Dr. MILLER. That would force the administration to change some of its financial structure or plans?

Mr. KRABACH. You would have to change it all, because you had planned certain funds out of general funds and certain ones out of matching; and, of course, when you have essential departments, such as health and public works, you cannot cut them too much, and as a result you must approve almost what is had.

Dr. MILLER. Would you clarify this statement :

This method of appropriation nullifies the (iii) portion of section 28. So long as the legislature appropriates for basic operating departments out of matching funds and includes enough of these departments, there never will be a surplus. The Governor and the Secretary of the Interior are forced to approve in order to maintain the operations of government.

Mr. KRABACH. That means this, Dr. Miller: If we have got, let us say, operating expenses of $4.5 million and we have $5 million of available funds, if $2.4 of that is matching and the balance is local, and the legislature would appropriate for essential departments, such as health, education, public works, things that must be done, out of matching funds, to be sure that all of the matching funds are spent first, naturally the Governor has got to approve that appropriation. He cannot very well not approve it without closing down an essential department, such as education or public works or health. So he must approve it. Of course, under the (i) portion, where the President's representative must also approve it, he cannot very well disapprove an appropriation for an essential department. So he is pretty much forced to approve that portion.

As long as the legislature will put enough of the essential departments in the (i) appropriations you will never have any (iii) balance, because you will put the essential projects in. After all, they have got to keep the Government running, and you would have a surplus under local funds and a deficit actually under matching funds, which would have to be handled in another manner.

Dr. MILLER. Do you think that was the intent of the organic act? Is that the way you interpret it?

Mr. KRABACH. I do not know that it was the intent necessarily, but that is the way we interpreted the way it was written, sir. I don't know. It did seem that there was somewhat of a controversy in thinking here between the (i) portion and the (iii).

As we said in that report, if we must approve essential operating departments out of the (ii) as the legislature must determine and of course that is the way it has to be done-and they appropriate essential departments out of (i), there is no need for (iii) because there will never be any balance. Whether that is the intent of the United States Congress or not

Mr. ASPINALL. If my colleague will yield right there. What Dr. Miller is saying is that Congress would not have had the (iii) provision there unless Congress expected the local funds to be expended entirely or practically entirely every year so that there could be, if the funds came into the treasury, this return to the Federal Treasury. Now, with that provision in there, certainly it was the intent of Congress, at least, that there was a possibility of funds getting back into the treasury if they exceeded the amounts that were needed, using first the local funds in their entirety.

Now I do not know whether you are the one to answer what was the intent of the Congress or not, but most certainly Congressman Miller is in position to state what his intent was, and I am in position to state what mine was.

Mr. KRABACH. Congressman Aspinall, the reason that we made that particular comment in our annual report is that it was our opinion that possibly this (iii) section had that intent, and we wanted to bring it to the attention of the Governor and the Secretary of the Interior, and, of course, General Accounting, who were reviewing our office, that with the present procedure-and it doesn't seem there is any way we can get away from it because that is the way it is writtenit would nullify section (iii), and therefore obviate the intent. As we suggested, if this is the intent-and we did not try to presume to know what the intent was-but if it was the intent and as you say, it was—then the (iii) section is nullified by this last procedure.

Dr. MILLER. That was my understanding of it. Of course, if you have any other interpretation of it, it circumvents the results that you might have. It sort of nullifies what seems to me to be the actual intent of Congress.

STATEMENT OF CHARLES K. CLAUNCH, GOVERNMENT SECRETARY, VIRGIN ISLANDS

Mr. CLAUNCH. Mr. Chairman, when the Governor presented the budget to the legislature the Governor anticipated spending all general funds first. When general funds were expended, then we had to go into matching funds. However, it is out of the hands of the administration, it is in the hands of the Legislature, and the Governor cannot do anything about it.

STATEMENT OF EARLE B. OTTLEY, VICE CHAIRMAN, LEGISLATURE, VIRGIN ISLANDS

Mr. OTTLEY. May I say this, Mr. Chairman: that when the Governor submits a budget, he submits the budget in two parts, 22 million, let us say, for matching funds, 22 million in general funds.

The Governor might suggest the department of health, let us say, to expend money from general funds. Our experience has been that general funds come in so sporadically that our major departments cannot operate unless they have sufficient funds in hand. So we felt that, since we have Federal funds available, we should put our major departments, our essential departments, in the matching funds where the money is readily available, where the departments can draw from these funds, and we put the less essential departments in the general funds.

So, therefore, the legislature has the authority, it seems to me, to make the determination as to which department should be the general fund or matching fund, provided we do not exceed the amount that the Governor has recommended.

We have attempted during the past year to stay within the recommendations of the Governor even though we might agree that we should have a department in the matching fund different from what the Governor has recommended. So the onus of responsibility is not

in the legislature as indicated here. We have attempted to live within the appropriations.

Mr. ASPINALL. Senator, answer this question: Under the procedure which apparently you are following, what is to prohibit you from building up a balance in the so-called general fund of $5 million?

Mr. OTTLEY. We have disputed the interpretation that we should keep the funds divided. We feel that the matching fund and the general fund should be combined to obviate that possibility, because we feel, too, that our general funds should be expended. But when you have the matching fund and the general funds separate, then, of course, the temptation is always there to utilize all of the matching funds. But if you have them combined that possibility would be erased.

Mr. ABBOTT. Senator, you are not suggesting you are going to appropriate it just to be spending the funds because it might otherwise go into a reverse, are you?

Mr. OTTLEY. No. We appropriate the money based on the essentialities, Mr. Abbott. We do not appropriate the money simply because we want to spend it.

Mr. ABBOTT. While we are on this question of the operation of section 28, the history of the so-called matching grant provision or matching fund provision is a pretty clear one. It was thought that it would be an incentive for increasing purely local taxes, that is, as distinguished from Federal taxes collected locally.

I believe that, from figures submitted to us—and fiscal years 1955 and 1956 are perhaps the best representative years not only have local collections not been increased, but they have been decreased rather substantially. In the cause of real-estate taxes, the reduction was 20 percent. In the case of trade taxes, the reduction was some 30 percent.

Is that a correct statement, Mr. Krabach?

Mr. KRABACH. That is approximately correct.

Mr. ABBOTT. So that the incentive provision-the hope of the Congress was that by holding out these matching funds locally more and more revenues would be raised.

Mr. OTTLEY. I can explain to you, sir, the reason for the reduction in your trade taxes. There was a tax holiday, based on the fact that the Governor and the legislature could not agree on tax legislation that was passed here. The Governor disapproved it, and there was a tax holiday.

Mr. ABBOTT. What do you mean by a "tax holiday"?

Mr. OTTLEY. The tax law expired at a certain date and the legislature extended it for a certain period, and the Governor disapproved the extension because of certain provisions in the act, and several months elapsed before the legislature could meet again.

Mr. ABBOTT. The plain fact is that the tax law was extended for only a 6-month period; was it not?

Mr. OTTLEY. You are talking about this fiscal year. The last year it was for 1 year. Of course, we extended it for 6 months only in the last regular session.

Mr. ABBOTT. By reason of a disagreement between the legislative branch and the executive branch you had a tax holiday?

Mr. OTTLEY. That is right. But I cannot explain why there should be a reduction in the real property tax, because there was no reduction in the tax rate. So I do not understand it.

Mr. ABBOTT. I am speaking, of course, of revenues on the figures supplied us that real-estate tax revenues were reduced some 20 percent and trade taxes 30 percent.

Mr. OTTLEY. I cannot understand that because, it seems to me, there must be a normal increase, because there is a really tremendous building program, a tremendous building boom; and I cannot understand why in any succeeding year there should be a reduction in real property

taxes.

Mr. ABBOTT. Is it possibly related to collections rather than assessments?

Mr. OTTLEY. I don't know, because there is not too much delinquency in the collection of real property taxes.

Mr. ABBOTT. Mr. Krabach, what were the total purely local collections in fiscal 1955?

Mr. KRABACH. All told?

Mr. ABBOTT. Yes, sir.

Mr. KRABACH. Of everything in 1955, sir, which would include all service charges, medical fees

Mr. ABBOTT. Exclusive of Federal.

Mr. KRABACH. Exclusive of Federal would be, I would say, roughly $1.1 million.

Mr. ABBOTT. In 1955?

Mr. KRABACH. Right.

Mr. ABBOTT. What were the collections in 1956?

Mr. KRABACH. About $965,000.

Mr. ABBOTT. A slight drop?

Mr. KRABACH. That is right. One of the things to explain Mr. 'Ottley's question why real-estate taxes did drop, there was not any reduction in rate because the legislature did not pass any bill, a legislative bill on real-estate taxes. There is a question as to whether they can, especially in St. Thomas, because the President of the United States approved a bill on that.

One of the reasons was, in the prior year there were a number of delinquencies collected, which made the amount rather high in the prior year. Of course, as you said, the delinquencies were pretty well in line this past year. So, as a result, we have just had normal collections, which amounted to slightly over $200,000. But we had collected in the prior year some $40,000 worth of delinquencies that had gone over a number of years and had not been collected.

Mr. ABBOTT. Rather than lengthening this, Mr. Chairman-Mr. Krabach, could you submit for inclusion in the record at this point a table showing the revenue collections for fiscal years 1952 through 1956, both inclusive, to show the breakdown of local revenue collections, that is, by type of tax? And by "local" is meant non-Federal. Mr. KRABACH. Mr. Abbott, we would be very happy to furnish what we can, but in the years 1952-53 there were no financial statements prepared. The only figures that we have are the figures that were presented by General Accounting, which were not a financial state

ment.

Mr. ABBOTT. Are you saying that no financial statements were prepared here?

Mr. KRABACH. That is correct, sir; 1952 and 1953. General Accounting prepared a financial statement which was included in the Governor's report, which they specifically stated was not a financial statement, because they had no way to get the figures.

In 1954, when the comptroller was first appointed, our first job was to make a financial statement, and we had to make that financial statement from the actual documents because there were no books at the time from which you could make a financial statement. So we actually took all of the receipt documents and tabulated them and took all of the expenditure documents and tabulated them, and for fiscal year 1954 is actually the first financial statement that is available.

We do have figures in those prior years, but there is no way to prove them, there is no way to audit them.

Mr. ABBOTT. Is the committee correctly advised by the Comptroller General in Washington that for the periods 1952, 1953, 1954, 1955, and 1956, which embraces, I believe, 2 years before they had an audit, they have been unable to come up with what is termed "a balance sheet for the Virgin Islands"?

Mr. KRABACH. For the years 1955 and 1956 the General Accounting Office used our balance sheets, which now they consider a balance sheet. For the prior years they said specifically that they could not prepare a financial statement.

Mr. ABBOTT. But are the 1955 and 1956 balance sheets in such form that they are satisfied that all of the accounting for funds in the Virgin Islands meets desirable accounting and fiscal control standards?

Mr. KRABACH. I think so, sir. They included it-General Accounting included the statement in their return for fiscal year 1955, and they will include it for fiscal year 1956, that is, our return.

Mr. ABBOTT. Neither this committee nor, I believe, the Government Operations Committee has had transmitted to it yet the 1956 report. Mr. KRABACH. I presume it is not ready yet.

Mr. ABBOTT. If we may now, Mr. Chairman, I would like to ask Mr. Silverman to introduce himself. The purpose in calling him at this time is in a belief and understanding that he is perhaps most familiar with the so-called tax-exemption laws which have been enacted both by the old municipal councils and by the 1956 legislature. Would you give your full name to the reporter, please?

STATEMENT OF IRWIN W. SILVERMAN, PRESIDENT, WEST INDIES BANK & TRUST CO., ST., THOMAS, V. I.

Mr. SILVERMAN. My name is Irwin W. Silverman. I am president of the West Indies Bank & Trust Co. Prior to that time I was for a number of years Chief Counsel of the Office of Territories in the Department of the Interior, Washington.

I really don't know how to proceed with the background of the taxexemption program, because it does have a long history. It dates back largely to Puerto Rico, and to a large degree Senator Taft was the father of tax exemption in the Caribbean area.

I think Congressman Miller is the only one here on this committee who had been in Puerto Rico shortly after the Chavez committee was in Puerto Rico in 1940 or 1941.

In the late thirties and early forties, Senator Taft, as well as many of us in the Department of the Interior, was very much concerned