Puerto Rico Gov. Alejandro García Padilla's State of the Commonwealth speech won praise from municipal analysts, even though some quibbled with his claim that the budget would be balanced in the coming fiscal year.
In his speech on Tuesday evening García Padilla also presented a variety of economic growth measures and promised to pay back his government's debt, moving to reassure investors after all three rating agencies cut Puerto Rico to junk before its $3.5 billion general obligation sale in March.
Janney Capital Markets managing director Alan Schankel said the proposed fiscal 2015 budget is Puerto Rico's first balanced budget in 20 years.
"Significant fiscal and economic challenges remain, but it is important to emphasize the immense progress made in the past 18 months," Schankel wrote. "With a budget gap of $2.2 billion [projected in the middle of] fiscal year 2013, few would have predicted budget balance two years later. The government's positive track record in the current fiscal year reflects well on the likelihood of success in achieving balance in the coming fiscal year."
While the government will partly rely on $270 million in capitalized interest from its March bond sale to pay debt service in fiscal 2015, Puerto Rico has still made a definite improvement from earlier years' budgets, said Axios Advisors managing partner Triet Nguyen.
"The 2015 budget proposal appears to be a positive development for the commonwealth, based on its effort to move toward structural balance, its call for spending restraint and the avoidance of new deficit financings," Moody's Investors Service vice president Emily Raimes said. "Proposals aimed at restraining costs in the commonwealth's electric and water utilities, as well as other public corporations, could eliminate historic reliance on support from the commonwealth's general fund. While the budget may constitute a significant, positive step if enacted, this financial plan still leaves the commonwealth with many economic and financial challenges."
The governor made no mention of restructuring the debt, Nguyen said. This may alleviate market concerns about the commonwealth's general obligation debt but may raise concerns about the debt of the public corporations. The governor's budget will not provide support to the public corporations and they will have to stand on their own two feet, he said.
U.S. Trust managing director David Litvack was cautious. "We need to see more details," he said. "A budget can be structurally out-of-balance, even if it does not call for selling new bonds. We will also need to wait and see what kind of drag such fiscal austerity will have on Puerto Rico's economy. That's really our biggest credit concern."
García Padilla titled his one-hour state of the commonwealth speech to the Puerto Rico legislature, "Debts of the Past and Debts with the Future." Regarding what he said was a $70 billion Puerto Rican government debt that past generations incurred, García Padilla said: "Let's assume that responsibility and make clear to the world that this country pays."
In the speech the governor claimed that his proposed fiscal 2015 budget was balanced, in contrast to years of government deficits. He said the proposed budget would increase the payment of debt to $775 million from $200 million in the current fiscal year. "Compatriots, we are finally meeting the debt of the past," he said.
The current fiscal year's budget was originally approved with a deficit of $820 million or 7.9%. Because of additional steps taken during the fiscal year, that deficit is now expected to be $640 million.
The proposed budget, including debt service spending, is for $9.64 billion. This is down from $10.35 billion in the current fiscal year.
The government cut $1.4 billion in spending compared with last year's budget and to increases that had been planned. García Padilla said the government made $547 million in operating cuts without affecting citizens; avoided $446 million in projected expenditures in the next fiscal year; cut $265 million due to reduced reliance of the public corporations on the general fund; and achieved $191 million in reductions due to discipline in controlling payroll and certain special assignments.
The budget does not propose laying off employees, García Padilla said.
The government is eliminating 25 agencies and moving their responsibilities to other agencies. It is proposing closing several public schools and having those students go to new different schools. The cost of transporting students to schools is being shifted from the commonwealth to the municipalities.
The governor also spoke of the need for economic development saying, "it's not just time to pay; it's time to build It's time to pay the debt we owe to the future."
García Padilla proposed steps to promote bioscience and renewable energy, improve higher education to meet the needs of the new economy, reform tax laws, and shift more government processes to computers.
To simplify the permitting process, he noted that the government's business permitting office is now giving interim permits within 24 hours.
Near the end of his speech, the governor talked about the commonwealth's current infrastructure projects. These include building a train line from San Juan to Caguas, improving Puerto Rico's central and regional airports, and updating ports 1, 2, and 4 in San Juan. He also said Puerto Rico will convert the Aguirre electrical plant to natural gas and build a natural gas port there.
In an interview Wednesday, Carlos Rivas, the director of the Puerto Rico Office of Management and Budget, acknowledged that because of the recent bond sale's capitalized interest, the budget was not technically balanced. Puerto Rico was clear about the interest in its bond sale's official statement, he said. "But we still believe [the budget] is a very big milestone for Puerto Rico."
Puerto Rico Secretary of the Treasure Melba Acosta Febo said that the commonwealth was bringing the deficit down from what at one point had been a projected $2.2 billion shortfall in fiscal year 2013 to $270 million in fiscal year 2015.
Rivas said that the glass should be seen as 90% full rather than 10% empty. Acosta Febo was already working on handling the remaining deficit in fiscal year 2016's budget, Rivas said.
Rivas said the government would save $460 million through its passage of a fiscal emergency law, which it was submitting today.
The law will allow it to overrule government contracts with its workers and freeze wages that had been expected to rise. It will also allow it to overrule laws that would normally dictate higher contributions to the University of Puerto Rico and allow the government to continue to keep contributions at the current level.
The $191 million cut is due to the fact the government will have fewer employees than anticipated, Rivas said. There will be losses due to retirements and other contracted workers will no longer be employed.
The budget is not just about austerity and cuts, Rivas said. In some ways it will improve services, consolidate schools, and make government more agile and efficient, he said.
Puerto Rico's legislature has until the end of June to amend and approve a budget. The governor would have to sign the budget for it to go into effect.
On Wednesday government released a 116 page, four year plan to revive the economy.
