UPDATE 1-Puerto Rico governor's budget seeks to raise taxes

Thu Apr 25, 2013 11:08pm EDT

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April 25 (Reuters) - Puerto Rico's new governor on Thursday proposed raising government spending by 8 percent and expanding the goods and services on the Caribbean Island subject to a sales and use tax.

In presenting his $9.835 billion budget plan, awaited by anxious investors in America's $3.7 trillion municipal bond market, Governor Alejandro Garcia Padilla also called for using $200 million to pay down debt and $253 million to shore up underfunded pension funds.

The proposed budget, which must be approved by the legislature controlled by the governor's Popular Democratic party, comes as the island's Planning Board forecast that Puerto Rico's economy will shrink by 0.4 percent this calendar year and grow slightly during the fiscal year beginning in July.

In 2012, the commonwealth's economy expanded for the first time since 2005, but Puerto Rico's tepid economic recovery now shows substantial signs of sputtering - a turn that worries owners of $53 billion of Puerto Rico municipal debt.

The island's unemployment rate is 14.2 percent.

A big, popular issuer of muni bonds, Puerto Rico was stung in recent months by bond downgrades by all three leading Wall Street credit-rating agencies. Each knocked its credit rating to near junk-bond status, pointing in part to an economy sapped by recession. Further ratings cuts are possible.

To pay for the expanded budget, the administration wants to raise revenue by $1.4 billion, but Garcia Padilla said these measures would not impact the "working middle class." One of the biggest increases will be an expansion of the goods and services subject to a 7 percent sales and use tax, which officials estimate will raise an additional $550 million annually and mostly impact the wealthy.

"We are going to pay our loans, and we are going to lower water and energy rates during this term," the governor told a joint session of the island's legislature.

The governor also said nearly $2 billion would be invested in public works over the next 18 months, much of it in partnership with private companies. Puerto Rico has in recent years leased its main airport and toll roads to private operators.

The budget plan contained an extra $253 million payment to help keep the island's badly underfunded pension funds afloat, Garcia Padilla said.

The governor also said his administration would begin paying down long-term debt, rather than continually postponing payments through refinancing. The budget plan sets aside $200 million to pay down general obligation issues and pares a refinancing to $500 million from $775 million contemplated this year.

The budget gives $75 million to the University of Puerto Rico to eliminate a controversial $800 annual fee imposed under the previous administration.

About $95 million will go toward salary hikes and other labor commitments, with the governor saying that 40,000 employees will get monthly increases of between $70 and $160 beginning July 1.

"The budget closes some gaps in corporate taxes and similar areas with revenue measures that will not affect the upper middle class, nor the middle class nor the lower middle class nor the poor," he said.

Garcia Padilla announced a $100 million investment this year to begin work on a new Cancer Center and a center for research and technology.

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