Puerto Rico could issue roughly $1.4 billion of sales tax bonds over the next two years to help meet cash-flow needs — just one of the recommendations a special fiscal advisory board announced Thursday to help close a $3.2 billion deficit by fiscal 2013.
The proposed sales tax bonds require legislative approval. Gov. Luis Fortuño stressed that the borrowing does not involve an increase to the island’s 7% sales tax, but would increase the Puerto Rico Sales Tax Financing Corp.’s 1% dedication to 2%.
Banco Popular chief executive officer Richard Carrion, who heads the 14-member panel, said the Fortuño administration will now review his committee’s suggestions, including the proposed sales tax borrowing. It is unclear how soon the commonwealth could sell the bonds, as the administration needs to review the plan and file legislation before the transaction reaches a volatile municipal market.
“It really depends on how these recommendations fair with the governor’s economic team as we just handed it to them today and secondly on market conditions,” Carrion said in a phone interview. “There would have to be some legislation passed, but essentially it’s really market conditions.”
The Sales Tax Financing Corp.’s current 1% dedication backs $5.2 billion of debt rated A-plus by Standard & Poor’s and Fitch Ratings. Moody’s Investors Service rates the credit A1. Those ratings are higher than Puerto Rico’s general obligation credit ratings, which are one notch above investment grade.
While the government may move forward with additional sales tax debt, another borrowing plan may not advance. The previous administration and Fortuño’s transition team were evaluating leveraging delinquent tax receipts to help reimburse the Government Development Bank for Puerto Rico, the island’s fiscal adviser, for $700 million that the bank extended to the central government in 2008. Carrion said that under current market conditions, the tax receivables deal would not generate the goal of $1 billion of bond proceeds.
The government may borrow an additional $1 billion from the GDB to help meet payroll expenses and obligations to government suppliers, pending legislation. Carrion said additional revenue via temporary business tax increases of 5% and a two-year moratorium on corporate tax credits, along with spending reductions, would allow the commonwealth to repay the GDB for the $1 billion loan within two years. Those corporate tax changes require legislative approval as well.
In addition, Fortuño called for all government agencies to cut their budgets by 5% and immediately imposed a hiring freeze to help reduce government spending. The administration will also review potential tax increases for gasoline, cigarettes, alcohol, and cell-phone use.
“There’s some tough things in here, but we tried to make it as balanced as possible for all sectors,” Carrion said. “Given the economic environment we felt it was the best package possible.”
Fortuño, who took office on Jan. 2, said Puerto Rico is in “a state of emergency” due to the sizeable $3.2 billion deficit within the current $9.48 billion fiscal 2009 budget, which began July 1.
“Make no mistake that the actual $3.2 billion deficit is the largest among all states, in terms of percentage,” Fortuño said in a press release. “As I mentioned in my inaugural address, there’s no doubt that we will face a very serious fiscal crisis, but we shall overcome it. The different measures that we will be taking during the next few days will grant us the right to hope.”
