5.25 241,510 2001 Series A Tobacco Bonds 2031 5.00 12,645 Subtotal 2,061,450 Deferred costs on refundings (13,272) Bond premium 50,122 Bond discount (3,533) Bond accretion 4,500 Total 2,099,267 $ Note 11 provides detailed information regarding all bonds of the PG. === page 18 === Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1406-1263767 15 In fiscal year 2013, the Government issued the 1) 2013A Revenue Refunding Bonds in the amount of $36.0 million, to partially advance refund certain bond issuances, 2) the 2012A and B Revenue and Refunding Bonds in the amount of $228.8 million to current refund the Series 1999A Bonds, the Series 2010A-1 and A-2 Working Capital Notes, and the Series 2011A Note, 3) the Series 2012C Bonds in the amount of $35 million to finance certain energy projects, 4) the Series 2013A Note in the amount of $2.6 million to finance the purchase of police vehicles, and 5) the Series 2013B Note in the amount of $40.0 million, to provide working capital and to pay certain operating expenses. During fiscal year 2013, the Government also borrowed $38.0 million from the U.S. Treasury to fund deficits in the Virgin Islands Unemployment Trust Fund. In fiscal year 2012, the Government issued the 1) 2012A Working Capital Revenue Bonds in the amount of $142.6 million, to provide working capital for various operating expenses, 2) the 2011 Property Tax Revenue Anticipation Note in the amount of $13.0 million, the proceeds of which was used to pay incentive payments to government employees that elected to retire early under the Economic Stability Act enacted by the Virgin Islands Legislature in 2010, and 3) an additional $1.6 million to a private developer in St. Croix under the 2009A Tax Increment Note. During fiscal year 2012, the Government also borrowed $15.1 million from the U.S. Treasury to fund deficits in the Virgin Islands Unemployment Trust Fund. The PG made bond principal payments on all outstanding general and special revenue bonds amounting to $113.0 million during fiscal year 2013, and $48.6 million during fiscal year 2012. The Government’s bonds secured by pledged rum excise taxes (matching funds) carry insured ratings of “BBB-” from Fitch Ratings and “Baa2” from Moody’s Investors Service, respectively as of the date of this report. The Government’s bonds secured by gross receipts taxes carry insured ratings of “BBB” from Fitch Ratings. On February 12, 2013, Moody’s Investors Service withdrew its ratings of the Government’s gross receipts tax debt, citing a lack of sufficient financial and operating information due to the late issuance of audit reports. Bond ratings reflect only the respective views of the rating agencies and an explanation of the significance of each rating may be obtained from the respective rating agency. === page 19 === Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1406-1263767 16 Other liabilities of the PG include: 2013 2012 Accrued compensated absences 51 $ 73 $ Accrued arbitrage rebates – 14 Retroactive union arbitration 195 195 Litigation 13 12 Post employment benefits 285 246 Landfill closure and post closure costs 96 72 Worker's compensation 27 27 Total other liabilities 667 $ 639 $ Primary Government – Other Liabilities September 30, 2013 and 2012 (In millions) Economic Condition and Outlook The PG continues its recovery efforts from the economic recession of 2008 through a combination of revenue initiatives and developing measures to reduce the deficit by controlling expenditures. Revenue Initiatives The PG has implemented several initiatives to create jobs and promote economic growth including: providing economic incentives to attract a major rum distiller (Diageo) and retain another rum distiller (Cruzan Rum), enactment of tax increment financing legislation, implementation of a broadband infrastructure initiative, continued promotion of tourism through national advertising. The PG has also implemented several tax initiatives to promote tax compliance and tax collection. A successful initiative was the “Operation Last Chance” income tax collection initiative. Delinquent taxpayers were provided an amnesty of penalty and interest to become current in tax filings. The PG has also legislated increases in local taxes, including gross receipts taxes, hotel taxes and stamp taxes. === page 20 === Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1406-1263767 17 In connection with a real property tax case instituted against the PG in the U.S. District Court of the Virgin Islands, the PG was enjoined from appraising and assessing any real property taxes until it modified its system of appraisal to comply with certain court mandates. The PG retained a consultant to modify its system of appraisal and to perform reassessment of properties. This project was completed in fiscal 2009. The U.S. District Court also required an over-haul of the tax review board responsible for hearing tax assessment reviews. The PG complied with all court orders and in 2013 became current in the issuance of property tax assessments. 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 on appeal. Budgetary Control of Expenditures The PG faces the challenge of carry-forward liabilities from prior fiscal years and the loss of federal grant revenues with the closing of the American Recovery and Reinvestment (ARRA) grant program. Carry-forward liabilities consist mainly of retroactive salary increases, which accumulated following Hurricanes Hugo, Marilyn and Bertha in the years of 1990 through 1998. At September 30, 2013 and 2012, unpaid retroactive salary increase liabilities amounted to $195.3 million, respectively, reported as a liability of the Government within other noncurrent liabilities. Federal grant program revenues returned to pre-ARRA levels in fiscal year 2013, a reduction of $64.8 million. The PG faces the challenge of funding pension and other post-employment benefits for retirees. In September 2011, the Department of Interior issued an evaluation report that the Government’s pension plan may be unable to fulfill its responsibilities in fourteen to seventeen years. In addition to pension liabilities, the actuarial estimate of post-employment liabilities (mainly health insurance for retirees) was $284.9 billion as of September 30, 2013. The PG has enacted a Pension Reform Joint Task Force to provide recommendations to the Legislature to meet these challenges. Recommendations provided by the Task Force included: (1) increasing retirement age, (2) restructuring of benefits, and (3) no longer allowing retirees to both work and collect benefits from the PG. === page 21 === Government of the United States Virgin Islands Management’s Discussion and Analysis (continued) 1406-1263767 18 Deficit Reduction Measures In fiscal year 2013, the PG reported an unrestricted net deficit of $1.9 billion. In fiscal year 2012, the PG reported an unrestricted net deficit of $1.8 billion. The PG has implemented a number of deficit reducing measures including: (i) withholding of local gross receipts taxes on Government invoice payments, (ii) increasing local taxes such as property tax assessments on time-shares, gross receipts taxes and hotel taxes; (iii) exerting greater control of expenditures through the budgetary process, and (iv) increasing collection efforts for amounts due to the PG from taxpayers. Contacting the Government’s Financial Management This financial report is designed to provide the Government’s citizens, taxpayers, customers, 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. === page 22 === 1406-1263767 Basic Financial Statements === page 23 === Primary Government Governmental Business-type Component Activities Activities Total Units Assets Cash and cash equivalents 194,404 $ 9,226 $ 203,630 $ 78,138 $ Investments 544,268 1,519 545,787 12,047 Receivables, net 220,697 5,260 225,957 65,065 Internal balances 37,378 (37,378) – – Due from component units 4,348 – 4,348 – Notes and other receivables – – – 8,660 Due from primary government – – – 41,181 Due from federal government 22,740 14,429 37,169 13,015 Inventories – – – 32,271 Other assets 5,502 1,187 6,689 15,455 Restricted: Cash and cash equivalents 1,323 11,864 13,187 59,771 Investments – – – 85,788 Other – – – 26,062 Capital assets, net 784,258 102,481 886,739 991,625 Deferred expenses and other assets 46,652 – 46,652 108,132 Total assets 1,861,570 108,588 1,970,158 1,537,210 Liabilities Accounts payable and accrued liabilities 121,616 14,004 135,620 205,702 Tax refunds payable 50,039 – 50,039 – Unemployment insurance benefits – 8,319 8,319 – Customer deposits – – – 24,889 Due to primary government – – – 4,348 Due to component units 41,181 – 41,181 – Due to federal government – – – 5,770 Interest payable 51,931 – 51,931 7,095 Unearned revenue 193,166 1,392 194,558 11,895 Other current liabilities – – – 17,820 Noncurrent liabilities: Due within one year: Notes payable 3,037 76,406 79,443 4,665 Bonds payable 62,835 – 62,835 15,359 Other liabilities 5,376 3,047 8,423 771 Due in more than one year: Line of credit payable – – – 19,375 Notes payable 23,522 21,239 44,761 58,864 Bonds payable 2,036,432 – 2,036,432 292,077 Other liabilities 635,030 20,744 655,774 68,453 Total liabilities 3,224,165 145,151 3,369,316 737,083 (Continued) Government of the United States Virgin Islands Statement of Net Position September 30, 2013 (In thousands) 1406-1263767 19 === page 24 === Primary Government Governmental Business-type Component Activities Activities Total Units Net Position: Invested in capital assets 197,458 $ 81,293 $ 278,751 $ 735,640 $ Restricted for: Unemployment insurance – 9,907 9,907 – Debt service 276,429 1,957 278,386 – Capital projects 1,323 – 1,323 – Other purposes – – – 169,608 Unrestricted (1,837,805) (129,720) (1,967,525) (105,121) Total net position (deficit) (1,362,595) $ (36,563) $ (1,399,158) $ 800,127 $ See accompanying notes. Government of the United States Virgin Islands Statement of Net Position (continued) September 30, 2013 (In thousands) 1406-1263767 20 === page 25 === Net Revenue (Expense) and Program Revenues Changes in Net Position Operating Capital Primary Government Charges for Grants and Grants and Governmental Business-type Component Expenses Services Contributions Contributions Activities Activities Total Units Functions: Primary government: Governmental activities: General government 613,282 $ 16,801 $ 29,168 $ 6,888 $ (560,425) $ – $ (560,425) $ – $ Public safety 53,873 557 2,998 – (50,318) – (50,318) – Health 48,350 708 20,201 – (27,441) – (27,441) – Public housing and welfare 153,895 434 100,114 – (53,347) – (53,347) – Education 229,021 421 58,000 – (170,600) – (170,600) – Transportation and communication 17,938 465 4,165 19,867 6,559 – 6,559 – Culture and recreation 7,613 1,105 – – (6,508) – (6,508) – Interest on long-term debt 106,000 – – – (106,000) – (106,000) – Total governmental activities 1,229,972 20,491 214,646 26,755 (968,080) – (968,080) – Business-type activities: Unemployment insurance 21,167 12,299 13,267 – – 4,399 4,399 – West Indian Company 9,820 9,112 – – – (708) (708) – Workmen’s compensation 9,297 6,635 – – – (2,662) (2,662) – VI Lottery 20,061 19,287 – – – (774) (774) – Other 23,994 12,316 2,677 28,774 – 19,773 19,773 – Total business-type activities 84,339 59,649 15,944 28,774 – 20,028 20,028 – Total primary government 1,314,311 $ 80,140 $ 230,590 $ 55,529 $ (968,080) 20,028 (948,052) – Component units: Virgin Islands Housing Authority 48,819 $ 6,499 $ 35,978 $ 7,226 $ – – – 884 Virgin Islands Port Authority 65,575 47,671 – 6,561 – – – (11,343) Virgin Islands Water and Power Authority: Electric system 341,328 339,000 – 4,944 – – – 2,616 Water system 50,472 37,706 – 3,185 – – – (9,581) Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 86,540 53,393 21,022 360 – – – (11,765) Juan F. Luis Hospital 85,901 48,160 20,282 327 – – – (17,132) University of the Virgin Islands 84,228 17,580 49,640 3,992 – – – (13,016) Other component units 69,192 8,460 55,547 5,400 – – – 215 Total component units 832,055 $ 558,469 $ 182,469 $ 31,995 $ – – – (59,122) Total primary government and component units (968,080) 20,028 (948,052) (59,122) (continued) Government of the United States Virgin Islands Statement of Activities Year Ended September 30, 2013 (In thousands) 21 1406-1263767 === page 26 === Net Revenue (Expense) and Changes in Net Position Primary Government Governmental Business-type Component Activities Activities Total Units General revenues: Taxes 895,004 – 895,004 – Interest and other 44,199 5,467 49,666 13,960 Tobacco settlement rights 2,134 – 2,134 – Transfers – internal activities of primary government 700 (700) – – Forgiveness of debt – – – – Total general revenue 942,037 4,767 946,804 13,960 Changes in net position (26,043) 24,795 (1,248) (45,162) Net position, beginning of year, as restated (1,336,552) (61,358) (1,397,910) 845,289 Net position, end of year (1,362,595) $ (36,563) $ (1,399,158) $ 800,127 $ See accompanying notes. Statement of Activities (continued) Government of the United States Virgin Islands Year Ended September 30, 2013 (In thousands) 22 1406-1263767 === page 27 === PFA PFA Debt Capital Other Total General Service Projects Governmental Governmental Cash and cash equivalents 105,284 $ 4,514 $ 23,634 $ 62,295 $ 195,727 $ Investments 143,577 341,303 54,291 5,097 544,268 Receivables: Taxes, net 171,417 47,532 – – 218,949 Accrued interest and other 9 – – 139 148 Due from: Other funds 13,979 – 31,089 18,549 63,617 Component units, net 4,348 – – – 4,348 Federal government – – – 22,740 22,740 Total assets 438,614 $ 393,349 $ 109,014 $ 108,820 $ 1,049,797 $ Liabilities and Fund Balances Accounts payable and accrued liabilities 97,977 $ 194 $ 2,247 $ 21,198 $ 121,616 $ Tax refunds payable 50,039 – – – 50,039 Due to: Other funds 17,160 – – 9,079 26,239 Component units 41,181 – – – 41,181 Unearned revenue 242,203 116,726 – 3,500 362,429 Total liabilities 448,560 116,920 2,247 33,777 601,504 Fund balances: Restricted – 276,429 106,767 – 383,196 Committed 27,314 – – 27,217 54,531 Assigned – – – 47,826 47,826 Unassigned (37,260) – – – (37,260) Total fund balances (9,946) 276,429 106,767 75,043 448,293 Total liabilities and fund balances 438,614 $ 393,349 $ 109,014 $ 108,820 $ Amounts reported for governmental activities in the statement of net position (deficit) are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. 784,258 Expenditures identified as related to a future period recognized as a prepaid asset in the statement of net assets. 5,502 Deferred bond issue costs are not financial resources and, therefore, are not reported in the funds. 46,652 Other long-term assets, primarily taxes receivable, will not be available to pay for current period expenditures and, therefore, are deferred in the funds 170,865 Interest on long-term debt is not accrued in the funds, but rather is recognized as an expenditure when due. (51,931) Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds. (2,766,234) Net position (deficit) of governmental activities (1,362,595) $ See accompanying notes. (In thousands) Assets Government of the United States Virgin Islands Balance Sheet – Governmental Funds September 30, 2013 1406-1263767 23 === page 28 === PFA PFA Debt Capital Other Total General Service Projects Governmental Governmental Revenues: Taxes 641,000 $ 249,219 $ 1,946 $ 22,613 $ 914,778 $ Federal grants and contributions 13,968 – – 227,433 241,401 Charges for services 9,969 – – 10,522 20,491 Tobacco settlement rights – – – 2,134 2,134 Interest and other 17,169 2,957 32 24,041 44,199 Total revenues 682,106 252,176 1,978 286,743 1,223,003 Expenditures: Current: General government 476,215 50 6,842 74,843 557,950 Public safety 49,996 – – 2,054 52,050 Health 31,483 – – 15,892 47,375 Public housing and welfare 52,560 – – 100,996 153,556 Education 165,250 – – 58,063 223,313 Transportation and communication 18,784 – 384 4,989 24,157 Culture and recreation 6,964 – – 227 7,191 Capital outlays 3,630 – 21,057 39,058 63,745 Debt service: Principal 44,152 272,937 1,934 1,535 320,558 Interest 1,888 98,283 239 706 101,116 Total expenditures 850,922 371,270 30,456 298,363 1,551,011 Deficiency of revenue under expenditures (168,816) (119,094) (28,478) (11,620) (328,008) Other financing sources (uses): Bonds issued – 265,798 34,122 – 299,920 Loans issued 40,000 – 2,660 – 42,660 Bond premiums – 15,281 1,661 – 16,942 Bond discounts and issuance costs – (7,545) – – (7,545) Transfers from other funds 102,428 1,309 – 5,878 109,615 Transfers to other funds (4,008) (100,823) (584) (3,500) (108,915) Total other financing sources, net 138,420 174,020 37,859 2,378 352,677 Net change in fund balances (30,396) 54,926 9,381 (9,242) 24,669 Fund balance at beginning of year 20,450 221,503 97,386 84,285 423,624 Fund balance at end of year (9,946) $ 276,429 $ 106,767 $ 75,043 $ 448,293 $ See accompanying notes. (In thousands) Government of the United States Virgin Islands Statement of Revenues, Expenditures, and Changes in Fund Balances − Governmental Funds Year Ended September 30, 2013 1406-1263767 24 === page 29 === Net change in fund balances – total governmental funds 24,669 $ 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 year. 31,201 Tax revenue in the statement of activities, which do not provide current financial resources, are not reported as revenue in the funds. (19,774) 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. This is the amount by which debt loan and bond proceeds of $342.6 million exceeded debt repayments of $320.6 million. (22,022) 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 decrease in certain liabilities reported in the statement of net assets of the previous year decreased expenses reported in the statement of activities that do not require the use of current financial resources. (28,232) Some expenses reported as prepaid assets in the statement of net assets in the current year are recognized as expenses in the following year in the statement of activities. 5,468 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 of bond issuance costs amortized in the statement of activities. 4,909 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 additional net interest expense 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. (17,378) Certain interest reported in the statement of activities does not require the use of current financial resources and therefore is not reported as expenditures in the governmental funds. This amount represents the increase in interest payable reported in the statement of net assets. (4,884) Change in net position of governmental activities (26,043) $ See accompanying notes. (In thousands) Government of the United States Virgin Islands Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities – Governmental Funds Year Ended September 30, 2013 1406-1263767 25 === page 30 === Original Amended Budget Budget Actual Variance Revenues: Taxes 507,244 $ 507,244 $ 641,000 $ 133,756 $ Federal grants and contributions 13,508 – 13,968 13,968 Charges for services – 13,508 9,969 (3,539) Interest and other 83,357 83,357 17,169 (66,188) Total revenues 604,109 604,109 682,106 77,997 Expenditures: Current: General government 157,696 176,279 476,215 (299,936) Public safety 123,151 123,151 49,996 73,155 Health 68,158 68,166 31,483 36,683 Public housing and welfare 74,820 75,920 52,560 23,360 Education 198,905 200,184 165,250 34,934 Transportation and communication 30,361 30,365 18,784 11,581 Culture and recreation 21,744 21,760 6,964 14,796 Total expenditures 674,835 695,825 801,252 (105,427) Deficiency of revenues over expenditures (70,726) (91,716) (119,146) (27,430) Other financing sources (uses): Bonds issued – – – – Loans issued – – 40,000 40,000 Debt service: Principal – – – – Transfers from other funds 91,716 91,716 102,428 10,712 Transfer to other funds – – (4,008) (4,008) Total other financing sources, net 91,716 91,716 98,420 6,704 Excess (deficiency) of revenues and net other financing sources over expenditures 20,990 $ – $ (20,726) $ (20,726) $ See accompanying notes. Year Ended September 30, 2013 (In thousands) Government of the United States Virgin Islands Statement of Revenues and Expenditures – Budget and Actual – Budgetary Basis – General Fund 1406-1263767 26 === page 31 === Business-type Activities – Enterprise Funds West Indian Unemployment Other Company Insurance Enterprise Totals Assets Current assets: Cash and cash equivalents 2,013 $ 1,129 $ 6,084 $ 9,226 $ Investments at fair value – – 1,519 1,519 Receivables, net: Premiums receivable – 2,617 – 2,617 Other receivables 872 – 1,771 2,643 Due from: Other funds – – 739 739 Federal government 4,521 9,908 14,429 Other assets 675 – 512 1,187 Total current assets 3,560 8,267 20,533 32,360 Noncurrent assets: Restricted cash and cash equivalents 1,957 9,907 – 11,864 Capital assets 40,436 – 62,045 102,481 Deferred expenses – – – – Total noncurrent assets 42,393 9,907 62,045 114,345 Total assets 45,953 18,174 82,578 146,705 Liabilities Current liabilities: Accounts payable and accrued liabilities 2,772 1,337 9,895 14,004 Due to other funds 4,700 – 33,417 38,117 Unemployment insurance benefits – 8,319 – 8,319 Unearned revenue – – 1,392 1,392 Workers compensation – – 3,047 3,047 Loan payable to U.S. Treasury – 76,406 – 76,406 Total current liabilities 7,472 86,062 47,751 141,285 Noncurrent liabilities: Workers compensation – – 20,744 20,744 Loans payable related to capital assets 21,239 – – 21,239 Total noncurrent liabilities 21,239 – 20,744 41,983 Total liabilities 28,711 86,062 68,495 183,268 Net position Invested in capital assets 19,248 – 62,045 81,293 Restricted 1,957 9,907 – 11,864 Unrestricted (3,963) (77,795) (47,962) (129,720) Total net position 17,242 $ (67,888) $ 14,083 $ (36,563) $ See accompanying notes. Statement of Net Position – Proprietary Funds September 30, 2013 (In thousands) Government of the United States Virgin Islands 1406-1263767 27 === page 32 === Business-type Activities – Enterprise Funds West Indian Unemployment Other Company Insurance Enterprise Total Operating revenues: Charges for services 9,112 $ 12,299 $ 38,238 $ 59,649 $ Total operating revenues 9,112 12,299 38,238 59,649 Operating expenses: Cost of services 6,500 20,318 50,509 77,327 Amortization – – 1,586 1,586 Depreciation 1,970 – 1,257 3,227 Total operating expenses 8,470 20,318 53,352 82,140 Operating income (loss) 642 (8,019) (15,114) (22,491) Non-operating revenues (expenses): Federal grants – 13,267 31,451 44,718 Interest and other income 2,970 143 2,354 5,467 Interest expense (1,350) (849) – (2,199) 1,620 12,561 33,805 47,986 Income before operating transfers 2,262 4,542 18,691 25,495 Transfers to other funds (700) – – (700) Change in net position 1,562 4,542 18,691 24,795 Net position at beginning of year 15,680 (72,430) (4,608) (61,358) Net position at end of year 17,242 $ (67,888) $ 14,083 $ (36,563) $ See accompanying notes. Total non-operating revenues, net Year Ended September 30, 2013 (In thousands) Government of the United States Virgin Islands Statement of Revenues, Expenses, and Changes in Net Position − Proprietary Funds 1406-1263767 28 === page 33 === Business-type Activities – Enterprise Funds West Indian Unemployment Other Company Insurance Enterprise Total Cash flows from operating activities Receipts from customers and users 8,989 $ 6,207 $ 30,181 $ 45,377 $ Payments to beneficiaries, suppliers and employees (4,517) (46,371) (37,302) (88,190) Net cash provided by (used in) operating activities 4,472 (40,164) (7,121) (42,813) Cash flows from noncapital financing activities Settlement of lawsuit 2,950 – – 2,950 Transfer in (out) to other fund (700) – – (700) Federal grants – 13,267 31,451 44,718 Net cash provided by noncapital financing activities 2,250 13,267 31,451 46,968 Cash flows from capital and related financing activities Acquisition and construction of capital assets (3,956) – (34,156) (38,112) Issuance of debt – 38,000 – 38,000 Principal paid on debt issuances (524) (3,341) – (3,865) Interest paid on debt issuances (1,350) (849) – (2,199) Net cash provided by (used in) capital and related financing activities (5,830) 33,810 (34,156) (6,176) Cash flows from investing activities Interest on investments 20 143 17 180 Net cash provided by investing activities 20 143 17 180 Net change in cash and cash equivalents 912 7,056 (9,809) (1,841) Cash and cash equivalents at beginning of year 3,058 3,980 15,893 22,931 Cash and cash equivalents at end of year 3,970 $ 11,036 $ 6,084 $ 21,090 $ Reconciliation of operating income (loss) to net cash provided by (used in) operating activities Operating income (loss) 642 $ (8,019) $ (15,114) $ (22,491) $ Adjustments to reconcile operating loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,970 – 2,843 4,813 Change in assets and liabilities: Receivables, net (123) (1,573) (483) (2,179) Due from federal government – (4,520) (7,864) (12,384) Unearned revenue – – 290 290 Other assets 49 – 4,429 4,478 Accounts payable and accrued liabilities 1,234 747 1,965 3,946 Unemployment insurance benefits – (26,799) – (26,799) Workers compensation – – – – Due to other funds 700 – 6,813 7,513 Net cash provided by (used in) operating activities 4,472 $ (40,164) $ (7,121) $ (42,813) $ Reconciliation of cash and cash equivalents to the statement of net assets Cash and cash equivalents – current 2,013 $ 1,129 $ 6,084 $ 9,226 $ Cash and cash equivalents – restricted 1,957 9,907 – 11,864 Total cash and cash equivalents at end of year 3,970 $ 11,036 $ 6,084 $ 21,090 $ See accompanying notes. Government of the United States Virgin Islands Statement of Cash Flows −Proprietary Funds Year Ended September 30, 2013 (In thousands) 1406-1263767 29 === page 34 === Pension Trust Agency Fund Funds Assets Cash and cash equivalents: Unrestricted 77,997 $ – $ Restricted 33 – Investments 1,069,809 4,090 Receivables, net: Loans and advances 148,069 – Accrued interest 5,405 – Other 4,697 – Other assets 12,498 – Total assets 1,318,508 4,090 Liabilities Accounts payable and accrued liabilities – – Benefits in process of payment 4,502 – Unsettled securities purchased 566 – Securities lending collateral 52,361 – Other liabilities 8,570 4,090 Total liabilities 65,999 4,090 Net position held in trust for employees’ pension benefits 1,252,509 $ – $ See accompanying notes. (In thousands) Government of the United States Virgin Islands Statement of Fiduciary Net Position – Fiduciary Funds September 30, 2013 1406-1263767 30 === page 35 === Pension Trust Fund Additions: Contributions: Employer 64,431 $ Plan members 34,090 Total contributions 98,521 Investment income: Net appreciation of fair value of investments 81,931 Net depreciation of fair value of real estate (366) Interest, dividends, and other, net 31,679 Real estate – net rental income 2,932 116,176 Less investment expense 4,651 Net investment income 111,525 Other income 1,272 Total additions 211,318 Deductions: Benefits paid 234,362 Refunds of contributions 6,203 Administrative and operational expenses 19,582 Total deductions 260,147 Change in net position (48,829) Net position, beginning of year 1,301,338 Net position, end of year 1,252,509 $ See accompanying notes. (In thousands) Government of the United States Virgin Islands Statement of Changes in Fiduciary Net Position - Fiduciary Funds Year Ended September 30, 2013 1406-1263767 31 === page 36 === Government of the United States Virgin Islands Notes to Basic Financial Statements September 30, 2013 1406-1263767 32 1. 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. Financial Reporting Entity The Government follows the provisions of GASB Statement No. 61, The Financial Reporting Entity, Omnibus, an amendment of GASBS Statements No. 14 and No. 34. 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 organizations for which the nature and significance of their relationship with the primary Government are such that exclusion would cause the reporting entity’s financial statements to be misleading. The criteria used to define financial accountability include: (i) if an organization is fiscally dependent on, and there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary Government, (ii) a government board appointed by a higher level of government, or (iii) a jointly appointed board. === page 37 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 33 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) 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: (a) 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 (PFA) 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 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, any governmental instrumentality, and to private entities. Pursuant to Section 7(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. 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 USVI Legislature (the Legislature). PFA activities are blended within the PG because it is so intertwined with the Government that, in substance, they are the same. The PFA funds are reported as major funds, with the exception of PFA Special Revenue Fund, which is included in the other aggregate remaining fund information. PFA’s blended component units, the West Indian Company (WICO) and Virgin Islands Next Generation Network (viNGN), are presented as enterprise funds in the Government’s basic financial statements. === page 38 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 34 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (a) Blended Component Units (continued) Tobacco Settlement Financing Corporation (TSFC) 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. The TSFC is reported in the other aggregate fund information. Complete audited financial statements of the 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 32-33 Kongens Gade St. Thomas, VI 00802 Tobacco Settlement Financing Corporation 32-33 Kongens Gade St. Thomas, VI 00802 (b) Discretely-Presented Component Units The following component units, consistent with GASB Statements Nos. 61, 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. === page 39 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 35 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely-Presented Component Units (continued) Major Component Units Virgin Islands Housing Authority (VIHA) 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 and moderate income families residing in the U.S. Virgin Islands. From June 1962 through August 2003, the powers of VIHA were exercised by a board of commissioners consisting of seven members. 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. VIHA was placed in receivership and HUD assumed control of all assets, projects, and programs. The Authority is governed by a board of commissioners autonomous to HUD. An executive director is appointed by the Authority’s Board to manage the day-to-day operations of the Authority. 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. On May 30, 2014, the HUD receivership ended, and management of VIHA was returned to a board of trustees appointed by the PG. Virgin Islands Port Authority (VIPA) VIPA was created as a body corporate and politic constituting a public corporation and autonomous government instrumentality by Act No. 2375 on 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. === page 40 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 36 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely-Presented Component Units (continued) Major Component Units (continued) Virgin Islands Water and Power Authority (WAPA) WAPA was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality by Act No. 1248 on 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). Virgin Islands Government Hospital and Health Facilities Corporation (VIGHHFC) VIGHHFC was created by Act No. 6012 on August 23, 1994 and became active on May 1, 1999, with the purpose of providing 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 separated organizations for which the Roy L. Schneider Hospital is financially accountable. The Juan F. Luis Hospital and Medical Center’s financial statements include its component unit: the Virgin Islands Cardiac Center at the Governor Juan F. Luis Hospital and Medical Center Foundation, Inc. (VICC Foundation). VICC Foundation is a legally separate nonprofit corporation for which the Juan F. Luis Hospital and Medical Center is financially accountable. === page 41 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 37 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely-Presented Component Units (continued) Major Component Units (continued) University of the Virgin Islands (the University) The University was organized as an instrumentality of the Government under Act No. 852 on 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, 9 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 representative 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 blended component units: The Foundation for the University of the Virgin Islands and The Reichhold Foundation. 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. === page 42 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 38 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely-Presented Component Units (continued) Nonmajor Component Units Virgin Islands Economic Development Authority (EDA) EDA was created by Act No. 6390 on 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 Agency, 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 (MBA) 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. === page 43 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 39 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely-Presented Component Units (continued) Nonmajor Component Units (continued) Virgin Islands Housing Finance Authority (VIHFA) VIHFA was created as a body corporate and politic constituting a public corporation and autonomous governmental instrumentality of the Government by Act No. 4636 on 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. On October 31, 2008, VIHFA established the Virgin Islands Housing Management, Inc. (VIHM), a wholly-owned not-for-profit subsidiary for the purpose of managing VIHFA’s rental properties. The financial statements of VIHM are separately issued, and not blended into the PG. 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 (VIPTS) VIPTS 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 as well as to provide an effective supplement to the in-school education of children. The powers of VIPTS 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 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 VIPTS are ex-officio members of the board who are not entitled to vote. === page 44 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 40 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (b) Discretely-Presented Component Units (continued) Nonmajor Component Units (continued) Virgin Islands Waste Management Authority (VIWMA) VIWMA was established as a nonprofit, public, autonomous instrumentality of the Government by Act No. 6638 and approved by the Governor of the Virgin Islands on January 23, 2004. VIWMA provides environmentally sound management for the collection and disposal of solid waste in the territory, including operation and closure of landfills and wastewater collection, treatment and disposal. VIWMA is governed by a Board of Directors consisting of seven members. University of the Virgin Islands Research and Technology Park (RTPark) RTPark was established as a public, autonomous instrumentality of the Government by Act 6502 on February 21, 2002, as amended, by Act 6725, the Protected Cell Amendments Act of 2005. RTPark was organized for internet commerce and technology, providing an enabling environment for research, development, business incubation and technology- driven businesses. RTPark is governed by a Board of Directors consisting of seven members, including the Chairman of the Board of Trustees of the University, the President of the University, two trustees selected from among the Board of Trustees of the University, and three members selected by the Governor. Complete audited financial statements of the discretely-presented component units can be obtained directly by contacting their administrative offices: Administrative Offices 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 === page 45 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 41 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) Administrative Offices (continued) 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 Nisky Shopping Center, Suite 620 St. Thomas, VI 00802 Magens Bay Authority PO Box 10583 St. Thomas, VI 00801 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 Virgin Islands Waste Management Authority #1 La Grande Princesse, Suite BL1 Christiansted, VI 00820 === page 46 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 42 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) Administrative Offices (continued) University of the Virgin Islands Research and Technology Park Corporation RR1 Box 10000 Kingshill, St. Croix, VI 00850-9781 All financial statements of the discretely-presented component units have a fiscal year-end of September 30, 2013, except for WAPA and VIHA that have a year-end of June 30, 2013 and December 31, 2012, respectively. (c) Fiduciary Component Unit 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 (GERS) GERS was created as an independent and separate agency of the Government with the purpose of administering the Government’s, and component units, cost-sharing, multiple- employer defined-benefit pension plan. GERS was established on October 1, 1959. The responsibility for the 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 position 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 of 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. === page 47 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 43 1. Summary of Significant Accounting Policies (continued) Financial Reporting Entity (continued) (c) Fiduciary Component Unit (continued) 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, Virgin Islands 00802 Government-wide and Fund Financial Statements The government-wide financial statements (that is, the statement of net position and the statement of activities) report information on all of the non-fiduciary 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 position presents the reporting entities’ non-fiduciary assets and liabilities, with the difference reported as net position. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenue. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include (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 revenues 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. === page 48 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 44 1. Summary of Significant Accounting Policies (continued) Measurement Focus, Basis of Accounting, and Financial Statement Presentation (a) 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 when as all eligibility requirements have been met. (b) 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. === page 49 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 45 1. Summary of Significant Accounting Policies (continued) Fund Accounting (continued) (c) 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. Proprietary funds distinguish operating revenue and expenses from non-operating 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. Non-major funds are combined in a single column in the fund financial statements. The Government reports the following major funds: === page 50 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 46 1. Summary of Significant Accounting Policies (continued) Fund Accounting (continued) (a) Governmental Funds The Government reports the following major governmental funds:  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 Fund – The PFA debt service fund 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. (b) 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:  West Indian Company – WICO, a blended component unit of PFA, accounts for the activities of a cruise ship pier and shopping mall complex on the island of St. Thomas.  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. === page 51 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 47 1. Summary of Significant Accounting Policies (continued) Fund Accounting (continued) (c) 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 GERS, which accumulates resources for pension benefit payments to qualified employees.  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. 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 the Commissioner of Finance to secure all governmental funds deposited. Investments The PG and its component units follow the provisions of GASB Statement No. 40, Deposit and Investment Risk Disclosures, an Amendment of GASB Statement No. 3. GASB Statement No. 40 establishes and modifies the following disclosure requirements related to investment risks: credit risk (including custodial credit risk and concentrations of credit risk), interest rate risk, and foreign currency risk. === page 52 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 48 1. Summary of Significant Accounting Policies (continued) 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 its agencies’ obligations, mortgage-backed securities, repurchase agreements, commercial paper, local government obligations, and corporate debt and equity obligations. As of September 30, 2013, the General Fund, the Virgin Islands Lottery, a non-major governmental fund, and an agency fund had invested in certificates of deposit with two local banks. Investments are reported at fair value.  PFA 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 PFA has retained investment managers and investments are held in trust by a commercial bank on behalf of the PFA. Investments are reported at fair value in the non-major governmental fund of the Government. === page 53 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 49 1. Summary of Significant Accounting Policies (continued) Investment Policies (continued)  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 requirements 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 trust certificates, common and preferred shares of foreign and domestic corporations, mutual funds, mortgage or personal loans to GERS members or retirees, and 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 stock may not exceed 60% of the market value of total investments of GERS. Investment in foreign stock should be limited to 10% of the market value 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 GERS. 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. === page 54 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 50 1. Summary of Significant Accounting Policies (continued) Investment Policies (continued) GERS is authorized to invest in life settlement policy contract investments provided the investment is in a group of life insurance policies, with a minimum number of 100 measured lives; the face value of any single policy investment does not exceed $5.0 million or 2% of the aggregate face value of policy investments, and; the aggregate face value on any individual life does not exceed the greater of $10.0 million or 1% of the aggregate face value of policies purchased as investments by GERS. As of September 30, 2013, GERS had invested $50 million in the limited partnership Attilanus, a company that purchases senior life insurance policies for individuals age 65 and older with an average life expectancy of 5 to 7 years. The partnership agreement is effective through December 31, 2017, and may be extended for an additional two year period. Limited partners are not permitted to withdraw funds from the partnership. The value of the investment, net of returns of capital of $8.1 million, was $41.2 million at September 30, 2013. On July 18, 2012, GERS executed a loan agreement with Attilanus. Under the terms of the agreement, a credit facility of $10 million was made available to meet on-going premium costs and other expenses. The terms of the credit facility require interest payments at a rate of 15% per annum, and principal payments reduce the future amount available. The entire loan principal and accrued and unpaid interest is to be repaid at the termination of the credit facility on July 10, 2017. As of September 30, 2013, the outstanding balance of the credit facility was $4.1 million. In December 4, 2009, GERS executed a loan agreement with Seaborne Virgin Islands, Inc., a seaplane service operating on the islands of St. Croix and St. Thomas. The agreement provided for a first lien term loan of $1.3 million at an initial interest rate of 8.25%, and a senior secured convertible loan of $2 million at an interest rate of 14.5%, secured by real and personal property of Seaborne Airlines, the unconditional guarantee of Coastal Airways, Inc., the parent company of Seaborne, and all of the issued and outstanding stock of Seaborne. On September 20, 2012 the parties agreed to an amendment/modification to the loan agreement and term note and provided for the modification of the convertible note. The original principal indebtedness of the term note was amended and restated to be $2.3 million with an interest rate of 6.25% per annum for the unpaid principal of the term note. The original principal indebtedness of the convertible note was amended and restated to be $1 million. The interest is accrued at the rate of 8.25% per annum payable quarterly in arrears until the maturity date. The note may be prepaid in whole or in part with a prepayment penalty of $300 thousand. === page 55 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 51 1. Summary of Significant Accounting Policies (continued) Investment Policies (continued) On November 2, 2013, GERS extended an additional loan to Seaborne Virgin Islands, Inc., in the amount of $1.5 million as part of a modification agreement of existing loans. The term of the loan is five (5) years, bearing interest in the amount of 6.25%. At September 30, 2013, the combined unpaid principal balances for the investment loans was $3.8 million. On December 8, 2009, GERS executed a loan agreement with Carambola Northwest, LLC (Carambola), a condominium, hotel, and golf resort on the island of St. Croix. The five year term loan in the amount of $15 million is collateralized with all real property holdings of Carambola, with an interest rate of 10.5% per annum. Carambola subsequently went into default on the loan agreement. On May 11, 2013, GERS exercised its rights under the loan agreement and executed a preliminary Disposition Agreement with Carambola assuming management and ownership of the resort complex. As of September 30, 2013, the complex had an appraised value of $12 million. On September 24, 2013, GERS entered into a loan agreement with KAZI Foods of the Virgin Islands in the amount of $6 million at an interest rate of 6.25%, and a maturity date of October 23, 2023. At September 30, 2013, the outstanding principal balance on the loan is $5.8 million. GERS has also invested in Havensight Mall, a shopping and pier complex on the island of St. Thomas. The property is reported at the fair market value of $66.6 million. The investment in Havensight Mall generated rental income, net of related expense, of $2.7 million for the year ended September 30, 2013. GERS owns administrative facilities on the islands of St. Thomas and St. Croix. Portions of the facilities are leased to government agencies and commercial tenants, and portions of the facilities are utilized for GERS operations. The investment is reported at historical cost, net of accumulated depreciation, in the amount of $28.1 million as of September 30, 2013. === page 56 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 52 1. Summary of Significant Accounting Policies (continued) Investment Policies (continued)  WAPA and VIPA Investment Policies – These major component units are authorized under bond resolutions and the V.I. Code to invest in open accounts, time deposits, certificates of deposit, repurchase agreements, guaranteed investment contracts, obligations of the United States government, and obligations of any state within the United States, obligations of international banking institutions, mutual funds, corporate commercial paper, money market accounts and investment pools. Investments are reported at fair value.  The University 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. The University is in the process of finalizing a formal investment policy for review and approval by the board of trustees. The members of the board of trustees of the Reichhold Foundation are responsible for their specific investment policy.  VIGHHFC Investment Policies – The board of trustees of this major component unit have not developed a formal investment policy. At September 30, 2013, investments consisted of a 40% interest in a U.S. Virgin Islands corporation that provides radiology services at Juan F. Luis Hospital and Medical Center. The investment in the U.S. Virgin Islands Corporation is accounted for under the equity method and was reported without value at September 30, 2013.  VIHA Investment Policies – This major component unit is required by the U.S. Department of Housing and Urban Development (“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. === page 57 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 53 1. Summary of Significant Accounting Policies (continued) 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 seven months subsequent to the fiscal year end. 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, members of GERS have the right to obtain loans from GERS to finance a home, automobile, or other personal needs. The maximum mortgage loan that could be granted to members who have been contributing to GERS for at least five years is $250,000. The interest rate on new first mortgages was 5% for loans payable in 1 to 15 years and 5.75% for loans payable over 15 years;87 and on second mortgages, 6% for loans payable in 1 to 15 years and 6.75% for loans payable in over 15 years. Members may also borrow up to $50,000 to purchase land. Members who have contributed to GERS for at least five years can borrow up to $18,000 for the purchase of a new automobile. The interest rate offered on auto loans was 8.5% with a maximum term of five years. Active members may also borrow up to 75% of their contributions paid into GERS to a maximum borrowing of $50,000 as a personal loan. The interest rate offered on personal loans was 8% for the year. Retired members may qualify for personal loans up to $50,000 at the same interest rates as active members; however, effective fiscal year 2009, retirees have the option of refinancing their personal loan provided the original amount is paid down by at least 50%. Effective March 25, 2014, the policy changed to allow retirees to refinance their loans regardless of the outstanding balance. Member loans in GERS are valued at the outstanding loan principal balance less an allowance for estimated loan losses. GERS believe that, based upon interest rate and risk factors, this valuation approximate fair value. Loans with limited partnerships have no readily ascertainable market value and are based on the valuation reported by their general partners. === page 58 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 54 1. Summary of Significant Accounting Policies (continued) Receivables (continued) The accounts receivable from non-governmental 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. Restricted Assets Restricted assets in the PG and discretely-presented component units are set aside primarily for the payment of bonds, notes, construction funds, unemployment benefits, and other specific purposes. Capital Assets Capital assets, which include land, land improvements, buildings, and intangible 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 estimated useful lives of 40 and 20 years, respectively; (iii) $100,000 for land improvements with an estimated useful life of 20 years; 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 based on replacement cost indexed by a reciprocal factor of the price increase from the appraisal date to the actual or estimated acquisition date was used to estimate the historical cost of certain land, buildings, and building improvements because invoices and similar documentation was 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 proprietary component units. The costs of routine maintenance and repairs that do not add value to the assets or materially extend asset lives are expensed as incurred. === page 59 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 55 1. Summary of Significant Accounting Policies (continued) Capital Assets (continued) 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, excluding land and construction in progress, are depreciated on the straight-line method over the assets’ estimated useful lives. 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. Tax Refunds Payable During the calendar year, the Government collects individual income taxes through withholdings and payments from taxpayers. As of September 30th, 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. Unearned Revenue Unearned revenue at the governmental fund level arises when potential revenue neither meets measurable nor available criteria for revenue recognition in the current period. Unearned revenue also arises when resources are received before the Government has a legal claim to them. In subsequent periods, when the revenue recognition criteria are met, or when the Government has a legal claim to the resources, Unearned revenue is reduced 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 or revenue recognition criteria have not been met. === page 60 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 56 1. Summary of Significant Accounting Policies (continued) Long-term Liabilities The liabilities reported in the government-wide financial statements include the Government’s bonds, long-term notes, and other long-term liabilities including: compensated absences, retroactive union arbitration salaries, landfill closure and post closure, workers compensation loss claims, postemployment benefit costs, accrued arbitrage rebates, and legal claims. 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. In the fund financial statements, governmental 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 Balance Fund balances are reported in classifications provided by the Government Accounting Standards Board Statement No. 54, “Fund Balance Reporting and Governmental Fund Type Definitions”. Statement No. 54 provides a hierarchy of classifications based primarily on the extent to which the Government is bound to honor constraints on the specific purposes for which amounts in funds may be spent. Following are the fund classifications:  Restricted Fund Balance – Fund balances constrained by externally imposed constraints such as constitutional provisions, laws and regulations, debt covenants and grantors. The Government’s policy is to consider restricted amounts to have been spent when expenditures are incurred for which both restricted and unrestricted fund balances are available.  Committed Fund Balance – Fund balances subject to constraints imposed by the Government’s highest level of decision making authority including legislation enacted by the Legislature of the Virgin Islands, and resolutions or ordinances enacted by Government elected regulatory boards and authorities. Committed fund balances may be modified or rescinded by enacted legislation, or amendment of resolutions or ordinances. === page 61 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 57 1. Summary of Significant Accounting Policies (continued) Fund Balance (continued)  Assigned Fund Balance – Fund balances subject to budgetary constraints of the Legislature, the Office of Management and Budget, or authorizing boards of the Government, that are not restricted or committed. Budgetary authority of the Office of Management and Budget is provided by Title 2, Sections 22, 23, 26 and 27 VIC, and Executive Order No. 371-1997. The Government’s policy is to expend assigned or committed amounts, before unassigned amounts, when an expenditure is incurred.  Unassigned Fund Balance – Unassigned fund balance is the residual classification for the General Fund. This classification represents fund balance that has not been assigned to other funds and that has not been restricted, committed or assigned to specific purposes within the General Fund.  Nonspendable Fund Balance – The nonspendable fund balance classification includes amounts that cannot be spent because they are either (a) not in spendable form (such as inventories or prepaid amounts), or (b) legally or contractually required to be maintained intact (such as a permanent endowment fund). Net Position Net position is reported in three categories:  Invested in Capital Assets – This category consists 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 as part of restricted net position for capital projects. === page 62 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 58 1. Summary of Significant Accounting Policies (continued) Net Position (continued)  Restricted Net Position – This category reflects the results constraints placed on the use of assets are either externally imposed by creditors, grantors, contributors, and the like, or imposed by law through constitutional provisions or enabling legislation.  Unrestricted Net Position – Net position (deficit) which does not meet the definition of the two preceding categories. Unrestricted assets often are designated to indicate that management does not consider them to be available for general operations. Unrestricted 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 needed. 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 pay rate. 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. === page 63 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 59 1. Summary of Significant Accounting Policies (continued) Interfund and Intra-entity Transactions The Government has the following types of transactions among funds:  Interfund Transfers – Legally required transfers 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 from (to) 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 as due from (to) component units, net of allowance for estimated uncollectible amounts. Risk Management With some exceptions, the Government does not carry general casualty or liability insurance coverage on its properties or the acts of its employees, relying instead on self-insurance and/or statutory liability limitations. However, 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 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. The Government does not maintain accounting records in support of individual claim liabilities or for claims incurred but not reported (IBNR). Accordingly, medical malpractice claims are accounted for on a cash basis. Therefore, the basic financial statements do not include a liability for medical malpractice claims outstanding, including related IBNR, as of September 30, 2013, as required by GAAP. === page 64 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 60 1. Summary of Significant Accounting Policies (continued) Future Adoption of Accounting Requirements GASB has issued the following statements that the Government and its component units have adopted for the current fiscal year: Statement Required in Number Fiscal Year 60 Accounting and Financial Reporting for Service Concession Arrangements 2013 61 The Financial Reporting Entity; Omnibus - an amendment of GASB Statements Nos. 14 and 34 2013 62 Codification in Accounting and Financial Reporting Guidance Contained in pre-November 30, 1989 FASB and AICPA Pronouncements 2013 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position 2013 GASB has issued the following statements that the Government or its component units have not yet adopted: Statement Required in Number Fiscal Year 65 Items Previously Reported as Assets and Liabilities 2014 66 Technical Corrections - 2012 - an amendment of GASB Statement No. 10 and No. 62 2014 67 Financial Reporting for Pension Plans - an amendment of Statement No. 25 2014 68 Accounting and Financial Reporting for Pensions - an amendment of GASB Statement No. 27 2015 69 Government Combinations and Disposals of Government of Government Operations 2015 70 Accounting and Financial Reporting for Non-exchange Financial Guarantees 2014 71 Pension Transition for Contributions Made Subsequent to the Measurement Date 2015 The impact of these statements has not yet been determined by the Government. === page 65 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 61 2. Component Units The basic financial statements include the financial statements of the following discretely- presented component units:  Virgin Islands Housing Authority  Virgin Islands Port Authority  Virgin Islands Water and Power Authority  Virgin Islands Government Hospital and Health Facilities Corporation  University of the Virgin Islands  Virgin Islands Economic Development Authority  Magens Bay Authority  Virgin Islands Housing Finance Authority  Virgin Islands Public Television System  Virgin Islands Waste Management Authority  University of the Virgin Islands Research and Technology Park Corporation === page 66 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 62 1406-1263767 2. Component Units (continued) Condensed financial information as of September 30, 2013 of all discretely-presented component units follows (expressed in thousands): Virgin Islands Water Virgin Virgin and Power Authority Islands Islands Roy L. University Total Housing Port Electric Water Schneider Juan F. Luis of the Other Component Authority Authority System System Hospital Hospital Virgin Islands Entities Units Assets: Current assets 21,504 $ 28,246 $ 59,951 $ 12,166 $ 20,986 $ 15,416 $ 28,175 $ 25,195 $ 211,639 $ Due from primary government – – 31,695 3,622 – 8 686 5,170 41,181 Due from federal government 1,975 2,188 – – – – 8,103 749 13,015 Restricted assets 3,366 13,016 56,893 10,150 823 193 38,334 48,843 171,618 Capital assets, net 69,859 232,417 290,706 66,641 52,964 38,001 69,176 171,861 991,625 Deferred expenses – 868 60,068 1,222 – – – – 62,158 Other noncurrent assets 1,564 – – – 255 – 1,340 42,815 45,974 Total assets 98,268 276,735 499,313 93,801 75,028 53,618 145,814 294,633 1,537,210 Liabilities: Current liabilities 3,855 12,728 128,048 5,601 30,417 56,601 5,043 13,213 255,506 Due to primary government – – – – 3,698 – – 650 4,348 Due to federal government 5 – 4,565 – – 1,200 – – 5,770 Bonds payable – 28,363 262,641 16,432 – – – – 307,436 Notes payable 1,554 – 8,348 – – – 51,897 1,730 63,529 Line of credit payable – – 16,875 2,500 – – – – 19,375 Deferred revenue 7 – – – – – 3,765 8,123 11,895 Other noncurrent liabilities 11,369 – 35,390 7,101 – 245 5,270 9,849 69,224 Total liabilities 16,790 41,091 455,867 31,634 34,115 58,046 65,975 33,565 737,083 Net assets (deficit): Invested in capital assets, net of related debt 64,978 203,161 138,306 52,250 52,964 37,756 15,804 170,421 735,640 Restricted 2,566 13,016 42,349 9,254 823 193 42,832 58,575 169,608 Unrestricted (deficit) 13,933 19,467 (137,208) 663 (12,874) (42,378) 21,201 32,075 (105,121) Total net assets 81,477 $ 235,644 $ 43,447 $ 62,167 $ 40,913 $ (4,429) $ 79,837 $ 261,071 $ 800,127 $ Hospital and Health Facilities Corporation net assets Information on === page 67 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 63 2. Component Units (continued) Program revenue Operating Capital Total Charges for Grants and Grants and Component Expenses Services Contributions Contributions Units Virgin Islands Housing Authority 48,819 $ 6,499 $ 35,978 $ 7,226 $ 884 $ Virgin Islands Port Authority 65,575 47,671 – 6,561 (11,343) Virgin Islands Water and Power Authority: Electric System 341,328 339,001 – 4,944 2,617 Water System 50,472 37,706 – 3,185 (9,581) Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 86,540 53,393 21,022 360 (11,765) Juan F. Luis Hospital 85,901 48,160 20,282 327 (17,132) University of the Virgin Islands 84,228 17,580 49,640 3,992 (13,016) Other component units 69,192 8,459 55,547 5,400 214 Total activities 832,055 $ 558,469 $ 182,469 $ 31,995 $ (59,122) General revenue: Interest and other 13,960 Forgiveness of debt – Changes in net assets (45,162) Net assets at beginning of year (as restated) 845,289 Net assets at end of year 800,127 $ Information on statements of activities The amount due from the PG at September 30, 2013, amounted to approximately $41.2 million, with $35.3 million due to WAPA Electric and WAPA Water. The amount due to the PG amounted to $3.9 million with $3.6 million due from Roy L. Schneider Hospital. 3. Stewardship, Compliance, and Accountability 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 balanced executive budget no later than May 30. The annual balanced executive budget is prepared 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 === page 68 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 64 3. Stewardship, Compliance, and Accountability (continued) Budgetary Process and Control (continued) 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 re-appropriated item by item. The annual balanced 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-thirds 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 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. === page 69 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 65 3. Stewardship, Compliance, and Accountability (continued) Budget/GAAP Reconciliation The following schedule presents a comparison 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 (deficiency) of revenue and net other financing sources over expenditures for the year ended September 30, 2013 is presented below (expressed in thousands): Deficiency of revenues and net other financing sources over expenditures (20,726) $ Entity difference – deficiency of revenues and net other financing over expenditures – activities with budgets not legally adopted (9,670) Deficiency of revenues and net other financing sources over expenditures – GAAP basis (net change in fund balance) (30,396) $ Controls over spending in special revenue funds and non-appropriated funds are maintained at the Department of Finance by use of budgets and available resources (revenues). 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. 4. Cash and Cash Equivalents Primary Government At September 30, 2013, the PG reported $203.6 million in unrestricted cash and cash equivalents, and $13.1 million in restricted cash and cash equivalents. All of the PG’s bank balances were fully collateralized. Pension Trust Fund GERS considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. At September 30, 2013, GERS held $77.9 million in cash and cash equivalents consisting of: $46.1 million in money market accounts and $17.2 million in operational accounts and $14.6 million in certificates of deposits with maturity time less than 90 days. === page 70 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 66 4. Cash and Cash Equivalents (continued) Component Units At September 30, 2013, discretely component units held $78.1 million in unrestricted cash and cash equivalents and $59.7 million in restricted cash and cash equivalents, of which $3.1 million was not insured, bonded or collateralized as required for public funds of the Government. 5. Investments Primary Government Investments Following is a summary of the investments of the PG, categorized by investment type and maturity as of September 30, 2013: Fair Less Than 1 to 5 Over 5 Value 1 Year Years Years Investments with contractual maturities Certificates of Deposit 1,530 $ 1,530 $ – $ – $ Portfolio investments Commercial Paper 38,691 38,370 – 321 U.S. Government Agencies and Notes 29,640 29,640 – – Total investments with contractual maturities 69,861 69,540 $ – $ 321 $ Investments without contractual maturities Money Market and Mutual Funds 475,926 Total Primary Government Investments 545,787 $ Primary Government Investments (In thousands) Maturity (in years) === page 71 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 67 5. Investments (continued) Primary Government Investments (continued) Interest-Rate Risk – Interest-rate risk represents the exposure to fair 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, virtually 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. At September 30, 2013, the PG’s investments in money market funds were rated AAAm by Standard & Poor’s, and Aaa-mf by Moody’s Investor Service. The PG’s investment in commercial securities were rated A- by Standard & Poor’s, and A2 by Moody’s Investor Services. The PG’s investment in U.S. government agencies were rated AA+ by Standard & Poor’s and Aaa by 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, 2013, more than 5% of the PG’s investments were invested in: Goldman Financial Square Money Market #524 (52.2%), Federated Government Obligation #5 (17.0%), Chesham FNC/Chesh LLC, CPDS (7. 01%), Invesco Treasury #1930 (6.2%), and Goldman Financial Securities Money Market #474 (5.5%). 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, 2013, $544.3 million of investments were held in the name of The Bank of New York Trust Company, N.A, as trustee for the Government. === page 72 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 68 5. Investments (continued) Pension Trust Fund Investments Following is a summary of pension trust fund investments as of September 30, 2013: Fair Less Than 1 to 5 6 to 10 More Than No Stated Value 1 Year Years Years 10 Years Maturity Investments with contractual maturities US government and agency obligations 3,626 $ 1,012 $ 1,443 $ 490 $ 680 $ – $ US Treasury notes 51,514 8,743 24,616 18,155 – – US Treasury bonds 4,175 – – – 4,175 – Municipals 4,820 – 921 240 3,659 – Mutual Funds 525,600 – – – – 525,600 Corporate obligations 33,186 4,051 12,958 9,146 7,031 – Foreign bonds and government obligations 7,418 656 3,421 – 3,340 – Mortgage and asset backed securities 41,623 23 5,230 2,529 33,841 – Investment loan 21,925 – 21,924 – – – 693,887 14,485 $ 70,513 $ 30,560 $ 52,726 $ 525,600 $ Investments without contractual maturities Equity Securities Common stocks - U.S. 154,876 Real Estate Investments Real estate investment trusts 4,252 Havensight Mall - US Virgin Islands 66,600 Renaissance Carambola Beach Resort 12,000 GERS Complex - US Virgin Islands 28,140 Limited partnerships 57,693 Securities lending short-term collateral investment pool 52,361 Total pension fund investments 1,069,809 $ Pension Trust Fund Investments (In thousands) Maturity (in years) Total investments with contractual maturities === page 73 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 69 5. Investments (continued) Pension Trust Fund Investments (continued) 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 market benchmarks that represent their investment style. Any exemption from general guidelines requires approval from 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. === page 74 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 70 5. Investments (continued) Pension Trust Fund Investments (continued) The credit ratings of GERS debt and equity securities include: Standard & Fair Value Poor Moody's US government and agency obligations 1,139 $ AA+ Aaa US government and agency obligations 726 AA+ Aa2 US government and agency obligations 1,013 AA- Aa1 US government and agency obligations 258 Not Rated BBB US government and agency obligations 490 Not Rated Not Rated US Treasury notes 4,175 AA+ Aaa US Treasury bonds 51,514 AA+ Aaa Corporate obligations 32,636 BBB- to AA+ Baa3 to Aa1 Corporate obligations 368 BBB- Not Rated Corporate obligations 182 Not Rated Not Rated Foreign bonds and government obligations 3,427 A1 to AAA Aaa Foreign bonds and government obligations 3,991 Not Rated Baa1 to Aaa Municipals 3,491 A to AAA A1 to Aaa Municipals 1,329 B- to BB+ B3 to B2 Mortgage and asset backed securities 33,753 A+ to AAA Caa3 to Aaa Mortgage and asset backed securities 1,986 CCC to A+ Not Rated Mortgage and asset backed securities 5,884 Not Rated Not Rated Common stocks- US 154,876 Not Rated Not Rated Real estate investment trust 4,252 Not Rated Not Rated Real estate holdings - US Virgin Islands 106,740 Not Rated Not Rated Investment loans 21,925 Not Rated Not Rated Limited partnership 57,693 Not Rated Not Rated Securities lending short-term collateral investment pool 52,361 Not Rated Not Rated Mutual funds 525,600 Not Rated Not Rated Total investments 1,069,809 $ Credit Ratings Pension Trust Fund Investment Credit Ratings (in thousands) === page 75 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 71 5. Investments (continued) Pension Trust Fund Investments (continued) Custodial Credit Risk – The custodial credit risk for investments is the risk that, in the event of the failure of a depository financial institution or other counterparty, 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 loans secured by non-cash collateral amounting to $8.9 million, the entire investment portfolio of GERS was held with a single third-party custodian as of September 30, 2013. Cash collateral held for securities lending transactions is invested in a collective investment pool maintained by the securities lending agent. Foreign Currency Risk – Foreign currency risk is the risk of holding investments in foreign currencies and the risk that those foreign currencies may devalue. GERS has no general investment policy with respect to foreign currency risk. As of September 30, 2013, $9.4 million of GERS’ portfolio was held in foreign cash equivalents and investments, with $2.7 million held in Euro currency, $2.0 million held in pound sterling, $2.8 million held in Australian dollars, $1.9 million in Egyptian pound, and $3 thousand in other currencies. 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 recorded with interest, dividends, and other income or losses reported at fair value. During the fiscal year ended September 30, 2013, GERS reported $7.6 million in forward currency purchases, $7.3 million in forward currency sales, and a foreign exchange gain of $50 thousand. === page 76 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 72 5. Investments (continued) Pension Trust Fund Investments (continued) 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 Street 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 2013 as to the amount of loans the Custodian can make on behalf of 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 no such violations during fiscal year 2013, or losses resulting from the default of the borrowers or the Custodian. Loans are generally terminable on demand. The collateral received shall, (i) 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 loaned securities, (ii) in the case of loaned securities which are not denominated in U.S. dollars or whose primary trading market is not located in the United States, have a market value of 105% of the market value of the loaned securities, or (iii) have a higher value as may be applicable in the jurisdiction in which the loaned securities are customarily traded. Such collateral should be kept, at a minimum, at 100% of the market value of the security for all borrowers throughout the outstanding period of the loans. At September 30, 2013, approximately $60.4 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 position. 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, 2013, such investment pool had a weighted average maturity of 42 days and an average expected maturity of 123 days. Because the loans were terminable on demand, their duration did not generally match the duration of the investments made with cash collateral. === page 77 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 73 5. Investments (continued) Component Unit Investments Following is a summary of component unit investments and maturities as of September 30, 2013: Fair Less Than 1 to 5 6 to 10 Over 10 Value 1 Year Years Years Years Investments with contractual maturities Certificates of deposit 8,982 $ 6,307 $ 2,675 $ – $ – $ Mortgage backed securites – – – – – Corporate bonds 708 283 404 – 21 Guaranteed investment contracts – – U.S. Government agencies and notes 43,431 38,784 4,647 – – Total investments with contractual maturities 53,121 45,374 $ 7,726 $ – $ 21 $ Investments without contractual maturities Common stock 6,212 Mutual funds 6,694 Other investments 31,808 Total component unit investments 97,835 $ Maturity (in years) Component Unit Investments (in thousands) === page 78 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 74 5. Investments (continued) Component Unit Investments (continued) 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. 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. At September 30, 2013, the University of the Virgin Islands’ investments includes corporate bonds with ratings of A- to BBB by Standard & Poor’s. 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. 6. Receivables Primary Government Receivables Receivables for governmental funds at September 30, 2013 consist of the following (expressed in thousands): PFA Debt General Service Total Income taxes 256,188 $ – $ 256,188 $ Real property taxes 137,277 – 137,277 Hotel occupancy taxes 2,529 – 2,529 Excise taxes 1,681 – 1,681 Gross receipts taxes – 131,587 131,587 Tax receivables 397,675 131,587 529,262 Less allowance for doubtful accounts (226,258) (84,055) (310,313) Net tax receivables 171,417 $ 47,532 $ 218,949 Other long-term receivables – Tobacco settlement rights and other 1,748 Total receivables reported in 220,697 $ the statement of net assets === page 79 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 75 6. Receivables (continued) Tax Receivables 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 from income tax withholding and estimated payments are 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 assessed each calendar year on all taxable real property located in the U.S. Virgin Islands. The receivable is recognized, net of estimated uncollectable amounts, in the general fund in the fiscal period for which the tax was assessed. The revenue is recognized in the general fund in the fiscal period for which the property tax is levied, provided the tax is collected within 60 days subsequent to fiscal year-end, unless the facts justify a period greater than 60 days. Receivables recognized before that period are recorded as deferred revenues. 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 Office of the Tax Collector, 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 June 30 and become delinquent if not paid by August 31. === page 80 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 76 6. Receivables (continued) Tax Receivables (continued) For businesses with gross receipts of $120,000 per annum or less, gross receipts taxes are levied on an annual basis based on the amount of gross receipts in excess of $9,000 per month. Businesses with annual gross receipts greater than $120,000, but less than $225,000, are levied on a monthly basis, based on the amount of gross receipts in excess of $9,000 per month. Businesses with annual gross receipts of more than $225,000 are levied on a monthly basis, based on all gross receipts, with no $9,000 per month exemption. Gross receipts tax assessment rates, applied to taxable gross receipts, were as follows: October 1, 2010 through April 30, 2012: 4.0% June 1, 2012 through February 28, 2013: 4.5% March 1, 2013 and thereafter: 5.0% Monthly gross receipts tax filings are due within 30 calendar days following the last day of the calendar month collected. Annual gross receipts tax filings are due within 30 calendar days following the last day of the calendar year. Other Receivables In addition to tax receivables, the PG receives tobacco settlement right payments in connection with a Master Settlement Agreement entered into with certain participating cigarette manufacturers. Under the terms of the agreement, the U.S. Virgin Islands receives .0173593% of annual payments made under the agreement. As of September 30, 2013, the PG reported a receivable of $1.6 million for tobacco settlement right payments. On November 14, 2011, the PG entered into a loan agreement on behalf of GERS in the amount of $13 million, at an interest rate of 4.91% and a maturity date of December 15, 2016. The security for the loan was pledged property tax receipts for tax years prior to, and including, 2005. At September 30, 2013, the outstanding balance of the loan was $8 million, and pledged property tax receipts were sufficient to meet debt service payments. === page 81 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 77 6. Receivables (continued) Component Unit and Pension Trust Fund Receivables Component unit receivables at September 30, 2013, consist of the following (expressed in thousands): Utility service charges 23,918 $ Port fees 3,827 Students 1,976 Patients 27,968 Other 7,376 Total 65,065 $ Loans and advances receivable, net at September 30, 2013, consist of the following (expressed in thousands): Fiduciary Funds Pension Trust Mortgage loans 7,333 $ Personal loans 141,687 Other loans and advances 70 Subtotal 149,090 Less allowance for uncollectible accounts (1,021) Loans and advances receivable, net 148,069 $ === page 82 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 78 7. Unearned Revenue The components of unearned revenue for the general fund as of September 30, 2013 consist of the following (expressed in thousands): Property tax $ 21,942 Matching excise tax 109,457 Income tax 110,804 $ 242,203 8. Interfund Transactions Interfund transfers for the year ended September 30, 2013 consisted of the following (expressed in thousands): PFA PFA Debt Capital West Nonmajor Transfers to General Service Projects Indian Governmental Total General – $ 98,228 $ – $ 700 $ 3,500 $ 102,428 $ PFA Debt Service 725 – 584 – – 1,309 PFA capital projects – – – – – – Nonmajor governmental 3,283 2,595 – – – 5,878 West Indian Company – – – – – – Total 4,008 $ 100,823 $ 584 $ 700 $ 3,500 $ 109,615 $ Transfer from General – $ 725 $ – $ – $ 3,283 $ 4,008 $ PFA Debt Service 98,228 – – – 2,595 100,823 PFA Capital Projects – 584 – – – 584 Nonmajor governmental 3,500 – – – – 3,500 West Indian Company 700 – – – – 700 Total 102,428 $ 1,309 $ – $ – $ 5,878 $ 109,615 $ 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 included a $98.2 million transfer from the PFA Debt Service Fund (a major governmental fund) representing gross receipt tax revenue in excess of bond debt service requirements, and a $3.5 million transfer from the PFA Operating Fund, representing reprogrammed investment income. === page 83 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 79 8. Interfund Transactions (continued) Significant transfers made from the General Fund include a transfer of $2.0 million to the St. Croix Capital Improvement Fund (a non-major governmental fund) and a transfer of $1.0 million to the Crisis Intervention Fund (a non-major governmental fund). Significant transfers from the PFA Debt Service Fund included a transfer of $2.5 million to the PFA Operating Fund (a non-major governmental fund), representing interest earned from unexpended bond proceeds. Due From/To Other Funds The following table summarizes interfund receivables and payables at September 30, 2013 (expressed in thousands): PFA PFA West Debt Capital Nonmajor Indian Nonmajor Due from other funds General Service Projects Governmental Company Enterprise Total General – $ – $ – $ 9,079 $ 4,700 $ 200 $ 13,979 $ PFA Debt Service – – – – – – – PFA capital projects – – – – – 31,089 31,089 Nonmajor governmental 16,421 – – – – 2,128 18,549 Total Governmental Funds 16,421 – – 9,079 4,700 33,417 63,617 Nonmajor enterprise 739 – – – – – 739 Total Enterprise Funds 739 – – – – – 739 Total 17,160 $ – $ – $ 9,079 $ 4,700 $ 33,417 $ 64,356 $ Due to other funds General – $ – $ – $ 16,421 $ – $ 739 $ 17,160 $ PFA Debt Service – – – – – – – Nonmajor governmental 9,079 – – – – – 9,079 Total Governmental Funds 9,079 – – 16,421 – 739 26,239 4,700 – – – – – 4,700 Nonmajor enterprise 200 – 31,089 2,128 – – 33,417 Total Enterprise Funds 4,900 – 31,089 2,128 – – 38,117 Total 13,979 $ – $ 31,089 $ 18,549 $ – $ 739 $ 64,356 $ West Indian Company === page 84 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 80 8. Interfund Transactions (continued) Due From/To Other Funds (continued) The due from (to) other funds includes the following amounts due from the general fund: $4.9 million due to the emergency molasses fund (a non-major governmental fund) for unpaid appropriations, $3.5 million due to the PFA special revenue fund for unpaid matching funds, and $1.3 million due to the elected governor retirement fund. The due to the General Fund is mainly composed of $5.9 million due from the District Street Lighting Fund (a non-major governmental fund) and $2.7 million owed from the bond proceeds fund (a non-major governmental fund) to the general fund. The due to other governmental funds includes $6 million due to the St. Croix Capital Improvement Fund from the General Fund for capital improvement projects, $962.6 thousand due from the Virgin Islands Lottery to the Pharmaceutical Assistance to the Aged Fund and $946 thousand due from the Virgin Islands Lottery to the VI Educational Initiative Fund consisting primarily of 15% of revenue derived from lottery games under contract between the Virgin Islands Lottery and private contractors to be transferred to these funds. The due to PFA Capital Projects funds includes $30.7 million due from the Virgin Islands Next Generation Network (viNGN), a non-major business-type fund in connection with start-up costs in connection with the broadband project. 9. Restricted Assets Primary Government Restricted assets of proprietary funds and business-type activities as of September 30, 2013 include cash and cash equivalents as follows (expressed in thousands): Restricted Assets – Proprietary Funds and Business-type Activities Unemployment insurance funds 9,907 $ WICO debt service funds 1,957 Total restricted assets of proprietary funds and business-type activities 11,864 $ === page 85 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 81 9. Restricted Assets (continued) Component Units Restricted assets of component units include cash and cash equivalents, investments, and receivables as follows (expressed in thousands): Restricted Assets – Component Units Cash and cash equivalents: Debt service and sinking fund requirements 22,984 $ Endowment funds 277 HUD project funds 3,366 Revolving loan funds 19,398 Construction funds 359 Renewal and replacement funds 3,714 Other 9,673 Total cash and cash equivalents 59,771 Investments: Debt service and sinking fund requirements 31,923 Construction funds 11,573 Endowment funds 33,942 Renewal and replacement funds 4,263 Revolving loan funds 3,768 Other 319 Total investments 85,788 Other: Pledged funds 26,062 Total restricted assets of component units 171,621 $ === page 86 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 82 10. Capital Assets Primary Government The capital assets activity for the governmental activities for the year ended September 30, 2013, is summarized as follows (expressed in thousands): Beginning Ending Balance Additions Transfers Disposals Balance Capital assets not being depreciated: Land 193,036 $ 274 $ – $ – $ 193,310 $ Construction in progress 85,687 56,935 (18,644) 483 123,495 Total capital assets not being depreciated 278,723 57,209 (18,644) 483 316,805 Capital assets being depreciated: Land improvements 5,305 335 375 – 6,015 Infrastructure 240,167 974 10,534 – 251,675 Buildings and improvements 449,066 2,196 7,735 – 458,997 Machinery and equipment 156,705 3,512 – – 160,217 Total capital assets being depreciated 851,243 7,017 18,644 – 876,904 Less accumulated depreciation for: Land improvements (3,603) (210) (3,813) Infrastructure (67,005) (8,194) – (75,199) Buildings and improvements (186,716) (12,791) – – (199,507) Machinery and equipment (119,583) (11,349) – – (130,932) Total accumulated depreciation (376,907) (32,544) – – (409,451) Total capital assets being depreciated, net 474,336 (25,527) 18,644 – 467,453 Governmental activities capital assets, net 753,059 $ 31,682 $ – $ 483 $ 784,258 $ === page 87 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 83 10. Capital Assets (continued) Primary Government (continued) Capital assets activity for the business-type activities for the year ended September 30, 2013, is summarized as follows (expressed in thousands): Beginning Ending Balance Additions Transfers Disposals Balance Capital assets not being depreciated: Land 5,147 $ – $ – $ – $ 5,147 $ Construction in progress 13,260 36,528 (2,353) – 47,435 Total capital assets not being depreciated 18,407 36,528 (2,353) – 52,582 Capital assets being depreciated and amortized: Land improvements 348 – – – 348 Buildings and improvements 67,867 59 29 – 67,955 Machinery and equipment 10,459 1,471 2,324 (73) 14,181 Intangible 8,064 53 – – 8,117 Total capital assets being depreciated 86,738 1,583 2,353 (73) 90,601 Less accumulated depreciation and amortization for: Land improvements (341) (189) – – (530) Buildings and improvements (25,663) (2,414) – – (28,077) Machinery and equipment (9,504) (625) – 73 (10,056) Intangible (454) (1,585) – – (2,039) (35,962) (4,813) – 73 (40,702) Total capital assets being depreciated and amortized, net 50,776 (3,230) 2,353 – 49,899 Business-type activities capital assets, net 69,183 $ 33,298 $ – $ – $ 102,481 $ === page 88 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 84 10. Capital Assets (continued) Primary Government (continued) Depreciation expense was charged to functions/programs of the PG for the year ended September 30, 2013 as follows (expressed in thousands): Governmental activities: General government 15,153 $ Public safety 1,823 Health 975 Education 5,768 Public Housing and Welfare 339 Culture and recreation 422 Transportation and communication 8,064 Total depreciation expense – governmental activities 32,544 $ Business-type activities: WICO – depreciation 1,970 $ Other enterprise funds – depreciation 2,843 Total depreciation – business-type activities 4,813 $ === page 89 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 85 10. Capital Assets (continued) Component Units The capital assets activity for the discretely-presented component units for the year ended September 30, 2013 is summarized as follows (expressed in thousands): Beginning Ending Balance Additions Transfers Disposal Balance Capital assets not being depreciated: Land 94,677 $ 2,301 $ – $ – $ 96,978 $ Construction in progress 70,909 44,309 (23,795) 1,659 89,764 Total capital assets not being depreciated 165,586 46,610 (23,795) 1,659 186,742 Capital assets being depreciated: Buildings and improvements 1,700,633 13,079 20,279 273 1,733,718 Airport and marine terminal facilities 148,339 – 1,308 – 149,647 Personal property and equipment 150,989 7,694 2,208 249 160,642 Intangible assets 2,604 – – – 2,604 Total capital assets being depreciated 2,002,565 20,773 23,795 522 2,046,611 Less accumulated depreciation: Buildings and improvements (958,137) (57,274) – 188 (1,015,223) Airport and marine terminal facilities (108,845) (6,746) – – (115,591) Personal property and equipment (103,468) (7,168) – 170 (110,466) Intangible assets (448) – – – (448) Total accumulated depreciation (1,170,898) (71,188) – 358 (1,241,728) Total capital assets being depreciated, net 831,667 (50,415) 23,795 880 804,883 Component unit capital assets, net 997,253 $ (3,805) $ – $ 2,539 $ 991,625 $ === page 90 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 86 10. Capital Assets (continued) Component Units (continued) Depreciation expense charged by each component unit for the year ended September 30, 2013 was as follows (expressed in thousands): Virgin Islands Housing Authority 6,449 $ Virgin Islands Port Authority 20,451 Virgin Islands Water and Power Authority: Electric System 23,320 Water System 4,285 Virgin Islands Government Hospital and Health Facilities Corporation: Roy L. Schneider Hospital 4,269 Juan F. Luis Hospital 3,190 University of the Virgin Islands 3,131 Other component units 6,093 Total depreciation expense– component units 71,188 $ === page 91 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 87 11. Long-Term Liabilities The change in long-term bonds and loans for governmental activities was as follows for the year ended September 30, 2013 (expressed in thousands): Amounts Amounts Beginning Ending Due Within Due Balance Additions Reductions Balance One Year Thereafter Governmental activities: Bonds payable: 2013 A Revenue Bonds – $ 36,000 $ – $ 36,000 $ – $ 36,000 $ 2012 C Revenue Bonds – 35,115 – 35,115 1,670 33,445 2012 Series A & B Revenue and Refunding Bonds – 228,805 – 228,805 10,460 218,345 2012 Series A Revenue Bonds 142,640 – – 142,640 – 142,640 2010 Series A & B Revenue Bonds 399,050 – (1,990) 397,060 2,065 394,995 2009 Series A Revenue Bonds (Cruzan) 38,075 – (585) 37,490 605 36,885 2009 Series A-1, B & C Revenue and Refunding Bonds 420,730 – (24,145) 396,585 25,355 371,230 2009 Series A Revenue Bonds (Diageo) 250,000 – – 250,000 4,040 245,960 2006 Series A Revenue Bonds 211,680 – (2,805) 208,875 2,905 205,970 2006 Series A Tobacco Bonds 7,290 – – 7,290 – 7,290 2004 Series A Revenue Bonds 71,430 – (3,995) 67,435 4,195 63,240 2003 Series A Revenue Bonds 245,325 – (3,815) 241,510 4,010 237,500 2001 Series A Tobacco Bonds 14,180 – (1,535) 12,645 1,405 11,240 1999 Series A Revenue Bonds 74,165 – (74,165) – – – Total bonds payable 1,874,565 299,920 (113,035) 2,061,450 56,710 2,004,740 Plus (less): Deferred losses on refundings (14,126) – 854 (13,272) (854) (12,418) Bonds premium 35,499 16,942 (2,319) 50,122 2,656 47,466 Bonds discount (4,728) (164) 1,359 (3,533) (177) (3,356) Bonds accretion 3,794 706 – 4,500 4,500 – Total bonds payable, net 1,895,004 317,404 (113,141) 2,099,267 62,835 2,036,432 Loans payable: Series 2013A Note – 2,660 (296) 2,364 886 1,478 Series 2013B Note – 40,000 (40,000) – – – Series 2012A Tax Increment Financing 15,700 (2,175) 13,525 245 13,280 Series 2011 B Note 10,141 – (2,098) 8,043 178 7,865 Series 2011 A Note 29,915 – (29,915) – – – Series 2010 A Working Capital Notes 131,400 – (131,400) – – – Series 2009 Note 4,266 – (1,639) 2,627 1,728 899 Total loans payable 191,422 42,660 (207,523) 26,559 3,037 23,522 Total governmental bonds and loans 2,086,426 $ 360,064 $ (320,664) $ 2,125,826 $ 65,872 $ 2,059,954 $ === page 92 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 88 11. Long-Term Liabilities (continued) The change in other long-term liabilities for governmental activities was as follows for the year ended September 30, 2013 (expressed in thousands): Amounts Amounts Beginning Ending Due Within Due Balance Additions Reductions Balance One Year Thereafter Other liabilities: Accrued compensated absences 72,870 $ – $ (21,588) $ 51,282 $ 5,239 $ 46,043 $ Retroactive union arbitration 195,286 – – 195,286 – 195,286 Litigation 12,908 7,956 (7,810) 13,054 137 12,917 Landfill closure and postclosure costs 72,398 23,412 – 95,810 – 95,810 Accrued arbitrage rebate 13,635 – (13,635) – – – Post employment benefit 245,079 39,895 – 284,974 – 284,974 Total other liabilities 612,176 $ 71,263 $ (43,033) $ 640,406 $ 5,376 $ 635,030 $ Accrued compensated absences, retroactive union arbitration, litigation, landfill closure and post- closure costs, accrued arbitrage rebates and post-employment benefits to retirees such as health insurance, are generally expected to be liquidated with resources derived from the general fund. Changes in long-term liabilities for business-type activities were as follows for the year ended September 30, 2013 (expressed in thousands): Amounts Amounts Beginning Ending Due Within Due Balance Additions Reductions Balance One Year Thereafter Business-type activities: Workers compensation claims 26,661 $ 9,903 $ (12,773) $ 23,791 $ 3,047 $ 20,744 $ Loan payable - US Treasury 41,747 38,000 (3,341) 76,406 76,406 – Note payable - WICO 21,764 – (525) 21,239 – 21,239 Total business-type activities 90,172 $ 47,903 $ (16,639) $ 121,436 $ 79,453 $ 41,983 $ === page 93 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 89 11. Long-Term Liabilities (continued) 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. === page 94 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 90 11. Long-Term Liabilities (continued) Bonds Payable Bonds payable outstanding at September 30, 2013 are comprised of the following (thousands): Primary Government - Bonds Payable Bonds Payable Maturity Rates (%) Balance 2013 Series A Revenue Refunding Bonds 2024 5.00 - 5.25 36,000 $ 2012 Series C Revenue Bonds 2042 4.00 - 5.00 35,115 2012 Series A & B Revenue and Refunding Bonds 2032 2.25 - 5.25 228,805 2012 Series A Revenue Bonds 2032 4.00 - 5.00 142,640 2010 Series A & B Revenue Bonds 2029 4.00 - 5.25 397,060 2009 Series A Revenue Bonds (Cruzan) 2039 3.00 - 6.00 37,490 2009 Series A-1, B & C Revenue and Refunding Bonds 2040 3.00 - 5.00 396,585 2009 Series A Revenue Bonds (Diageo) 2038 6.00 - 6.75 250,000 2006 Series A Revenue Bonds 2029 3.50 - 5.00 208,875 2006 Series A, B, C & D Tobacco Turbo and Capital Appreciation Bonds 2035 6.25 - 7.625 7,290 2004 Series A Revenue Bonds 2024 4.00 - 5.25 67,435 2003 Series A Revenue Bonds 2033 4.00 - 5.25 241,510 2001 Series A Tobacco Bonds 2031 5.00 12,645 Subtotal 2,061,450 Plus (less): Deferred costs on refundings (13,272) Bonds premium 50,122 Bonds discount (3,533) Bonds accretion 4,500 Total 2,099,267 $ === page 95 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 91 11. Long-Term Liabilities (continued) Bonds Payable (continued) On September 19, 2013, the Public Finance Authority (“PFA”) issued the 2013 Series A Revenue Refunding Bonds (the “2013 Series A Bonds”), the proceeds of which amounted to $36.0 million. The Government has pledged matching funds, described below, for the timely payment of the principal and interest on the 2013 Series A Bonds. The 2012 Series A Bonds bear interest at rates ranging from 5.00% to 5.25%, and mature on October 1, 2018 to October 1, 2024. The bonds were issued to: (i) provide a partial advance refunding of the 2004 Series A Bonds amounting to $14.7 million, provide a partial advance refunding of the 2009 Series A-1 Bonds amounting to $1.6 million, and provide a partial advance refunding of the 2009 Series B Bonds amounting to $16.7 million, (ii) fund the debt service requirements of the bond issuance, and (iii) pay the costs of issuing the bonds. The October 1, 2014 advance refunding resulted in a net present value economic gain of $4.2 million. The 2013 Series A Bonds maturing on October 1, in the years 2018 and 2024 are subject to mandatory sinking fund redemptions at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption beginning October 1, 2015. The matching funds pledged for the payment of the bonds consist of annual advance payments received from the U.S. Department of the Treasury of excise taxes imposed and collected under the Internal Revenue laws of the United States on rum products produced in the U.S. Virgin Islands 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. Amounts to be received by the Government from federal rum excise tax are deposited directly into trust accounts in accordance with the Indenture of Trust for bond debt service payments. The amounts to be received are 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 position, and recognized as income in the subsequent fiscal year. === page 96 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 92 11. Long-Term Liabilities (continued) Bonds Payable (continued) The rate of federal rum excise tax is determined by Congress. In November 1999, Congress increased the federal rum excise tax rate from $10.50 to $13.25 per proof gallon. Since then, Congress has extended the higher rate seven times. Under the American Taxpayer Relief Act of 2013, the rate was in effect through December, 31, 2013. On September 1, 2013, PFA issued the 2012 Series A (Working Capital) Revenue Bonds, the proceeds of which amounted to $142.6 million. The Government has pledged matching funds, described below, for the timely payment of the principal and interest on the 2012 Series A Revenue Bonds. The 2012 Series A Bonds bear interest at rates ranging from 4.00% to 5.00%, and mature from 2014 to 2032. The bonds were issued to: (i) provide working capital to the PG to finance various operating expenses, (ii) fund the debt service requirements of the bond issuance, and (iii) pay the costs of issuing the bonds. The 2012 Series A Bonds maturing on October 1, in the years 2022, 2027, and 2032 are subject to mandatory sinking fund redemptions at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption. On December 19, 2012, PFA issued the 2012 Series C Revenue Bonds, the proceeds of which amounted to $35.15 million. The Government has pledged gross receipts taxes, for the timely payment of the principal and interest on the 2012 Series C Bonds. The 2012 Series C Bonds, bear interest at rates ranging from 4.00% to 5.00% and mature from 2014 to 2042. The Series 2012 C Bonds were issued to: (i) finance the costs of certain energy and water conservation projects in the Territory (ii) fund the debt service requirements of the bond issuance, and (iii) pay the costs of issuing the bonds. The 2012 Series C Bonds maturing on October 1, in the years 2017, 2030 and 2042 are subject to mandatory sinking fund redemptions at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption. === page 97 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 93 11. Long-Term Liabilities (continued) Bonds Payable (continued) On November 20, 2012, PFA issued the 2012 Series A and B Revenue and Refunding Bonds, the proceeds of which amounted to $228.8 million. The Government has pledged gross receipts taxes, for the timely payment of the principal and interest on the 2012 Series A and B Revenue and Refunding Bonds. The 2012 Series A Bonds, amounting to $197.0 million, bear interest at rates ranging from 2.25% to 5.00% mature from 2013 to 2032. The 2012 Series B Bonds, amounting to $31.7 million, bear interest at the rate of 5.25% and mature from 2013 to 2027. The Series 2012 A Bonds were issued to: (i) refund the 1999 Series A Bonds, (ii) repay the Series 2010 A-1 and 2010 A-2 Notes, (iii) fund the debt service requirements of the bond issuance, and (iv) pay the costs of issuing the bonds. The 2012 Series A Bonds maturing on October 1, in the years 2017, 2022 and 2032 are subject to mandatory sinking fund redemptions at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption. The current refunding of the Series 1999 A Bonds resulted in an economic gain of net present value savings of $7.7 million. The Series 2012 B Bonds were issued to: (i) refinance the Series 2011 A Note (ii) fund the debt service requirements of the bond issuance, and (iii) pay the costs of issuing the bonds. The 2012 Series B Bonds maturing on October 1, 2027 are subject to mandatory sinking fund redemptions at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption. On July 8, 2010, PFA issued the 2010 Series A and B Revenue Bonds, the proceeds of which amounted to $399.0 million. The Government has pledged matching funds for the timely payment of the principal and interest on the 2010 Series A and B Revenue Bonds. The 2010 Series A Bonds, amounting to $305.0 million, bear interest at rates ranging from 4.00% to 5.00% mature from 2013 to 2029. The 2010 Series B Bonds, amounting to $94.0 million, bear interest at rates ranging from 5.00% to 5.25% and mature from 2025 to 2029. The bonds were issued to: (i) provide working capital to the PG to finance various operating expenses, (ii) refinance a portion of the outstanding Series 2009 B1 and B2 Notes, (iii) fund the debt service requirements of the bond issuance, and (iv) to pay the costs of issuing the bonds. The 2010 Series A Bonds maturing on October 1, in the years 2020, 2025, and 2029 are subject to mandatory sinking fund redemptions at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption. === page 98 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 94 11. Long-Term Liabilities (continued) Bonds Payable (continued) The 2010 Series B Bonds maturing on October 1, in the years 2025 and 2029 are subject to mandatory sinking fund redemptions at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption On December 17, 2009, PFA issued the 2009 Series A Revenue Bonds (the “Cruzan Bonds”) amounting to $39.1 million. The Government has pledged matching funds generated from the sale of Cruzan rum products for the timely payment of the principal and interest of the Cruzan Bonds. The Cruzan Bonds bear interest at rates ranging from 3.00% to 6.00% and mature from 2010 to 2039. The proceeds of the Cruzan Bonds were used to: (i) finance the costs of a wastewater treatment facility and renovations at the Cruzan VIRIL, Ltd. (“Cruzan”) rum distillery on the island of St. Croix, (ii) fund debt service reserve accounts and (iii) pay the costs of issuing the bonds. The bonds maturing October 1, 2039 are subject to mandatory sinking fund redemptions beginning October 1, 2020, at a redemption price equal to 100% of the principal amount plus interest accrued to the date of redemption. In association with the issuance of the Cruzan Bonds, the Government entered into an agreement with Cruzan on October 6, 2009, to provide marketing support payments, production incentive payments, continuation of molasses subsidies and other tax incentives to retain Cruzan as part of the rum industry in the U.S. Virgin Islands. Marketing and incentive payments to Cruzan amounted to $44.9 million, $33.5 million, $54.7 million and $3.9 million for the years ended September 30, 2013, 2012, 2011 and 2010. On October 1, 2009, PFA issued the 2009 Series A-1, A-2, B and C Revenue and Refunding Bonds, the proceeds of which amounted to $458.8 million. The Government has pledged matching funds for the timely payment of principal and interest on the 2009 Series A-1, A-2, B and C Revenue and Refunding Bonds. The 2009 Series A-1 Bonds amounted to $86.3 million. The 2009 Series A-1 Bonds bear interest at rates ranging from 3.00% to 5.00% and mature from 2010 to 2039. The Series A-1 Bonds were issued to: (i) fund certain capital projects, (ii) fund debt service reserve accounts, and (iii) pay certain costs of issuing the bonds. === page 99 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 95 11. Long-Term Liabilities (continued) Bonds Payable (continued) The 2009 Series A-2 Bonds amounted to $8.6 million. The 2009 Series A-2 Bonds bear an interest rate of 3.00% and mature from 2010 to 2012. The Series A-2 Bonds were issued to: (i) fund certain capital projects, (ii) fund debt service reserve accounts and (iii) pay certain costs of issuing the bonds. The 2009 Series B Bonds amounted to $266.3 million, bear an interest rate of 5.00%, and mature from 2010 to 2025. The 2009 Series B Bonds were issued to: (i) current refund the 1998 Series A Bonds, (ii) fund debt service reserve accounts, and (iii) pay certain costs of issuing the bonds. The 2009 Series C Bonds amounted to $97.5 million, bear an interest rate of 5.00% and mature from 2010 to 2022. The 2009 Series C Bonds were issued to: (i) current refund the 1998 Series E Revenue and Refunding Bonds, (ii) fund debt service reserve accounts and (iii) pay certain costs of issuing the bonds. The current refunding of the 1998 Series A and E Bonds, on October 28, 2009, was made in order to obtain lower interest rates. The economic gain obtained by this current refunding is the difference between the present value of old debt service requirements and the new debt service. This refunding resulted in a debt service saving of approximately $35.9 million and an economic gain of approximately $35.6 million. The 2009 Series A-1, B and C Bonds are subject to mandatory sinking fund installment redemptions beginning October 1, 2020 at a redemption price equal to 100% of the principal amount, plus interest accrued, to the date of redemption. === page 100 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 96 11. Long-Term Liabilities (continued) Bonds Payable (continued) On July 9, 2009, PFA issued the 2009 Series A Bonds (the “Diageo Bonds”) amounting to $250 million. The Diageo Bonds mature from 2013 to 2038 at interest rates ranging from 6.00% to 6.75%. The proceeds of the bonds were issued to: (i) provide a grant to Diageo USVI, Inc. (the producer of Captain Morgan rum products) to construct a rum distillery and warehouse on the island of St. Croix, (ii) to redeem the Subordinated Revenue Bond Anticipation Notes Series 2009A issued to finance preliminary costs of the Diageo construction project, (iii) to fund debt service reserve accounts, and (iv) to finance capitalized interest and costs associated with the issuance of the bonds. The PG has pledged matching funds generated from the sale of Captain Morgan rum products for the timely payment of the principal and interest on the Diageo Bonds. The Diageo Bonds maturing on or after October 1, 2020 are subject to optional redemption on or after October 1, 2019, at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption. In association with the issuance of the Diageo Bonds, the Government entered into an agreement with Diageo USVI, Inc. on June 17, 2008, to provide marketing support payments, production incentive payments, continuation of molasses subsidies and other tax incentives to attract Diageo USVI, Inc. as part of the rum industry in the U.S. Virgin Islands. Marketing and incentive payments to Diageo USVI, Inc. amounted to $39.1 million and $23.1 million for the years ended September 30, 2013 and 2012. On September 28, 2006, PFA issued the 2006 Series Gross Receipts Revenue Bonds (“2006 Series Bonds”), the proceeds of which amounted to $219.5 million. The Government has pledged gross receipts tax revenues for the timely payment of the principal and interest on the 2006 Series Bonds. The 2006 Series Bonds bear interest at 3.50% to 5.00% and mature from 2007 to 2029. The proceeds of the bonds were issued to: (i) advance refund a portion of the Series 1999A Revenue Bonds, (ii) pay the cost of a termination fee in connection with an outstanding swap option agreement, (iii) fund certain capital projects, (iv) fund debt service reserve accounts, (v) pay certain costs of issuing the Series 2006 Bonds, and (vi) fund a net payment reserve account for a new swap agreement in connection with the refunding. The 2006 Series Bonds maturing on or before October 1, 2016 are not subject to optional redemption. === page 101 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 97 11. Long-Term Liabilities (continued) Bonds Payable (continued) The advance refunding of the 2020 through 2029 maturities of the 1999 Series A Bonds was made in order to obtain lower interest rates. The economic gain obtained by this advance refunding is the difference between the present value of old debt service requirements and the new debt service. This refunding resulted in a debt service saving of approximately $40.8 million and an economic gain of approximately $25.6 million. The proceeds of the 2006 Series Bonds related to the refunding were placed in a trust account to provide for all future debt service payments on the 2020 through 2029 maturities of the 1999 Series A Bonds. Approximately $180.0 million in funds were deposited into the Escrow Fund accounts. At September 30, 2013, $162.9 million of the defeased 1999 Bonds remained outstanding. On March 15, 2006, the Tobacco Settlement Financing Corporation (“TSFC”) issued the 2006 Tobacco Settlement Asset-Backed Bonds, Subordinated Series 2006 A, B, C & D Turbo and Capital Appreciation Bonds amounting to $48.1 million, with an issue value of $7.3 million (net of accretion of $40.8 million). The bonds are secured and payable from collections including all Tobacco Settlement Revenues to be received by TSFC, reserves, amounts held in other accounts established by the indenture and TSFC’s rights under the purchase agreement. The proceeds have been used for the purpose of (i) financing several capital hospital and health development projects for the benefit of the Virgin Islands and its residents, (ii) pay certain costs of issuance relating to the Series 2006 Bonds, and (iii) fund operating costs. Interest on the Series 2006 Tobacco Settlement Asset-Backed Bonds is not paid currently, but accretes from the date of delivery, compounded every May 15 and November 15, commencing May 15, 2006 through the final maturity date of May 15, 2035. Interest yields on the Bonds range from 6.25% to 7.63%. The series are subject to early redemption at accreted value beginning May 15, 2023, provided that the 2001 Tobacco Settlement Asset-Backed Series A Bonds have been paid in full. === page 102 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 98 11. Long-Term Liabilities (continued) Bonds Payable (continued) On December 1, 2004, PFA issued the 2004 Series A Bonds, the proceeds of which amounted to $94.0 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. On September 19, 2013, PFA issued the Series 2013A Bonds to partially refund the Series 2004 A Bonds for principal payments due October 1, 2013, 2017 and 2018 amounting to $14.7 million. On December 17, 2003, PFA issued the Series 2003A Revenue Bonds, the proceeds of which amounted to approximately $268.0 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. The Series 2003A Revenue Bonds are not subject to optional redemption prior to October 1, 2014. === page 103 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 99 11. Long-Term Liabilities (continued) Bonds Payable (continued) On November 20, 2001, TSFC issued the 2001 Tobacco Settlement Asset-Backed Series A Bonds amounting to $23.7 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 each May and November 15 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. The 2001 Series A Tobacco Bonds payable at September 30, 2013 amounted to $12.6 million. 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, 2013, resulted in early redemption of $200 thousand during fiscal year 2013. 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) finance certain costs of issuing the bonds. On September 28, 2006, PFA advance refunded a portion of the 1999 Bonds with maturity dates of October 1, 2020 to October 1, 2029 totaling $162.9 million. The proceeds of the refunding were placed in a trust account to provide for all future debt service payments on the 2020 through 2029 maturities of the bonds. Approximately $180 million was deposited with the refunding bond escrow agent to fund the Escrow Fund accounts. At September 30, 2013, $162.9 million of the defeased 1999 Series A Revenue Bonds remain outstanding. === page 104 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 100 11. Long-Term Liabilities (continued) Bonds Payable (continued) On December 14, 2012, PFA current refunded the Series 1999 A Bonds with maturity dates of October 1, 2013 to October 1, 2020 totaling $66.8 million with the issuance of the Series 2012A Revenue and Refunding Bonds. The current refunding of the Series 1999 A Bonds resulted in an economic gain of net present value savings of $7.7 million. On May 1, 1998, PFA issued the 1998 Series A and B Bonds to advance refund previously issued bonds 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, 2013, $88.4 million of the above-mentioned defeased bonds were outstanding. On June 15, 1992, PFA issued the Series 1992 Revenue Bonds. 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, 2013, $89.3 million of the defeased bonds were outstanding. 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. === page 105 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 101 11. Long-Term Liabilities (continued) Bonds Payable (continued) Revenue Bonds Series 2006 Series 2009 A (Diageo) Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Maturity Year: 2014 1,405 $ 632 $ 4,010 $ 12,066 $ 4,195 $ 3,414 $ 2,905 $ 10,049 $ – $ – $ 4,040 $ 16,581 $ 2015 – 562 4,210 11,861 4,405 3,200 3,015 9,901 – – 4,290 16,332 2016 – 562 4,420 11,639 4,625 2,967 3,125 9,748 – – 4,575 16,048 2017 – 562 4,655 11,401 4,865 2,718 3,240 9,589 – – 4,890 15,729 2018 – 562 4,895 11,150 5,120 2,456 3,360 9,423 – – 5,235 15,387 2019 - 2023 3,195 2,490 28,625 51,513 29,935 7,841 56,155 42,050 – – 32,155 70,954 2024 - 2028 – 2,011 36,690 43,266 14,290 760 94,300 22,006 – – 44,800 58,302 2029 - 2033 8,045 1,207 117,310 27,704 – – 42,775 1,913 – – 62,485 40,622 2034 - 2038 – – 36,695 917 – – – – 48,145 – 87,530 15,567 discount – – – – – – – – (40,855) – – – Total 12,645 $ 8,588 $ 241,510 $ 181,517 $ 67,435 $ 23,356 $ 208,875 $ 114,679 $ 7,290 $ – $ 250,000 $ 265,522 $ Revenue Bonds Revenue Bonds Series 2010 B Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Maturity Year: 2014 1,600 $ 3,881 $ 16,740 $ 11,170 $ 7,015 $ 3,974 $ 605 $ 2,186 $ 2,065 $ 15,067 $ – $ 4,833 $ 2015 1,650 3,830 17,600 10,311 7,210 3,618 640 2,154 2,155 14,983 – 4,833 2016 1,705 3,773 18,505 9,409 7,745 3,244 670 2,122 2,270 14,883 – 4,833 2017 1,770 3,710 19,450 8,460 8,040 2,850 705 2,087 2,395 14,766 – 4,834 2018 1,840 3,640 20,450 7,462 8,440 2,438 740 2,051 2,520 14,643 – 4,834 2019 - 2023 10,500 16,897 102,485 20,878 44,535 5,517 4,360 9,600 31,420 70,712 3,755 23,988 2024 - 2028 13,320 14,079 36,535 3,102 – – 5,875 8,092 159,950 48,636 61,065 15,881 2029 - 2033 17,085 10,312 – – – – 7,930 6,036 100,235 5,074 29,230 1,555 2034 - 2038 21,935 5,458 – – – – 10,700 3,262 – – – – 2039 - 2043 10,430 528 – – – – 5,265 321 – – – – Total 81,835 $ 66,108 $ 231,765 $ 70,792 $ 82,985 $ 21,641 $ 37,490 $ 37,911 $ 303,010 $ 198,764 $ 94,050 $ 65,591 $ Revenue Bonds Revenue & Refunding Revenue Bonds Revenue Bonds Series 2012 A Series 2012 A Series 2012 B Series 2012 C Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Maturity Year: 2014 – $ 7,044 $ 9,030 $ 8,037 $ 1,430 $ 1,629 $ – $ 1,616 $ – $ 976 $ 55,040 $ 103,155 $ 2015 800 7,028 9,940 7,824 1,505 1,552 1,670 1,591 – 1,830 59,090 101,410 2016 825 6,995 10,815 7,590 1,585 1,470 1,720 1,540 2,210 1,774 64,795 98,597 2017 850 6,962 11,110 7,344 1,670 1,385 1,775 1,488 2,320 1,661 67,735 95,546 2018 900 6,927 11,415 7,090 1,765 1,295 1,820 1,434 7,555 1,415 76,055 92,207 2019 - 2023 5,450 34,028 27,585 30,769 10,340 4,944 8,870 5,968 18,015 3,335 417,380 401,484 2024 - 2028 7,500 32,566 40,420 24,576 13,445 1,839 2,385 4,528 5,900 310 536,475 279,954 2029 - 2033 126,315 21,850 76,750 10,078 – – 3,680 3,821 – – 591,840 130,172 2034 - 2038 – – – – – – 5,775 2,606 – – 210,780 27,810 2039 - 2043 – – – – – – 7,420 964 – – 23,115 1,813 – – – – – – – – – – (40,855) – 142,640 $ 123,400 $ 197,065 $ 103,308 $ 31,740 $ 14,114 $ 35,115 $ 25,556 $ 36,000 $ 11,301 $ 2,061,450 $ 1,332,148 $ Less unamortized discount Series 2009 C Revenue Bonds Series 2003 A Series 2004 A Less unamortized Activities Series 2009 B Revenue Bonds Series 2006 Series 2013 A Series 2010 A Series 2009 A (Cruzan) Revenue Bonds Revenue Bonds Governmental Activities – Bonds Series 2009 A-1 Revenue Bonds Tobacco Bonds Revenue Bonds Total Government Series 2001 A Tobacco Bonds Revenue Bonds Revenue Bonds === page 106 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 102 11. Long-Term Liabilities (continued) Notes Payable On August 22, 2013, PFA issued the Series 2013B Subordinate Lien Revenue Anticipation Note (“Series 2013B Note”) amounting to $40.0 million. The Government has pledged gross receipts taxes for the timely payment of the Series 2013B Note. The Series 2013B Note bears interest at 6.0% and requires payment in full by September 30th of each fiscal year under the redemption provisions of the Note. The Series 2013B Note was issued to: (i) finance a settlement with the Internal Revenue Service in connection with an audit of the Series 2006 Bonds, (ii) to finance certain operating expenses of the PG, and (iii) to fund certain costs of issuing the Series 2013B Note. On September 30, 2013, the Series 2013B Note was redeemed in full. On May 14, 2013, PFA issued the Series 2013A Subordinate Lien Revenue Note (“Series 2013A Note”) amounting to $6.7 million. The Government has pledged gross receipts taxes for the timely payment of the Series 2013A Note. The Series 2013A Note bears interest at the 90 day Libor rate plus 375 points to be paid in thirty-six (36) monthly payments. The Series 2013A Note was issued to: (i) finance the acquisition of a fleet of police vehicles for the PG, and (ii) to fund certain costs of issuing the Series 2013A Note. Debt service requirements for the Series 2013A Notes at September 30, 2013 are as follows (expressed in thousands): Principal 887 $ 886 591 2,364 $ Year 2014 2015 2016 === page 107 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 103 11. Long-Term Liabilities (continued) Notes Payable On October 1, 2012, PFA entered into the Series 2012A Tax Increment Revenue Term Loan Note (the “Series 2012A Notes”) in the amount of $13.7 million. The Series 2012A Notes were issued as part of a Term Loan Note Conversion of the Series 2009A Notes which were issued to provide a loan to the PG (the “Series 2009A Tax Increment Revenue Loan Note”) to finance the developmental costs of a shopping complex on the island of St. Croix. The Series 2012A Notes are a term loan with twenty quarterly payments (five years) based on a twenty-five (25) year amortization schedule, with a final payment on October 1, 2018. The Notes bear interest of 300 points above the J.P. Morgan Chase Prime Rate, or 6.25%, whichever is higher. As of September 30, 2013, PFA had $13.5 million in outstanding Series 2012A Notes. Debt service requirements for the Series 2012A Notes at September 30, 2013 were as follows (expressed in thousands): Principal Interest 245 $ 851 $ 261 835 275 821 295 801 12,449 199 13,525 $ 3,507 $ Year 2014 2015 2016 2017 2018 On November 14, 2011, PFA entered into the 2011 Property Tax Revenue Anticipation Note (the “Series 2011B Note”) in the amount of $13.0 million. The proceeds were used to pay incentive payments to government employees who elected to retire early under Act No. 7261 the “Economic Stability Act”, as amended by Acts No. 7270 and 7307. The Series 2011B Note is a general obligation of the PG, secured by a first priority lien on real property taxes levied for tax years up to and including tax year 2005. Also, the PG has pledged a third subordinate lien on the gross receipts taxes, along with all fines, interest, penalties and other charges related to gross receipts taxes. Interest on the Series 2011B Note accrues monthly at the rate of 4.91% until the Series 2011B Note reaches maturity on December 15, 2016. On that date, the Series 2011B Note will convert to a two year term loan. As of September 30, 2013, the outstanding amount of the Series 2011B Note was $8.04 million. === page 108 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 104 11. Long-Term Liabilities (continued) Notes Payable Debt service requirements for the Series 2011B Note at September 30, 2013 were as follows (expressed in thousands): Principal Interest 178 386 – 386 – 386 7,865 89 8,043 $ 1,247 $ Year 2014 2015 2016 2017 On April 29, 2011, PFA entered into the Subordinate Lien Revenue Bond Anticipation Notes (the “Series 2011A Notes”), in the amount of $32.2 million, for the purpose of upgrading the broadband infrastructure, equipment and technology in the U.S. Virgin Islands. The Series 2011A Notes are a general obligation of the PG, secured by gross receipts taxes. Interest on the Series 2011A Notes accrued quarterly at the rate of 4.75% until the Notes reached maturity on April 29, 2013. On that date the Notes were converted to a term loan with Banco Popular de Puerto Rico in the amount of $32.2 million at an interest rate of 6.25% for sixty (60) months. On November 20, 2012, the Series 2011A Notes were defeased with the issuance of the Series 2012 B Revenue and Refunding Bonds. On November 4, 2010, PFA entered into the Subordinated Lien Revenue Bond Anticipation Notes (the “Series 2010A Notes”), which modified and amended the Series 2009B Notes, extending the maturity date to October 1, 2013, with a maximum amount of $78.84 million from the Agent Lender and $52.56 million from the Syndicate Lender. The Series 2010A Notes are a general obligation of the PG, secured by gross receipts taxes and, commencing October 1, 2013, a set-aside amount equal to four percent (4%) of matching fund revenues. The Series 2010A Notes accrue interest at a rate of 400 points above the 90-day LIBOR rate, not to be less than a minimum rate of 5.50%, with interest payments due on the first business day of the month. On December 13, 2012, the Series 2010A Notes were defeased with the issuance of the Series 2012 A Revenue and Refunding Bonds. === page 109 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 105 11. Long-Term Liabilities (continued) Notes Payable (continued) In August 2009, the territory reserve balance of the Unemployment Trust Fund (UTF) became inadequate to cover expenditures for unemployment compensation (UC) benefits. UC benefits are an entitlement program administered through the U.S. Treasury, and the PG is legally liable to pay benefits even if the UTF becomes insolvent. As of September 30, 2013, the PG had borrowed $76.4 million from the U.S. Treasury. The American Recovery and Reinvestment Act of 2009 (P.L. 111-5 Section 2004) temporarily waived interest payments on UTF loans through September 30, 2012. Beginning in 2012, the loan became subject to interest at a federal rate of 2.943% and the PG paid $1.07 million in fiscal year 2012. As of September 30, 2013, the effective interest rate was 2.387% and the PG owed $1.3 million in interest to the UTF. On February 12, 2009, PFA issued the Subordinate Lien Revenue Bond Anticipation Notes (“Series 2009 Notes”), in the amount of $8 million. The Government has pledged gross receipts taxes for the timely payment of the Series 2009 Notes. The Series 2009 Notes initially had an interest rate of 4.75% and a due date of February 1, 2010. PFA elected a conversion of the Series 2009 Notes to term notes with principal and interest payable semi-annually on February 1 and August 1, at an interest rate of 5.40% and a maturity date of August 1, 2015. The proceeds of the Series 2009 Notes were issued: (i) to finance the purchase and installation of 911 emergency communication equipment for the Virgin Islands Police Department and (ii) to pay certain costs of issuing the Series 2009 Notes. === page 110 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 106 11. Long-Term Liabilities (continued) Notes Payable (continued) Debt service requirements for the Series 2009 Notes at September 30, 2013, were as follows (expressed in thousands): Principal Interest 1,728 119 899 24 Total 2,627 $ 143 $ Year 2015 2014 On June 1, 2008, WICO refinanced its outstanding notes payable and obtained an additional $2.3 million in financing for infrastructure improvements. The consolidated notes amounted to $23.6 million, to be repaid in 120 consecutive monthly installments of $154,953 at a fixed interest rate of 6.2%, plus a final payment of the balance of principal, plus any unpaid interest, in 2018. The notes may be prepaid, in whole, or in part, at any time without penalty. WICO has pledged all leases and revenues to secure the notes, and may not declare dividends, or issue additional equity interests without lender approval. As of September 30, 2013, WICO was in compliance with note covenants requiring certain minimum operating revenue thresholds, and the maintenance of a debt service reserve account equal to one year’s debt service payments. === page 111 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 107 11. Long-Term Liabilities (continued) Notes Payable (continued) Debt service requirements for the WICO loan at September 30, 2013, were as follows (expressed in thousands): Principal 2014 – $ 2015 603 2016 642 2017 682 2018 19,311 Total 21,238 $ Year: On October 18, 2013, WICO entered into a refinancing loan agreement with Banco Popular de Puerto Rico amounting to $28.5 million (“WICO loan”). Under the terms of the refinancing agreement WICO pledged: (i) operating revenues arising from the ship’s agent business, and (ii) real property and improvements referred to as the “WICO Dock” including bulkhead and wharf, warehouses, office buildings, maintenance buildings and other facilities. The purpose of the WICO loan is to: (i) repay the existing loan with the bank amounting to $21.2 million, (ii) finance the construction and expansion of the WICO Dock and ship berthing facilities to accommodate larger cruise ships, and (iii) to fund costs associated with the issuance of the WICO loan. The WICO loan bears interest at 6.18%, and requires only interest payments during the first twelve months from the date of closing on the loan. Thereafter, the loan shall be repaid in fifty-nine (59) monthly installment payments of $187 thousand, with a sixtieth (60), final payment of outstanding principal. === page 112 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 108 11. Long-Term Liabilities (continued) Standby Credit Facility On October 9, 2010, PFA entered into a standby credit facility (“credit facility”) with Banco Popular de Puerto Rico in an aggregate principal amount of up to $45.0 million. The purpose of the credit facility was to provide financial liquidity for payments required under Chapter 10 of Title 22 of the VIC upon the failure of a Virgin Islands insurance carrier. Under that legislation, the Virgin Islands Insurance Guaranty Fund was required to maintain a minimum balance of $50.0 million for claimant payments. The credit facility was secured and payable from gross receipts taxes. The initial term of the credit facility was three (3) years at an interest rate on drawn funds equal to the 90-Day LIBOR plus 400 basis points with a minimum rate of 5.50%, payable quarterly in advance, with an option to extend the credit facility for an additional three (3) year term. On February 10, 2012, legislation was enacted authorizing a reduction in the minimum balance to be held by the Virgin Islands Insurance Guaranty Fund from $50.0 million to $10.0 million until September 30, 2015. That legislation was amended on August 9, 2013, to authorize the PG to issue bonds or notes of up to $40.0 million on behalf of the Insurance Guaranty Fund, if necessary for claimant payments. The authorization will terminate on the earlier of (i) the date that funds on deposit in the Insurance Guaranty Fund equal $50.0 million dollars, or (ii) March 31, 2019. On September 9, 2013, the standby credit facility with Banco Popular de Puerto Rico was cancelled. As of September 30, 2013, the balance reported by the PG in the Insurance Guaranty Fund was $27.1 million. === page 113 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 109 11. Long-Term Liabilities (continued) Component Units – Bonds Payable Bonds payable of discretely-presented component units are those liabilities that are paid out of resources pledged by such entities. Bonds payable, outstanding at September 30, 2013, are as follows (expressed in thousands): Interest Bonds Payable Maturity Rates (%) Balance Virgin Islands Water and Power Authority (Electric System) Revenue bonds of 2012 2025 4.00 - 6.06 69,145 $ Revenue bonds of 2010 2033 4.00 - 6.85 76,305 Revenue bonds of 2007 2031 4.50 - 5.00 57,585 Revenue bonds of 2003 2023 4.00 – 5.00 55,855 Virgin Islands Water and Power Authority (Water System) Revenue bonds of 1998 2017 5.00 - 5.5 16,520 Virgin Islands Port Authority Series A Revenue bonds of 2003 2023 5.00 – 5.25 18,005 Series B Revenue bonds of 2003 2015 3.73 – 5.43 3,435 Series C Revenue bonds of 2003 2023 4.40 6,850 Subtotal 303,700 Plus unamortized premium 3,824 Less unamortized discount (88) Bonds payable, net 307,436 Less amount due within one year (15,359) Bonds payable, due in more than one year 292,077 $ === page 114 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 110 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) Following is a schedule of changes in bonds payable, loans payable and other long-term liabilities for discretely-presented component units for fiscal year ended September 30, 2013 (expressed in thousands): Amounts Amounts Beginning Ending Due Within Due Balance Additions Reductions Balance One Year Thereafter Bonds payable: Virgin Islands Water and Power Authority: Electric System 270,335 $ – $ (7,694) $ 262,641 $ 10,145 $ 252,496 $ Water System 19,225 – (2,793) 16,432 2,960 13,472 Virgin Islands Port Authority 30,762 – (2,399) 28,363 2,254 26,109 Virgin Islands Housing Finance Authority 2,150 – (2,150) – – – Total bonds payable, net 322,472 – (15,036) 307,436 15,359 292,077 Notes payable: Virgin Islands Economic Development Authority 417 – (25) 392 24 368 Virgin Islands Water and Power Authority: – Electric System 11,027 – (2,679) 8,348 2,672 5,676 Virgin Islands Housing Authority 3,155 – (1,602) 1,554 – 1,554 Virgin Islands Port Authority 1,929 – (1,929) – – – Virgin Islands Housing Finance Authority 1,415 – (77) 1,338 78 1,260 University of the Virgin Islands 48,917 4,580 (1,600) 51,897 1,891 50,006 Total loans payable 66,860 4,580 (7,912) 63,529 4,665 58,864 Line of credit payable: Virgin Islands Water and Power Authority: Electric System 16,875 – – 16,875 – 16,875 Water System 2,500 – – 2,500 – 2,500 Total line of credit payable 19,375 $ – $ – $ 19,375 $ – $ 19,375 $ Other long-term liabilities: University of the Virgin Islands 3,768 $ 1,503 $ – $ 5,271 $ – $ 5,271 $ Virgin Islands Housing Authority 28,004 – (16,635) 11,369 566 10,803 Virgin Islands Water and Power Authority: Electric System 31,121 4,269 – 35,390 – 35,390 Water System 6,228 873 – 7,101 – 7,101 Economic Development Authority 1,248 – (1,134) 114 – 114 Juan F. Luis Hospital 51 400 (206) 245 205 40 Virgin Islands Housing Finance Authority 10,639 – (905) 9,734 – 9,734 Total other long-term liabilities 81,059 $ 7,045 $ (18,880) $ 69,224 $ 771 $ 68,453 $ === page 115 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 111 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) In May 2012, the Electric System of WAPA issued the: (i) 2013A Electric System Revenues Refunding Bonds amounting to $17.3 million; (ii) the 2013B Electric System Subordinated Revenue Bonds amounting to $19.7 million; and (iii) the 2013C Electric System Subordinated Revenue Bonds amounting to $32.1 million. The proceeds of the Series 2013A Bonds were used to refund the Electric System Revenue Refunding Bonds, Series 1998 and pay certain costs of issuances of the Series 2013A Bonds. The proceeds of the Series 2013B Bonds were used to refinance a portion of the Electric System Term Loan, make a deposit into the Subordinated Debt Service Reserve Fund sufficient to satisfy the Series 2013B Subordinated Debt Service Fund Requirement and pay certain costs of issuance of the Series 2013B Bonds. The proceeds of the Series 2013C Bonds were used to refinance all or a portion of the Electric System Working Capital Lines of Credit and Overdraft Credit Facility, make a deposit into the Series 2013C Subordinated Debt Service Reserve Fund sufficient to satisfy the Subordinated Debt Service Reserve Fund Requirement and pay certain costs of issuance of the Series 2013C Bonds. In June 2011, the University of the Virgin Islands entered into two capital project loan agreements (loan agreements) in the amounts of $44 million and $16 million, with Rice Capital Access Program, LLC. The purpose of the capital project loans was to: (i) advance refund the University’s 1999 Series A Bonds and 2004 Series A Bonds, and (ii) to pay for construction costs of a 100 bed student residence facility and other construction improvement costs of facilities on the St. Thomas and St. Croix campuses. The advance refunding resulted in a difference between the reacquisition price and the net carrying amount of the old outstanding bonds of approximately $4.5 million and an economic gain of $6.8 million. In March 2010, the Electric System issued the $39 million 2010A Electric System Revenue Refunding Bonds; the $9 million 2010B Electric System Revenue Bonds; and the $37 million 2010C Electric System Revenue Refunding Bonds. The proceeds of the Series 2010A Bonds were used to: i) refund a portion of the Electric System Revenue Refunding Bonds, Series 1998, and ii) pay certain costs of issuance of the Series 2010A Bonds. The proceeds of the Series 2010B and 2010C Bonds were used to: i) finance certain capital expenditures temporarily funded through draws on a line of credit ($9 million) and, ii) to make certain deposits into the Debt Service Revenue Fund sufficient to satisfy the Debt Service Reserve Fund requirement. The proceeds of the three series were also used to pay certain costs of issuance of the 2010A, 2010B, and 2010C Revenue and Refunding Bonds. === page 116 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 112 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) In June 2007, the Electric System issued the $57.6 million 2007A Electric System Subordinated Revenue Bonds, to pay certain costs of issuance of the bonds, to finance the costs of certain capital improvements, refinance capital improvements funded through draws on a Line of Credit and to reinstall a $10.0 million Line of Credit. In June 2003, the Electric System issued the Electric System Revenue Bonds, Series 2003, amounting to $69.9 million. The proceeds from the bonds were used to finance capital improvements, repay $18.0 million of then outstanding lines-of-credit, cover underwriters’ costs, and establish a debt service fund. The Series 2003 Bonds maturing on or after July 1, 2023 are subject to redemption prior to their stated maturity date, at the option of the Electric System, on or after July 1, 2013, as a whole or in part at any time, at a redemption price equal to the principal amount thereof plus accrued interest thereon to the date fixed for redemption. In June 1998, the Electric System issued $110.9 million of 1998 Series A Electric System Revenue and Refunding Bonds. The proceeds from the bonds, and approximately $14 million in funds from the existing debt service and debt service funds, were used to repay outstanding line- of-credit balances, to provide for approximately $30.0 million in funds for the construction of certain capital projects, and to pay underwriters discount and issuance costs of approximately $1.7 million. The remaining proceeds were used to purchase direct obligations of the U.S. government which were placed in an irrevocable trust with an escrow agent to provide all future debt service on the remaining $69.0 million principal amount of the 1991 Series A Electric System Revenue Bonds. Under the terms of the Bond Resolution relating to the Electric System Revenue and Refunding Bonds, payment of the principal and interest is secured by an irrevocable lien on the Electric System’s net revenue, (exclusive of any funds that may be established pursuant to the Bond Resolution for certain specified purposes), including the investments and income, if any, thereof. Under the General Resolution, the Authority is required to maintain a Debt Service coverage ratio at least equal to 1.25 times (125%) the principal of and interest on all Outstanding Senior Bonds for the current and each future fiscal year (the Senior Coverage). === page 117 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 113 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) Under the Electric System Subordinated Revenue Bond Resolution, adopted by the Authority on May 17, 2007, as amended and supplemented (the Subordinated Bond Resolution), the Authority must satisfy the Debt Service coverage ratio of the General Resolution for the Senior Bonds, must maintain a Subordinated Debt Service coverage ratio at least equal to 1.15 times (115%) the principal of and interest on all Outstanding Bonds (the Senior and Subordinate Coverage) and all Outstanding Subordinated Bonds for the current and each future fiscal year, and must maintain at least 1.0 times (100%) the Maximum Aggregate Debt Service for each such fiscal year (total debt coverage). For the year ended June 30, 2013, the Authority’s debt coverage ratio was 216% for senior coverage, 137% for senior and subordinate coverage and 116% for total debt coverage. Section 606(2) of the Subordinated Bond Resolutions provides that if the Authority fails to achieve the required coverage ratios, then the Authority must “take whatever steps it can to produce the amount of net electric revenues required in the following year”. Section 701(3) of the Subordinated Bond Resolutions further provides that if the covenant default continues for 60 days after notice of default without the Authority proceeding with diligence to cure the default. The Authority believes it is taking such steps currently to ensure future compliance with required debt coverage ratios. The Electric System Revenue Bonds are subject to mandatory redemption if (i) any significant part of the Electric System was damaged, destroyed, taken, or condemned, or (ii) any for-profit nongovernmental investor shall acquire an ownership interest in some or all of the assets of the Electric System. In December 1998, the Water System of WAPA issued the 1998 Water System Revenue and Refunding Bonds amounting to $44.2 million. The proceeds from the bonds were used to repay the 1990 Series A Water System Revenue Bonds at a redemption price of 100% and to refund the 1992 Series B Water System Revenue Bonds, repay outstanding lines of credit balances, pay underwriters’ costs, provide funding for a Renewal and Replacement Reserve Fund, and to purchase obligations of the United States Government, which were placed in an irrevocable trust with an escrow agent to provide all future debt service on the remaining principal amount of the 1992 Series B Bonds. === page 118 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 114 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) Payment of principal and interest of the 1998 Series Bonds is secured by an irrevocable lien on the Water System’s net revenues (exclusive of any funds that may be established pursuant to the Bond Resolution for certain other specified purposes) and funds established under the Bond Resolution, including investment securities. To provide additional security, the Water System has conveyed to the bond trustee, a subordinate lien and security interest in the Water System’s General Fund. The Water System is also required to make deposits in a debt service reserve fund in accordance with the Bond Resolution. The Bond Resolution contains certain restrictions and commitments, including the Water System’s covenant to establish and maintain reasonable rates, fees, rentals, and other charges to produce net water revenue, as defined, that will be at least 125% of aggregate annual principal and interest payments. The Water System’s net water revenue for the fiscal years ended June 30, 2013 and 2012 was 174% and 42% of the aggregate debt service as defined in the Bond Resolution. Section 606(2) of the Bond Resolution provides that if the Authority fails to achieve the 125% coverage, the Authority must “take whatever steps it can to produce the amount of net water revenue required in the following fiscal year”. Section 701(3) of the Bond Resolution defines this as a condition of default unless the Authority is proceeding with diligence to cure such default. The management of the Water System advises it is taking necessary steps to ensure future compliance with debt coverage ratios. The 1998 Series Bonds maturing on or after July 1, 2010 are subject to redemption prior to their stated maturity date, at the option of the Water System, as a whole or in part at any time, at a redemption price of 101% through June 30, 2010 and 100% thereafter. The Water System Revenue Bonds are subject to mandatory redemption if (i) any significant part of the water system shall be damaged, destroyed, taken, or condemned or (ii) any for-profit non- governmental investor shall acquire an ownership interest in some or all assets of the Water System. In January 2003, VIPA issued the Marine Revenue Bonds Series 2003A (AMT) and 2003B (federally taxable) with principal amounts of approximately $18 million and $17.4 million, respectively. VIPA is using the proceeds of the bonds to finance the dredging, rehabilitation, and construction of berthing piers for cruise and seagoing vessels at Crown Bay in St. Thomas, and the construction of a mixed used commercial facility. === page 119 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 115 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) In October 2003, VIPA issued the Marine Revenue Bonds Series 2003C (non-AMT), with an authorized principal amount not to exceed approximately $10.8 million. VIPA used the proceeds of the bonds to finance the completion of several projects of rehabilitation and construction of berthing piers and dredging for cruise and seagoing vessels at Crown Bay on the island of St. Thomas, and the construction at Red Hook, Enighed Pond, Gallows Bay Dock, and dredging of the Charlotte Amalie Harbor. The bonds’ indentures contain certain account restrictions and funding covenants to cover interest, debt service, maintenance, and other costs as specified in the corresponding bond indentures. The bonds’ indentures also specify certain debt service coverage requirements determined from net available revenue (as defined) of the Authority’s Marine Division. The provisions of each of the bonds’ indentures require that rates and fees charged for the use of each facility should be sufficient to generate enough revenue to pay all operation and maintenance expenses, exclusive of depreciation and certain noncash charges, of the respective facilities, plus: (i) at least 125% of the principal and interest and redemption account sinking fund deposit requirement of each of the bonds becoming due during such year; (ii) the amount of the debt service reserve fund deposit requirement for such period; (iii) the deposit required to the Renewal and Replacement Fund; and (iv) the amount of the capital improvements appropriations for such period. For the year ending September 30, 2013, VIPA did not comply with the requirement to issue the audited financial statements within 150 days after year-end. However, as per the Authority’s bond indenture, this noncompliance event does not constitute an event of default until the Trustee sends a notification of failure and such failure continues for 90 days. VIPA did receive notification from its Trustee, but noncompliance was covered within the 90 days. In August 1998, VIHFA issued the 1998 Revenue Bonds Series A in the amount of $3.0 million, and on March 1, 1995, VIHFA issued the 1995 Revenue Bonds Series A in the amount of $6.2 million, for the purpose of building single-family housing. The indenture agreements for the bonds require the VIHFA to deposit with the trustee the full amount of the bond proceeds, to purchase Government National Mortgage Association (GNMA) certificates. The servicer is obligated to pay the principal and interest due on the GNMA certificates to the trustee in an amount equal to the scheduled principal and interest payments of the underlying mortgages. All mortgage loans issued by the VIHFA must be originated by the participants and secured by a first priority mortgage lien on the applicable single-family residences. === page 120 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 116 11. Long-Term Liabilities (continued) Component Units – Bonds Payable (continued) Fixed maturities required to pay principal and interest on discretely-presented component units’ bonds payable with fixed maturities at September 30, 2013 are as follows (expressed in thousands): Principal Interest Total 2014 15,345 $ 14,641 $ 29,986 $ 2015 16,040 13,952 29,992 2016 16,785 13,206 29,991 2017 17,605 12,377 29,982 2018 15,745 11,516 27,261 2019 - 2023 86,265 62,244 148,509 2024 - 2028 74,645 28,288 102,933 2029 - 2033 53,590 9,106 62,696 2034 - 2036 7,680 795 8,475 Total 303,700 166,125 $ 469,825 $ Plus unamortized premium 3,824 Less unamortized discount (88) Bonds payable, net 307,436 $ Year === page 121 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 117 12. General Tax Revenue For the year ended September 30, 2013, general tax revenue of the PG consisted of the following (expressed in thousands): PFA Debt PFA Capital Other General Service Projects Governmental Total Income taxes 316,026 $ – $ – $ – $ 316,026 $ Real property taxes 94,086 – – 9,885 103,971 Gross receipts taxes 1,475 152,312 1,946 250 155,983 Excise taxes rum products 176,900 96,907 – 4,885 278,692 Other taxes 52,513 – – 7,593 60,106 Tax revenue 641,000 $ 249,219 $ 1,946 $ 22,613 $ 914,778 Tax revenue recognized on the full accrual basis (19,774) Total tax revenue - government-wide 895,004 $ 13. Governmental Fund Balances For the year ended September 30, 2012, the PG implemented Statement No. 54 of the Governmental Accounting Standards Board, “Fund Balance Reporting and Governmental Fund Type Definitions.” This Statement establishes criteria for classifying fund balances into specifically defined classifications and clarifies definitions for governmental fund types. The classifications reported by the PG include: nonspendable fund balance, restricted fund balance, committed fund balance, assigned fund balance, and unassigned fund balance. The PG utilizes the classification of: (i) nonspendable fund balance to report prepaid expenses, (ii) restricted fund balance to report debt service accounts, (iii) committed fund balance to report fund balances restricted by grantors, external parties, regulations and litigation, (iv) assigned fund balances to report those funds assigned by the legislature, boards and authorities of the PG, and (v) unassigned fund balances of the General Fund. The PG’s policy is to expend unassigned fund balances before assigned, committed or restricted balances. === page 122 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 118 13. Governmental Fund Balances (continued) Following is a detail of the aggregated fund balances presented in the Balance Sheet – Governmental Funds as of September 30, 2013: PFA Debt PFA Capital Other General Service Projects Governmental Total Fund balances: Restricted for: Debt Service – $ 276,429 $ – $ – $ 276,429 $ Capital Projects – – 106,767 – 106,767 General Government – – – – – Public Safety – – – – – Health – – – – – Public Housing and Welfare – – – – – Education – – – – – Transportation and Communication – – – – – Culture and Recreation – – – – – Total Restricted – 276,429 106,767 – 383,196 Committed to: General Government 26,749 – – 17,760 44,509 Public Housing and Welfare – – – 82 82 Transportation and Communication – – – 9,034 9,034 Culture and Recreation 565 – – 341 906 Total Committed: 27,314 – – 27,217 54,531 Assigned to: General Government – – – 28,909 28,909 Public Safety – – – (4,351) (4,351) Health – – – 3,977 3,977 Public Housing and Welfare – – – 28,457 28,457 Education – – – (18,252) (18,252) Transportation and Communication – – – 8,767 8,767 Culture and Recreation – – – 319 319 Total Assigned – – – 47,826 47,826 Unassigned (37,260) – – – (37,260) Total Fund Balances (9,946) $ 276,429 $ 106,767 $ 75,043 $ 448,293 $ === page 123 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 119 13. Governmental Fund Balances (continued) The assigned fund balance includes approximately $44.7 million in unexpended encumbrances. Encumbrances are utilized to determine commitments related to unperformed (executor) contracts for goods and services, and to prevent the over-spending of an appropriation. 14. Commitments and Contingencies Primary Government Collective Bargaining Agreements The current labor relations environment of the Government is defined by 13 distinct labor organizations subject to approximately 26 collective bargaining agreements. Fourteen bargaining units are without collective bargaining agreements. As specific disciplines are not grouped under a single pay plan, it is common to have clerical and nonprofessional workers in different departments throughout the Government, represented by different unions. Of the approximately 9,600 government workers, including employees of the executive branch of the Government, approximately 7,200 belong to unions. The present collective bargaining statute requires binding arbitration for certain classified employees in the event of an impasse during salary negotiations between the Government and any union. Under this process, each side chooses an arbitrator and a third impartial arbitrator is selected by the chosen arbitrators. The arbitration panel investigates and reviews the issues in dispute and renders a final and binding decision. For other classified employees, the Government must decide to go to impasse or to enjoin any strike. As of September 30, 2013, the Government has contractual liabilities for retroactive union arbitration salary increases estimated at $195.3 million accruing from fiscal years 1993 through 2013, as established by the Virgin Islands Retroactive Wage Commission. Under Title 24, Section 374(h) of the Virgin Islands Code, the PG may not make any payments of retroactive salaries until there is an appropriation of funds by the Legislature. === page 124 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 120 14. Commitments and Contingencies (continued) Primary Government (continued) Federal Assistance Programs The Government receives financial assistance from the federal government in the form of loans, grants, and entitlements. Loans received are described in Note 11. Monetary and nonmonetary federal financial assistance to governmental funds amounted to approximately $214.6 million and $26.7 million for operation and capital contributions, respectively, for the year ended September 30, 2013. In February 2009, the federal government passed the American Recovery and Reinvestment Act (“ARRA”) to create jobs and stimulate the economy. Under Title I, Section 1001(b) of ARRA, the federal government acknowledged that certain refundable tax credits authorized by the Act imposed an economic hardship on United States territories that operate under “mirror” income tax systems. To alleviate this economic hardship, Congress provided for federal loss reimbursements to the mirrored system territories. During fiscal years 2009, 2010, and 2011, the PG received $23.4 million, $21.1 million and $7.7 million in loss reimbursements for the Making Work Pay refundable tax credit. During fiscal year 2011 and 2012, the PG received $18.6 and $5.1 million in loss reimbursements of the Additional Child Tax refundable tax credit. Receipt of grants and loss reimbursements is generally conditioned upon compliance with terms and conditions of the grant agreements and applicable federal regulations, including the expenditure of resources for eligible purposes. Substantially all grants are subject to audit under OMB Circular A-133. Disallowances as a result of these audits may become liabilities of the Government. Management of the Government believes that the future outcome of any changes in federal financial assistance programs will not have a material adverse effect on the basic financial statements. === page 125 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 121 14. Commitments and Contingencies (continued) Primary Government (continued) Compliance Agreement U.S. Department of Education On September 23, 2002, the Government entered into a three-year compliance agreement with the U.S. Department of Education requiring that the Government develop integrated and systemic solutions to problems in managing its federally funded education programs. The compliance agreement focuses on the areas of program design and evaluation, financial management, human capital, and property management and procurement. The compliance agreement expired on September 23, 2005. The Government had not fully complied with all terms and conditions of the compliance agreement. The U.S. Department of Education subsequently implemented a special condition for the Government to designate a third-party fiduciary to administer U.S. Department of Education grants. On August 22, 2006, the PG entered into a contract with a third-party fiduciary to administer U.S. Department of Education grants, effective October 1, 2006. The terms and conditions of the original compliance agreement have been extended until the Government is in full compliance with the agreement. Legal Proceedings and Litigation Claims The Government is a defendant in numerous legal proceedings pertaining to matters incidental to the performance of routine governmental operations. 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 who acted reasonably and within the scope of his employment. The Government may pay up to a maximum amount of $100,000 of the settlement. With respect to pending and threatened litigation, the Government has accrued a provision for legal claims and judgments of approximately $13.0 million for awarded and anticipated unfavorable judgments as of September 30, 2013. Management believes that any liability in excess of amounts recorded will not have a material effect on the basic financial statements. === page 126 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 122 14. Commitments and Contingencies (continued) Primary Government (continued) Legal Proceedings and Litigation Claims (continued) Changes in the reported provision for legal claims since October 1, 2011, resulted from the following activity (expressed in thousands): Beginning Balance at October 1, 2011 New Claims Claim Payments and Changes in Estimates Ending Balance at September 30, 2012 Provision for legal claims 27,263 $ 1,252 $ (15,607) $ 12,908 $ Beginning Balance at October 1, 2012 New Claims Claim Payments and Changes in Estimates Ending Balance at September 30, 2013 Provision for legal claims 12,908 $ 7,956 $ (7,810) $ 13,054 $ The breakdown of the provision for legal claims at September 30, 2013 is as follows (expressed in thousands): Current portion of provision for legal claims 137 $ Long-term portion of provision for legal claims 12,917 13,054 $ Governmental activities === page 127 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 123 14. Commitments and Contingencies (continued) Primary Government (continued) Property Tax Assessments As of September 2002, the Government was a defendant in a lawsuit regarding the assessment of property taxes. Under the lawsuit, taxpayers asserted that properties should be assessed at actual value in accordance with the Organic Act of 1933. The U.S. District Court agreed with the plaintiffs and, in May 2003, imposed an injunction on the collection of real property taxes at values higher than the 1998 assessed value. The Government complied with the Court order to develop a plan to implement the new valuation method. In February 2007, the 2005 property tax assessments, based on 1998 assessment levels, were issued. In August 2008, the 2006 property tax assessments, based at actual value in accordance with the Organic Act of 1933, were issued. In September 2008, the 2006 property tax bills were rescinded by court order. In May 2009, the Government received court approval to reissue the 2006 property tax assessments; however, that approval was rescinded in June 2009. The Government subsequently issued the 2006, 2007 and 2008, 2009 property tax assessments, based on 1998 assessment levels. The 2010, 2011 and 2012 property tax assessments were issued in June 2012, February 2013 and July 2013 at the 2008 assessment levels. Landfill Closure and Post-Closure Costs Federal laws and regulations, including the Clean Air Act, 42 U.S.C. § 7401 et seq. (“CAA”), and regulations promulgated thereunder, including the federal standards set forth in 40 C.F.R. Part 62, Subpart GGG (“Federal Plan”), and the National Emission Standards for Hazardous Air Pollutants for Municipal Landfill Maximum Achievable Control Technology, set forth in 40 C.F.R. Part 63, Subpart AAAA (“Landfill MACT”), and the Solid Waste Disposal Act, 42 U.S.C. § 6901 et seq. (“RCRA”), and regulations promulgated thereunder, including federal municipal solid waste landfill operating, closure, and post-closure criteria set forth in 40 C.F.R. Part 258, and three EPA administrative orders issued pursuant to RCRA § 7003(a), 42 U.S.C. § 6973(a), and Territorial laws and regulations, including V.I. Code Title 19, Chapter 56 (Solid and Hazardous Waste Management), Title 12, Chapter 9 (Air Pollution Control), and Title 12, Chapter 21 (Virgin Islands Coastal Zone Management), and regulations promulgated thereunder, require the Government to construct and operate certain environmental control systems and otherwise comply with certain requirements during operation of each of its landfill sites, properly close the site (including placement of a final landfill cover) when the landfill (or portion thereof) stops accepting waste, and perform certain post-closure maintenance and monitoring functions at the site for 30 years following closure. Compliance costs during the operational phase will be paid prior to closure. === page 128 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 124 14. Commitments and Contingencies (continued) Primary Government (continued) Landfill Closure and Post-Closure Costs (continued) Although closure and post-closure costs will be paid only near or after the date that the landfill stops accepting waste, the Government reports a portion of these closure and post-closure care costs as an operating expense in each period based on landfill capacity used as of each balance sheet date. The $95.8 million reported as landfill compliance, closure, and post-closure care liability at September 30, 2013, represents the cumulative amount reported to date based on the use of the estimated capacity of each landfill. The Government will recognize the remaining estimated cost of closure and post-closure care as the remaining estimated capacities are filled. These amounts are based on what it would cost to perform all closure and post-closure care as of September 30, 2013. The estimated used capacity and expected closure of each of the Government landfills is as follows: Estimated Estimated Landfill used capacity closure date Bovoni 66% 2020 Angilla 100% Closed Susannaberg 100% Closed The actual cost to perform closure and post-closure may be higher due to inflation, changes in technology, or changes in regulations. The Government is required by state and federal laws and regulations to make annual contributions to a trust to finance closure and post-closure care. The Government began making annual contributions to a trust in fiscal year 2007 to finance closure and post-closure costs. The Government expects that future inflation costs will be paid from interest earnings on these annual contributions and other financing measures. However, if interest earnings and financing measures should prove to be inadequate, or additional post- closure care requirements are determined due to changes in technology or applicable laws or regulations, these costs may need to be covered by charges to future landfill users. === page 129 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 125 14. Commitments and Contingencies (continued) Primary Government (continued) Wastewater Treatment Plant Consent Decree Since 1985, the Government has been subject to a consent decree issued by the Virgin Islands District Court, governing the operation of its wastewater treatment plants. The consent decree was amended in 1996 and further modified with the 2002 Stipulation to the Amended Consent Decree (the Stipulation) to establish deadlines for the construction of new secondary treatment facilities, including the replacement of the existing St. Croix and Airport Lagoon (Charlotte Amalie) wastewater treatment plants. The Stipulation requires that the new St. Croix wastewater treatment plants be completed by the end of 2006 and the new Charlotte Amalie wastewater treatment plants be completed by the end of 2007. The cost of both facilities is estimated at approximately $50 million. The Stipulation also establishes certain interim deadlines and performance standards that must be met by the Government pending completion of the new facilities. In addition, the Stipulation establishes specified penalties for violation of any of the deadlines or performance standards set forth therein. As of the date of the basic financial statements, the Government is current on all of its outstanding obligations pursuant to the stipulation. In January 2004, the Government’s Legislature authorized the creation of the Virgin Islands Waste Management Authority (WMA) for the purpose of meeting environmental requirements of waste treatment in the U.S. Virgin Islands. On December 2004, the PFA issued revenue bonds amounting to $94 million for the purpose of constructing and rehabilitating wastewater treatment plants noted above. Memorandum of Understanding - EPA On August 21, 2002, the Government and the United States Environmental Protection Agency (EPA) entered into a memorandum of understanding documenting the EPA’s agreement to support the renewal of the Territorial Pollutant Discharge Elimination System permit for its St. Croix distillery operations provided that the Government make certain funding available to (1) conduct treatability studies regarding the Virgin Islands Rum Industries, Ltd. effluent and the means to mitigate its potential environmental effects in the vicinity of the discharge, (2) identify practicable, available, reliable, and cost-effective potential mitigation measures, and (3) implement (or assist in the implementation of) such mitigation measures in the event such measures are determined by the V.I. Department of Planning and Natural Resources after consultation with EPA to be necessary and appropriate. === page 130 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 126 14. Commitments and Contingencies (continued) Primary Government (continued) Memorandum of Understanding – EPA (continued) Pursuant to the memorandum of understanding, the Government’s obligation to fund such activities is limited to $6 million in the aggregate, commencing on October 13, 2003. In June 2004, the Government entered into a three year contract with a locally licensed environmental consulting firm to facilitate the Government’s commitments with the memorandum of understanding with the EPA. Workers’ Compensation Liability The Government is exposed to risk of loss related to workers’ compensation claims. The Government is self-insured for this risk. Self-insured risk liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. Because actual claims liabilities depend upon such complex factors as inflation, changes in legal doctrines, and damage awards, the process used in computing claims liabilities does not necessarily result in an exact amount. Claims liabilities are reevaluated periodically to take into consideration recently settled claims, the frequency of claims, and other economic and social factors. Changes in the claims liability amount in fiscal year 2013, as recorded in the Government Insurance Fund was as follows (expressed in thousands): 2012 2013 Claims payable - October 1 20,342 $ 26,661 $ Incurred claims and changes in estimates 10,878 9,903 Payments for claims and adjustments expenses (4,559) (12,773) Claims payable - September 30 26,661 $ 23,791 $ The Government continues to carry commercial insurance for all other risks of loss. Settled claims resulting from these risks have not exceeded commercial insurance coverage in any of the past three fiscal years. === page 131 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 127 14. Commitments and Contingencies (continued) Primary Government (continued) Bond Credit Ratings On February 12, 2013, Moody’s Investors Service withdrew the ratings on the U.S. Virgin Islands general obligation gross receipts tax debt, issued through PFA, due to the lack of sufficient financial and operating information, and the late issuance of the 2010 audited financial statements. On October 15, 2013, Fitch Ratings affirmed a BBB rating for general obligation gross receipts tax debt of the PFA. On August 4, 2013, Moody’s assigned a Baa2 rating to the issuance of the Series 2013A matching fund bonds. On August 29, 2013 Fitch downgraded the U.S. Virgin Islands matching fund bonds from a BBB rating to a BBB- rating due to revised projections based on alcohol content of Captain Morgan products. Pension Reform Joint Task Force In response to a recommendation in a September 27, 2011 audit report from the Office of the Inspector General, U.S. Department of Interior, the PG formed the Pension Reform Joint Task Force (the “Task Force”) to address the declining fiscal condition of the Government Employees Retirement System. The Office of the Inspector General’s audit report had concluded that, due to insufficient contribution levels, and an unbalanced ratio of active to retired members, the retirement system of the U.S. Virgin Islands may default within 14 to 19 years. The Task Force recommendations, presented to the Legislature in May 2013, included: (i) have the government and its employees contribute a larger amount towards pension benefits, (ii) raising contribution rates for senators and judges, (iii) reducing retiree’s current benefits by 10 percent, (iv) increasing the early retirement age from 50 to 55 and the regular retirement age from 60 to 65, (vi) limiting the cost of living increase, and (vii) changing the formula used to calculate benefits. The Task Force continues to work with the Legislature, and hearings were held at the Legislature in May 2014. === page 132 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 128 14. Commitments and Contingencies (continued) Component Units In September 1989, WAPA Electric facilities were damaged by Hurricane Hugo. WAPA reconstructed the facilities with proceeds from insurance and FEMA. Subsequent to the receipt of funds, FEMA de-obligated approximately $7.9 million in questioned costs. Approximately $2.6 million of these questioned costs related to an oil spill that was subsequently settled with FEMA. During 1998, WAPA submitted a second appeal for $4.4 million of the remaining questioned costs, and agreed to refund approximately $900 thousand of questioned costs to FEMA. During 1999, FEMA denied the second appeal and formally closed the disaster claim. WAPA has recorded a liability for $4.6 million related to the questioned costs. FEMA has not made a formal request for repayment of the funds. In October 2008, WAPA Electric facilities on the island of St. Croix were damaged by Hurricane Omar. WAPA expended $2.7 million for storm cleanup and system restoration through June 2010. The territory was declared a federal disaster after the hurricane and is eligible for reimbursement of 75% of what was expended according to the category of the damage. WAPA Electric has recorded a receivable from FEMA through the Office of Management and Budget – Public Assistance (OMB-PA) amounting to approximately $2.1 million. In August 2010, WAPA Electric facilities were damaged by Hurricane Earl. WAPA has expended over $2 million for storm clean-up and restoration, which was completed in October 2010. The territory was declared a Federal disaster area after the Hurricane and is eligible for reimbursement of 75% - 80% of what was expended according to the category damage. WAPA recorded a receivable of $1.1 million from FEMA through the Virgin Islands Territorial Emergency Management Agency (VITEMA) Public Assistance Program as of June 30, 2013. On September 30, 2011, WAPA Electric entered into a Memorandum of Agreement (MOA) with viNGN, Inc., a Virgin Islands corporation and wholly owned subsidiary of the PFA. The MOA terms call for WAPA Electric to provide in-kind contributions in connection with a federal grant received by viNGN, Inc. The in-kind contributions consist of the use of certain facilities, equipment and communications infrastructure. The total in-kind match value budgeted by WAPA was $15.2 million. The term of the MOA is twenty-five (25) years upon execution, with two additional twenty-five (25) year terms unless either party provides a written notice of non- renewal not less than twelve (12) months, but no sooner than twenty-four (24) months prior to the expiration of the original term or any additional term. === page 133 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 129 14. Commitments and Contingencies (continued) Component Units (continued) In 2011, the Water System of WAPA entered into two agreements with a private company to build, operate and maintain two reverse osmosis facilities, one on St. Croix and one on St. Thomas, and sell the water from the facilities to WAPA. The agreements both have 20 year terms expiring through 2032. In 2002, the Federal Aviation Administration (FAA) conducted an on-site wildlife evaluation of the Anguilla Landfill, which is located next to the St. Croix airport. The FAA determined that the landfill posed an environmental and navigational threat to the airport due to flocks of birds that reside in the landfill area. The FAA stated it may require the VIPA to repay $9.3 million in federal grants and has refused further discretionary grants for the airport until VIPA shows progress toward closing the landfill. The matter was mitigated in fiscal year 2013, and VIPA is now eligible for grants. In 2009, the Anguilla Landfill was transferred to the jurisdiction of the WMA. WMA subsequently entered into a consent decree with EPA, extending the closure date of the landfill to the year 2020, while diverting incoming solid waste to a newly constructed transfer station. Under the consent decree, WMA must pay penalties of $50 thousand in installment of $12.5 thousand for the years ending September 30, 2012 through 2016. The Governor Juan F. Luis Hospital and Medical Center owns a 40% interest in a radiology practice that operates within the hospital. The radiology practice pays rent to the hospital and the hospital pays for services to hospital patients. As of September 30, 2013 and 2012, the hospital owed the radiology practice $7.8 and $6.6 million. As a result of the unpaid service fees, the hospital incurred an impairment loss of $375 thousand for the year ending September 30, 2013 and $2.4 million for the year ending September 30, 2012, in its investment in the radiology practice. WAPA, VIPA, and other discretely-presented component units are presently a defendant or codefendant in various lawsuits. The financial managers of the component units have advised the PG that any adverse outcome involving a material claim is expected to be substantially covered by insurance. Government property is exempt from lien, levy, or sale as a result of any judgment under the Virgin Islands Code. === page 134 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 130 15. Retirement Systems Plan Description GERS is the administrator of a cost-sharing, multiple-employer, defined-benefit pension plan established as of October 1, 1959 by the Government to provide retirement, death, and disability benefits to its employees. The following description of the plan is provided for general information purposes only. Refer to the actual text of the retirement law in the V.I. Code, Title 3, Chapter 27 for more complete information. Regular employees are eligible for a full-service retirement annuity when they have completed 30 years of credited service or have attained the age of 60 with at least 10 years of credited service. Members who are considered “safety employees,” as defined in the V.I. Code, are eligible for full retirement benefits when they have earned at least 20 years of government service or have reached the age of 55 with at least 10 years of credited service. Regular employees who have attained the age of 50 with at least 10 years of credited service can elect to retire early with a reduced benefit. Senators and members of the Legislature may receive a retirement annuity when they have attained the age of 50 and upon the completion of 6 years of credited service as a member of the Legislature. Membership of the System consisted of the following at September 30, 2013 and 2012: 2013 2012 Retirees and beneficiaries currently receiving benefits and terminated employees entitle to benefits but not yet receiving them 8,653 $ 8,151 $ Current employees 9,241 9,935 17,894 $ 18,086 $ Funding Policy The monthly annuity benefit payment is determined by applying a stipulated benefit ratio to the member’s average compensation. Average compensation is determined by averaging the five highest years of salary the member earned within the last ten years of service, subject to the maximum salary limitation in effect during such service. The maximum annual salary that can be used in this computation is $65,000, except for senators and judges, whose annual salary is used. The board of trustees of GERS may set cost-of-living increases for annuitants and pensioners and determine when the annuity should be paid on the basis of the most recent actuarial valuation and the Consumer Price Index. === page 135 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 131 15. Retirement Systems (continued) Funding Policy (continued) 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, St. Thomas, Virgin Islands 00802. 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, 2011 indicates that the current combined statutory employer and employee contribution rates are not sufficient to meet the cost of the pension trust fund on an actuarial basis, as required by law. The Government’s required contribution for the year ended September 30, 2013 was 17.5% of the member’s annual salary. Since April 1, 1991, required member contributions are 8% of annual salary for regular employees, 9% for senators, 11% for judges, and 10% for safety (hazardous employees) and eligible employees under Act 5226. Prior to June 29, 2000, member contributions were refundable without interest upon withdrawal from employment before retirement. Effective July 1, 2009, GERS Board of Trustees approved an effective annual interest rate on refunded contributions of 2% per annum. The Government’s estimated annual required contributions (based on a fiscal year 2006 actuarial valuation), actual contributions made, and percentage contributed to the plan for the years ended September 30, 2013, 2012, and 2011 were as follows (expressed in thousands): Contractually Required Contributions Percentage Contributions Made Contributed 2011 80,850 $ 80,850 $ 100% 2012 66,677 $ 66,677 $ 100% 2013 64,531 $ 64,531 $ 100% === page 136 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 132 15. Retirement Systems (continued) Funding Policy (continued) 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 3 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 4 percentage points. 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 due to GERS was $26.9 million as of September 30, 2013, of which $26.9 million had been remitted to GERS. 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 Government will compensate GERS for the costs of any special early retirement program. === page 137 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 133 15. Retirement Systems (continued) Funding Policy (continued) 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) and GERS. The 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. Total contributions made by the University to TIAA-CREF and GERS participant accounts amounted to $2.1 million and $1.3 million, respectively. Postemployment Benefits In addition to the pension benefits described in Note 15, the Government provides other postemployment benefits (OPEB) of healthcare, prescription, dental and life insurance coverage. These benefits are provided in accordance with Title 3, Chapter 25, Subchapter VIII of the VI Code as part of a cost-sharing, multiple employer defined benefit OPEB plan, in which all component units of the PG participate and contribute. All employees who retire from government service 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, are eligible for these benefits. Based on census data included in the October 1, 2011 actuarial valuation of OPEB, approximately 9,655 active employees, 6,837 service retirees, 1,845 spouses of service retirees covered for medical and dental benefits, 118 disability retirees, 52 spouses of disability retirees, and 175 deferred vested (i.e., non-retired employees who have already terminated employment with the PG, but who are eligible for medical and life insurance benefits when they subsequently reach the qualifying age) meet the eligibility requirements of OPEB. === page 138 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 134 15. Retirement Systems (continued) Postemployment Benefits (continued) Healthcare, prescription and dental insurance is provided through negotiated contracts with private insurance companies. Participants in the plan may elect coverage for their spouses and dependent children. Participants are required to contribute 35% of medical, prescription and dental premiums. Effective October 1, 2013, separate medical premiums for non-Medicare retirees and Medicare retirees are being used to determine contribution requirements, instead of a premium blended with active costs. Retirees of UVI that participate in the 403(b) retirement plan may obtain coverage on a fully contributory basis. Life insurance is offered to retirees on a fully contributory basis. The contribution requirements of plan members and the PG are legislated within the Virgin Islands Code, and may be amended, by the Virgin Islands Legislature. The plan is a non-funded pay-as-you-go plan, and expenditures are paid as they become due. For the years ended September 30, 2013 and 2012, the Legislature budgeted, and paid, $23.9 and 22.3 million for retiree health insurance payments. The PG’s postemployment benefit cost is calculated on the annual required contribution of the PG, an amount actuarially determined. The first actuarial valuation was prepared as of October 1, 2007, in accordance with provisions of GASB Statement 45, “Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions”, and has been updated by the actuarial consultant on October 1, 2009, October 1, 2011, and October 1, 2012. On October 1, 2013, the plan covering post-65 retirees and dependents was changed to AARP Medicare Supplement Plan N and an Employer Group Waiver Plan. Due to the significant cost reductions, a new valuation was prepared for October 1, 2012, projecting the liabilities and normal cost to determine the PG’s annual required contribution for the fiscal year ending September 30, 2013. The valuation results were based on census data provided by the Government as of October 1, 2011. Prior to the implementation of GASB Statement 45, the PG did not report an OPEB obligation. The annual required contribution represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year, and amortize any unfunded actuarial liabilities over a period not to exceed an open thirty (30) year period. === page 139 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 135 15. Retirement Systems (continued) Postemployment Benefits (continued) The following table shows the components of the PG’s annual postemployment benefits cost for the fiscal year ended September 30, 2013, and the changes in the net estimated obligation for future payments of benefits: Annual OPEB Cost and Net Postemployment Benefit Obligation In thousands Annual required contribution 71,385 $ Interest on underfunded OPEB obligation 9,190 Adjustment to underfunded OPEB obligation (9,397) AAnnual OPEB cost 71,178 Employer contributions (31,283) 39,895 $ Net OPEB obligation - beginning of year 245,079 $ OChange in the net OPEB obligation 39,895 Net OPEB obligation - end of year 284,974 $ Actuarial Accrued Liability and Funding Status In thousands Actuarial Valuation Date October 1, 2012 Actuarial Accrued Liability (AAL) $994,464 Unfunded AAL $994,464 Funded Ratio 0% Change in the net OPEB obligation === page 140 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 136 15. Retirement Systems (continued) Postemployment Benefits (continued) The PG’s obligation to provide health insurance to retirees is an unfunded plan. The actuarial valuation of the amount required to fund the plan involves estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Estimated annual required contributions are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members), and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the PG and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short term volatility in actuarial accrued liabilities, and the actuarial value of assets, consistent with the long-term perspective of the calculations. In the first actuarial valuation dated October 1, 2007, liabilities at October 1, 2008 were rolled back to October 1, 2007. In subsequent valuation reports, actual benefit payments were used for the fiscal years ending September 30, 2009 through 2013. Covered health care and dental care expenses were assumed to increase in future years based on the claims experience for fiscal years 2012 and 2013, and a trend assumption beginning at 8.5% for pre-Medicare retirees, 7.0% for post-Medicare retirees, and 7.5% for dental for fiscal year 2013 grading down to an ultimate rate of 4.5% in fiscal year 2022. The entry age normal actuarial cost method with costs on a level percentage of payroll basis was used to determine the annual required cost of OPEB benefits to retirees. Amortization is over an open thirty (30) year period as a level percentage of payroll. Payroll growth is assumed to be 3% per year for purposes of amortization. This method is consistent with the cost method used by GERS and typically produces the most level annual required contribution each subsequent year as a percentage of payroll. The normal cost was rolled back using the ultimate trend rate. A discount rate of 3.75% per annum was used, compounded annually. The valuation assumed that the annual unit cost per covered individual (i.e., retiree or spouse) for medical, prescription drugs and dental care for the fiscal year ending September 30, 2013 was $7,395, $1,257 and $199 for retirees under age 65; and $972, $1,578 and $199 for retirees over age 65. The normal cost reflects the average age of the covered population and is based on claims experience for fiscal year ending September 30, 2013. === page 141 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 137 15. Retirement Systems (continued) Postemployment Benefits (continued) Combined experience and a combined cost were used for the pre-65 and post-65 populations. A composite cost was developed for retirees and spouses by combining their claim experience. Dependent children claims were included in developing the composite retiree and spouse cost. Costs were trended forward to fiscal year 2013 and adjusted to reflect the anticipated lag in claim payment. 16. Liquidity Governmental Activities At September 30, 2013, the Government reported an unrestricted net deficit in governmental activities amounting to $1.8 billion. The net deficit resulted from: 1) the 2008 financial markets collapse and subsequent recession resulting in a reduction in income tax revenue and increase in unemployment, 2) the delay in the issuance of property taxes due to a class action lawsuit, 3) increases in costs of operations, and 4) the negative effect of certain Internal Revenue Service regulations resulting in a reduction of economic development companies operating in the Territory. Following is a summary of the Government’s unrestricted net deficit for governmental activities for fiscal years 2007 through 2013: Governmental Activities Unrestricted Net Deficit (In thousands, as restated) Fiscal Year Governmental Unrestricted Net Deficit (Increase) 2007 $ (335,924) $ (29,457) 2008 (513,201) (177,277) 2009 (1,110,871) (597,670) 2010 (1,408,601) (297,730) 2011 (1,630,549) (221,948) 2012 (1,697,066) (66,517) 2013 (1,837,805) (140,739) === page 142 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 138 16. Liquidity (continued) Governmental Activities (continued) The Government has initiated specific actions to improve its liquidity and future cash flows. The Government established the Office of Economic Opportunity to pursue grants through the American Recovery and Reinvestment Act of 2009, to generate jobs, to promote energy efficient appliances and automobiles, and to improve infrastructure. The Government has successfully attracted a rum producer (Captain Morgan) and retained an existing rum producer (Cruzan Rum) within the Territory. The Government has imposed budgetary restraints, including incentives for early retirement of government workers, salary reductions, personnel reductions and budgetary cut-backs for the entire government. The Government has also legislated increases in local taxes such as the gross receipts taxes and hotel taxes. The Government has met certain District Court requirements in connection with a taxpayer class-action lawsuit, allowing the issuance of property tax assessments through 2012. General Fund At September 30, 2013, the Government reported a fund deficit in the General Fund of $9.9 million. This fund balance represents a decrease in the General Fund balance of $30.3 million from the 2012 fiscal year, mainly due to the issuance of working capital loans to offset deficits resulting from expenditures exceeding revenues. Following is a summary of the General Fund balance for fiscal years 2013, 2012 and 2011: General Fund Unreserved Fund Balance (Deficit) (In thousands) Fiscal Year Committed Unassigned Total 2011 $29,571 $(103,408) $(73,837) 2012 29,099 (8,649) 20,450 2013 27,314 (37,260) (9,946) === page 143 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 0000-0000000 139 17. Fund and Net Position Deficits The following non-major funds have a fund or net position deficits as of September 30, 2013 (in thousands): Governmental Funds Proprietary Funds RURAL LIBRARY EXTENSION $ 572 BUREAU OF MOTOR VEHCILES $ 5,253 EMPLOYMENT SECURITY ADMINISTRATION 2442 GOVERNMENT INSURANCE 23,081 FEDERALLY AIDED EDUCATION PROGRAM 9,593 HOUSING CONSTRUCTION REVOLVING 3,004 EMERGENCY HOUSING FUND 82 AIR & WATER POLLUTION CONTROL 7,157 VIRGIN ISLANDS LOTTERY 2,200 VI PLANNING BOARD PROJECTS 2,999 CONSUMER PROTECTION FUND 200 HIGHWAY SAFETY 4,600 VIRGIN ISLANDS HOUSING FINANCE AUTHORITY 3,000 VIRGIN ISLANDS ENERGY OFFICE 3,633 FREDERIKSTED SMALL BUSINESS FUND 47 VIRGIN ISLANDS NATIONAL GUARD FEDERAL AND STATE AGREEMENT 2,755 Proprietary Fund Net Position Deficits $ 36,867 FOOD STAMP WELFARE 2,432 FEDERAL PROGRAMS/DEPARTMENT CONSERVATION 4,229 FEDERAL AIDED COMMUNITY ACTION AGENCY 187 COMMISSION ON AGING 50 ELEMENTARY/SECONDARY EDUCATION 19 JOB TRAINING PARTNERSHIP ACT OF 1983-1984 8,614 CIVIL DEFENSE PROTECTION 849 HEALTH INFORMATION COUNCIL ASSISTANCE 18 DRUG EDUCATION TRAINING PROGRAM 123 FEDERAL HEALTH PROGRAM NOT ON FEDERAL LETTER OF CREDIT SYSTEM 489 === page 144 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 140 17. Fund and Net Position Deficits (continued) Governmental Funds Governmental Funds WATER & ELECTRIC SYSTEM PROJECTS $ 1,698 BOATING SAFETY PROGRAM $ 583 SEWER SYSTEM FUND 168 DISTRICT POTABLE WATER FUND 4,962 DEPT OF EDUCATION FEDERAL GRANTS EXCEPT ARRA 1,587 PATERNITY AND CHILD SUPPORT 11,872 Total Fund Deficit $ 143,488 DISTRICT STREET LIGHT FUND 8,078 VI LAW ENFORCEMENT 4,534 FORENSIC SCIENCE 74 VOCATIONAL REHABILITATION 1,848 HURRICAN HUGO INSURANCE CLAIMS 3,908 VI ARMY NATIONAL GUARD 2,266 EMERGENCY DROUGHT RELIEF 173 OUTDOOR RECREATION PROGRAM 40 NARCOTICS STRIKE FORCE FORFEITURE 3 SMALL BUSINESS DEVELOPMENT ADMINISTRATION MANAGERIAL AND TECHNICAL ASSISTANCE 8 FEDERAL GRANTS FOR ALL AGENCIES EXCEPT DEPT OF EDUCATION 3,054 JUVENILE DETENTION CENTER FUND NON-LAPSING 14 VI EDUCATION INITIATIVE FUND NON LAPSING 9,264 SECTION 12 BOND PROCEEDS 31,072 ROAD FUND 6,330 PFA/OFFICE OF ECONOMIC OPPORTUNITY 133 MAJOR REPAIR AND IMPROVEMENT 58 === page 145 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 141 18. Restatement of Component Units Beginning net position of three discretely-presented component units were restated to correct account balances reported in prior years as follows (expressed in thousands): As Previously As Component Unit Reported Adjustments Restated Virgin Islands Housing Authority 63,607 $ 16,928 $ 80,535 $ Magens Bay Authority 15,911 10 15,921 Virgin Islands Public Television Station 7,745 204 7,949 Other component units 740,884 – 740,884 Net Assets 828,147 $ 17,142 $ 845,289 $ Beginning Net Position Virgin Islands Housing Authority (VIHA) During the audit of fiscal year 2012, VIHA restated the 2011 audited financial statements due to the fact that the Authority’s previously issued financial statements did not included a liability for postemployment benefits other than pensions (OPEB) in accordance with GASB No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. This Statement establishes standards for the measurement, recognition, and display of OPEB expense/expenditures and related liabilities (assets), note disclosures, and, if applicable, required supplementary information (RSI) in the financial reports of state and local governmental employers. As a result, VIHA’s net position as of September 30, 2011 was adjusted by $16.9 million. === page 146 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 142 19. Subsequent Events Primary Government On October 16, 2013, PFA issued the Series 2013 B-2 Revenue Anticipation Note (“Series 2013B-2 Note”) amounting to $20 million through FirstBank Puerto Rico. The Government has pledged gross receipts taxes for the timely payment of the Series 2013B-2 Note. The proceeds of the Series 2013B-2 Note were used to: (i) finance certain operating expenses and other financial obligations of the Government, and (ii) pay the costs of issuing the Series 2013B-2. The Series 2013B-2 Note has a maturity date of September 30, 2014, and has a 6.0% interest rate. On October 17, 2013, PFA issued the Series 2013 B Revenue Refunding Bonds (“Series 2013B Bonds”) amounting to $51.4 million. The Government has pledged matching funds for the timely payment of the Series 2013B Bonds. The Series 2013B Bonds bear interest at rates from 3.00% to 5.00% and mature from 2015 to 2024. The Series 2013B Bonds were issued to: (i) refund portions of the Series 2004A Bonds, (ii) fund certain debt service reserves in connection with the issuance of the Series 2013B Bonds, and (iii) to pay the costs of issuing the bonds. On October 18, 2013, WICO entered into a refinancing loan agreement with Banco Popular de Puerto Rico amounting to $28.5 million (“WICO loan”). Under the terms of the refinancing agreement WICO pledged: (i) operating revenues arising from the ship’s agent business, and (ii) real property and improvements referred to as the “WICO Dock” including bulkhead and wharf, warehouses, office buildings, maintenance buildings and other facilities. The purpose of the WICO loan is to: (i) repay the existing loan with the bank amounting to $21.2 million, (ii) finance the construction and expansion of the WICO Dock and ship berthing facilities to accommodate larger cruise ships, and (iii) to fund costs associated with the issuance of the WICO loan. The WICO loan bears interest at 6.18%, and requires only interest payments during the first twelve months from the date of closing on the loan. Thereafter, the loan shall be repaid in fifty-nine (59) monthly installment payments of $187 thousand, with a sixtieth (60), final payment of outstanding principal. On November 8, 2013, the PG ratified an agreement with HOVENSA to sell the oil refinery, which discontinued operations on the island of St Croix in January 2012. The oil refinery will be utilized as a storage facility pending the sale. === page 147 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 143 19. Subsequent Events (continued) Primary Government (continued) On February 21, 2014, the U.S. Department of Interior’s Office of Insular Affairs approved an advance payment of matching funds to the PG of $60.8 million based on a rum excise tax rate of $13.50 per proof gallon (“matching funds”). The Office of Insular Affairs had previously released an advance to the PG on September 30, 2013 at the rate of $10.50 per proof gallon, due to the expiration of the $13.50 rate on December 31, 2013. Legislation introduced in Congress in April 2014 provides for an extension of the $13.50 per proof gallon rate. Component Units On July 25, 2013, WAPA Electric approved a five to seven year agreement with the Vitol Group, a global energy provider to supply propane for power generation in the Territory. The project, scheduled for completion in the fall of 2014, is designed to reduce fuel costs by an estimated 30%. On November 12, 2013, WAPA Electric extended its lease agreement with APR Energy for a gas turbine, for an additional twelve months through November 2014 for $7.8 million. On November 21, 2013, WAPA Electric management and the various financial institutions that had extended lines of credit to the Authority maturing in December 2013, entered into a revised agreement whereby the maturity date was extended to June 25, 2016. On December 13, 2013, WAPA Electric was awarded a $13 million low-interest rate loan from the United States Department of Agriculture Rural Utilities Service Program. The purpose of the loan is to fund the replacement of all electric meters in the Territory with digital meters that automatically report electricity usage to the WAPA offices. The loan bears interest rates of 3% to 4% and has a fifteen (15) year term. In March 2014, the WAPA Board authorized management to enter into a contract for the purchase of an LM 2500, 22-megawatt gas turbine for an amount not to exceed $15,000,500. The project will include procurement, engineering, installation, and commissioning to fully refurbish the gas turbine which is to be installed at the Randolph Harley Power Plant on St. Thomas. === page 148 === Government of the United States Virgin Islands Notes to Basic Financial Statements (continued) 1406-1263767 144 19. Subsequent Events (continued) Component Units (continued) On March 13, 2014, the VIPA purchased a parcel of land from the PFA for $700 thousand, in connection with development of a cruise port area on the island of St. Thomas. On April 2014, VIPA amended its marine thrift to institute an increase in ship dues and wharfage from $.85 to $2 and $1 to $3, respectively. On May 30, 2014, the VIHA was transferred from federal receivership with the U.S. Department of Housing and Urban Development, to administration by a board of directors appointed by the PG, and an executive director. The receivership had been established in August 2003 to address housing inventory management, financial management and long-term sustainability. Pension Trust Fund On December 19, 2013, GERS received a payment of $4.3 million from Seaborne Airlines towards the outstanding principal and interest on all loans held with GERS. Seaborne continues to pay costs associated with the loan restructuring. On June 19, 2014, GERS Board of Trustees approved a settlement agreement with the PG establishing required contributions to GERS for employees who retired between October 1, 2010 and December 31, 2012 under an early retirement program. Under the terms of the agreement, delinquent property taxes remaining in debt service reserves of the Series 2011B Note upon final payment of the note, will be applied to the payment of benefits for the early retirees. === page 149 === 1406-1263767 Required Supplementary Information === page 150 === 1406-1263767 145 Required Supplementary Information (other than MD&A) Government of U.S. Virgin Islands Schedules of Funding Progress September 30, 2013 Employees Retirement System of the Government of the U.S. Virgin Islands Actuarial valuation date (a) Actuarial value of assets (b) Unfunded actuarial accrued liability (UAAL) (c) Actuarial accrued liability (a) + (b) (d) Funded Ratio (a)/(c) (e) Annual covered payroll UAAL as a percentage of covered payroll (b)/(e) Pension Plan 1999 $ 1,255,210,585 $ 518,081,040 $ 1,773,291,625 70.78% $ 307,568,648 168.44% 2000 1,330,089,822 525,608,964 1,855,698,786 71.68% 304,887,045 172.39% 2001 1,342,894,336 731,727,064 2,074,621,400 64.73% 298,909,928 244.80% 2002 1,337,676,064 815,884,419 2,153,560,483 62.11% 367,803,013 221.83% 2003 1,346,906,862 921,669,858 2,268,576,720 59.37% 338,444,739 272.33% 2004 1,360,288,336 977,502,024 2,337,790,360 58.19% 372,996,234 262.07% 2005 1,366,982,183 1,088,574,553 2,455,556,736 55.67% 355,462,276 306.24% 2006 1,421,093,035 1,236,571,529 2,657,664,564 53.47% 394,595,844 313.38% 2007 1,509,244,380 1,241,138,878 2,750,383,258 54.87% 419,161,255 296.10% 2008 1,530,604,789 1,310,218,726 2,840,823,515 53.88% 433,549,406 302.21% 2009 1,534,899,736 1,397,261,661 2,932,161,397 52.35% 458,154,309 304.98% 2010 1,505,970,212 1,513,059,673 3,019,029,885 49.88% 440,026,457 343.86% 2011(*) 1,448,926,591 1,719,110,906 3,168,037,497 45.74% 403,473,988 426.08% 2012(**) 1,327,038,907 1,603,758,454 3,168,037,497 45.28% 381,012,309 420.92% 2013(***) 1,262,600,000 1,817,900,000 3,080,500,000 41.00% 370,100,000 486.00% (*) Estimated based on the financial information provided as of September 30, 2010, for the actuarial value of assets. For the unfunded actuarial accrued liability (UAAL) amount was projected from the last completed actuarial valuation as of October 1, 2006, assuming that actual experience during the October 1, 2006 to September 30, 2010, matched that assumed by the actuarial assumptions. (**) Estimated based on the financial information provided as of September 30, 2012, for the actuarial value of assets projected from the October 1, 2011 actuarial valuation, assuming that actual experience during the October 1, 2011 to September 30, 2012 matched that assumed by the actuarial assumptions. Payroll was estimated based on reported contributions for the year ending September 30, 2012. The 2012 results also reflect the suspension of the cost of living adjustment effective January 1, 2013. (***) Based on the financial information as of September 30, 2013 and an estimated actuarial accrued liability assuming that actual experience during the October 1, 2012 to September 30, 2013 matched that assumed by the actuarial assumptions. Actuarial valuation – October 1, 2013. Actuarial accrued liability determined under the Entry Age Normal Method. === page 151 === 1406-1263767 146 Required Supplementary Information (other than MD&A) Government of U.S. Virgin Islands Schedules of Funding Progress (continued) Actuarial Methods and Assumptions The comparability of trend information, shows as RSI, is affected by changes in actuarial assumptions, benefit provisions, actuarial funding methods, accounting policies, and other changes. Those changes usually affect trends in contribution requirements and in ratios that use the pension benefit obligations as a factor. The information presented in the required supplementary schedules was determined as part of the actuarial valuation at the dates indicated. Additional information as of the latest actuarial valuation follows: Valuation date October 1, 2013 Actuarial cost method Entry age normal Amortization method Level dollar, closed group Remaining amortization period 20 years Asset valuation method Actuarial value, but not less than 80% nor greater than 120% of market Actuarial assumptions: Investment rate of return 7.5% per year compounded annually Projected salary increases 4.0% per year compounded annually, attributable to inflation Cost-of-living adjustments COLA to non-disabled pensioners was suspended. Disability benefits increased by 1% up to age 60. === page 152 === 1406-1263767 147 Required Supplementary Information (other than MD&A) Government of U.S. Virgin Islands Schedules of Funding Progress (continued) Postemployment Benefits Other Than Pensions Schedule of Funding Progress Actuarial valuation Date (a) Actuarial value of assets (b) Unfunded actuarial accrued liability (UAAL) (c) Actuarial accrued liability (a) + (b) (d) Funded Ratio (a)/(c) (e) Annual covered payroll UAAL as a percentage of covered payroll (b)/(e) 10/1/2007 $ – $ 976,455,000 $ 976,455,000 – N/A N/A 10/1/2009 $ – $1,069,562,000 $1069,562,000 – $418,467,000 255.59% 10/1/2011 $ – $1,133,327,000 $1,133,327,000 – $403,389,000 280.95% 10/1/2012 $ – $ 999,464,000 $ 999,464,000 – $415,491,000 240.55% Additional Note Disclosure Annual OPEB Cost and Net OPEB Obligation Fiscal Year Ended Annual OPEB Cost Percentage of Annual OPEB Cost Contributed Net OPEB Obligation 9/30/2008 $78,185,000 40.36% $ 46,629,000 9/30/2009 82,004,000 42.34% 93,195,000 9/30/2010 85,946,000 42.89% 143,002,000 9/30/2011 89,962,000 35.06% 201,423,000 9/30/2012 80,322,000 45.65% 245,079,000 9/30/2013 71,176,000 43.95% 284,974,000 === page 153 === 1406-1263767 148 Required Supplementary Information (other than MD&A) Employees’ Retirement System of the Government of U.S. Virgin Islands Schedule of Employer Contributions September 30, 2013 Annual required contributions Contributions made Percentage contributed Year ended September 30, 2008 $ 138,488,871 $ 75,871,146 54.79% 2009 147,490,851 80,177,004 52.35% 2010 157,817,709 77,004,630 48.79% 2011 162,841,336 80,849,762 49.65% 2012 178,644,349 66,677,154 37.32% 2013 172,439,842 64,531,322 37.42% === page 154 === 1406-1263767 Report on Internal Control === page 155 === A member firm of Ernst & Young Global Limited 1406-1263767 149 Ernst & Young LLP 1000 Scotiabank Plaza 273 Ponce de León Avenue San Juan, PR 00917-1951 Tel: +1 787 759 8212 Fax: +1 787 753 0808 ey.com Report of Independent Auditors on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards The Honorable Governor of the Government of the United States Virgin Islands: We have audited, in accordance with auditing standards generally accepted in the United States and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the 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, 2013, which collectively comprise the Government’s basic financial statements as listed in the table of contents, and have issued our report thereon dated June 30, 2014. We expressed a qualified opinion on the financial statements of the governmental activities and aggregate discretely-presented component units opinion units based on the circumstances noted in our report. In addition, we expressed a disclaimer of opinion on the financial statements of the aggregate remaining fund information and business type activities opinion units based on the circumstances described in our report. Our report include references to other auditors who audited the financial statements of the Tobacco Settlement Financing Corporation (TSFC), Virgin Islands Public Finance Authority (VIPFA), Virgin Islands Water and Power Authority (WAPA), Virgin Islands Housing Authority (VIHA), Virgin Islands Public Television System (VIPTS), Virgin Islands Lottery (V.I. Lottery), Virgin Islands Economic Development Authority (VIEDA), Magens Bay Authority (MBA), Virgin Islands Government Hospital and Health Facilities Corporation (Roy L. Schneider Hospital and Juan F. Luis Hospital and Medical Center), Employees’ Retirement System of the Government of the Virgin Islands (GERS), and the Virgin Islands Housing Finance Authority (VIHFA), as described in our report on the Government’s financial statements. This report does not include the results of the other auditors’ testing of internal control over financial reporting or compliance and other matters that are reported on separately by those auditors. The financial statements of GERS were not audited in accordance with Government Auditing Standards. === page 156 === A member firm of Ernst & Young Global Limited 1406-1263767 150 Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Government’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Government’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Government’s internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying schedule of findings and questioned costs, we identified certain deficiencies in internal control that we consider to be material weaknesses. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. We consider the deficiencies described in the accompanying schedule of findings and questioned costs as items 2013-001 through 2013-008 to be material weaknesses. The Government’s Response to Findings The Government’s responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The Government’s responses were not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them. Compliance and Other Matters As part of obtaining reasonable assurance about whether Government’s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. === page 157 === 0A member firm of Ernst & Young Global Limited 1406-1263767 151 Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. ey June 30, 2014 === page 158 === 1406-1263767 Single Audit Report === page 159 === A member firm of Ernst & Young Global Limited 1406-1263767 152 Ernst & Young LLP 1000 Scotiabank Plaza 273 Ponce de León Avenue San Juan, PR 00917-1951 Tel: +1 787 759 8212 Fax: +1 787 753 0808 ey.com Report of Independent Auditors on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Required by OMB Circular A-133 The Honorable Governor of the United States Virgin Islands Government of the United States Virgin Islands Report on Compliance for Each Major Federal Program We have audited the Government of the United States Virgin Islands (the Government)’s compliance with the types of compliance requirements described in the US Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that could have a direct and material effect on each of the Government’s major federal programs for the year ended September 30, 2013. The Government’s major federal programs are identified in the summary of auditor’s results section of the accompanying schedule of findings and questioned costs. Management’s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts and grants applicable to its federal programs. Auditor’s Responsibility Our responsibility is to express an opinion on each of the Government’s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Government’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the Government’s compliance. === page 160 === A member firm of Ernst & Young Global Limited 1406-1263767 153 Basis for Adverse Opinion on CFDA 16.738 and ARRA-16.803 JAG Program Cluster, and on CFDA 93.778 Medical Assistance Program As described in the accompanying schedule of findings and questioned costs, the Government did not comply with requirements regarding CFDA 16.738 and ARRA-16.803 JAG Program Cluster as described in finding numbers 2013-014 for Cash Management, 2013-015 for Reporting, and 2013-016 for Subrecipient Monitoring. Also, the Government did not comply with requirements regarding CFDA 93.778 Medical Assistance Program as described in finding numbers 2013-009 for Cash Management, 2013-018 for Special Tests and Provisions – Utilization Control and Program Integrity, 2013-019 for Special Tests and Provisions – Inpatient Hospital and Long-Term Care Facility Audits, 2013-020 for Special Tests and Provisions – ADP Risk and System Security Review, 2013-021 for Activities Allowed or Unallowed and Allowable Costs/Cost Principles, and 2013-022 for Special Tests and Provisions – Medicaid Fraud Control Unit. Compliance with such requirements is necessary, in our opinion, for the Government to comply with requirements applicable to those programs. Adverse Opinion on CFDA 16.738 and ARRA-16.803 JAG Program Cluster, and on CFDA 93.778 Medical Assistance Program In our opinion, because of the significant of the noncompliance described in the Basis of Adverse Opinion paragraph, the Government did not comply, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on CFDA 16.738 and ARRA-16.803 JAG Program Cluster, and on CFDA 93.778 Medical Assistance Program for the year ended September 30, 2013. Unmodified Opinion on Each of the Other Major Federal Programs In our opinion, the Government complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its other major federal programs that are identified in the summary of auditors results section of the accompanying schedule of findings and questioned costs for the year ended September 30, 2013. === page 161 === A member firm of Ernst & Young Global Limited 1406-1263767 154 Other Matters The results of our auditing procedures disclosed other instances of noncompliance which are required to be reported in accordance with OMB Circular A-133, and which are described in the accompanying schedule of findings and questioned costs regarding the following: Finding No. CFDA No. Program (or Cluster) Name Compliance Requirement 2013-009 20.205, ARRA-20.205 Highway Planning and Construction Cash Management 2013-010 17.225 Unemployment Insurance Cash Management 2013-011 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) Special Tests and Provisions – Authorization of Above-50- Percent Vendors 2013-012 16.588 Violence Against Women Formula Grants Reporting 2013-013 16.588 Violence Against Women Formula Grants Subrecipient Monitoring 2013-017 93.558 Temporary Assistance for Needy Families Special Tests and Provisions – Income Eligibility and Verification System (IEVS) Our opinion on each major federal program is not modified with respect to these matters. The Government’s response to the noncompliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs and corrective action plan. The Government’s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. Report on Internal Control Over Compliance Management of the Government is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Government’s internal control over compliance with requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Government’s internal control over compliance. === page 162 === A member firm of Ernst & Young Global Limited 1406-1263767 155 Our consideration of internal control over compliance was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as discussed below, we identified certain deficiencies in internal control over compliance that we consider to be material weaknesses. A deficiency in internal control over compliance exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. We consider the deficiencies in internal control over compliance described as follows to be material weaknesses: Finding No. CFDA No. Program Compliance (or Cluster) Name Requirement 2013-009 20.205, ARRA- 20.205 Highway Planning and Construction Cash Management 93.778 Medical Assistance Program 2013-010 17.225 Unemployment Insurance Cash Management 2013-011 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) Special Tests and Provisions – Authorization of Above-50-Percent Vendors 2013-012 16.588 Violence Against Women Formula Grants Reporting 2013-013 16.588 Violence Against Women Formula Grants Subrecipient Monitoring 2013-014 16.738, ARRA-16.803 JAG Program Cluster Cash Management 2013-015 16.738, ARRA-16.803 JAG Program Cluster Reporting 2013-016 16.738, ARRA-16.803 JAG Program Cluster Subrecipient Monitoring 2013-017 93.558 Temporary Assistance for Needy Families Special Tests and Provisions – Income Eligibility and Verification System (IEVS) === page 163 === A member firm of Ernst & Young Global Limited 1406-1263767 156 Finding No. CFDA No. Program Compliance (or Cluster) Name Requirement 2013-018 93.778 Medical Assistance Program Special Tests and Provisions- Utilization Control and Program Integrity 2013-019 93.778 Medical Assistance Program Special Test and Provisions- Inpatient Hospital and Long-Term Care Facility Audits 2013-020 93.778 Medical Assistance Program Special Tests and Provisions- ADP Risk Analysis and System Security Review 2013-021 93.778 Medical Assistance Program Activities Allowed or Unallowed and Allowable Costs/ Costs Principles- Recoveries, refunds and rebates 2013-022 93.778 Medical Assistance Program Special Tests and Provisions- Medical Fraud Control Unit (MFCU) A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. The Government’s responses to the internal control over compliance findings identified in our audit are described in the schedule of findings and questioned costs and corrective action plan. The Government’s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. ey June 30, 2014 === page 164 === CFDA Number Federal grantor/ pass through grantor / program or cluster title Federal Expenditures U.S. Department of Agriculture 10.025 Plant and Animal Disease, Pest Control, and Animal Care 72,389 $ 10.170 Specialty Crop Block Grant Program - Farm Bill 168,367 SNAP Cluster 10.551 Supplemental Nutrition Assistance Program (SNAP) 56,990,837 $ 10.561 State Administrative Matching Grants for the Supplemental Nutrition Assistance Program 4,523,850 SNAP Cluster Total 61,514,687 Child Nutrition Cluster 10.555 National School Lunch Program 9,607,821 10.556 Special Milk Program for Children 265,887 10.559 Summer Food Service Program for Children 205,464 Child Nutrition Cluster Total 10,079,172 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children 7,107,682 10.558 Child and Adult Care Food Program 163,492 10.560 State Administrative Expenses for Child Nutrition 177,796 10.568 Emergency Food Assistance Program (Administrative Costs) 31,513 10.582 Fresh Fruit and Vegetable Program 31,435 10.664 Cooperative Forestry Assistance 109,341 10.675 Urban and Community Forestry Program 56,307 10.676 Forest Legacy Program 56,419 10.678 Forest Stewardship Program 61,494 10.680 Forest Health Protection 483 79,630,577 U.S Department of Commerce 11.407 Interjurisdictional Fisheries Act of 1986 634 11.419 Coastal Zone Management Administration Awards 1,058,172 11.426 Financial Assistance for National Centers for Coastal Ocean Science 1,489 11.433 Marine Fisheries Initiative 66,200 11.434 Cooperative Fisheries Statistics 8,855 11.435 Southeast Area Monitoring and Assessment Program 63,638 11.482 Coral Reef Conservation Program 27,422 1,226,410 U.S Department of Defense 12.401 National Guard Military Operations and Maintenance (O&M) Projects 4,479,777 Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards Year Ended September 30, 2013 157 1406-1263767 === page 165 === CFDA Number Federal grantor/ pass through grantor / program or cluster title Federal Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards (continued) Year Ended September 30, 2013 U.S Department of Housing and Urban Development 14.235 Supporting Housing Program 30,450 U.S Department of the Interior Fish and Wildlife Cluster 15.605 Sport Fish Restoration Program 478,235 15.611 Wildlife Restoration and Basic Hunter Education 92,454 Fish and Wildlife Cluster Total 570,689 15.615 Cooperative Endangered Species Conservation Fund 81,005 15.622 Sportfishing and Boating Safety Act 821 15.631 Partners for Fish and Wildlife 1,480 15.634 State Wildlife Grants 247,153 15.875 Economic , Social, and Political Development of the Territories 7,460,885 15.904 Historic Preservation Fund Grants - In-Aid 25,327 15.916 Outdoor Recreation_Acquisition, Development and Planning 150,830 8,538,190 U.S Department of Justice 16.523 Juvenile Accountability Block Grants 96,008 16.540 Juvenile Justice and Delinquency Prevention - Allocation to States 57,387 16.575 Crime Victim Assistance 313,636 16.576 Crime Victim Compensation 38,062 16.588 Violence Against Women Formula Grants 350,048 ARRA-16.588 ARRA - Violence Against Women Formula Grants 23,673 Violent Against Women Formula Grants Total 373,721 16.606 State Criminal Alien Assistance Program 85,402 16.710 Public Safety Partnership and Community Policing Grants 516,784 16.727 Enforcing Underage Drinking Laws Program 144,351 JAG Program Cluster 16.738 Edward Byrne Memorial Justice Assistance Grant Program 289,114 ARRA-16.803 ARRA - Recovery Act- Edward Byrne Memorial Justice Assistance Grant (JAG) Program/ Grants to States and Territories 827,261 JAG Program Cluster Total 1,116,375 16.742 Paul Coverdell Forensic Sciences Improvement Grant Program 11,757 16.750 Support for Adam Walsh Act Implementation Grant Program 61,092 2,814,575 158 1406-1263767 === page 166 === CFDA Number Federal grantor/ pass through grantor / program or cluster title Federal Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards (continued) Year Ended September 30, 2013 U.S Department of Labor 17.002 Labor Force Statistics 380,251 17.005 Compensation and Working Conditions 51,631 Employment Service Cluster 17.207 Employment Service/Wagner-Peyser Funded Activities 1,317,299 17.801 Disabled Veterans Outreach Program (DVOP) 15,430 17.804 Local Veterans Employment Representative Program 34,100 Employment Service Cluster Total 1,366,829 17.225 Unemployment Insurance 49,572,488 17.235 Senior Community Service Employment Program 813,441 17.259 WIA Youth Activities 1,865,721 17.271 Work Opportunity Tax Credit Program (WOTC) 13,085 17.277 Workforce Investment Act (WIA) National Emergency Grants 1,527,725 17.503 Occupational Safety and Health State Program 217,082 55,808,253 U.S Department of Transportation 20.205 Highway Planning and Construction 20,789,169 ARRA-20.205 ARRA - Highway Planning and Construction 2,150,829 Highway Planning and Construction Total 22,939,998 20.218 National Motor Carrier Safety 5,120 20.507 Federal Transit_Formula Grants 471,490 ARRA-20.507 ARRA - Federal Transit_Formula Grants 30,394 Federal Transit Formula Grants Total 501,884 20.513 Capital Assistance Program for Elderly Persons and Persons with Disabilities 225,462 20.600 State and Community Highway Safety 418,179 20.703 Interagency Hazardous Materials Public Sector Training and Planning Grants 35,197 24,125,840 National Foundation on the Arts and Humanities 45.025 Promotion of the Arts_Partnership Agreement 316,899 45.310 Grants to States 91,781 408,680 159 1406-1263767 === page 167 === CFDA Number Federal grantor/ pass through grantor / program or cluster title Federal Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards (continued) Year Ended September 30, 2013 U.S Environmental Protection Agency 66.040 State Clean Diesel Grant Program 277 ARRA-66.418 ARRA - Construction Grants for Wastewater Treatment Works 188,558 66.454 Water Quality Management Planning 102,009 66.468 Capitalization Grants for Drinking Water State Revolving Fund 2,176,798 66.471 State Grants to Reimburse Operators of Small Water Systems for Training and Certification Costs 38,721 66.472 Beach Monitoring and Notification Program Implementation Grants 229,124 66.474 Water Protection Grants to the States 49,794 66.605 Performance Partnership Grants 1,601,294 66.804 Underground Storage Tank Prevention, Detection and Compliance Program 88,478 66.805 Leaking Underground Storage Tank Trust Fund Corrective Action Program 61,305 66.817 State and Tribal Response Program Grants 82,633 4,618,991 U.S Department of Energy 81.041 State Energy Program 156,714 ARRA-81.041 ARRA - State Energy Program 2,052,389 State Energy Program Total 2,209,103 81.042 Weatherization Assistance for Low-Income Persons 32,634 ARRA-81.042 ARRA-Weatherization Assistance for Low-Income Persons 72,239 Weatherization Assistance for Low Income Persons Total 104,873 ARRA-81.128 ARRA - Energy Efficiency and Conservation Block Grant Program (EECBG) 698,502 3,012,478 U.S Department of Education 84.027 Special Education_Grants to States 11,221,214 84.041 Impact Aid 294,632 84.126 Rehabilitation Services - Vocational Rehabilitation Grants to States 1,716,611 84.169 Independent Living - State Grants 24,652 84.177 Rehabilitation Services - Independent Living Services for Older Individuals Who Are Blind 24,047 84.181 Special Education - Grants for Infants and Families 788,267 84.187 Supported Employment Services for Individuals with the Most Significant Disabilities 12,150 84.215 Fund for the Improvement of Education 264,759 84.256 Territories and Freely Associated States Education Grant Program 264,714 160 1406-1263767 === page 168 === CFDA Number Federal grantor/ pass through grantor / program or cluster title Federal Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards (continued) Year Ended September 30, 2013 84.330 Advanced Placement Program (Advanced Placement Test Fee; Advanced Placement Incentive Program Grants) 18,616 84.371 Striving Readers 196,036 84.372 Statewide Data System 1 ARRA-84.402 ARRA- Consolidated Grants to the Outlying Areas, Recovery Act 101,576 84.403 Consolidated Grants to the Outlying Areas 22,216,645 37,143,920 U.S. Department of Health and Human Services 93.042 Special Programs for the Aging-Title VII, Chapter 2-Long Term Care Ombudsman Services for Older Individuals 39,314 Aging Cluster (93.044/045) 93.044 Special Programs for the Aging-Title III, Part B, Grants for Supportive Services and Senior Centers 497,848 93.045 Special Programs for the Aging-Title III, Part C- Nutrition Services 1,605,672 Aging Cluster (93.044/045) Total 2,103,520 93.048 Special Programs for the Aging_ Title IV and Title II Discretionary Projects 88,321 93.052 National Family Caregiver Support, Title III, Part E 213,686 93.069 Public Health Emergency Preparedness 42,580 93.074 Hospital Preparedness Program (HPP) and Public Health Emergency Preparedness (PHEP) Aligned Cooperative Agreements 814,985 93.092 Affordable Care Act (ACA) Personal Responsibility Education Program 179,428 93.110 Maternal and Child Health Federal Consolidated Programs 46,274 93.116 Project Grants and Cooperative Agreements for Tuberculosis Control Programs 85,462 93.120 Mental Health Services for Cuban Entrants 51,896 93.127 Emergency Medical Services for Children 101,188 93.130 Cooperative Agreements to States/Territories for the Coordination and Development of Primary Care Offices 30,716 93.136 Injury Prevention and Control Research and State and Community Based Programs 2,930 93.150 Projects for Assistance in Transition from Homelessness (PATH) 50,000 93.153 Coordinated Services and Access to Research for Women, Infants, Children, and Youth 61,158 93.217 Family Planning-Services 929,678 93.243 Substance Abuse and Mental Health Services-Projects of Regional and National Significance 119,900 93.251 Universal Newborn Hearing Screening 131,523 93.259 Rural Access to Emergency Devices Grant 31,158 93.268 Immunization Grants 1,279,315 93.283 The Affordable Care Act: Centers for Disease Control and Prevention-Investigations and Technical Assistance 352,738 93.505 Affordable Care Act (ACA) Maternal, Infant, and Early Childhood Home Visiting Program 712,308 161 1406-1263767 === page 169 === CFDA Number Federal grantor/ pass through grantor / program or cluster title Federal Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards (continued) Year Ended September 30, 2013 93.507 PPHF 2012 National Public Health Improvement Initiative 2,850 93.519 Affordable Care Act (ACA) Consumer Assistance Program Grants 74,146 93.525 State Planning and Establishment Grants for the Affordable Care Act (ACA)s Exchanges 679,192 93.556 Promoting Safe and Stable Families 592,940 93.558 Temporary Assistance for Needy Families 3,320,798 93.563 Child Support Enforcement 4,441,336 93.568 Low-Income Home Energy Assistance 151,073 93.569 Community Services Block Grant 2,376,612 93.575 Child Care and Development Block Grant 1,876,513 93.597 Grants to States for Access and Visitation Programs 14,768 93.600 Head Start 8,849,937 93.617 Voting Access for Individual with Disabilities - Grants to States 121 93.645 Stephanie Tubbs Jones Child Welfare Services Program 325,361 93.667 Social Services Block Grant 172,523 93.671 Family Violence Prevention and Services/Bettered Women's Shelters_Grants to States and Indian Tribes 41,825 ARRA-93.708 ARRA-Head Start 453,212 ARRA-93.719 ARRA State Grants to Promote Health Information Technology 24,654 ARRA-93.729 ARRA Health Information Technology and Public Health 3,159 93.778 Medical Assistance Program (Medicaid; Title XIX) 15,355,529 93.794 Reimbursement of State Costs for Provision for Part D Drugs 154,563 93.887 Health Care and Other Facilities 358,734 93.889 National Bioterrorism Hospital Preparedness Program 457,924 93.917 HIV Care Formula Grants 808,886 93.940 HIV Prevention Activities-Health Department Based 494,335 93.944 Human Immunodeficiency Virus (HIV)/Acquired Immunodeficiency Virus Syndrome (AIDS) Surveillance 145,917 93.958 Block Grants for Community Mental Health Services 40,816 93.959 Block Grants for Prevention and Treatment of Substance Abuse 517,006 93.977 Preventive Health Services-Sexually Transmitted Diseases Control Grants 128,060 93.991 Preventive Health and Health Services Block Grant 125,234 93.994 Maternal and Child Health Services Block Grant to the States 1,380,881 50,836,983 Corporation for National and Community Service 94.002 Retired and Senior Volunteer Program 24,677 94.011 Foster Grandparent Program 226,719 251,396 162 1406-1263767 === page 170 === CFDA Number Federal grantor/ pass through grantor / program or cluster title Federal Expenditures Government of the United States Virgin Islands Schedule of Expenditures of Federal Awards (continued) Year Ended September 30, 2013 Executive Office of the President 95.001 High Intensity Drug Trafficking Program 77,605 Department of Homeland Security 97.012 Boating Safety Financial Assistance 622,910 97.017 Pre-Disaster Mitigation (PDM) Competitive Grants 3,967,504 97.036 Disaster Grants - Public Assistance (Presidentially Declared Disasters) 1,659,177 ARRA-97.039 ARRA-Hazard Mitigation Grant 196,360 97.042 Emergency Management Performance Grants 585,634 97.045 Cooperating Technical Partners 71,672 97.067 Homeland Security Grant Program 962,864 97.078 Buffer Zone Protection Plan (BZPP) 182,066 97.082 Earthquake Consortium 76,095 97.089 Driver's License Security Grant Program 1,179,854 9,504,136 Total expenditures of federal awards 282,508,261 $ See accompanying notes. 163 1406-1263767 === page 171 === Government of the United States Virgin Islands Notes to Schedule of Expenditures of Federal Awards Year Ended September 30, 2013 1406-1263767 164 1. Basis of Presentation For purposes of complying with the Single Audit Act Amendments of 1996, the Government of the United States Virgin Islands (the Government or GVI) is defined in a manner consistent with the entity defined in the basic financial statements as of and for the year ended September 30, 2013, except that the discretely-presented component units (as defined in the notes to the aforementioned basic financial statements) are excluded. Accordingly, the accompanying Schedule of Expenditures of Federal Awards (the Schedule) presents the federal financial assistance programs administered by the Government for the year ended September 30, 2013, excluding the discretely-presented component units. 2. Basis of Accounting The accompanying Schedule was prepared using the modified accrual basis of accounting, except for nonmonetary programs, which are presented based on the fair value of the food stamps (CFDA No. 10.551 in the amount of $56,990,836) and the food cost (CFDA No. 10.557 in the amount of $5,038,762) distributed during the year. The Government’s accounting system provides the primary information from which the schedule is prepared. 3. Matching Costs Matching costs, such as the nonfederal share of certain program costs, are not included in the accompanying Schedule, except Unemployment Insurance (CFDA No. 17.225), as indicated in Note 5. 4. Relationship to Federal Financial Reports The regulations and guidelines governing the preparation of Federal Financial Reports vary by federal agency and among programs administered by the same agency. Accordingly, the amounts reported in the Federal Financial Reports do not necessarily agree with the amounts reported in the accompanying Schedule, which is prepared on the basis of accounting explained in Notes 1 and 2. Office of Management and Budget (OMB) Circular A-133 requires that Federal Financial Reports and claims for advances and reimbursements contain information that is supported by the books and records from which the basic financial statements have been prepared. The Government’s departments prepare the Federal Financial Reports and claims for advances and reimbursements primarily based on information from the internal accounting records of the respective Government’s program departments. === page 172 === Government of the United States Virgin Islands Notes to Schedule of Expenditures of Federal Awards (continued) 1406-1263767 165 5. Unemployment Insurance Program (UI) The U.S. Department of Labor in consultation with the Office of Management and Budget officials has determined that for the purpose of audits and reporting under OMB Circular A-133, state Unemployment Insurance (UI) funds as well as federal funds should be considered federal awards for determining Type A programs. The State receives federal funds for administrative purposes. State unemployment taxes must be deposited to a state account in the Federal Unemployment Trust Fund, used only to pay benefits under the federally approved state law. State UI funds as well as federal funds are included on the Schedule. The following table provides a breakdown of the state and federal portions of the total expended under CFDA No. 17.225: Expenditures Federal fund expenditures (Administration) $ 2,770,037 State fund expenditures (Trust fund) 46,802,451 Total expenditures $49,572,488 6. Subrecipients Of the federal expenditures presented in the schedule, the Government provided federal awards to subrecipients related to programs as follows: Federal CFDA Number Program Title Amount Provided to Subrecipients 16.588 and ARRA-16588 Violence Against Women Formula Grants $ 158,181 16.738 and ARRA-16.803 JAG Program Cluster 43,550 ARRA-81.128 Energy Efficiency and Conservation Block Grant Program 183,719 97.017 Pre-Disaster Mitigation (PDM) Competitive Grants 3,967,504 Total federal awards provided to subrecipients $4,352,954 === page 173 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs Year Ended September 30, 2013 1406-1263767 166 Part I - Summary of Auditor’s Results Financial Statement Section Type of auditor’s report issued on the basic financial statements: Opinion Unit Type of Report Governmental Activities Qualified Business-type Activities Disclaimer General Fund Unmodified Debt Service Fund Unmodified Capital Projects Fund Unmodified West Indian Company Fund-enterprise Fund Unmodified Unemployment Insurance-enterprise Fund Unmodified Aggregate Remaining Fund Information Disclaimer Aggregate Discretely-presented Component Units Qualified Internal Control over Financial Reporting Material weaknesses identified?............................................................................................ Yes Significant deficiencies identified? ......................................................................None reported Noncompliance material to financial statements noted?........................................................ No Federal Awards Section Internal control over major programs: Material weaknesses identified?............................................................................................ Yes Significant deficiencies identified?.......................................................................None reported === page 174 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 1406-1263767 167 Part I - Summary of Auditor’s Results (continued) Identification of major programs and type of auditor’s report issued on compliance for major each program: CFDA Number Major Program Type of Report Issued on Compliance 10.551 and 10.561 SNAP Cluster Unmodified 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) Unmodified 16.588 and ARRA-16.588 Violence Against Women Formula Grants Unmodified 16.738 and ARRA-16.803 JAG Program Cluster Adverse 17.225 Unemployment Insurance Unmodified 20.205 and ARRA-20.205 Highway Planning and Construction Unmodified 81.041 and ARRA-81.041 State Energy Program Unmodified ARRA-81.128 Energy Efficiency and Conservation Block Program Unmodified 93.558 Temporary Assistance for Needy Families Unmodified 93.563 Child Support Enforcement Unmodified 93.600 Head Start Unmodified ARRA-93.708 ARRA–Head Start Unmodified 93.778 Medical Assistance Program Adverse 97.017 Pre-Disaster Mitigation Competitive Grants Unmodified Any audit findings disclosed that are required to be reported in accordance with Section .510(a) of OMB Circular A-133……………………………… Yes Dollar threshold used to distinguish between Type A and Type B programs:…$3,000,000 Auditee qualified as low-risk auditee:…………………………………………………. No === page 175 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 168 This section identifies the significant deficiencies, material weaknesses, fraud, noncompliance with provisions and laws, regulations, contracts and grant agreements, and abuse related to the financial statements for which Government Auditing Standards require reporting in a Circular A-133 audit. === page 176 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 169 Finding Number 2013-001 Primary Agencies/Departments Affected Department of Finance (DOF), Internal Revenue Bureau (IRB), Lieutenant Governors Office (LGO) Topic The Government’s lack of control over the income, property and gross receipts tax revenues, and accounts receivable processes led to significant audit adjustments being recorded in the financial statements. Due to the nature and magnitude of this control deficiency, such control deficiency is considered to be a material weakness. Category Internal Control Criteria A sound system of internal controls is essential in enabling the Government to prepare timely and accurate financial statements by helping ensure that all financial transactions are properly recorded, appropriately supported, and subjected to supervisory review. Condition Found Management’s calculation of its tax revenues and accounts receivable processes were not properly performed, resulting in significant audit adjustments. The following items resulted in audit adjustments which could have been prevented if Management has implemented sound internal controls over its tax revenue and accounts receivable recognition processes: (a) Management calculation for property tax receivables was not properly calculated and thus significant audit adjustments were proposed in order to correctly present these accounts, and (b) inaccuracy of the accounts receivable aging due to subsequent collections being applied to the year-end balance. Questioned Costs Not applicable. === page 177 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 170 Finding Number 2013-001 (continued) Cause The Government’s tax revenue and accounts receivable process has grown in complexity. Additionally, supervisory review of the tax revenue and accounts receivable process was not effective in all instances. Effect The lack of supervisory review led to significant adjustments in the Government’s financial statements. Recommendation The governmental finance department should be more closely involved in the monitoring and review of the tax revenue and accounts receivable processes. Management should consider performing these controls on a quarterly basis in order to detect and correct errors on a timely basis, while enhancing the Government’s knowledge over its financial condition. In addition, the Department of Finance should be more involved in the preparation of the accounts receivable aging in order to validate the accuracy of the information provided. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s finding and recommendations. Refer to the Corrective Action for further details. === page 178 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 171 Finding Number 2013-002 Primary Agencies/Departments Affected Department of Finance (DOF), Property and Procurement (P&P), Department of Public Works (DPW), Public Finance Authority (PFA), Department of Education (DOE) Topic The Government’s lack of control over its capital assets process led to significant adjustments in the financial statements. Category Internal Control Criteria A sound system of internal controls is essential in enabling the Government to prepare timely and accurate financial statements by helping ensure that all financial transactions are properly recorded, appropriately supported, and subjected to supervisory review. Condition Found During our review of capital asset accounts, we noted projects capitalized in the incorrect asset class. We also noted transfers of assets from construction in progress included as an addition instead of as a transfer from construction in progress, creating a duplicate addition. In addition, we noted assets capitalized in the incorrect period creating a cubolt issue. Questioned Costs Not applicable. Cause There is a lack of timely coordination and communication between the Department of Finance, the Department of Property and Procurement, V.I. Public Finance Authority, and the Department of Public Works. Effect The lack of supervisory review, coordination and communication between the mentioned departments led to significant audit adjustments in the Government’s financial statements. === page 179 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 172 Finding Number 2013-002 (continued) Recommendation The Government should be more closely involved in the monitoring and review of the financial statement close process of its capital assets. On a quarterly basis, at least, Management should consider reviewing assets capitalized in order to ascertain proper project capitalization. This will enable the detection and correction of errors on a timely basis. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s finding and recommendations. Refer to the Corrective Action for further details. === page 180 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 173 Finding Number 2013-003 Primary Agency/Department Affected Department of Finance (DOF) Topic The Government’s lack of control over the accounts payable reconciliations process and estimation of accrued liabilities led to significant adjustments in the financial statements. Due to the nature and magnitude of this control deficiency, such control deficiency is considered to be a material weakness. Category Internal Control Criteria A fundamental element of a sound system of internal controls is an effective accounts payable reconciliations process and proper estimation of accrued liabilities. Such processes are essential in enabling entities to prevent and detect errors on a timely basis. This effective process helps ensure that all accounts payable and accrued liabilities are properly recorded, appropriately supported, and subjected to supervisory review. Condition Found Lack of controls over the accounts payable ERP module and accounts payable reconciliations has made it difficult for the Government to establish its accounts payable subledger. Management establishes its accounts payable subledger through a manually intensive process, in addition to the lack of processes to accurately estimate accrued liabilities as part of the financial statement close process. This resulted in audit significant adjustments in the Government’s financial statements. Questioned Costs Not applicable. Cause The Government’s financial statements have grown in complexity. Additionally, supervisory review of the accounts payable reconciliation process and estimation of accrued liabilities was not effective in all instances. === page 181 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 174 Finding Number 2013-003 (continued) Effect The lack of supervisory review led to significant adjustments in the Government’s financial statements. This resulted in a material misstatement of the financial statements. Recommendation The Government’s management should be more closely involved in the monitoring and review of the financial statement close process. Management should consider performing this process on a quarterly basis in order to detect and correct errors on a timely basis, while enhancing the Government’s knowledge over its financial condition. In addition, Management should consider establishing procedures to reduce manual efforts by utilizing its ERP Accounts Payable module more effectively. Additionally, Management should develop and establish a policy with accurate techniques to estimate accrued liabilities and not rely solely on subsequent events. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s finding and recommendations. Refer to the Corrective Action for further details. === page 182 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 175 Finding Number 2013-004 Primary Agencies/Departments Affected Department of Finance (DOF) Topic The Government’s lack of control over its retroactive pay liability has affected the auditor’s ability to opine on certain affected opinion units. This has resulted in a modification of the audit opinion for the last four years. For the last four years, we encountered calculation errors that were significant in the retroactive pay liability calculation. The calculation errors have not been remediated as of the date of this report. Category Internal Control Criteria A fundamental element of a sound system of internal controls is an effective liability calculation process. Such process is essential in enabling organization to prevent and detect errors on a timely basis. This effective process helps ensure that all liability transactions are properly recorded, appropriately supported, and subjected to supervisory review. Condition Found The Government was not able to substantiate its calculation of the retroactive pay liability, which resulted in a qualification of the opinion of governmental activities in the Government’s basic financial statements. Questioned Costs Not applicable. Cause Supervisory review of this liability calculation process was not effective. As a result, supporting documentation for calculation was not sufficiently adequate to support Management’s assertions. === page 183 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 176 Finding Number 2013-004 (continued) Effect The Government was not able to support its calculation for this liability, which resulted in a qualification of the audit opinion of governmental activities in the Government’s basic financial statements. Recommendation The Government’s management should establish controls over the review of this calculation process and effective procedures to document their support of this liability. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s finding and recommendations. Refer to the Corrective Action for further details. === page 184 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 177 Finding Number 2013-005 Primary Agencies/Departments Affected Department of Finance (DOF) Topic Performance and review of the bank reconciliation process has not been timely performed and reconciling items have not been properly addressed or accounted for. Category Internal Control Criteria Performance and review of bank reconciliations should be performed within a reasonable period after month-end. Additionally, appropriate attention to detail should be practiced so that errors are appropriately identified and corrected on a timely basis. Condition Found During our audit, we noted that bank reconciliations were not being performed on a timely basis. Most bank reconciliations were completed, reviewed and approved after 365 days. As a result, reconciling items with inaccuracies that should have been identified during the review process were unheeded resulting in material misstatements. Questioned Costs Not applicable. Cause The Government has numerous bank accounts and its process for performing bank reconciliations is, for the most part, performed manually. === page 185 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 178 Finding Number 2013-005 (continued) Effect The lack of timely performance and review of bank reconciliations led to adjustments not identified on a timely basis. Due to the nature of cash, lack of proper internal controls over the bank reconciliation process and cash in general can lead to an inaccurate presentation of the financial position of the Government, which can be detrimental to their operation. It can also pose a fraud risk as unapproved transactions may not be identified on a timely basis. In addition, this has prevented the Government from performing monthly closing procedures, which is necessary for timely financing reporting. Recommendation The Government should automate its bank reconciliation process and consolidate unnecessary bank accounts. This will allow for the Government’s personnel to be more efficient and effective in detecting errors and provide the Government more timely and accurate financial information. In addition, should perform detail review of reconciling items in order to conclude on the accuracy and the proper inclusion or exclusion. Management’s Response and Planned Corrective Actions While the Government concurs with the auditor's findings and recommendations as of September 30, 2013, significant progress regarding bank reconciliations was made subsequently. At September 30, 2013, 31 out of 32 bank accounts had been reconciled and substantial work completed in relation to the remaining bank account. === page 186 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 179 Finding Number 2013-006 Primary Agencies/Departments Affected Department of Finance (DOF), Department of Health (DOH) Topic The Government’s lack of control over its liability estimation process for medical malpractice claims led to an error in the financial statements, which could not be quantified by management. Category Internal Control Criteria A fundamental element of a sound system of internal controls is an effective liability estimation process. Such process is essential in enabling entities to prevent and detect errors on a timely basis. This effective process helps ensure that all liability estimation transactions are properly recorded, appropriately supported, and subjected to supervisory review. Condition Found The Government did not establish a liability for medical malpractice claims. Questioned Costs Not applicable. Cause The Government’s financial statements have grown in complexity. An evaluation of the malpractice liability was not performed for fiscal year 2013. Effect The Government was not able to quantify this liability, which resulted in a disclaimer in the audit opinion of the business-type activities and aggregate remaining fund information. === page 187 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 180 Finding Number 2013-006 (continued) Recommendation The Government’s management should establish controls over the review its claims data process which will allow them to provide the data necessary to their actuary for the estimation of this liability. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s finding and recommendations. Refer to the Corrective Action for further details. === page 188 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 181 Finding Number 2013-007 Primary Agency/Department Affected Department of Finance (DOF) Topic The Government’s lack of control over transactions with its component units led to significant adjustments in the financial statements. In addition, due to consecutive restatements and qualifications with components units audited financial statements that led to qualifications and restatements on the Government’s financial statements. Due to the nature and magnitude of this control deficiency, such control deficiency is considered to be a material weakness. Category Internal Control Criteria A sound system of internal controls is essential in enabling the Government to prepare timely and accurate financial statements by helping ensure that all financial transactions are properly recorded, appropriately supported, and subjected to supervisory review. In addition, a sound system of internal controls improves their oversight on component units’ financial statements and the potential effect on the Government’s financial statements. Condition Found Lack of review of classification and reporting of transactions with component units led to errors, resulting in significant audit adjustments. Questioned Costs Not applicable. Cause The Government does not have an effective process to review the classification and reporting of transactions between component units and the Government; in addition to process to oversight component units operation and financial statements preparation process. === page 189 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 182 Finding Number 2013-007 (continued) Effect This control deficiency led to significant adjustments, qualifications and restatement in the Government’s financial statements. This resulted in a material misstatement of the financial statements, some of which related to prior periods. Recommendation The Government’s management should be more closely involved in the monitoring and review of the transactions with its component units, in order to detect and correct errors on a timely basis, while enhancing the Government’s understanding over its financial condition. Additionally, the Government should implement procedures to improve their oversight over component units audit procedures and financial statement close process. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s finding and recommendations. Refer to the Corrective Action for further details. === page 190 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 183 Finding Number: 2013-008 Topic Schedule of Expenditures of Federal Awards (SEFA) Category Internal Control Criteria The Government of the US Virgin Islands does not have internal controls in place to adequately prepare and review the Schedule of Expenditures of Federal Awards (SEFA). Due to the nature and magnitude of this control deficiency, we consider it to be a material weakness. Condition Found During the performance of our audit procedures, we received various versions of the Schedule of Expenditures of Federal Awards (SEFA). We noted the original versions did not include non- cash items or other program adjustments. Such adjustments included:  Supplemental Nutrition Assistance Program (SNAP) (CFDA No. 10.551) Food Commodities of $ 56,990,836.  Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) (CFDA No. 10.557) Food Commodities of $ 5,048,805.  Unemployment Insurance (CFDA No. 17.225) Benefits of $ 46,802,451.  Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) (CFDA No. 10.557) adjustment of $ 961,004 reclassifying program rebates previously presented as revenue against program Food Commodities expenditures. Additionally, there are no procedures established to ascertain completeness and accuracy of the SEFA provided to the auditors. Furthermore, the government did not appropriately identify ARRA funds within the schedule or verify documentation of CFDA numbers and program/cluster titles according to the Catalog of Federal Domestic Assistance. === page 191 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part II - Financial Statement Findings Section 1406-1263767 184 Finding Number: 2013-008 (continued) Questioned Costs Not applicable. Cause There are no internal control procedures established to review and ensure that the SEFA is accurately and timely prepared. Effect The lack of adequate internal controls to ensure a complete compilation of the SEFA and accuracy of the information presented may cause material omissions of certain grant expenditures, as well as missed major programs and delays in the audit process. Recommendation The Government of the US Virgin Islands should establish policies and procedures to ascertain a complete and accurate compilation of the SEFA is timely performed, including all Federal program expenditures and adjustments. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s finding and recommendations. Refer to the Corrective Action for further details. === page 192 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 185 This section identifies the audit findings required to be reported by OMB Circular A-133, Section .510(a) (for example, material weaknesses, significant deficiencies and material instances of noncompliance, including questioned costs), as well as any abuse findings involving federal awards that are material to a major program. === page 193 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 186 Finding Number: 2013-009 Programs U.S. Department of Transportation - Highway Planning and Construction - CFDA Nos. 20.205, ARRA-20.205 U.S. Department of Health and Human Services – Medical Assistance Program - CFDA No. 93.778 Category Internal Control / Compliance Compliance Requirement Cash Management Criteria In accordance with 31 CFR part 205 and the Cash Management Improvement Act (CMIA) Treasury-State Agreement in effect for fiscal year 2013, between the Territory of the Virgin Islands (the Territory) and the U.S. Secretary of the Treasury, the Territory is required to use an "average clearance" funding technique for vendor and payroll related costs. Under the "average clearance" funding technique, the Government may submit claims for reimbursement such that the funds are deposited, by ACH on the dollar-weighted average day of clearance, in the Government's bank account on the fourth day following the release of funds for vendor disbursements and on the day in which payroll checks are released for payroll related costs. Furthermore, reimbursement requests shall be for the exact amounts disbursed. === page 194 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 187 Finding Number: 2013-009 (continued) Condition- Highway Planning and Construction – CFDA Nos. 20.205 and ARRA- 20.205 Funding Techniques per Cash Management Improvement Act Agreement: CFDA: 20.205 and ARRA 20.205 Component: Salaries Technique: Average Clearance Clearance Pattern: 0 Days Component: Vendor pay and all other costs Technique: Average Clearance Clearance Pattern:4 Days During our assessment to determine whether the Government complied with the terms and conditions of the CMIA, we selected a sample of sixty (60) cash drawdowns (out of a population of 601) totaling $879,114 (from a population of $15,377,832). We noted that fifty-nine (59) out of the 60 drawdowns selected for testing totaling $879,114 did not comply with the average clearance pattern established in the CMIA. One of the fifty-nine (59) items were submitted prior to the actual deposit date. Additionally, we encountered seven (7) instances where the program was unable to provide support to confirm that the funds were deposited as required. === page 195 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 188 Finding Number: 2013-009 (continued) Condition- Highway Planning and Construction – CFDA Nos. 20.205 and ARRA- 20.205 Funding Techniques per Cash Management Improvement Act Agreement (continued): Item No. Component Amount Check Release Date Actual Deposit Date Check Release- Actual Deposit Date ARRA Non- ARRA 1 Vendor Payments and all other payments $19,930.89 1/22/2013 2/5/2013 14 x 2 Vendor Payments and all other payments 18.73 4/13/2013 12/20/2013 251 x 3 Vendor Payments and all other payments 1,289.95 3/19/2013 4/15/2013 27 x 4 Vendor Payments and all other payments 14.38 4/13/2013 12/20/2013 251 x 5 Vendor Payments and all other payments 20.00 4/13/2013 12/20/2013 251 x 6 Vendor Payments and all other payments 66.05 8/14/2013 12/20/2013 128 x 7 Vendor Payments and all other payments 20.77 8/14/2013 12/20/2013 128 x 8 Vendor Payments and all other payments 322.77 8/14/2013 12/20/2013 128 x 9 Vendor Payments and all other payments 119.01 8/14/2013 12/20/2013 128 x 10 Vendor Payments and all other payments 3,836.80 10/2/2013 3/24/2014 173 x 11 Vendor Payments and all other payments 3,500.00 9/17/2013 9/24/2013 7 x 12 Vendor Payments and all other payments 4,848.00 9/4/2013 3/24/2014 201 x 13 Vendor Payments and all other payments 3,653.80 8/17/2013 3/24/2014 219 x 14 Vendor Payments and all other payments 3,845.60 8/7/2013 3/24/2014 229 x 15 Vendor Payments and all other payments 2,972.16 7/26/2013 3/24/2014 241 x 16 Vendor Payments and all other payments 3,653.80 7/24/2013 3/24/2014 243 x 17 Vendor Payments and all other payments 3,836.80 7/24/2013 3/24/2014 243 x 18 Vendor Payments and all other payments 6,023.20 7/12/2013 3/24/2014 255 x 18 Vendor Payments and all other payments 3,109.62 1/22/2013 2/15/2013 24 x 20 Vendor Payments and all other payments 3,653.86 1/11/2013 2/15/2013 35 x 21 Vendor Payments and all other payments 4,442.30 12/28/2012 2/15/2013 49 x === page 196 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 189 Finding Number: 2013-009 (continued) Condition- Highway Planning and Construction – CFDA Nos. 20.205 and ARRA- 20.205 Funding Techniques per Cash Management Improvement Act Agreement (continued): Item No. Component Amount Check Release Date Actual Deposit Date Check Release- Actual Deposit Date ARRA Non- ARRA 22 Vendor Payments and all other payments 724.98 10/13/2012 – – x 23 Vendor Payments and all other payments 28,716.61 7/24/2013 8/21/2013 28 x 24 Vendor Payments and all other payments 27,659.71 5/13/2013 7/12/2013 60 x 25 Vendor Payments and all other payments 267.00 3/21/2013 5/9/2013 49 x 26 Vendor Payments and all other payments 24,093.03 10/10/2013 11/19/2013 40 x 27 Vendor Payments and all other payments 10,556.26 12/18/2012 12/24/2012 6 x 28 Vendor Payments and all other payments 222,001.70 11/21/2012 11/14/2012 -7 x 29 Vendor Payments and all other payments 283,162.02 12/18/2012 8/20/2013 245 x 30 Vendor Payments and all other payments 82.14 6/5/2013 6/20/2013 15 x 31 Vendor Payments and all other payments 11.76 4/13/2013 5/9/2013 26 x 32 Vendor Payments and all other payments 12.10 4/13/2013 5/9/2013 26 x 33 Vendor Payments and all other payments 6.87 3/5/2013 4/20/2013 46 x 34 Vendor Payments and all other payments 9.21 3/5/2013 4/20/2013 46 x 35 Vendor Payments and all other payments 9.55 3/5/2013 4/20/2013 46 x 36 Vendor Payments and all other payments 8.73 3/5/2013 4/20/2013 46 x 37 Vendor Payments and all other payments 3,300.00 9/23/2013 10/11/2013 18 x 38 Vendor Payments and all other payments 82,166.86 12/29/2012 1/10/2013 12 x 39 Vendor Payments and all other payments 28.65 3/5/2013 4/20/2013 46 x 40 Vendor Payments and all other payments 498.90 9/4/2013 – – x 41 Vendor Payments and all other payments 228.00 8/12/2013 – – x 42 Vendor Payments and all other payments 10.55 6/5/2013 7/29/2013 54 x === page 197 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 190 Finding Number: 2013-009 (continued) Condition- Highway Planning and Construction – CFDA Nos. 20.205 and ARRA- 20.205 Funding Techniques per Cash Management Improvement Act Agreement (continued): Item No. Component Amount Check Release Date Actual Deposit Date Check Release- Actual Deposit Date ARRA Non- ARRA 43 Vendor Payments and all other payments 84.03 6/5/2013 6/20/2013 15 x 44 Vendor Payments and all other payments 10,602.00 3/18/2013 – – x 45 Vendor Payments and all other payments 5,007.70 11/30/2012 1/21/2013 52 x 46 Vendor Payments and all other payments 4,038.46 11/20/2012 2/15/2013 87 x 47 Vendor Payments and all other payments 3,836.80 11/20/2012 2/15/2013 87 x 48 Vendor Payments and all other payments 4,444.26 11/20/2012 2/15/2013 87 x 49 Vendor Payments and all other payments 84,919.09 10/01/2013 10/11/2013 10 x 50 Vendor Payments and all other payments 175.20 8/29/2013 – – x 51 Vendor Payments and all other payments 1,000.00 3/25/2013 – – x 52 Vendor Payments and all other payments 500.00 12/7/2012 – – x 53 Vendor Payments and all other payments 4,807.20 2/14/2013 2/15/2013 1 x 54 Vendor Payments and all other payments 3,576.80 12/12/2012 2/15/2013 65 x 55 Vendor Payments and all other payments 77.81 1/9/2013 1/17/2013 8 x 56 Vendor Payments and all other payments 78.02 1/9/2013 1/17/2013 8 x 57 Vendor Payments and all other payments 84.09 1/9/2013 1/17/2013 8 x 58 Vendor Payments and all other payments 85.32 11/23/2012 12/1/2012 8 x 59 Vendor Payments and all other payments 71.20 1/28/2013 2/11/2013 14 x === page 198 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 191 Finding Number: 2013-009 (continued) Condition- Medical Assistance Program - CFDA No. 93.778 Funding Techniques per Cash Management Improvement Act Agreement CFDA: 93.778 Component: Salaries Technique: Average Clearance Clearance Pattern: 0 Days Component: Vendor pay and all other costs Technique: Average Clearance Clearance Pattern: 4 Days During our assessment to determine whether the Government complied with the terms and conditions of the CMIA Treasury-State Agreement, we selected a sample of twelve (12) cash drawdowns (out of a population of 60) totaling $2,272,899 (from a population of $15,326,347). We noted that six (6) drawdowns selected for testing totaling $2,272,899 did not comply with the CMIA as follows: Item # Component Amount Payment Release Date Actual Deposit Date Check Release Date- Actual Deposit Date 1 Vendor Pay and all other costs $324,717.37 8/28/2013 9/26/2013 29 2 Salaries 29,951.02 8/22/2013 8/27/2013 5 3 Salaries 28,079.73 6/27/2013 7/8/2013 11 4 Vendor Pay and all other costs 685,175.48 5/21/2013 5/28/2013 7 5 Vendor Pay and all other costs 161,726.15 4/17/2013 5/16/2013 29 6 Vendor Pay and all other costs 112,240.38 3/13/2013 3/21/2013 8 Questioned Costs Not applicable. === page 199 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 192 Finding Number: 2013-009 (continued) Cause Internal controls related to cash management to minimize the time between when funds are released and the transfers are made are not operating effectively in accordance with Cash Management Improvement Act (CMIA) requirements. Effect Delays in drawing funds may result in inability to satisfy current financial obligations. Recommendation The Government should ensure that policies and procedures are enforced in order to comply with the appropriate funding patterns set forth in the CMIA Treasury-State Agreement. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s finding and recommendations. Refer to the Corrective Action for further details. === page 200 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 193 Finding Number: 2013-010 Program U.S. Department of Labor – Unemployment Insurance – CFDA No. 17.225 Category Internal Control / Compliance Compliance Requirement Cash Management Criteria According to the 31 CFR 205 “Subpart B- Rules Applicable to Federal Assistance Programs not included in a Treasury-State Agreement”: A state must minimize the time between the drawdown of federal funds from the federal government and their disbursement for federal program purposes. A Federal Program Agency must limit a funds transfer to a State to the minimum amounts needed by the State and must time the disbursement to be in accord with the actual, immediate cash requirement of the State in carrying out a federal assistance program or project. The timing and amount of funds transfer must be as close as is administratively feasible to a State’s actual cash outlay for direct program costs and the proportionate share of any allowable indirect costs. === page 201 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 194 Finding Number: 2013-010 (continued) Condition Found During our testing to determine whether the Government complied with the terms and conditions established in 31 CFR 205 “Subpart B- Rules Applicable to Federal Assistance Programs Not included in a Treasury- State Agreement”, we selected a sample of forty-one (41) cash drawdowns (out of a population of 205 drawdowns) totaling $1,635,563 (from a population of $2,763,297). We noted that eleven (11) cash drawdowns tested did not comply with conditions established in 31 CFR 205. Additionally, we encountered two (2) items were submitted prior to the actual deposit date. Item No. Component Amount Payment Release Date Actual Deposit Date Check Release Date- Actual Deposit Date 1 Vendor Pay and all other costs $27,268.00 11/21/2012 12/7/2012 16 2 Vendor Pay and all other costs 11,030.00 1/2/2013 12/28/2012 -5 3 Salaries 16,848.00 11/15/2012 11/26/2012 11 4 Vendor Pay and all other costs 27,268.00 12/10/2012 12/7/2012 -3 5 Vendor Pay and all other costs 43,757.00 8/28/2013 9/13/2013 16 6 Vendor Pay and all other costs 15,516.00 8/17/2013 8/28/2013 11 7 Vendor Pay and all other costs 2,784.00 3/27/2013 5/6/2013 40 8 Vendor Pay and all other costs 3,904.00 5/6/2013 5/13/2013 7 9 Vendor Pay and all other costs 4,240.00 1/30/2013 2/6/2013 7 10 Vendor Pay and all other costs 43,757.00 8/15/2013 9/13/2013 29 11 Vendor Pay and all other costs 15,516.00 8/20/2013 8/28/2013 8 Questioned Costs Not applicable. === page 202 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 195 Finding Number: 2013-010 (continued) Cause Internal Control over policies and procedures related to transfers of Federal Funds for Programs not included in the Treasury- State Agreement, do not appear to be operating effectively in order to minimize the timing between the release of the funds, and the transfers are made, to be as close as is administratively feasible. Effect Delays in requesting Federal funds could affect cash flow demands and may cause program activities to be funded by other programs’ funds or by the Government’s operating funds. Recommendation The Government should ensure that policies and procedures are enforced in order to comply with 31 CFR 205 Subpart B, and minimize the timing between the time funds are released and the transfers are made. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s finding and recommendations. Refer to the Corrective Action for further details. === page 203 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 196 U.S. Department of Agriculture Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) CFDA No. 10.557 The objective of the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) is to provide supplemental nutritious foods, nutrition education, and referrals to health care for low-income persons during critical periods of growth and development. Such persons include pregnant women, breast-feeding women up to one year postpartum, non-breast-feeding women up to six months postpartum, infants (persons under one year of age), and children under age five determined to be at nutritional risk. Total Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) federal expenditures for the fiscal year ended September 30, 2013 amounted to $7,107,682. === page 204 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 197 Finding Number: 2013-011 Program U.S. Department of Agriculture – Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) – CFDA No. 10.557 Category Internal Control / Compliance Compliance Requirement Special Tests and Provisions – Authorization of Above-50-Percent Vendors Criteria In accordance with 7 CFR Part 246.12(g)(4)(i)(D), the State agency that chooses to authorize any above-50-percent vendors: must ensure that the prices of above-50-percent vendors do not inflate the competitive price criteria and allowable reimbursement levels for the peer groups or result in higher total food costs if program participants transact their food instruments at above-50-percent vendors rather than at other vendors that do not meet the above-50-percent criterion. To comply with this requirement, the State agency must compare the average cost of each type of food instrument redeemed by above-50-percent vendors against the average cost of the same type of food instrument redeemed by regular vendors. The average cost per food instrument may be weighted to reflect the relative proportion of food instruments redeemed by each category of vendors in the peer group system. The State agency must compute statewide average costs per food instrument at least quarterly to monitor compliance with this requirement. If average payments per food instrument for above-50-percent vendors exceed average payments per food instrument to regular vendors, then the State agency must take necessary action to ensure compliance, such as adjusting payment levels. Where EBT systems are in use, it may be more appropriate to compare prices of individual WIC food items to ensure that average payments to above-50-percent vendors do not exceed average payments for the same food item to comparable vendors. If FNS determines that a State agency has failed to ensure that above-50-percent vendors do not result in higher costs to the program than if participants transact their food === page 205 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 198 Finding Number: 2013-011 (continued) Criteria (continued) instruments at regular vendors, FNS will establish a claim against the State agency to recover excess food funds expended and will require remedial action. A State agency may exclude partially-redeemed food instruments from a quarterly cost neutrality assessment based on an empirical methodology approved by FNS. A State agency may not exclude food instruments from the quarterly cost neutrality assessment based on a rate of partially-redeemed food instruments. Condition Found As part of our internal controls and compliance testing over Authorization of Above-50-Percent Vendors, we noted the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) query results indicated the program had one vendor with greater than 50% of annual food sales derived from WIC Financial Instruments. After inquiries with management, EY learned that the vendor was not identified as an above-50-percent vendor when management had entered into business with them. However, during FY2013, other WIC vendors shutdown operations and this referred vendor became the only available vendor in Frederiskted area of the St. Croix district for a portion of the year under audit, which led to an increase in volume with this vendor and it becoming classified as above-50-percent vendor. During the evaluation of required procedures as per cited criteria, we learned management had failed to obtain FNS certification for the vendor and to conduct the required quarterly cost neutrality assessments during the FY2013 audit period. Questioned Costs Not applicable. Cause Internal controls over compliance with the requirements for Above-50-Percent Vendors were not operating effectively. === page 206 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 199 Finding Number: 2013-011 (continued) Effect WIC program participants could be charged prices that exceed those charged by regular vendors. Recommendation The Government should ensure that policies and procedures are enforced in order to comply with Authorization of Above-50-Percent Vendors compliance requirement. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s findings and recommendations. Refer to the Corrective Action Plan for further details. === page 207 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 200 U.S. Department of Justice Violence Against Women Formula Grants CFDA Nos. 16.588 and ARRA-16.588 The Violence Against Women Formula Grants main objectives are to assist States, Indian tribal governments, tribal courts, State and local courts, and units of local government to develop and strengthen effective law enforcement and prosecution strategies to combat violent crimes against women, and develop and strengthen victim services in cases involving crimes against women. The Program encourages the development and implementation of effective, victim-centered law enforcement, prosecution, and court strategies to address violent crimes against women and the development and enhancement of victim services in cases involving violent crimes against women. For funds under the ARRA, the program also focuses on creating and retaining jobs and improving the economy. Total Violence Against Women Formula Grants Federal expenditures for the year ended September 30, 2013, amounted to $373,721. === page 208 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 201 Finding Number: 2013-012 Program U.S. Department of Justice – Violence Against Women Formula Grants - CFDA Nos. 16.588 and ARRA-16.588 Category Internal Control / Compliance Compliance Requirement: Reporting Criteria In accordance with 29 CFR 97.20 requirements: (a) A State must expend and account for grant funds in accordance with State laws and procedures for expending and accounting for its own funds. Fiscal control and accounting procedures of the State, as well as its subgrantees and cost- type contractors, must be sufficient to (1) Permit preparation of reports required by this part and the statutes authorizing the grant, and (2) Permit the tracing of funds to a level of expenditures adequate to establish that such funds have not been used in violation of the restrictions and prohibitions of applicable statutes. (b) The financial management systems of other grantees and subgrantees must meet the following standards (1) Financial reporting. Accurate, current, and complete disclosure of the financial results of financially assisted activities must be made in accordance with the financial reporting requirements of the grant or subgrant. (2) Accounting records. Grantees and subgrantees must maintain records which adequately identify the source and application of funds provided for financially-assisted activities. These records must contain information pertaining to grant or subgrant awards and authorizations, obligations, unobligated balances, assets, liabilities, outlays or expenditures, and income. (4) Budget control. Actual expenditures or outlays must be compared with budgeted amounts for each grant or subgrant. Financial information must be related to performance or productivity data, including the development of unit cost information whenever appropriate or specifically required in the grant === page 209 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 202 Finding Number: 2013-012 (continued) Criteria (continued) or subgrant agreement. If unit cost data are required, estimates based on available documentation will be accepted whenever possible. (6) Source documentation. Accounting records must be supported by such source documentation as cancelled checks, paid bills, payrolls, time and attendance records, contract and subgrant award documents, etc. In accordance with 2 CFR section § 176.50: Award term—Reporting and registration requirements under section 1512 of the Recovery Act, Agencies are responsible for ensuring that their recipients report information required under the Recovery Act in a timely manner. The following award term shall be used by agencies to implement the recipient reporting and registration requirements in section 1512: (a) This award requires the recipient to complete projects or activities which are funded under the American Recovery and Reinvestment Act of 2009 (Recovery Act) and to report on use of Recovery Act funds provided through this award. Information from these reports will be made available to the public. (b) The reports are due no later than ten calendar days after each calendar quarter in which the recipient receives the assistance award funded in whole or in part by the Recovery Act. (c) Recipients and their first- tier recipients must maintain current registrations in the Central Contractor Registration (http://www.ccr.gov) at all times during which they have active federal awards funded with Recovery Act funds. A Dun and Bradstreet Data Universal Numbering System (DUNS) Number (http://www.dnb.com) is one of the requirements for registration in the Central Contractor Registration. (d) The recipient shall report the information described in section 1512(c) of the Recovery Act using the reporting instructions and data elements that will be provided online at http://www.FederalReporting.gov and ensure that any information that is pre-filled is corrected or updated as needed. === page 210 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 203 Finding Number: 2013-012 (continued) Condition We selected a sample of eight (8) Federal Financial Reports (SF-425) (out of a population of 16) to test compliance and internal control over reporting requirements. We noted a difference between the Financial Status Reports and the Accounting Records (ERP) regarding the expenditures for FY2013 for the following report: Federal Expenditures of 2009 ARRA Grant for Period 7/1/2013-9/30/2013 as Per SF-425 $48,370.83 Expenditures in ERP 7,638.87 Difference $40,731.96 We selected a sample of two (2) ARRA-1512 reports submitted during fiscal year (out of a total of 4 reports) to test compliance and internal controls over the Reporting requirement. We noted two (2) instances where management could not reconcile the difference between the ARRA Report and the ERP detail of expenditures, in the quarters ended 6/30/13 and 12/31/12; therefore, we could not ascertain that the underlying data was accurate and complete. Questioned Costs Not applicable. Cause The Local Emergency Planning Committee (LEPC) does not have internal controls in place, in order to ensure the accuracy of the information contained in the required reports, including reconciling federal expenditures with the Government's accounting records (ERP). Effect The Government could be reporting unallowable costs as federal expenditures. This may also lead to incorrect financial information presented in reports submitted to the federal government. === page 211 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 204 Finding Number: 2013-012 (continued) Recommendation The Government should implement procedures to ensure a proper reconciliation between accounting records (ERP) and Federal Financial Reports (SF-425) and ARRA-1512 reports. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s findings and recommendations. Refer to the Corrective Action Plan for further details. === page 212 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 205 Finding Number: 2013-013 Program U.S. Department of Justice – Violence Against Women Formula Grants - CFDA Nos. 16.588 and ARRA-16.588 Category Internal Control / Compliance Compliance Requirement Subrecipient Monitoring Criteria In accordance with 2 CFR 25.200: (a) Each agency that awards types of Federal financial assistance included in the definition of “award” in §25.305 must include the requirements described in paragraph (b) of this section in each program announcement, regulation, or other issuance containing instructions for applicants that either: (1) Is issued on or after the effective date of this part; or (2) Has application or plan due dates after October 1, 2010. (b) The program announcement, regulation, or other issuance must require each entity that applies and does not have an exemption under §25.110 to: (1) Be registered in the CCR prior to submitting an application or plan; (2) Maintain an active CCR registration with current information at all times during which it has an active Federal award or an application or plan under consideration by an agency; and (3) Provide its DUNS number in each application or plan it submits to the agency. Condition We selected a sample of four (4) subrecipients (out of a population of 5) to test control and compliance over the Subrecipient Monitoring compliance requirement. Management indicated that they did not obtain a DUNS number prior to issuing the sub-awards to The Legal Services of St. Thomas, the Women’s Coalition of St. Croix, and the Family Resource Center, who were subrecipients that received sub-awards after October 1, 2010. === page 213 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 206 Finding Number: 2013-013 (continued) Questioned Costs Not applicable. Cause Management does not have controls implemented to ensure a DUNS number is obtained from subrecipients prior to issuing the sub-award. Effect Non-compliance with federal regulations may result in a disallowance of funding. Recommendation The Government should ensure that policies and procedures are enforced in order to keep an accurate, detailed and proper monitoring for first tier sub-awards to ascertain if the pass-through entity obtained the DUNS number from non-ARRA subrecipients prior to issuance of the sub- award. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s findings and recommendations. Refer to the Corrective Action Plan for further details. === page 214 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 207 U.S. Department of Justice JAG Program Cluster CFDA Nos. 16.738 and ARRA-16.803 The JAG Program Cluster (42 USC 3750) is the primary provider of Federal criminal justice funding to State and local jurisdictions. The JAG Program Cluster funds support all components of the criminal justice system, from multi-jurisdictional drug and gang task forces to crime prevention and domestic violence programs, courts, corrections, treatment, and justice information-sharing initiatives. Total The JAG Program Cluster Federal expenditures for the fiscal year ended September 30, 2013 amounted to $1,116,375. === page 215 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 208 Finding Number: 2013-014 Program U.S. Department of Justice – JAG Program Cluster - CFDA Nos. 16.738 and ARRA-16.803 Category Internal Control / Compliance Compliance Requirement Cash Management Criteria In accordance with Subpart B of 31 CFR part 205: (a) A State must minimize the time between the drawdown of Federal funds from the Federal government and their disbursement for Federal program purposes. A Federal Program Agency must limit a funds transfer to a State to the minimum amounts needed by the State and must time the disbursement to be in accord with the actual, immediate cash requirements of the State in carrying out a Federal assistance program or project. The timing and amount of funds transfers must be as close as is administratively feasible to a State's actual cash outlay for direct program costs and the proportionate share of any allowable indirect costs. States should exercise sound cash management in funds transfers to subgrantees in accordance with OMB Circular A-102 (For availability, see 5 CFR 1310.3.). (b) Neither a State nor the Federal government will incur an interest liability under this part on the transfer of funds for a Federal assistance program subject to this subpart B. Condition While performing our testing procedures to determine whether the client complies with the terms and conditions of Cash Management, we noted a difference between the Cash Drawdowns reports management provided us and ERP balances as follows: Total Cash Draws per Reports $331,224 Total balance per ERP 249,723 Difference $ 81,501 === page 216 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 209 Finding Number: 2013-014 (continued) Condition (continued) Management was unable to reconcile such difference; therefore, they could not support compliance with Cash Management requirement. Questioned Costs Not applicable. Cause Internal controls were not operating effectively with regard to compliance with Cash Management Requirements. Effect The lack of reconciliations presents more potential for errors to go unnoticed for a significant amount of time. Lack of submission of required reports may result in a disallowance of funding. Recommendation The Government should ensure that policies and procedures are enforced in order to keep an accurate, detailed record of cash drawdowns throughout the year in order to reconcile the drawdowns with those entered in the ERP system. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s findings and recommendations. Refer to the Corrective Action Plan for further details. === page 217 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 210 Finding Number: 2013-015 Program U.S. Department of Justice –JAG Program Cluster - CFDA Nos. 16.738 and ARRA-16.803 Category Internal Control / Compliance Compliance Requirement Reporting Criteria In accordance with 29 CFR 97.20 requirements: (a) A State must expend and account for grant funds in accordance with State laws and procedures for expending and accounting for its own funds. Fiscal control and accounting procedures of the State, as well as its subgrantees and cost- type contractors, must be sufficient to (1) Permit preparation of reports required by this part and the statutes authorizing the grant, and (2) Permit the tracing of funds to a level of expenditures adequate to establish that such funds have not been used in violation of the restrictions and prohibitions of applicable statutes. (b) The financial management systems of other grantees and subgrantees must meet the following standards (1) Financial reporting. Accurate, current, and complete disclosure of the financial results of financially assisted activities must be made in accordance with the financial reporting requirements of the grant or subgrant. (2) Accounting records. Grantees and subgrantees must maintain records which adequately identify the source and application of funds provided for financially-assisted activities. These records must contain information pertaining to grant or subgrant awards and authorizations, obligations, unobligated balances, assets, liabilities, outlays or expenditures, and income. (4) Budget control. Actual expenditures or outlays must be compared with budgeted amounts for each grant or subgrant. Financial information must be related to performance or productivity data, including the development of unit cost information whenever appropriate or specifically required in the grant === page 218 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 211 Finding Number: 2013-015 (continued) Criteria (continued) or subgrant agreement. If unit cost data are required, estimates based on available documentation will be accepted whenever possible. (6) Source documentation. Accounting records must be supported by such source documentation as cancelled checks, paid bills, payrolls, time and attendance records, contract and subgrant award documents, etc. In accordance with 2 CFR section § 176.50: Award term—Reporting and registration requirements under section 1512 of the Recovery Act, Agencies are responsible for ensuring that their recipients report information required under the Recovery Act in a timely manner. The following award term shall be used by agencies to implement the recipient reporting and registration requirements in section 1512: (a) This award requires the recipient to complete projects or activities which are funded under the American Recovery and Reinvestment Act of 2009 (Recovery Act) and to report on use of Recovery Act funds provided through this award. Information from these reports will be made available to the public. (b) The reports are due no later than ten calendar days after each calendar quarter in which the recipient receives the assistance award funded in whole or in part by the Recovery Act. (c) Recipients and their first- tier recipients must maintain current registrations in the Central Contractor Registration (http://www.ccr.gov) at all times during which they have active federal awards funded with Recovery Act funds. A Dun and Bradstreet Data Universal Numbering System (DUNS) Number (http://www.dnb.com) is one of the requirements for registration in the Central Contractor Registration. (d) The recipient shall report the information described in section 1512(c) of the Recovery Act using the reporting instructions and data elements that will be provided online at http://www.FederalReporting.gov and ensure that any information that is pre-filled is corrected or updated as needed. === page 219 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 212 Finding Number: 2013-015 (continued) Condition We selected a sample of eight (8) Federal Financial Reports (SF-425) (out of a population of 16) to test compliance and internal control over reporting requirements. We noted a difference between the Financial Status Reports and the Accounting Records (ERP) regarding the expenditures for FY2013 for the following reports: Federal Expenditures as per 2009 ARRA Grant for Period 7/1/2013-9/30/2013 as Per SF-425 $196,694.00 Expenditures in ERP 95,702.90 Difference $100,991.10 Federal Expenditures as per 2009 Grant for Period 7/1/2013-9/30/2013 as Per SF-425 $149,260.70 Expenditures in ERP – Difference $149,260.70 Federal Expenditures as per 2010 Grant for Period 7/1/2013-9/30/2013 as Per SF-425 $ 48,358.01 Expenditures in ERP 50,302.08 Difference $ (1,944.07) Federal Expenditures as per 2009 ARRA Grant for Period 10/1/2012 - 12/31/2012 as Per SF-425 $166,513.00 Expenditures in ERP 215,937.80 Difference $ (49,424.80) Federal Expenditures as per 2010 Grant for Period 10/1/2012 - 12/31/2012 as Per SF-425 $ 34,114.41 Expenditures in ERP 29,551.53 Difference $ 4,562.88 === page 220 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 213 Finding Number: 2013-015 (continued) Condition (continued) We selected a sample of two (2) ARRA 1512 reports submitted during fiscal year (out of a total of 4 reports) to test compliance and internal controls over the Reporting requirement. We noted one (1) instance where management was not able to provide the requested report for the quarter ended 3/31/13. In addition, we encountered one (1) instance where management could not reconcile the difference between the ARRA Report and the ERP detail of expenditures, in the quarter ended 6/30/13; therefore, we could not ascertain that the reported data was accurate and complete. Questioned Costs Not applicable. Cause The Government does not have internal controls in place, in order to ensure the accuracy of the information contained in the required reports, including reconciling federal expenditures with the Government's accounting records (ERP). Effect The Government could be reporting unallowable costs as federal expenditures. This may also lead to incorrect financial information presented in reports submitted to the federal government. Recommendation The Government should implement procedures to ensure a proper reconciliation between accounting records (ERP) and Federal Financial Reports (SF-425 and ARRA-1512). Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s findings and recommendations. Refer to the Corrective Action Plan for further details. === page 221 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 214 Finding Number: 2013-016 Program U.S. Department of Justice –JAG Program Cluster - CFDA Nos. 16.738 and ARRA-16.803 Category Internal Control / Compliance Compliance Requirement Subrecipient Monitoring Criteria In accordance with 2 CFR 25.200: (a) Each agency that awards types of Federal financial assistance included in the definition of “award” in §25.305 must include the requirements described in paragraph (b) of this section in each program announcement, regulation, or other issuance containing instructions for applicants that either: (1) Is issued on or after the effective date of this part; or (2) Has application or plan due dates after October 1, 2010. (b) The program announcement, regulation, or other issuance must require each entity that applies and does not have an exemption under §25.110 to: (1) Be registered in the CCR prior to submitting an application or plan; (2) Maintain an active CCR registration with current information at all times during which it has an active Federal award or an application or plan under consideration by an agency; and (3) Provide its DUNS number in each application or plan it submits to the agency. In accordance with 31 USC 7502(f)(2):(2) Each pass-through entity shall (A) provide such subrecipient the program names (and any identifying numbers) from which such assistance is derived, and the Federal requirements which govern the use of such awards and the requirements of this chapter;(B) monitor the subrecipient’s use of Federal awards through site visits, limited scope audits, or other means;(C) review the audit of a subrecipient as necessary to determine whether prompt and appropriate corrective action has been taken with respect to audit findings, === page 222 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 215 Finding Number: 2013-016 (continued) Criteria (continued) as defined by the Director, pertaining to Federal awards provided to the subrecipient by the pass- through entity; and (D) require each of its subrecipients of Federal awards to permit, as a condition of receiving Federal awards, the independent auditor of the pass-through entity to have such access to the subrecipient’s records and financial statements as may be necessary for the pass-through entity to comply with this chapter. Condition Management was unable to provide us with the supporting documentation of their monitoring procedures for one of their subrecipients, the Virgin Islands Prevention Council. Furthermore, we selected a sample of two (2) subrecipients from a total population of four (4) subrecipients and noted management did not require a valid DUNS number from subrecipients prior to issuing the sub-awards. Questioned Costs Not applicable. Cause Management does not have controls implemented to ensure a DUNS number is obtained from subrecipients prior to issuing the sub-award and to ensure supporting documentation of subrecipient monitoring is kept on file for review. Effect This could result in Federal monies being spent by subrecipients on unallowable or unsupportable costs, whereby the Government could be responsible for reimbursing the Department of Justice. === page 223 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 216 Finding Number: 2013-016 (continued) Recommendation The Government should ensure that policies and procedures are enforced in order to keep an accurate, detailed and proper monitoring for first tier sub-awards to ascertain if the pass-through entity obtained the DUNS number from non-ARRA subrecipients prior to issuance of the sub- award. Management should ensure proper records of the subrecipient monitoring procedures are maintained on file to ensure subrecipients have complied with applicable Federal grant requirements. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s findings and recommendations. Refer to the Corrective Action Plan for further details. === page 224 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 217 U.S. Department of Health and Human Services Temporary Assistance for Needy Families CFDA No. 93.558 The objective of the Temporary Assistance for Needy Families program is to provide time- limited assistance to needy families with children so that the children can be cared for in their own homes or in the homes of relatives; end dependence of needy parents on government benefits by promoting job preparation, work, and marriage; prevent and reduce out-of-wedlock pregnancies, including establishing prevention and reduction goals; and encourage the formation and maintenance of two-parent families. This Program replaced the Aid to Families with Dependent Children (AFDC), Job Opportunities and Basic Skills Training (JOBS), and Emergency Assistance (EA) programs. Total Temporary Assistance for Needy Families Federal expenditures for the fiscal year ended September 30, 2013 amounted to $3,320,798. === page 225 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 218 Finding Number: 2013-017 Program U.S. Department of Health and Human Services – Temporary Assistance for Needy Families - CFDA No. 93.558 Category Internal Control / Compliance Compliance Requirement Special Tests and Provisions - Income Eligibility and Verification System (IEVS) Criteria Each State shall participate in the IEVS required by section 1137 of the Social Security Act as amended. Under the State Plan, the State is required to coordinate data exchanges with other federally assisted benefit programs, request and use income and benefit information when making eligibility determinations, and adhere to standardized formats and procedures in exchanging information with other programs and agencies. HHS may penalize a State for up to two percent of the SFAG for failure to participate in IEVS (42 USC 609(a) (4) and 1320b-7; 45 CFR section 264.10 and 264.11). Specifically the state is required to request and obtain information as follow: (a) Wage information from the State Wage Information Collection Agency (SWICA) should be obtained for all applicants at the first opportunity following receipt of the application, and for all recipients on a quarterly basis; (b) Unemployment Compensation (UC) information should be obtained for all applicants at the first opportunity, and in each of the first 3 months in which the individual is receiving aid. This information should also be obtained in each of the first 3 month following any recipient-reported loss of employment. If an individual is found to be receiving UC, the information should be requested until benefits are exhausted; (c) All Available information from the Social Security Administration for all applicants at the first opportunity; (d) Information from the Immigration and Naturalization Service and any other information from other agencies in the State or in other States that might provide income or other useful information; (e) Unearned income from the Internal Revenue Service (IRS). === page 226 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 219 Finding Number: 2013-017 (continued) Condition Found During our procedures to test the IEVS, we noted that the program did not have controls establishing and implementing the required IEVS system for data matching and verification and use of such data. When management provided the population of the participants of TANF cases subject to IEVS system, EY found that the population contained participants of SNAP. Since it was impossible to segregate the TANF participants from the SNAP participants, we could not ascertain that the underlying data was accurate and complete. As per consequence, the Government was not able to provide us with the following information required by the Compliance Supplement (a) Wage information from the State Wage Information Collection Agency (SWICA) should be obtained for all applicants at the first opportunity following receipt of the application, and for all recipients on a quarterly basis. (b) All Available information from the Social Security Administration for all applicants at the first opportunity. (c) Information from the Immigration and Naturalization Service and any other information from other agencies in the State or in other States that might provide income or other useful information. (d) Unearned income from the Internal Revenue Service (IRS). Questioned Costs Not applicable. Cause Current internal controls were not operating effectively with regard to compliance with Special Tests and Provisions requirements over the IEVS. Effect The Government may have awarded Federal funds to an individual or family which is not eligible to participate in the Program. === page 227 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 220 Finding Number: 2013-017 (continued) Recommendation Management of the Temporary Assistance for Needy Families Program should implement procedures to coordinate data exchanges with other federally assisted benefit programs, request and use income and benefit information when making eligibility determinations, and adhere to standardized formats and procedures in exchanging information with other programs and agencies. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s findings and recommendations. Refer to the Corrective Action Plan for further details. === page 228 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 221 Department of Human Services Medical Assistance Program CFDA No. 93.778 The objective of the Medical Assistance Program of the Social Security Act, as amended, (42 USC 1396 et seq.) is to provide payments for medical assistance to low-income persons who are age 65 or over, blind, disabled, or members of families with dependent children or qualified pregnant women or children. Total Medical Assistance Program Federal expenditures for the year ended September 30, 2013, amounted to $15,355,529. === page 229 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 222 Finding Number: 2013-018 Program U.S. Department of Human Services – Medical Assistance Program - CFDA 93.778 Category Internal Control / Compliance Compliance Requirement Special Tests and Provisions – Utilization Control and Program Integrity Criteria The State plan must provide methods and procedures to safeguard against unnecessary utilization of care and services, including long-term care institutions. In addition, the State must have: (1) methods or criteria for identifying suspected fraud cases; (2) methods for investigating these cases; and (3) procedures, developed in cooperation with legal authorities, for referring suspected fraud cases to law enforcement officials (42 CFR parts 455, 456, and 1002). Suspected fraud should be referred to the State Medicaid Fraud Control Units (42 CFR part 1007). The State Medicaid agency must establish and use written criteria for evaluating the appropriateness and quality of Medicaid services. The agency must have procedures for the ongoing post-payment review, on a sample basis, of the need for and the quality and timeliness of Medicaid services. The State Medicaid agency may conduct this review directly or may contract with a QIO. Condition Found The Medical Assistance Program does not have the necessary controls in place to allow for the required investigation of utilization fraud. === page 230 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 223 Finding Number: 2013-018 (continued) Questioned Costs Not applicable. Cause The Department of Human Services does not have an effective system to identify and report suspected fraud. Effect There may be prolonged, ongoing cases of fraud which may be unnoticed and remain unreported by the program. The funds available are possibly being used inappropriately, with no way of properly identifying or tracking the amounts. Recommendation The Department should reconsider whether it would like to be directly responsible for Utilization Control and Program Integrity, or if the use of a quality improvement organization (QIO) would better suit the current program needs. Once this is decided, the program should take on the necessary steps to ensure compliance with this requirement. The written procedures should reflect the actual actions to be taken. In the event a QIO is used, the program should be involved enough, so that they are aware of the program’s vulnerabilities and make the necessary changes to improve. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s findings and recommendations. Refer to the Correction Action Plan for further details. === page 231 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 224 Finding Number: 2013-019 Program U.S. Department of Human Services – Medical Assistance Program - CFDA No. 93.778 Category Internal Control/Compliance Compliance Requirement Special Tests and Provisions – Inpatient Hospital and Long-Term Care Facility Audits Criteria The State Medicaid agency pays for inpatient hospital services and long-term care facility services through the use of rates that are reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated providers. The State Medicaid agency must provide for the filing of uniform cost reports for each participating provider. These cost reports are used to establish payment rates. The State Medicaid agency must provide for the periodic audits of financial and statistical records of participating providers. The specific audit requirements will be established by the State Plan (42 CFR section 447.253). Condition Found We requested the cost reports for participating providers for 2013 and noted that the reviews of such cost reports have not been conducted. Questioned Costs Not applicable. Cause The Department of Human Services does not have effective controls to ensure that cost report audits are completed as required. === page 232 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 225 Finding Number: 2013-019 (continued) Effect The Department may be paying unreasonable rates for long term care facility services. This may result in overpayment to certain providers, thus depleting the available funds which may be used to benefit others. Recommendation The Department should ensure that regular audits are performed and costs are appropriately monitored. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s findings and recommendations. Refer to the Correction Action Plan for further details. === page 233 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 226 Finding Number: 2013-020 Program U.S. Department of Human Services – Medical Assistance Program - CFDA No. 93.778 Category Internal Control / Compliance Compliance Requirement Special Tests and Provisions – ADP Risk Analysis and System Security Review Criteria State agencies must establish and maintain a program for conducting periodic risk analyses to ensure that appropriate, cost effective safeguards are incorporated into new and existing systems. State agencies must perform risk analyses whenever significant system changes occur. State agencies shall review the ADP system security installations involved in the administration of HHS programs on a biennial basis. At a minimum, the reviews shall include an evaluation of physical and data security Operating procedures and personnel practices. The State agency shall maintain reports on its biennial ADP system security reviews, together with pertinent supporting documentation, for HHS on-site reviews (45 CFR section 95.621). Condition Found The Government did not provide supporting documentation to evidence the performance of required ADP Risk Analysis and System Security Reviews. Questioned Costs Not applicable. Cause Although current policies and procedures include the performance of periodic ADP reviews, the Government does not have appropriate controls in place to ensure these procedures are performed. === page 234 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 227 Finding Number: 2013-020 (continued) Effect The absence of policies to ensure these analyses and reviews are performed may lead to physical and data security issues, and noncompliance with Program requirements. Recommendation The Medical Assistance Program should establish appropriate policies to ensure that required analysis and reviews are being performed on at least an annual basis. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s findings and recommendations. Refer to the Correction Action Plan for further details. === page 235 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 228 Finding Number: 2013-021 Program U.S. Department of Human Services – Medical Assistance Program - CFDA No. 93.778 Category Internal Control / Compliance Compliance Requirement Activities Allowed or Unallowed and Allowable Costs/Cost Principles – Recoveries, refunds and rebates. Criteria 1. States must have a system to identify medical services that are the legal obligation of third parties, such as private health or accident insurers. Such third-party resources should be exhausted prior to paying claims with program funds. Where a third-party liability is established after the claim is paid, reimbursement from the third party should be sought (42 CFR sections 433.135 through 433.154). 2. The State is required to credit the Medicaid program for (1) State warrants that are canceled and uncashed checks beyond 180 days of issuance (escheated warrants) and (2) overpayments made to providers of medical services within specified time frames. In most cases, the State must refund provider overpayments to the Federal Government within 60 days of identification of the overpayment, regardless of whether the overpayment was collected from the provider (42 CFR sections 433.300 through 433.320, and 433.40). === page 236 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 229 Finding Number: 2013-021 (continued) Condition Found 1. We requested a list of all third party obligations identified in 2013 in order to perform procedures to determine whether the obligations were exhausted prior to paying claims with federal funds. The program was not able to provide a complete list of all third party transactions processed throughout FY 2013. 2. We requested a listing of all uncashed /cancelled checks beyond 180 days of issuance. The program was unable to provide any information in this area. Questioned Costs Undeterminable. Cause The Government does not have effective procedures to ensure that rebates or recoveries of costs are properly tracked and recorded. Effect The possibility exists where overpayments may occur to providers. These overpayments may remain unnoticed. Recommendation The Medical Assistance Program should update its eligibility system so that it would facilitate review of third party obligations. Additionally, the program should ensure that periodic reports are requested from the Treasury which lists all uncashed checks exceeding 180 days, allowing them to easily recognize funds which may need to be returned to the grantor agencies or dealt with according to the appropriate Federal requirements. Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s findings and recommendations. Refer to the Correction Action Plan for further details. === page 237 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 230 Finding Number: 2013-022 Program U.S. Department of Human Services – Medical Assistance Program - CFDA No. 93.778 Category Compliance / Internal Control Compliance Requirement Special Tests and Provisions – Medicaid Fraud Control Unit (MFCU) Criteria States are required as part of their Medicaid State plans to maintain a MFCU, unless the Secretary of HHS determines that certain safeguards are met regarding fraud and abuse. Condition Found The U.S. Virgin Islands Medicaid program does not have in place a Medicaid Fraud Control Unit. We were not provided with a list of violations of Medicaid Laws and regulations. Questioned Costs Not applicable. Cause The Medicaid program has not established a Medicaid Fraud Control Unit. Effect Instances of provider fraud may go unnoticed, remain unreported and will not be prosecuted. Recommendation A Medicaid Fraud Control Unit needs to be implemented immediately, as it is a program requirement. === page 238 === Government of the United States Virgin Islands Schedule of Findings and Questioned Costs (continued) Year Ended September 30, 2013 Part III - Federal Awards Findings and Questioned Costs Section (continued) 1406-1263767 231 Finding Number: 2013-022 (continued) Management’s Response and Planned Corrective Actions The Government concurs with the auditor’s findings and recommendations. Refer to the Correction Action Plan for further details. === page 239 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings September 30, 2013 1406-1263767 232 Finding 12-09 CFDA Number 10.551, 10.561, 10.557, 17.225, 20.205, ARRA- 20.205, 93.563, 93.558, 93.778 Federal Agency US Department of Agriculture, US Department of Labor, US Department of Transportation, US Department of Health and Human Services, Name of Federal Program SNAP Cluster, Special Supplemental Nutrition Program for Women, Infants and Children (WIC), Unemployment Insurance, Highway Planning and Construction, Child Support Enforcement Program, Temporary Assistance for Needy Families, Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Cash Management Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Chief Financial Officer- DHS, Officer Manager and Accountant I, WIC-DOH, Director of Business and Administration – DOL, Assistant Director of Administration –DPW, Financial Control Officer, PCSD-DOJ, Chief Financial Officer –DHS. Status 10.551, 10.561, 10.557, 93.563, 93.558 – Corrected 17.225, 20.205, ARRA-20.205, 93.778 – Not Corrected. Refer to current year findings 2013- 009 and 2013-010. Finding 12-10 CFDA Number 16.588, ARRA-16.588 Federal Agency US Department of Justice Name of Federal Program Violence Against Women Formula Grants Type of Compliance Requirement Reporting Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Grants Manager – LEPC, Fiscal Manager – LEPC Status Not Corrected. Refer to current year finding 2013- 012. === page 240 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 233 Finding 12-11 CFDA Number 16.738, ARRA -16.803 Federal Agency US Department of Justice Name of Federal Program JAG Cluster Type of Compliance Requirement Reporting Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Grants Manager – LEPC, Fiscal Manager – LEPC Status Not Corrected. Refer to current year finding 2013- 015. Finding 12-12 CFDA Number ARRA -84.394, ARRA -84.397 Federal Agency US Department of Education Name of Federal Program State Fiscal Stabilization Fund (SFSF) Cluster Type of Compliance Requirement Subrecipient Monitoring Amount of Questioned Cost: $3,295,416 (all ARRA – 84.397) Contact Person Responsible for Corrective Action Plan Director, Business and Administration –OOG Status Corrected. Finding 12-13 CFDA Number ARRA -84.394, ARRA -84.397 Federal Agency US Department of Education Name of Federal Program State Fiscal Stabilization Fund (SFSF) Cluster Type of Compliance Requirement Activities Allowed or Unallowed/ Allowable Costs/Cost Principles Amount of Questioned Cost: $159 (all ARRA) Contact Person Responsible for Corrective Action Plan Director of Payroll –DOF Status Corrected. === page 241 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 234 Finding 12-14 CFDA Number 93.558 Federal Agency US Department of Health and Human Services Name of Federal Program Temporary Assistance for Needy Families Type of Compliance Requirement Special Tests and Provisions – Income Eligibility and Verification System (IEVS) Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Program Administrator –DHS Status Not Corrected. Refer to current year finding 2013- 017. Finding 12-15 CFDA Number 93.778 Federal Agency US Department of Health Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Special Tests and Provisions – Utilization Control and Program Integrity Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Medicaid Program Director and DFA Administrator –DHS Status Not corrected. Refer to current year finding 2013- 018. Finding 12-16 CFDA Number 93.778 Federal Agency US Department of Health Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Special Tests and Provisions – Inpatient Hospital and long-term Care Facility Audits Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan MIS Manager -DHS, Medicaid Program Director and DFA Administrator –DHS Status Not corrected. Refer to current year finding 2013- 019. === page 242 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 235 Finding 12-17 CFDA Number 93.778 Federal Agency US Department of Health Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Special Tests and Provisions – ADP Risk and System Security Review Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Medicaid Program Director and DFA Administrator –DHS Status Not corrected. Refer to current year finding 2013- 020. Finding 12-18 CFDA Number 93.778 Federal Agency US Department of Health Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Reporting and Matching, Level of Effort & Earmarking Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Medicaid Program Director and DFA Administrator –DHS, Chief Financial Officer DHS Status Corrected. Finding 12-19 CFDA Number 93.778 Federal Agency US Department of Health Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Reporting and Matching, Level of Effort & Earmarking Amount of Questioned Cost: $32,889 Contact Person Responsible for Corrective Action Plan Medicaid Program Director and DFA Administrator –DHS Status Corrected. === page 243 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 236 Finding 12-20 CFDA Number 93.778 Federal Agency US Department of Health Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Activities Allowed or Unallowed and Allowable Costs/Cost Principles – Recoveries, refunds and rebates Amount of Questioned Cost: Undeterminable Contact Person Responsible for Corrective Action Plan Medicaid Program Director and DFA Administrator –DHS, Chief Financial Officer DHS Status Not corrected. Refer to current year finding 2013- 021. Finding 12-21 CFDA Number 93.778 Federal Agency US Department of Health Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Special Tests and Provisions – Medicaid Fraud Control Unit Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Medicaid Program Director and DFA Administrator –DHS Status Not corrected. Refer to current year finding 2013- 022. === page 244 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 237 Finding 11-09 CFDA Number 10.551, 10.561, ARRA-10.561, 10.557, 17.225, ARRA-17.225, 20.205, ARRA-20.205, 93.563, 93.600, ARRA-93.708, 93.778 Federal Agency U.S. Department of Agriculture, U.S. Department of Labor, U.S. Department of Transportation, U.S. Department of Health and Human Services Name of Federal Program SNAP Cluster, Special Supplemental Nutrition Program for Woman, Infants, and Children (WIC), Unemployment Insurance, Highway Planning and Construction, Child Support Enforcement Program, Head Start Cluster, Medical Assistance Program (Medicaid) Type of Compliance Requirement Cash Management Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Chief Financial Officer – DHS, Officer Manager and Accountant I, WIC - DOH, Director of Business and Administration – DOL, Assistant Director of Administration – DPW, Financial Control Officer, PCSD – DOJ, Chief Financial Officer - DHS. Status 10.551, 10.561, 10.557, 93.563, 93.558 – Corrected 17.225, 20.205, ARRA-20.205, 93.778 – Not Corrected. Refer to current year findings 2013-009 and 2013-010. === page 245 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 238 Finding 11-10 CFDA Number 12.401, 17.258, ARRA-17.258, ARRA-17.259, 81.041, ARRA-81.041, ARRA-84.394, ARRA- 84.397, 93.558, 93.575 Federal Agency U.S. Department of Defense, U.S. Department of Labor, U.S. Department of Energy, U.S. Department of Education, U.S. Department of Health and Human Services Name of Federal Program National Guard Military Operations and Maintenance (O&M), WIA Cluster, State Energy Program, State Fiscal Stabilization Fund Cluster, Temporary Assistance for Needy Families, CCDF Cluster Type of Compliance Requirement Cash Management Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Director of Administration and Business Management – OTAG, Director of Business and Administration – DOL, Grant Manager - VIEO, Chief Financial Officer – DHS Status 12.401, 17.258, ARRA-17.258, ARRA-17.259, 81.041, ARRA-81.041, ARRA-84.394, ARRA- 84.397, 93.558, 93.575 – Corrected. Finding 11-11 CFDA Number 12.401 Federal Agency Department of Defense Name of Federal Program National Guard Military Operations and Maintenance (O&M) Type of Compliance Requirement Reporting Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Director of Administration and Business Management – OTAG Status Corrected. === page 246 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 239 Finding 11-12 CFDA Number 17.258, ARRA-17.258, ARRA-17.259 Federal Agency U.S. Department of Labor Name of Federal Program WIA Cluster Type of Compliance Requirement Eligibility Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Assistant Commissioner of Employment & Training (E&T) – DOL Status Corrected. Finding 11-13 CFDA Number 17.258, ARRA-17.258, ARRA-17.259 Federal Agency U.S. Department of Labor Name of Federal Program WIA Cluster Type of Compliance Requirement Reporting Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Director of Administration – DOL Status Corrected. Finding 11-14 CFDA Number 17.258, ARRA-17.258, ARRA-17.259 Federal Agency U.S. Department of Labor Name of Federal Program WIA Cluster Type of Compliance Requirement Matching, Level of Effort, and Earmarking Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Assistant Commissioner of E&T – DOL Status Corrected. === page 247 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 240 Finding 11-15 CFDA Number 20.205, ARRA-20.205 Federal Agency Department of Transportation Name of Federal Program Highway Planning and Construction Type of Compliance Requirement Reporting Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Program Manager, Federal Highway Office - DPW Status Corrected. Finding 11-16 CFDA Number 81.041, ARRA-81.041 Federal Agency U.S. Department of Energy Name of Federal Program State Energy Program Type of Compliance Requirement Activities Allowed or Unallowed, Allowable Costs/Cost Principles, and Period of Availability Amount of Questioned Cost: $25,093 Contact Person Responsible for Corrective Action Plan Grant Manager – VIEO, Financial Programs Coordinator - VIEO Status: Corrected. Finding 11-17 CFDA Number 84.394, ARRA-84.397 Federal Agency U.S. Department of Education Name of Federal Program State Fiscal Stabilization Fund Cluster Type of Compliance Requirement Subrecipient Monitoring Amount of Questioned Cost: $2,027,739 Contact Person Responsible for Corrective Action Plan N/A Status Corrected. === page 248 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 241 Finding 11-18 CFDA Number 84.394, ARRA-84.397 Federal Agency U.S. Department of Education Name of Federal Program State Fiscal Stabilization Fund Cluster Type of Compliance Requirement Activities Allowed or Unallowed, Allowable Costs/Cost Principles, and Period of Availability Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan N/A Status Corrected. Finding 11-19 CFDA Number 93.558 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Temporary Assistance for Needy Families (TANF) Type of Compliance Requirement Equipment and Real Property Management Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Program Administrator – DHS Status Corrected. Finding 11-20 CFDA Number 93.558 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Temporary Assistance for Needy Families (TANF) Type of Compliance Requirement Procurement, Suspension, and Debarment Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Program Administrator – DHS Status Corrected. === page 249 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 242 Finding 11-21 CFDA Number 93.558 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Temporary Assistance for Needy Families (TANF) Type of Compliance Requirement Reporting Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Program Administrator – DHS Status Corrected. Finding 11-22 CFDA Number 93.558 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Temporary Assistance for Needy Families (TANF) Type of Compliance Requirement Special Tests and Provisions – Income Eligibility and Verification Systems (IEVS) Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Program Administrator – DHS Status Not Corrected. Refer to current year finding 2013- 017. Finding 11-23 CFDA Number 93.563 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Child Support Enforcement Type of Compliance Requirement Matching, Level of Effort, and Earmarking Amount of Questioned Cost: $34,328 Contact Person Responsible for Corrective Action Plan Director of PCSD - DOJ, Financial Control Officer – DOJ Status Corrected. === page 250 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 243 Finding 11-24 CFDA Number 93.563 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Child Support Enforcement Type of Compliance Requirement Reporting Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Director of PCSD - DOJ, Financial Control Officer – DOJ Status Corrected. Finding 11-25 CFDA Number 93.563 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Child Support Enforcement Type of Compliance Requirement Special Tests and Provisions – Securing and Enforcing Medical Support Obligations Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan MIS Manager – DOS, Program Administrator, PCSD - DOJ Status Corrected. Finding 11-26 CFDA Number 93.778 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Activities Allowed or Unallowed, Allowable Costs/Cost Principles, and Period of Availability Amount of Questioned Cost: $28,880 Contact Person Responsible for Corrective Action Plan Medicaid Program Director – DHS Status Corrected. === page 251 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 244 Finding 11-27 CFDA Number 93.778 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Activities Allowed or Unallowed, Allowable Costs/Cost Principles, and Period of Availability Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Chief Financial Officer - DHS Status Not Corrected. Refer to current year finding 2013- 021. Finding 11-28 CFDA Number 93.778 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Eligibility Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Medicaid Program Director and DFA Administrator - DHS Status Corrected. Finding 11-29 CFDA Number 93.778 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Matching, Level of Effort, and Eligibility Amount of Questioned Cost: $374,572 Contact Person Responsible for Corrective Action Plan Medicaid Program Director – DHS Status Corrected. === page 252 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 245 Finding 11-30 CFDA Number 93.778 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Reporting Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Medicaid Program Director – DHS Status Corrected. Finding 11-31 CFDA Number 93.778 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Special Tests and Provisions – Utilization Control and Program Integrity Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Medicaid Program Director and DFA Administrator - DHS Status Not Corrected. Refer to current year finding 2013- 018. Finding 11-32 CFDA Number 93.778 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Special Tests and Provisions – Inpatient Hospital and Long-term Care Facility Audits Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Medicaid Program Director and DFA Administrator - DHS Status Not Corrected. Refer to current year finding 2013- 019. === page 253 === Government of the United States Virgin Islands Summary Schedule of Prior Audit Findings (continued) 1406-1263767 246 Finding 11-33 CFDA Number 93.778 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Special Tests and Provisions – ADP Risk and System Security Review Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Medicaid Program Director and DFA Administrator - DHS Status Not Corrected. Refer to current year finding 2013- 020. Finding 11-34 CFDA Number 93.778 Federal Agency U.S. Department of Health and Human Services Name of Federal Program Medical Assistance Program (Medicaid; Title XIX) Type of Compliance Requirement Special Tests and Provisions – Medicaid Fraud Control Unit Amount of Questioned Cost: N/A Contact Person Responsible for Corrective Action Plan Medicaid Program Director and DFA Administrator - DHS Status Not Corrected. Refer to current year finding 2013- 022. === page 254 === EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2013 Ernst & Young LLP. All Rights Reserved. ey.com === page 255 === GOVERNMENT of the UNITED STATES VIRGIN ISLANDS FY 2013 Corrective Action Plan for the Fiscal Year 2013 Single Audit June 30, 2014 === page 256 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit i TABLE OF CONTENTS I. Financial Statement Findings……………………………………………………………… 1 Finding No. 2013-001 – Internal Control – Tax Revenues Processes………………………… 1 Finding No. 2013-002 – Internal Control – Capital Assets……………………………………. 2 Finding No 2013-003 – Internal Control – Accounts Payable Reconciliations………………. 2 Finding No. 2013-004 – Internal Control – Retroactive Pay Liability ………..………………. 3 Finding No. 2013-005 – Internal Control – Bank Reconciliation……………...……………… 4 Finding No. 2013-006 – Internal Control – Medical Malpractice Claims ………..…………... 5 Finding No. 2013-007 – Internal Control – Component Units ……………………………….. 5 Finding No. 2013-008 – Internal Control/Compliance – Schedule of Expenditures of Federal Awards (SEFA)……………………………………………………. 6 II. Federal Programs – CFDA #s 20.205, ARRA 20.205 and 93.778……………………… 7 Finding No. 2013-009– Cash Management…………………………………………………… 7 III. Unemployment Insurance – CFDA #17.225………………..………………………….. 11 Finding No. 2013-010 – Cash Management….………………………………………………. 11 IV. Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) – CFDA# 10.557………………………………………………………………………….. 12 Finding No. 2013-011 – Special Tests and Provisions- Authorization of Above 50 Percent Vendors………………………………………………………….......................................... 12 V. Violence Against Women Formula Grants – CFDA #s 16.588 and ARRA 16.588.…… 13 Finding No. 2013-012 – Reporting………………….………………………………………… 13 Finding No. 2013-013 – Subrecipient Monitoring…………………………………………… 14 === page 257 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit ii VI. Recovery Act – Edward Byrne Memorial Justice Assistance Program - CFDA #s 16.738 and ARRA 16.803……………………………………………………………….. 15 Finding No. 2013-014– Cash Management..…………………………………………………. 15 Finding No. 2013-015 – Reporting…………………………………………………………… 16 Finding No 2013-016 – Subrecipient Monitoring……………………………………………. 17 VII. Temporary Assistance for Needy Families (TANF) – CFDA # 93.558………………. 19 Finding No. 2013-017 – Special Tests and Provisions: Income Eligibility and Verification System (IEVS)…………………………………………………….. 19 VIII. Medical Assistance Program (Medicaid) – CFDA #93.778 …………………...…….. 20 Finding No. 2013-018 – Special Tests and Provisions – Utilization Control and Program Integrity…………………………………………………………………………………. 20 Finding No. 2013-019 – Special Tests and Provisions – Inpatient Hospital and Long-term Care Facility Audits……………………………………………………………………... 21 Finding No. 2013-020 – Special Tests and Provisions – ADP Risk Analysis and System Security Review……………………………………………………………………….. 21 Finding No. 2013-021 - Activities Allowed or Unallowed – Allowable Costs/Cost Principles/Cost – Recoveries, Refunds and Rebates…………......................................... 22 Finding No. 2013-022 - Special Tests and Provisions – Medicaid Fraud Control Unit………. 23 === page 258 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 1 Financial Statements Finding No. 2013-001 Management’s calculation of its tax revenues and accounts receivable processes were not properly performed, resulting in significant audit adjustments. The following items resulted in audit adjustments which could have been prevented if Management had implemented sound internal controls over its tax revenue and accounts receivable recognition processes: (a) Management calculation for property tax receivables was not properly calculated and thus significant audit adjustments were proposed in order to correctly present these accounts, and (b) inaccuracy of the accounts receivable aging due to subsequent collections being applied to the year-end balance. Government’s Response The Government concurs with the auditor’s finding. The implementation in FY 2013 of Tax Express Scanoptic System by the Internal Revenue Bureau did create some challenges at the end of the Fiscal Year; and may have contributed to the need for significant adjustments. These have been duly noted and all parties have been apprised of the effects of certain processes. Action Plan: The Department of Finance (DOF) will collaboratively work with IRB and LGO to implement an acceptable formula to calculate the tax receivables. The DOF will on a monthly basis reconcile all tax revenues posted to the ERP against IRB and LGO’s localized reports. The Governor’s Financial Team also monitors the allowance for doubtful accounts, the estimate of income tax, property tax revenues and related tax credits on a monthly basis to validate that the correct data is used in the estimation processes. This has greatly reduced the audit adjustments. Implementation Date: FY 2013 and on-going Person(s) Responsible: The management team of DOF, BIR & LGO. === page 259 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 2 Finding No. 2013-002 During Ernst and Young’s (E&Y) review of capital asset accounts, E&Y noted projects capitalized in the incorrect asset class. E&Y also noted transfers of assets from construction in progress included as an addition instead of as a transfer from construction in progress. In addition, E&Y noted assets capitalized in the incorrect period creating a cut-off issue. Even though, E&Y has noticed a significant improvement on capital assets when compared to prior year. Government’s Response The Government concurs with the auditor’s finding and recommendations. In addition, the Government concurs that a better system needs to be implemented to automate the process of project capitalization. Action Plan: The Department of Finance will continue implementation to automate the process of project capitalization thereby reducing or eliminating the miscategorization of the various capital asset categories as well as reducing the risk of omitting capitalizable projects. A quarterly review of assets, as well as proper implementation of the Fixed Asset Module should be implemented. This needs to be a joint effort between the DOF and all related agencies. Implementation Date: FY 2014 and on-going Person(s) Responsible: The management team of DOF, PFA, P&P, and DPW. Finding No. 2013-003 Lack of controls over the accounts payable ERP module and accounts payable reconciliations has made it difficult for the Government to establish its accounts payable subledger. Management establishes its accounts payable subledger through a manually intensive process, in addition to the lack of processes to accurately estimate accrued liabilities as part of the financial statement close process. This resulted in audit significant adjustments in the Government’s financial statements. Government’s Response The Government concurs with the auditor’s finding and recommendations. === page 260 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 3 Action Plan: The Department of Finance along with the other central service agencies will continue to establish specific policies and procedures, as well as a standard set of definitions for expenditure object codes to assist department/agencies in the proper use and allocation of expenditures. The deficiencies in the accounts payable data for invoice payments continue to improve due to the implementation and updating of policies and procedures, follow-up ERP training and daily monitoring. In light of these actions delineated above, the DOF continues to see significant progress in the presentation of supporting documentation for the payment of invoices. Implementation Date: FY 2008 and on-going Person(s) Responsible: The management team of DOF. Finding No. 2013-004 The Government was not able to substantiate its calculation of the retroactive pay liability, which resulted in a qualification of the opinion of governmental activities in the Government’s basic financial statements. Government’s Response The Government concurs with the auditor’s finding and recommendations. Action Plan: The Government remains committed to ensuring that significant liabilities are recalculated and corrected. However, due to funding limitation and personnel constraints, the Division of Personnel was not able to complete the recalculations prior to the close of the FY 2013 audit. The Government anticipates that funding will be available in FY 2015 which will allow for the completion of the recalculations in time for the FY 2014 audit. Implementation Date: October 2012 and on-going Due Date: June 20, 2015 Person(s) Responsible: Department of Finance and Division of Personnel === page 261 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 4 Finding No. 2013-005 During the audit, Ernst and Young (E&Y) noted that bank reconciliations were not being performed on a timely basis. Most bank reconciliations were completed, reviewed and approved after 365 days. As a result, reconciling items with inaccuracies that should have been identified during the review process were unheeded resulting in material misstatements. Government’s Response While Management concurs with the observation that automation of the bank reconciliations should occur, steps have already been taken to address this issue with the banking institutions to receive the information in a format that will allow for elimination of the manual processes that are required to reconcile the bank accounts. Bank reconciliations are completed quarterly, December, March, June, September of the respective year, however, they can only be fully finished when all relevant information is received from external agencies and bank institutions. On occasion, some bank statements are not received until 4-6 weeks after the end of the month, however all bank accounts are reconciled within a 60-75 day period after receipt of the bank statement, not 365 days. Unique to the Fiscal Year 2013, was the implementation by the Government of the Virgin Islands Internal Revenue Bureau of the Scanoptics System. As a new implementation, it created new and unique challenges to the bank reconciliations and posting of revenues of a few of the larger accounts. This issue has been addressed and DOF do not foresee a future negative impact on bank reconciliations. The process of consolidating and reducing the number of bank accounts was started in FY 2013 and will continue until the desired goal of no more than 10 bank accounts is accomplished. Action Plan: The DOF will rely on on-line bank statements in order to expedite the bank reconciliation process. This will thereby eliminate the time lag that currently exists as a result of waiting for hard copies of bank statements to arrive. Also, discussions will continue with the respective bank regarding the complete automation of the reconciliation process. Additional efforts will be made to have revenues posted in “real time” by the collectors. These efforts will be further substantiated by DOF’s efforts to reduce the number of bank accounts managed by the DOF. Implementation Date: FY 2008 & on-going Person(s) Responsible: The management team of DOF. === page 262 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 5 Finding No. 2013-006 The Government did not establish a liability for medical malpractice claims. Government’s Response The Government concurs with the auditor’s finding and recommendations. Action Plan: The services of an actuarial firm for medical malpractice claims will once again be undertaken to continue efforts to improve the accuracy of the financial statements. Implementation Date: FY 2012 and on-going Person(s) Responsible: The management team of DOF and DOH. Finding No. 2013-007 Lack of review of classification and reporting of transactions with component units led to errors, resulting in significant audit adjustments. Government’s Response The Government concurs with the auditor’s finding and recommendations. Action Plan: The Government will continue its efforts implementing a “Component Unit Reporting Package”, which should result in more timely and accurate financial statements from the component units of the Government of the United States Virgin Islands. Implementation Date: FY 2011 and on-going Person(s) Responsible: The management team of DOF and the component units of the Virgin Islands Government. === page 263 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 6 Finding No. 2013-008 During the performance of the audit procedures, Ernst and Young (E&Y) received various versions of the Schedule of Expenditures of Federal Awards (SEFA). E&Y noted the original versions did not include non-cash items or other program adjustments. Such adjustments included:  Supplemental Nutrition Assistance Program (SNAP) (CFDA No. 10.551) Food Commodities of $ 56,990,836.  Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) (CFDA No. 10.557) Food Commodities of $ 5,048,805.  Unemployment Insurance (CFDA No. 17.225) Benefits of $ 46,802,451.  Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) (CFDA No. 10.557) adjustment of $ 961,004 reclassifying program rebates previously presented as revenue against program Food Commodities expenditures. Additionally, there are no procedures established to ascertain completeness and accuracy of the SEFA provided to the auditors. Furthermore, the government did not appropriately identify ARRA funds within the schedule or verify documentation of CFDA numbers and program/cluster titles according to the Catalog of Federal Domestic Assistance. Government’s Response The Government concurs with the auditor’s finding and recommendations. Action Plan: The Department of Finance will continue to provide training and support to the various departments and agencies to eliminate the discrepancies between the SEFA information provided in the ERP and the source documents. Additionally, the existing policies and procedures relative to this area will be reviewed and appropriately updated and revised in support of this action. Due Date: FY 2015 Person(s) Responsible: The management team of DOF. === page 264 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 7 Federal Programs (HP&C and MAP) CFDA Nos. 20.205, ARRA 20.205, and 93.778 Finding No. 2013-009 Highway Planning and Construction CFDA Nos. 20.205 and ARRA 20.205 During Ernst and Young’s (E&Y) assessment to determine whether the Government complied with the terms and conditions of the Cash Management Improvement Act (CMIA), E&Y selected a sample of sixty (60) cash drawdowns (out of a population of 601). E&Y noted that fifty-nine (59) out of the 60 drawdowns selected for testing totaling $879,114 did not comply with the average clearance pattern established in the CMIA. One (1) of the fifty-nine (59) items were submitted prior to the actual deposit date. Additionally, E&Y encountered seven (7) instances where the program was unable to provide support to confirm that the funds were deposited as required. Funding Techniques per Cash Management Improvement Act Agreement (continued): Item No. Component Amount Check Release Date Actual Deposit Date Check Release- Actual Deposit Date ARRA Non- ARRA 1 Vendor Payments and all other payments $19,930.89 1/22/2013 2/5/2013 14 x 2 Vendor Payments and all other payments 18.73 4/13/2013 12/20/2013 251 x 3 Vendor Payments and all other payments 1,289.95 3/19/2013 4/15/2013 27 x 4 Vendor Payments and all other payments 14.38 4/13/2013 12/20/2013 251 x 5 Vendor Payments and all other payments 20.00 4/13/2013 12/20/2013 251 x 6 Vendor Payments and all other payments 66.05 8/14/2013 12/20/2013 128 x 7 Vendor Payments and all other payments 20.77 8/14/2013 12/20/2013 128 x 8 Vendor Payments and all other payments 322.77 8/14/2013 12/20/2013 128 x 9 Vendor Payments and all other payments 119.01 8/14/2013 12/20/2013 128 x 10 Vendor Payments and all other payments 3,836.80 10/2/2013 3/24/2014 173 x 11 Vendor Payments and all other payments 3,500.00 9-17/2013 9/24/2013 7 x 12 Vendor Payments and all other payments 4,848.00 9/4/2013 3/24/2014 201 x 13 Vendor Payments and all other payments 3,653.80 8/17/2013 3/24/2014 219 x 14 Vendor Payments and all other payments 3,845.60 8/7/2013 3/24/2014 229 x === page 265 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 8 Item No. Component Amount Check Release Date Actual Deposit Date Check Release- Actual Deposit Date ARRA Non- ARRA 15 Vendor Payments and all other payments 2,972.16 7/26/2013 3/24/2014 241 x 16 Vendor Payments and all other payments 3,653.80 7/24/2013 3/24/2014 243 x 17 Vendor Payments and all other payments 3,836.80 7/24/2013 3/24/2014 243 x 18 Vendor Payments and all other payments 6,023.20 7/12/2013 3/24/2014 255 x 18 Vendor Payments and all other payments 3,109.62 1/22/2013 2/15/2013 24 x 20 Vendor Payments and all other payments 3,653.86 1/11/2013 2/15/2013 35 x 21 Vendor Payments and all other payments 4,442.30 12/28/2012 2/15/2013 49 x 22 Vendor Payments and all other payments 724.98 10/13/2012 – – x 23 Vendor Payments and all other payments 28,716.61 7/24/2013 8/21/2013 28 x 24 Vendor Payments and all other payments 27,659.71 5/13/2013 7/12/2013 60 x 25 Vendor Payments and all other payments 267.00 3/21/2013 5/9/2013 49 x 26 Vendor Payments and all other payments 24,093.03 10/10/2013 11/19/2013 40 x 27 Vendor Payments and all other payments 10,556.26 12/18/2012 12/24/2012 6 x 28 Vendor Payments and all other payments 222,001.70 11/21/2012 11/14/2012 -7 x 29 Vendor Payments and all other payments 283,162.02 12/18/2012 8/20/2013 245 x 30 Vendor Payments and all other payments 82.14 6/5/2013 6/20/2013 15 x 31 Vendor Payments and all other payments 11.76 4/13/2013 5/9/2013 26 x 32 Vendor Payments and all other payments 12.10 4/13/2013 5/9/2013 26 x 33 Vendor Payments and all other payments 6.87 3/5/2013 4/20/2013 46 x 34 Vendor Payments and all other payments 9.21 3/5/2013 4/20/2013 46 x 35 Vendor Payments and all other payments 9.55 3/5/2013 4/20/2013 46 x 36 Vendor Payments and all other payments 8.73 3/5/2013 4/20/2013 46 x 37 Vendor Payments and all other payments 3,300.00 9/23/2013 10/11/2013 18 x 38 Vendor Payments and all other payments 82,166.86 12/29/2012 1/10/2013 12 x 39 Vendor Payments and all other payments 28.65 3/5/2013 4/20/2013 46 x 40 Vendor Payments and all other payments 498.90 9/4/2013 – – x 41 Vendor Payments and all other payments 228.00 8/12/2013 – – x 42 Vendor Payments and all other payments 10.55 6/5/2013 7/29/2013 54 x 43 Vendor Payments and all other payments 84.03 6/5/2013 6/20/2013 15 x 44 Vendor Payments and all other payments 10,602.00 3/18/2013 – – x 45 Vendor Payments and all other payments 5,007.70 11/30/2012 1/21/2013 52 x 46 Vendor Payments and all other payments 4,038.46 11/20/2012 2/15/2013 87 x 47 Vendor Payments and all other payments 3,836.80 11/20/2012 2/15/2013 87 x 48 Vendor Payments and all other payments 4,444.26 11/20/2012 2/15/2013 87 x 49 Vendor Payments and all other payments 84,919.09 10/01/2013 10/11/2013 10 x 50 Vendor Payments and all other payments 175.20 8/29/2013 – – x 51 Vendor Payments and all other payments 1,000.00 3/25/2013 – – x 52 Vendor Payments and all other payments 500.00 12/7/2012 – – x 53 Vendor Payments and all other payments 4,807.20 2/14/2013 2/15/2013 1 x === page 266 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 9 Item No. Component Amount Check Release Date Actual Deposit Date Check Release- Actual Deposit Date ARRA Non- ARRA 54 Vendor Payments and all other payments 3,576.80 12/12/2012 2/15/2013 65 x 55 Vendor Payments and all other payments 77.81 1/9/2013 1/17/2013 8 x 56 Vendor Payments and all other payments 78.02 1/9/2013 1/17/2013 8 x 57 Vendor Payments and all other payments 84.09 1/9/2013 1/17/2013 8 x 58 Vendor Payments and all other payments 85.32 11/23/2012 12/1/2012 8 x 59 Vendor Payments and all other payments 71.20 1/28/2013 2/11/2013 14 x Government’s Response The Department of Public Works (DPW) concurs with this finding. Action Plan: The U.S. Virgin Islands Federal Highway Administration (FHWA) Program continues to communicate with the Office of FHWA in Puerto Rico regarding the implementation of the electronic Rapid Assessment Payment System (RASPS). Implementation Date: FY 2014 (Communication re: RASPS & Treasury – State Agreement) Due Date: To be determined re: RASPS implementation and new Treasury State Agreement Person Responsible: Assistant Director of Administration - DPW Medical Assistance Program (Medicaid) CFDA No. 93.778 During Ernst and Young’s (E&Y) assessment to determine whether the Government complied with the terms and conditions of the CMIA Treasury-State Agreement, E&Y selected a sample of twelve (12) cash drawdowns (out of a population of 60) totaling $2,272,899 (from a population of $15,326,347). E&Y noted that six (6) drawdowns selected for testing did not comply with the CMIA as follows: Item # Component Amount Payment Release Date Actual Deposit Date Check Release Date- Actual Deposit Date 1 Vendor Pay and all other costs $324,717.37 8/28/2013 9/26/2013 29 2 Salaries 29,951.02 8/22/2013 8/27/2013 5 3 Salaries 28,079.73 6/27/2013 7/8/2013 11 === page 267 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 10 Item # Component Amount Payment Release Date Actual Deposit Date Check Release Date- Actual Deposit Date 4 Vendor Pay and all other costs 685,175.48 5/21/2013 5/28/2013 7 5 Vendor Pay and all other costs 161,726.15 4/17/2013 5/16/2013 29 6 Vendor Pay and all other costs 112,240.38 3/13/2013 3/21/2013 8 Government’s Response The Department of Human Services (DHS) concurs with this finding. Action Plan: The Department of Human Services (DHS) continues to make great leaps to meet the necessary requirements on drawing funds in line with the CMIA regulations. DHS continues reviewing its procedures to address this process. Reconciliations continue on a monthly basis with the ERP for drawdowns and expenditures. Drawdowns are posted immediately to the ERP as they are completed. For payroll expenditures, funds are drawn the day before the check date to ensure funds are available to meet the payroll deadline, which will result in 26 paydays. DHS tracks other expenditures in the ERP when checks are run by the Department of Finance in order to draw for those expenditures within the 4 day requirement. Although DHS does not control when checks are mailed, DHS works to address any problems that are encountered to accomplish these requirements.   Implementation Date:  October 1, 2012 and on-going   Responsible Person: Chief Financial Officer - DHS === page 268 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 11 Unemployment Insurance CFDA No. 17.225 Finding No. 2013-010 During Ernst and Young’s (E&Y) testing to determine whether the Government complied with the terms and conditions established in 31 CFR 205 “Subpart B- Rules Applicable to Federal Assistance Programs not included in a Treasury - State Agreement”, E&Y selected a sample of forty-one (41) cash drawdowns (out of a population of 205 drawdowns) totaling $1,635,563 (from a population of $2,763,297). E&Y noted that eleven (11) cash drawdowns tested did not comply with conditions established in 31 CFR 205. Additionally, E&Y encountered two (2) items were submitted prior to the actual deposit date. Item No. Component Amount Payment Release Date Actual Deposit Date Check Release Date- Actual Deposit Date 1 Vendor Pay and all other costs $27,268.00 11/21/2012 12/7/2012 16 2 Vendor Pay and all other costs 11,030.00 1/2/2013 12/28/2012 -5 3 Salaries 16,848.00 11/15/2012 11/26/2012 11 4 Vendor Pay and all other costs 27,268.00 12/10/2012 12/7/2012 -3 5 Vendor Pay and all other costs 43,757.00 8/28/2013 9/13/2013 16 6 Vendor Pay and all other costs 15,516.00 8/17/2013 8/28/2013 11 7 Vendor Pay and all other costs 2,784.00 3/27/2013 5/6/2013 40 8 Vendor Pay and all other costs 3,904.00 5/6/2013 5/13/2013 7 9 Vendor Pay and all other costs 4,240.00 1/30/2013 2/6/2013 7 10 Vendor Pay and all other costs 43,757.00 8/15/2013 9/13/2013 29 11 Vendor Pay and all other costs 15,516.00 8/20/2013 8/28/2013 8 Action Plan: VIDOL has implemented the Cash Management and Draw Down Policy as indicated in FY 2012 Corrective Action Plan. VIDOL continues to collaborate and coordinate with VIDOF in obtaining check release dates and the check disbursement log while conducting regular quarterly reconciliations. VIDOL has seen an improvement in this area; however, VIDOL has recommended a joint meeting with all GVI agencies and DOF to address ways to streamline processes in order to adhere to the CMIA Treasury-State Agreement. === page 269 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 12 Implementation Date: January 1, 2012 and on-going Person Responsible: Director of Business and Administration - DOL Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) CFDA No. 10.557 Finding No. 2013-011 As part of Ernst and Young’s (E&Y) internal controls and compliance testing over Authorization of Above-50-Percent Vendors, E&Y noted the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) query results indicated the program had one vendor with greater than 50% of annual food sales derived from WIC Financial Instruments. After inquiries with management, E&Y learned that the vendor was not identified as an above -50-percent vendor when management had entered into business with them. However, during FY 2013, other competing vendors shut down operations and they became the only available seller in St. Croix territory which led to them being classified as above-50-percent for the audit period. During the evaluation of required procedures as per OMB A-133 Compliance Supplement, E&Y learned management had failed to obtain FNS certification for the vendor and to conduct the required quarterly cost neutrality assessments during the FY 2013 audit period. Government’s Response The Department of Health concurs with this finding. During FY 2013 two (2) WIC vendors shut down operations and the vendor became the only available vendor in the Frederiksted area of St. Croix for a period of 4 months before other WIC vendors were able to be authorized in that area; this resulted in an increase in participant volume. Therefore, the increase in WIC sales was responsible for the vendor becoming classified as an above-50-percent vendor for the audit period. Action Plan: VI WIC will develop policies and procedures to enforce compliance with authorization of Above-50-percent vendors. === page 270 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 13 Due Date:  September 30, 2014   Person Responsible: Vendor Monitor - DOH Violence Against Women Formula Grants CFDA Nos. 16.588 and ARRA16.588 Finding No. 2013-012 Ernst and Young (E&Y) selected a sample of eight (8) Federal Financial Reports (SF- 425) (out of a population of 16) to test compliance and internal control over reporting requirements. E&Y noted a difference between the Financial Status Reports and the Accounting Records (ERP) regarding the expenditures for FY 2013 for the following report: Federal Expenditures of 2009 ARRA Grant for Period 7/1/2013-9/30/2013 as Per SF-425 $48,370.83 Expenditures in ERP 7,638.87 Difference $40,731.96 E&Y selected a sample of two (2) ARRA-1512 reports submitted during the fiscal year (out of a total of 4 reports) to test compliance and internal controls over the Reporting requirement. E&Y noted two (2) instances where management could not reconcile the difference between the ARRA Report and the ERP detail of expenditures, in the quarters ended 6/30/13 and 12/31/12; therefore, E&Y could not ascertain that the underlying data was accurate and complete. Government’s Response The Law Enforcement Planning Commission (LEPC) concurs with this finding. === page 271 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 14 Action Plan: The Fiscal Unit, along with the Grant Director and Grant Manager, will again review the records, reconcile the approved expenditures and verify that the Federal Financial Reports (FFRs) correctly report expenditures against the grant. This is a requirement of the policy and procedures of the Agency. To ensure that this is done in the future it will be required of the Fiscal Unit and the Grant Manager to submit to the Director a signed copy of the reconciliation used in the filing of the FFRs. Due Date: March 31, 2015 Person(s) Responsible: Fiscal Management Supervisor, LEPC Financial Specialist, LEPC Grant Manager, LEPC Victim Service Director, LEPC Finding No. 2013-013 In accordance with 2 CFR 25.200: (a) Each agency that awards types of Federal financial assistance included in the definition of “award” in §25.305 must include the requirements described in paragraph (b) of this section in each program announcement, regulation, or other issuance containing instructions for applicants that either: (1) Is issued on or after the effective date of this part; or (2) Has application or plan due dates after October 1, 2010. (b) The program announcement, regulation, or other issuance must require each entity that applies and does not have an exemption under §25.110 to: (1) Be registered in the CCR prior to submitting an application or plan; (2) Maintain an active CCR registration with current information at all times during which it has an active Federal award or an application or plan under consideration by an agency; and (3) Provide its DUNS number in each application or plan it submits to the agency. Ernst and Young (E&Y) selected a sample of four (4) subrecipients (out of a population of 5) to test control and compliance over the Subrecipient Monitoring compliance requirement. Management indicated that they did not obtain a DUNS number prior to issuing the subawards to The Legal Services of St. Thomas, the Women’s Coalition of St. Croix, and the Family Resource Center, who were subrecipients that received subawards after October 1, 2010. Government’s Response The Law Enforcement Planning Commission (LEPC) concurs with this finding. LEPC required DUNS numbers from the ARRA grant sub-recipients but not from the-not-for profit organizations that received funding from grants prior to FY 2013. === page 272 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 15 Action Plan: Going forward LEPC will inform the subrecipients that funding will not be awarded to applicants without the required DUNS number. Subrecipients will be notified by phone, email or hard copy communication. This requirement will now become part of the application process. Notification will be sent out by July 15, 2014. Due Date: July 15, 2014 Person Responsible: Grant Manager - LEPC Victim Service Director - LEPC Edward Byrne Memorial Justice Assistance Grant (JAG) Cluster CFDA Nos. 16.738 and ARRA 16.803 Finding No. 2013-014 While performing testing procedures to determine whether the client complies with the terms and conditions of Cash Management, management provided Ernst and Young (E&Y) with the Cash Drawdowns reports requested, but was unable to reconcile the reports to ERP expenditures. Therefore, E&Y was unable to perform the control and compliance testing over Cash Management Compliance requirements. Government’s Response The Law Enforcement Planning Commission (LEPC) concurs with this finding. This occurred because some of the funding was not posted to the ERP System, but was still in an account managed by the Department of Finance. Action Plan: LEPC will ensure that Federal Funds drawn down into the designated bank account are posted in the government accounting system within five (5) business days of the funds reflected in the bank account. === page 273 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 16 Due Date: July 1, 2014 Person Responsible: Financial Management Supervisor - LEPC Financial Specialist - LEPC Finding No. 2013-015 Ernst and Young (E&Y) selected a sample of eight (8) Federal Financial Reports (SF- 425) (out of a population of 16) to test compliance and internal control over reporting requirements. E&Y noted a difference between the Financial Status Reports and the Accounting Records (ERP) regarding the expenditures for FY 2013 for the following reports: Federal Expenditures as per 2009 ARRA Grant for Period 7/1/2013-9/30/2013 as Per SF-425 $196,694.00 Expenditures in ERP 95,702.90 Difference $100,991.10 Federal Expenditures as per 2009 Grant for Period 7/1/2013-9/30/2013 as Per SF-425 $149,260.70 Expenditures in ERP – Difference $149,260.70 Federal Expenditures as per 2010 Grant for Period 7/1/2013-9/30/2013 as Per SF-425 $ 48,358.01 Expenditures in ERP 50,302.08 Difference $ (1,944.07) Federal Expenditures as per 2009 ARRA Grant for Period 10/1/2012 – 12/31/2012 as Per SF-425 $166,513.00 Expenditures in ERP 215,937.80 Difference $ (49,424.80) Federal Expenditures as per 2010 Grant for Period 10/1/2012 – 12/31/2012 as Per SF-425 $ 34,114.41 Expenditures in ERP 29,551.53 Difference $ 4,562.88 E&Y selected a sample of two (2) ARRA 1512 reports submitted during the fiscal year (out of a total of 4 reports) to test compliance and internal controls over the Reporting requirement. E&Y noted one (1) instance where management was not able to provide the requested report for the quarter ended 3/31/13. In addition, E&Y encountered one (1) instance where management could not reconcile the difference between the ARRA Report and the ERP detail of expenditures, in the quarter ended 6/30/13; therefore, E&Y could not ascertain that the underlying data was accurate and complete. === page 274 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 17 Government’s Response The Law Enforcement Planning Commission (LEPC) concurs with this finding. Notwithstanding LEPC’s concurrence with the findings, it must be noted that the 3/31/13 reporting period was the period when LEPC and USDOJ were working to reconcile the Tax ID numbers so that the report could be processed. The report in question could not be filed for that reason. The challenge was finally resolved around the middle of the third quarter. The ARRA grant has been closed as of February 2014. Action Plan: LEPC will require that Grant Managers and the Fiscal Unit submit signed reconciliation summaries to the Director or his designee before FFRs are filed. The policy already stipulates a time for the filing of these reports. LEPC will review the ERP reports for the periods mentioned to verify the amounts to be reported. LEPC will communicate with the grantor agency to have the reports corrected. If the grants are still active the correction will be reflected in upcoming reports. Due Date: June 30, 2015 Person Responsible: Fiscal Management Supervisor - LEPC Financial Specialist - LEPC Grant Manager/Administrator - LEPC Finding No. 2013-016 In accordance with 2 CFR 25.200: (a) Each agency that awards types of Federal financial assistance included in the definition of “award” in §25.305 must include the requirements described in paragraph (b) of this section in each program announcement, regulation, or other issuance containing instructions for applicants that either: (1) Is issued on or after the effective date of this part; or (2) Has application or plan due dates after October 1, 2010. (b) The program announcement, regulation, or other issuance must require each entity that applies and does not have an exemption under §25.110 to: (1) Be registered in the CCR prior to submitting an application or plan; (2) Maintain an active CCR registration with current information at all times during which it has an active Federal award or an application or plan under consideration by an agency; and (3) Provide its DUNS number in each application or plan it submits to the agency. In accordance with 31 USC 7502(f)(2):(2) Each pass-through entity shall: (A) provide such subrecipient the program names (and any identifying numbers) from which such assistance is derived, and the Federal requirements which govern the use of such awards and the requirements of this chapter; (B) monitor the subrecipient’s use of Federal awards through site visits, limited scope audits, or other means; (C) review the audit of a === page 275 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 18 subrecipient as necessary to determine whether prompt and appropriate corrective action has been taken with respect to audit findings, as defined by the Director, pertaining to Federal awards provided to the subrecipient by the pass-through entity; and (D) require each of its subrecipients of Federal awards to permit, as a condition of receiving Federal awards, the independent auditor of the pass-through entity to have such access to the subrecipient’s records and financial statements as may be necessary for the pass-through entity to comply with this chapter. Management was unable to provide the supporting documentation for their monitoring procedures for one (1) of their subrecipients, the Virgin Islands Prevention Council. Furthermore, E&Y selected a sample of two (2) subrecipients form a total population of four (4) subrecipients and noted management did not require a valid DUNS numbers from subrecipients prior to issuing the subawards. Government’s Response The Law Enforcement Planning Commission (LEPC) concurs with this finding. Action Plan: As it relates to the requirement for the DUNS number from applicants, LEPC will inform its present grant recipients by phone, email, hardcopy or written communication, that registration with CCR and/or SAM (System for Award Management) and the acquisition of a DUNS number are mandatory for receipt of funds. This requirement will now become part of the application process. Notification will be sent out by July 15, 2014. LEPC will ensure that all monitoring documentation, whether generated through a site visit or a desk audit, be kept in the file created for each subrecipient. Due Date: July 15, 2014 Person Responsible: Grant Administrator/Manager - LEPC === page 276 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 19 Temporary Assistance for Needy Families (TANF) CFDA No. 93.558 Finding No. 2013-017 During Ernst and Young’s (E&Y) procedures to test the IEVS, E&Y noted that the program did not have in place the controls establishing and implementing the required IEVS system for data matching and verification an use of such data. When management provided the population of the participants of TANF cases subject to IEVS system, E&Y found that the population contained participants of SNAP. Since it was impossible to segregate the TANF participants from the SNAP participants, E&Y could not ascertain that the underlying data was accurate and complete. As per consequence, the Government was not able to provide the following information required by the Compliance Supplement: (a) Wage information from the State Wage Information Collection Agency (SWICA) should be obtained for all applicants at the first opportunity following receipt of the application, and for all recipients on a quarterly basis; (b) All Available information from the Social Security Administration for all applicants at the first opportunity; (c) Information from the Immigration and Naturalization Service and any other information from other agencies in the State or in other States that might provide income or other useful information; and (d) Unearned income from the Internal Revenue Service (IRS). Government’s Response The Department of Human Services (DHS) concurs with this finding. Action Plan: The automated system between DHS and DOL was set up and is functional. DHS currently does the Income Eligibility and Verification System (IEVS) monthly matching; however, the personnel report findings were due to untimely entries being placed into the Client Application, Registration, and Issuance of Benefits System (CARIBS). A report worker has been assigned to enter IEVS matched data into the CARIBS case management system where necessary. Implementation Date: October 2012 Person Responsible: Program Administrator – DHS === page 277 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 20 Medical Assistance Program (Medicaid) CFDA No. 93.778 Finding No. 2013-018 The Medical Assistance Program does not have the necessary controls in place to allow for the required investigation of utilization fraud. Government’s Response The Department of Human Services (DHS) concurs with this finding. Action Plan: The Medical Assistance Program (MAP) was transferred to the Department of Human Services, Division of Family Assistance (DFA) in FY 2013. The department is integrating MAP into its Management Evaluation Unit and also assigning a MAP Front- end Worker on each island to sample and review MAP cases for integrity. Also, with the implementation of the MMIS, the department now has the ability to run integrity algorithms to red flag suspicious Medicaid transactions and take appropriate administrative and legal action in concert with CMS. Training and business process alignment are underway. The Department will provide staffing resource to ensure compliance. DHS will also provide written procedures to comply with program integrity policies with the help of CMS and acquire training for staff to ensure compliance with this requirement. Due Date: 1st quarter of 2015 Person Responsible: Medicaid Program Director - DHS DFA Administrator - DHS === page 278 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 21 Finding No. 2013-019 The State Medicaid agency pays for inpatient hospital services and long-term care facility services through the use of rates that are reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated providers. The State Medicaid agency must provide for the filing of uniform cost reports for each participating provider. These cost reports are used to establish payment rates. The State Medicaid agency must provide for the periodic audits of financial and statistical records of participating providers. The specific audit requirements will be established by the State Plan (42 CFR section 447.253). Ernst and Young (E&Y) requested the cost reports for participating providers for 2013 and noted that the reviews of such cost reports have not been conducted. Government’s Response The Department of Human Services (DHS) concurs with this finding. Action Plan: The Department of Human Services has put out an RFP for cost reporting. The RFP was publically posted by the Department of Property and Procurement. It is expected that a company will be contracted within sixty (60) days of the closing posting period and work on the cost reporting will ensue. Implementation Date: FY 2013 and on-going Person Responsible: MIS Manager - DHS Medicaid Program Director - DHS Finding No. 2013-020 The Government did not provide supporting documentation to evidence the performance of required ADP Risk Analysis and System Security Reviews. Government’s Response The Department of Human Services (DHS) concurs with this finding. === page 279 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 22 Action Plan: DHS put out an RFP for ADP. A vendor was selected and a contract was developed and approved by the Department of Property and Procurement. Charter meetings have been conducted with the vendor and ADP is underway. Implementation Date: October 2013 and on-going Person Responsible: Medicaid Program Director – DHS DFA Administrator - DHS Finding No. 2013-021 States must have a system to identify medical services that are the legal obligation of third parties, such as private health or accident insurers. Such third-party resources should be exhausted prior to paying claims with program funds. Where a third-party liability is established after the claim is paid, reimbursement from the third party should be sought (42 CFR sections 433.135 through 433.154). The State is required to credit the Medicaid program for (1) State warrants that are canceled and uncashed checks beyond 180 days of issuance (escheated warrants) and (2) overpayments made to providers of medical services within specified time frames. In most cases, the State must refund provider overpayments to the Federal Government within 60 days of identification of the overpayment, regardless of whether the overpayment was collected from the provider (42 CFR sections 433.300 through 433.320, and 433.40). Ernst and Young (E&Y) requested a list of all third party obligations identified in 2013 in order to perform procedures to determine whether the obligations were exhausted prior to paying claims with federal funds. The program was not able to provide a complete list of all third party transactions processed throughout FY 2013. E&Y requested a listing of all uncashed/cancelled checks beyond 180 days of issuance. The program was unable to provide any information in this area. Government’s Response The Department of Human Services (DHS) concurs with this finding. === page 280 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 23 Action Plan: The Department of Human Services will update its eligibility system so that it would facilitate review of third party obligations. The program will request and conduct quarterly reviews and reports requesting uncashed checks from the Treasury which lists all uncashed checks exceeding 180 days, allowing us to easily recognize funds which may need to be returned to the grantor agencies or dealt with according to the appropriate Federal requirements. Implementation Date: FY 2013 and on-going Person Responsible: Medicaid Program Director – DHS Chief Financial Officer - DHS Finding No. 2013-022 States are required as part of their Medicaid State plans to maintain a Medicaid Fraud Control Unit (MFCU), unless the Secretary of HHS determines that certain safeguards are met regarding fraud and abuse. The U.S. Virgin Islands Medicaid Program does not have in place a Medicaid Fraud Control Unit. Ernst and Young (E&Y) was not provided with a list of violations of Medicaid laws and regulations. Government’s Response The Department of Human Services (DHS) concurs with this finding. Action Plan: The Department of Human Services has done the following: hired a dedicated Fraud Worker just for MAP; sent Fraud staff to the National Association for Program Information and Performance Management (NAPIPM) training on MAP Fraud and Quality Control; conducted MAP Fraud and QC training for MAP fraud worker on March 19-20, 2014; conducted meetings in establishing methods or criteria for identifying suspected fraud cases; and drafted a Memorandum of Understanding (MOU) for establishing an agreement with the Attorney General’s Office (V.I. Department of Justice) on investigation and prosecution of fraud. === page 281 === Government of the United States Virgin Islands FY 2013 Corrective Action Plan for the FY 2013 Single Audit 24 Implementation Date: Fiscal Year 2013 and on-going Person Responsible: Medicaid Program Director - DHS