A new fiscal reform panel Tuesday will release its initial proposals to help Puerto Rico regain its financial footing as it faces what many anticipate will be a $2 billion deficit by the end of this fiscal year.
Treasury Secretary Angel Ortiz last month announced during a public hearing that the $1 billion deficit could grow to $2 billion by the end of fiscal 2009 on June 30, and that year-to-date revenue collections are $53 million below projections, according to Angel Perez, vice president of the House Treasury and Financial Affairs Committee.
Ortiz testified before a transitional committee to prepare Governor-elect Luis Fortuño, a member of the New Progressive Party, and his incoming administration.
Within two weeks of winning office, Fortuño formed a 14-member fiscal advisory and economic reconstruction committee headed by Banco Popular chief executive officer Richard Carrion to evaluate how best to tackle Puerto Rico's fiscal woes.
That team on Tuesday will present preliminary suggestions for addressing the immediate budget challenges as well as long-term goals for fiscal stability, according to Teruca Rullan, spokeswoman for Carrion. The committee will release its final proposals in March.
Rating analysts, who assign low investment-grade ratings to Puerto Rico, are watching to see how Fortuño will address the island's structural deficit.
To help with cash flow needs, the Government Development Bank for Puerto Rico has been extending loans to the commonwealth, with those advances to total $500 million by the end of this month.
Current plans include leveraging delinquent tax receipts to repay the GDB for the short-term loan, although officials have postponed that bond sale until next year due to market conditions.
Whether the government will continue with the tax receivable deal or substitute it for another type of revenue generator remains to be seen.
"We haven't seen that [bond deal] yet so all of that still has to either be done or replaced with some other solution," said Emily Raimes, an analyst at Moody's Investors Service. "And with the credit markets and the situation that they're in, it's going to be more difficult to do that kind of transaction. So I think they really have their work cut out for them now and it's a difficult time to be coming into office, but that's true across many states."
Gov. Anibal Acevedo Vila's fiscal 2009 budget proposal included a plan to lease the island's lottery system and use $500 million from that transaction, along with $500 million of proceeds from the planned tax receivable bond deal, to close the $1 billion deficit.
NPP lawmakers earlier this year nixed the proposal to lease the lottery and instead increased the delinquent tax transaction to $1 billion in order to balance the current budget.
Fortuño and other NPP members have said they prefer expanding the lottery and bonding against additional lottery revenues rather than leasing the entity.
If the system were to generate an additional $50 million per year, the island could issue $500 million of lottery bonds, according to Giovanni La Russa, economic advisor to the House Treasury and Financial Affairs Committee. That panel formed last month from a merger of two prior House committees, the House Budget Committee and the House Treasury Committee.
While the $1 billion shortfall still remains, underperforming revenues and a softening economy add to the island's challenges. Standard & Poor's analyst Horacio Aldrete said that the rating agency is in a "wait-and-see mode" until the new administration announces its fiscal plans.
"Our focus will be on the response of the government of Puerto Rico to that potential increase in the shortfall for this fiscal year," Aldrete said. "There's not a whole lot that Puerto Rico can do in terms of the revenue picture, but what we look forward to hearing is what the response will be on the expenditure side of the budget and what measures they will take to address that deficit. And that's something, at this point, that we just don't have yet."