U.S. spending cuts could add to Puerto Rico's financial woes
* Cuts in housing, education, other areas may total $125 million this year
* Auditor cautions Government Development Bank on island's debt
Feb 25 (Reuters) - The $85 billion in across-the-board U.S. government spending cuts that could become reality on March 1 will add to financial pressure on Puerto Rico, which depends on Washington for $1 of every $5 it spends while battling its own operating budget deficits, high government debt and severe unemployment.
Puerto Rico, a major borrower in the $3.7 trillion municipal bond market, faces education, housing-aid and other cuts of about $125 million this year under the automatic reductions in U.S. federal spending, officials in San Juan said on Monday.
They expect cuts of as much as 5 percent in many spending programs, but hope the reductions may be eased as U.S. officials make specific decisions.
The White House has tried to convince Americans of dire consequences if the spending cuts go ahead, but Republicans contend President Barack Obama has overstated the potential damage.
The largest targets for the cuts in Puerto Rico are education, public housing, Head Start and childcare programs, as well as community development block grants, worker training programs and HIV/AIDS programs.
Under a worst-case scenario, the education department would lose $26 million in federal funding, according to officials.
While it is not clear how many of the cuts in the larger programs will work out, the Obama administration released a number of specific program cuts on Monday.
They include a loss of $4.9 million that would put at risk 70 teacher and aide jobs at public schools. The White House also said that Head Start and Early Head Start services would be cut for 2,400 island school children, and that about 2,500 college students would lose work-study and other help.
"There are no jobs in danger," Governor Alejandro Garcia Padilla told reporters.
Resident Commissioner Pedro Pierluisi, Puerto Rico's sole congressional representative, labeled as "speculative" a study by George Mason University in Virginia that found 5,237 jobs could be lost on the island as a result of the spending cuts.
Officials in Puerto Rico have expressed relief that Social Security, Medicaid, Pell Grants and other spending programs that are especially important to the island are exempt.
BUILD AMERICA BONDS
Puerto Rico may also feel the sting of spending reductions tied to its outstanding Build America Bonds, taxable securities that come with the promise of a 35 percent interest-rate subsidy to issuers from the U.S. government.
"It's not going to break them, but it's not going to help them either," Richard Larkin, senior vice at Herbert J. Sims, said at a conference in Fort Lauderdale. "I'm not worried that Puerto Rico is not going to be able to make its payments."
Puerto Rico pays the highest rates of any big issuer, partly because of its weak economy and unfunded pension liabilities of $37.3 billion.
About $5.7 billion of Puerto Rico's muni debt is held by the Government Development Bank, according to independent auditor Deloitte & Touche in a report dated Feb. 11.
That equals 36 percent of the bank's assets as of June 30, 2012, and leaves it vulnerable to problems in collecting revenues, credit-rating downgrades and budget difficulties, Deloitte said.
"Continuance of and/or significant negative changes in these factors may affect the ability of the commonwealth and its agencies and instrumentalities to repay their outstanding loan balances with the bank and, accordingly, may have an adverse impact on the bank's financial condition, liquidity, funding sources, and results of operations," Deloitte said in its report.