SAN JUAN, July 1 Puerto Rico Governor Alejandro Garcia Padilla on Tuesday signed a $9.56 billion budget for 2015, a blueprint that cuts spending by $200 million from the previous year amid a continued contraction in the island's economy.
The development also comes as concerns among investors and analysts grow over the island's ability to stay current on its $73 billion debt load, and about new legislation that appears to open the door for the island's public corporations to restructure their debt.
Also on Tuesday, Moody's Investors Service slashed Puerto Rico's credit rating three notches deeper into junk territory, and warned further cuts may be ahead. Standard & Poor's and Fitch have both downgraded Puerto Rico to non-investment grade this year.
The new budget is $75 million less than the governor proposed back in April, with the reduction coming as tax revenue fell short of estimates in the final months of the 2014 fiscal year, which ended Monday.
The spending cuts are being accomplished through an across-the-board-cut that averages about 8 percent for most government agencies, except for the Police Department and University of Puerto Rico. The plan includes $775 million for debt service.
While claiming to be the first balanced budget in two decades, the government will rely on $269 million in debt financing from a $3.5 billion March bond issue for interest payments due this year. Another bill approved as part of the budget would allow agencies to postpone payments due to the Government Development Bank, which will save $75 million this year.
An analysis by the Center for a New Economy, a local think tank, has identified $300 million in projected savings and revenue that it believes the government will not be able to realize.
This includes a plan to begin charging tax on goods delivered to island ports, a plan whose implementation has already been delayed a month until August.
As part of the budget process, the governor pushed through a fiscal emergency law that freezes salaries and cuts other benefits for employees across government agencies and public corporations.
Other savings are slated to be achieved by consolidating 25 government entities, closing more than 80 schools and putting towns in charge of providing school transportation.
Lawmakers passed a slew of new measures to shore up revenue, including changes to the gross sales tax. Under the changes, companies with gross sales under $3 million will be exempt and a sliding scale applies to other companies.
Lawmakers also passed a 2 percent tax on money transfers made from Puerto Rico to anywhere off island, including the continental U.S., and the government is looking to raise cash through changes to the capital gains tax and the basic alternative minimum tax.
The tax increases and spending cuts will make it difficult to return Puerto Rico to economic growth, according to economists and credit analysts.
In May, Puerto Rico's economy shrank by 1.1 percent on a year-over-year basis, according to the Government Development Bank Economic Activity Index. It was the 18th straight month of decline.
Over the weekend, the governor signed enacted The Puerto Rico Public Corporations Debt Enforcement and Recovery Act, which allows financially distressed public corporations to enter a bankruptcy-like process to restructure debt and other obligations.
Two large investment groups, Oppenheimer Funds and Franklin Funds, immediately challenged the legislation with a federal lawsuit.
Rating agencies quickly downgraded several public corporations, saying the risk of default increases with the enactment of the new law. Public corporations account for almost 40 percent of the island's total debt of roughly $73 billion. (By Reuters in San Juan; Editing by Dan Burns and Diane Craft)