UPDATE 1-Puerto Rico governor announces $1.4 billion budget cut

Tue Apr 29, 2014 6:49pm EDT

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(Updates throughout with details from speech, adds announcement)

SAN JUAN, April 29 (Reuters) - Puerto Rico's governor announced a $1.4 billion cut in public spending on Tuesday as the commonwealth government agencies braced for measures that will be taken to produce the first balanced budget in years.

Governor Alejandro Garcia Padilla unveiled his $9.64 billion budget proposal for 2015 in an address to the legislature that included a $775 million payment for Puerto Rico's long-term debt.

The current general fund budget is $9.835 billion for fiscal year 2014, which runs through June 30.

"We are beginning to pay for today's expenses with today's earnings. This balanced budget complies with my commitment to prepare a budget without deficit financing nor refinancing of debt," the governor said.

"We have accomplished this without firing anyone, respecting the daily bread of public workers," the governor said.

The governor said that he would cut government spending by an average 8 percent and would freeze hiring but added he would not make cuts to the Police Department or the University of Puerto Rico.

The governor also announced the fusion of 25 government entities, which he said would be undertaken without affecting services or employee rights. He also said he ordered a 10 percent cut in the budget for senior executive staff positions and for professional service contracts.

The government will also seek savings of $236 million in government payroll expenses through negotiated cuts in marginal employee benefits, as well as transferring school transportation service to island municipalities. Officials also said the least utilized and most obsolete schools would be shut down to save money.

There will also be savings through changes to Christmas bonus and sick leave benefits to public workers.

On a positive note the governor highlighted plans and recent achievements in the areas of manufacturing, high tech and financial services, tourism and agriculture.

Hundreds of public workers gathered outside the Capitol building in the afternoon to pressure the government to respect their collective bargaining contracts.

In February, when Garcia Padilla pledged to investors to deliver a balanced budget, he said making the government's public corporations self-sufficient is "one of the most significant, greatest challenges" facing Puerto Rico.

"We have to adjust to the reality of a smaller economy with less resources and we can't maintain a government structure as if this was an economy with much greater productive capacity," said economist Jose Joaquin Villamil, of Estudios Tecnicos.

While no new taxes are expected following a year in which the administration levied $1.5 billion in new taxes, the government could see added revenue because some new taxes are still being implemented, including a levy on Internet purchases and a plan to charge the sales and use tax on goods imported into the island.

Earlier this year, concerns over the Puerto Rico government's ability to deal with its debt, with an economy and population in decline since 2006, prompted all three credit ratings agencies to cut Puerto Rico's credit to non-investment grade, or a junk bond rating.

Last month's $3.5 billion bond deal gave the Puerto Rico government "breathing room" and analysts have awaited the budget to see how the administration will address fiscal challenges.

The commonwealth government is seeking to make the case that the economy is turning the corner.

In March, the island economy fell for a 16th straight month, but the 0.8 percent year-over-year decline was the smallest drop in more than a year, according to the Government Development Bank Economic Activity Index.

While the EAI is down 3.4 percent overall through the first three quarters of the current fiscal year, it has been on the rise for three straight months. (By Reuters in San Juan.; Editing by David Adams, David Gregorio and Ken Wills)

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