Moody's says Puerto Rico budget may be hurt by tax collection risk

July 9 Tue Jul 9, 2013 2:47pm EDT

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July 9 (Reuters) - Puerto Rico's fiscal 2014 budget comes with welcome tax increases but contains tax-collection risks that may increase negative drag on the Caribbean island's near-junk credit rating, Moody's Investor Service said on Tuesday.

"The credit implications of these new taxes are mixed and the net effect will depend on actual collections," the Wall Street credit agency said in a written comment.

Puerto Rico policymakers last month okayed a $9.8 billion general fund budget for the 12 months started on July 1. The budget is a 5 percent rise over last year's expenses, contains payments to ease Puerto Rico's severely underfunded pension plans, and includes new taxes and tax hikes meant to raise $1 billion.

But Moody's, which was the first of three Wall Street credit agencies to cut Puerto Rico to the lowest investment-grade rating, said the revenue targets may not be met and that the new taxes may also sting the island's fragile economy.

"If the new revenues do not meet forecasts, a mid-year budgetary shortfall will emerge in fiscal 2014, increasing negative pressure on the rating," Moody's said.

Moody's also said an expansion of an island sales tax in the budget was a credit positive for both the commonwealth government and the Puerto Rico Sales Tax Financing Authority, a major issuer of municipal bonds.

"Further weakening of economic growth could result from the additional corporate and sales taxes, as well as increased tax compliance and enforcement measures," Moody's said. "Despite the increase in much-needed recurring revenue for the commonwealth, weaker economic conditions would also increase negative pressure on the rating."

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