A financial advisor to the deJongh administration said Friday that this week’s downgrading of the credit rating on the government’s general obligation bonds may not be as bad as it sounds — but the territory is still in pretty tough financial straits.

In its report, Fitch Ratings said it is downgrading the general obligation bond rating from an investment grade "BBB-" to a below investment grade "BB." According to the agency’s website, the lower rating signals a "higher level of credit risk" on the bonds, which are backed by available general funds.

"Because of the recession, our tax revenues are down 20 to 30 percent," David Paul, president of Fiscal Strategies Group and one of the government’s financial advisors, said Friday. Paul said other states have been similarly downgraded because they’ve also been patching funding gaps — tapping into excess reserves and available cash, or borrowing money.

"That, to a rating agency, is viewed as negative," he explained.

But in terms of what the downgrade means for the government, Paul said the situation isn’t dire. The government currently has about $600,000 in general obligation debt left, which should be paid off by the end of the year when the bonds mature, he said, adding that the government hasn’t issued any other general obligation bonds in the last 10 years.

According to the report, "The downgrade of the USVI GO rating reflects the USVI’s extreme revenue weakness in the context of already constrained flexibility. The territory’s longstanding fiscal challenges have worsened in the current downturn given sharp cyclical revenue declines, prolong, unresolved property tax litigation, high fixed cost burdens and a difficulty in reducing expenditures."

That the government has been suffering monumental cash flow shortages is no secret. In his recent State of the Territory Address, Gov. John deJongh Jr. said the government was running a monthly deficit of $25 million, which has only been bridged by borrowing money and floating more bonds — these backed by projected increases in local rum revenues — to pay for operational expenses and critical capital projects.

And in a recent interview, the governor anticipated having to go back to the Legislature for the authorization to borrow more money — a request that senators shot down last year after financial team members said they would need another $100 million to get through fiscal year 2010. That amount would have been added to the $250 million authorization approved a few months before, but senators said at the time they would continue to monitor revenue collections before deciding whether to borrow more money.

The figures have jumped a bit, but the borrowed cash, bond proceeds and rum revenues have really been keeping the wheels of government spinning, officials have said.

Meanwhile, Fitch’s outlook on the bonds is still "stable," and the downgrade does not extend to the government’s $500-$600 million in gross receipts tax or matching fund revenue bonds, Paul said. Those bonds, he added, are backed by specific revenue streams instead of general funds, which the Fitch report said are "insulated from General Fund" operations and could help "relieve" other government debts — such as the more than $1 billion pension liability and $400 million in retroactive wage debt — in the future.

"And on the flip side, Fitch was complimentary about the progress the government had made with its financial management system," Paul said.

There is no indication at this point if the two other rating agencies — Standard and Poor’s and Moody’s Investors Service — would be issuing similar reports, he added.