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Puerto Rico Bond Battle

Puerto Rico lawmakers are debating whether to slash the island's $450 million fiscal 2008 bond bill by $175 million, an amount officials originally pegged to help pay down debt the commonwealth owes the Government Development Bank for Puerto Rico.

Rep. Angel Perez, head of the House Budget Committee, said the lower chamber may pass its version by mid-May. House members are still deciding whether to include $175 million in the general obligation borrowing plan to help pay down more than $1.15 billion of Public Improvements Fund debt the government owes the GDB, or meet that obligation by tapping into $240 million of funds that the Treasury Department gained from a one-time tax measure. In 2006, lawmakers approved a 5% flat-tax on retirement-fund withdrawals, a move that generated $240 million of revenue for the commonwealth.

The Senate approved its version in December, passing the measure onto the House, and even increased Gov. Anibal Acevedo Vila's bonding proposal by $25 million to $450 million. The pro-statehood New Progressive Party controls the island's legislature while the governor is a member of the Popular Democratic Party, which supports maintaining Puerto Rico's commonwealth status.

House NPP members prefer using the $240 million of revenue to give the GDB $175 million towards the extra-constitutional debt rather than selling bonds, and if approved, would cut the bond bill to $275 million.

"If I have $175 million in my right pocket, why do I have to take a loan to pay my obligation? I have the money," said Speaker of the House José Aponte.

According to Perez and Aponte, lawmakers approved the one-time 5% flat-tax to generate funds in order to help pay back a $740 million loan the GDB gave to the government during the island's fiscal crisis in the spring of 2006, when officials shut down all non-essential services for two weeks.

Administration officials would now like to use the $240 million to help balance the fiscal 2008 budget, which Perez said has a deficit of roughly $500 million. Fiscal 2008 ends June 30. House NPP members do not support using the $240 million to help fill that budget gap and believe the government should use the revenue for its original purpose, paying down debt it owes to the GDB.

"What we're saying is let's use that amount of money and pay the $175 million and we could issue a lower amount of debt," Perez said.

Conversely, Acevedo Vila has criticized the legislature for not moving forward with the fiscal 2008 bond bill, as administration officials would like to see the bond proceeds help boost the island's economy and support needed capital projects. In addition, the GDB anticipates yearly payments of $175 million via the annual GO bond bill, with that amount subject to appropriation.

"This action only denies Puerto Rico a much-needed economic stimulus in this time of recession," GDB president Jorge Irizarry said before the Senate Treasury Committee and the House Budget Committee on April 1. "It also jeopardizes the fiscal health and credit rating of the GDB by denying the funds to pay the loans incurred by the Public Improvements Fund with the GDB."

Along with the $1.15 billion of PIF debt, Puerto Rico has $7.68 billion of appropriation debt, as of Dec. 31, 2007. The island has $8.49 billion of outstanding GO bonds.

Standard & Poor's and Moody's Investors Service rate Puerto Rico BBB-minus and Baa3, respectively. Fitch Ratings does not rate the credit.

As of April 25, the yield on 30-year commonwealth GO bonds ranged from 2.77% in 2009 to 5.77% in 2038, with the yield closest to that day's Municipal Market Data's triple-A curve in 2009, at 100 basis points above the curve. Yields are widest to the spread from 2012 through 2018, at 130 basis points higher on each maturity.

In separate news, the PDP Sunday approved the nomination of Acevedo Vila for the gubernatorial seat in the island's upcoming general elections in November. Many speculated that the current governor would relinquish his re-election campaign after the U.S. Department of Justice charged Acevedo Vila on March 27 with illegal use of campaign funds, wire fraud, and conspiracy, among other allegations, in a 19-count indictment.

The governor has maintained his innocence since the charges became public and throughout the prior two-year investigation. He will face Luis Fortuno, the island's current resident commissioner and a member of the NPP.

 

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