April 25 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
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.