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
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
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
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
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
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
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
Two large investment groups, Oppenheimer Funds and Franklin
Funds, immediately challenged the legislation with a federal
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)