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Plans for Puerto Rico

Balancing Puerto Rico's operating budget, controlling expenditures, and reducing the government payroll are just a few of New Progressive Party gubernatorial candidate Luis Fortuño’s proposed initiatives.

Fortuño, who currently serves as the island's resident commissioner, Puerto Rico's sole non-voting representative in Congress, recently talked with The Bond Buyer about his plans for the commonwealth.

Fortuño is up against Gov. Anibal Acevedo Vila, a member of the Popular Democratic Party, and currently leads the governor in the polls. A Sept. 16 poll conducted by El Vocero, a daily newspaper published on the island, and Univision, a Spanish-language television network, indicates that 57% of people interviewed would vote for Fortuño while 29% would vote to keep Acevedo Vila in office for a second term.

If the NPP candidate wins in the general election on Nov. 4, he plans "on day one" to cut the current $9.48 billion fiscal 2009 budget by 5%. The commonwealth faces a $1 billion deficit this fiscal year, which began July 1. To help fill the gap, the Government Development Bank for Puerto Rico, the island's financing arm, will extend by the end of 2008 up to $500 million to the central government, which the commonwealth plans to pay back by leveraging delinquent tax receipts.

The first-term congressman said the $1 billion funding gap could also be cut, in part, by reducing the current budget. In addition, he believes a smaller government with lower corporate and personal income taxes would enable the island's business sector to expand, thereby creating more jobs. Fortuño said he would decrease the corporate tax to 30% from 39% and also lower personal income taxes.

"The way to finance this has to be by shrinking the size of our government, and the first step is to have a true hiring freeze across the board, number one," Fortuño said. "Number two, I would order on day one to cut the present budget by 5% even before understanding exactly where we are financially. I'm convinced that we're spending too much and actually we are throwing away a lot of money that could be better used by Puerto Rico individuals and corporations. And again, I'm convinced that the moment we put that money into people's hands, they will invest it and spend it here."

Acevedo Vila has also proposed decreasing the island's income tax, which could jump-start more spending in Puerto Rico, but also says he would support the cuts with potential revenue that could come from a proposed long-term lease of the island's lottery system.

In addition, to help decrease the central government's payroll, the current administration has eliminated roughly 17,000 public sector jobs since January 2005 by terminating positions and implementing early-retirement incentives, according to the GDB. Puerto Rico's fiscal reform law does not allow for layoffs to decrease government employment. Of the more than 17,000 fewer employees, the GDB has decreased its staff by 62 positions, a 20% reduction.

Along with implementing an immediate 5% cut to the current budget, Fortuño said he would craft the fiscal 2010 budget by evaluating operations from the ground up to see where the government can cut expenditures and potentially operate more efficiently with fewer revenues.

NO INCREASE IN DEBT

"We simply cannot continue spending money that we do not have and we cannot increase our public debt any further," Fortuño said. "We really have to start saving, and actually in the next budget, what I intend to do is really go through a zero-based budgeting process approved at every process and understand whether it is serving the constituents as it should ... At this moment, for this year it will be to balance the budget, but further down the line I believe it should be to lower taxes."

Standard & Poor's analyst Horacio Aldrete said ending structural imbalances and closing up deficits is what is most important for the island's fiscal stability, regardless of which political party is in the executive branch or controlling the legislature. And even having the same political party in both branches has brought about stonewalling and budget shortfalls in the past.

"Things that we will continue to pay attention from our perspective is the extent to which the economy is able to rebound over time and more importantly, the extent to which the incoming administration - regardless of who wins the election - simply if the administration remains committed to expenditure controls and to try to achieve fiscal balance," Aldrete said. "I think those, more than who wins the election; those are really the issues from our perspective that will be key to the future credit quality of the commonwealth."

Overall, Fortuño said he supports less taxation and regulation for the private sector to facilitate business growth, and also wants to make Puerto Rico's permitting system for businesses less cumbersome and more efficient.

Luis Davila Colon, a prominent political analyst who hosts a daily political radio show in San Juan, said that while Fortuño has plans to reform the government, implementing those changes might prove to be difficult.

"He's going to try, for example, to deregulate the bureaucracy for the permitting process, and he's going to find a lot of resistance from the left there and from environmentalists and others, and he's going to fight a very hard wall there," Davila Colon said. "And in order to activate the economy, if it's not the government, you have to remove the permitting barriers because construction and development and real estate is very important."

In addition, a Fortuño win would have the NPP controlling both the executive branch and the Legislative Assembly, as many people believe the NPP will maintain its majority of both chambers after the election.

Even so, Davila Colon said the residents need to embrace change to really bring about governmental reforms.

"It still doesn't matter because in Puerto Rico you can have a majority and still in less than 100 days the press can make you look like corned beef because people in Puerto Rico are conditioned not to change," Davila Colon said. "They want change, but whenever somebody comes to rock the boat, the people say, 'Don't rock the boat.' It's terrible, it's really bad."

Like the current administration, Fortuño would like Puerto Rico to utilize public-private partnerships to help repair and build roads, bridges, and other infrastructure, which could decrease borrowing for capital needs.

Puerto Rico currently has $46 billion of total outstanding debt, including $8.16 billion of general obligation bonds, according to the GDB. Standard & Poor's and Moody's Investors Service rate the credit BBB-minus and Baa3, respectively. Fitch Ratings does not rate the commonwealth.

Fortuño said that in general, he favors both greenfield and brownfield concession agreements. He declined to comment on the government's current plan to enter Route 22 in a 50-year long-term lease, as he does not have access to specifics on the deal. GDB officials have yet to announce a winning private-sector bid on the 52-mile, east-west roadway, which runs along the north end of the island from San Juan to Arecibo.

The congressman's plan, if he is elected, is to form a special panel during the transition phase to map out P3 goals and guidelines in order to give lawmakers and administration officials a template to work with and help educate the public on the issue.

"What I have proposed is that I will immediately, after the election, I will [oversee] a blue-chip committee," Fortuño said. "People of incredible credentials and people that are respected by everyone in Puerto Rico, from different parties to create or come up with the parameters that we will use for our P3 transactions. That way, we will do something that different administrations have failed to do, and that is to fully explain and sell the concept to the general population."

COOL ON LOTTERY PRIVATIZATION

Yet Fortuño does not fully support the governor's plan to enter the lottery system in a 30- to 50-year lease agreement to a private company, and instead says he would like to see the government evaluate expanding the lottery and leveraging any additional revenues.

Acevedo Vila's lottery P3 failed to pass the legislature this year and would have helped the commonwealth balance its $1 billion deficit. A Standard & Poor's report pegged potential lottery concession revenues to be approximately $3 billion. The island receives roughly $150 million each year, on average, in lottery revenues.

"Perhaps privatizing it is not the best solution," the congressman said. "We could look into what we're doing today in our lottery, being more creative with different games and securitize the difference, and that may make more sense."

In looking at Puerto Rico's 7% sales tax, Fortuño said he would not replace the revenue stream with a revamped 6.6% excise tax, but keep the sales tax system in place. Acevedo Vila's initiative to decrease the sales tax to 2.5% and implement the excise tax failed in the legislature earlier this year and the governor has said he would revisit the issue in his second term.

Of the 7% sales tax, the first percentage point backs $2.6 billion of Puerto Rico Sales Tax Corp. bonds. While the governor's plan would keep that 1% revenue stream in place, if need be the agency has the ability to use additional sales tax revenue to cover debt service costs. While a new excise tax would also offer bondholders an extra cushion, investors balked at a change to the revenue stream.

"I believe it would send the wrong message in terms of our credit quality, and certainly one of my priorities in the bond market would be to continue to have access to the bond market as a critical component of our recovery plan," Fortuño said.

Bondholders may have to evaluate Puerto Rico differently if the territory were to ever become a state. Fortuño’s NPP party is pro-statehood, while the PDP party prefers maintaining its commonwealth status. Yet becoming a state would eventually change the triple-tax exemption that Puerto Rico bonds currently have. The congressman believes that if Puerto Rico were to become a state, it would jump-start the economy and offer publicity similar to when Hawaii became a state in 1959.

"I'm convinced that what happened in Hawaii would happen here as well," Fortuño said. "We would have an economic boom, there would be great opportunities for us, and our bonds would be attractive for different reasons. Actually, for the fundamental reasons that should be there, not just for tax reasons. So in that sense I am convinced that this would strengthen our economy."

One challenge that the island has is its dependence on petroleum, with the Puerto Rico Electric Power Authority using oil to fuel 72% of its system. The current administration aims to lower that ratio to 49% in 2010 and 32% by 2017 by incorporating more natural gas into the system. Fortuño said that if elected, he would pursue solar and hydropower energy sources "with a vengeance," with the goal of boosting the island's use of renewable energy to 35% within five years.

Before his term in Congress, Fortuño was a partner at Correa, Collazo, Herrero, Jimenez & Fortuño in San Juan, where he specialized in corporate finance and real estate law. In 1993, he served as executive director of the Puerto Rico Tourism Co. and president of the Hotel Development Corp. One year later, he became the first secretary of the Department of Economic Development and Commerce. He has a bachelor's degree from the School of Foreign Service at Georgetown University and a law degee from the University of Virginia.

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