Puerto Rico Gov. Luis Fortuño yesterday signed into law three bills to reduce government spending and raise additional revenue to help close a $3.4 billion deficit, marking the second time this year that lawmakers have received and approved legislation within days.
The initiatives allow officials to move forward with borrowing plans, including a potential $300 million tobacco bond deal, an upcoming $250 million to $500 million sales-tax bond transaction, and restructuring of prior debt, according to Fernando Batlle, executive vice president for financing and treasury at the Government Bank for Puerto Rico, the island's fiscal agent.
The commonwealth will also reduce its payroll of 300,000 employees by 30,000, temporarily raise corporate, personal, and property taxes, and suspend business tax credits.
"Now you can say that there is a plan in place to reduce expenses and to also increase revenues," Batlle said. "And that plan needs some financial measures which are also in place, and so it's not just going out there and financing for financing's sake, it's part of the overall plan to bring Puerto Rico's budget back in balance."
The administration and legislative leaders, who are all from the same political party, the New Progressive Party, acted quickly on the fiscal reform to help retain the island's credit rating, which is just above junk status. Fortuño filed the legislation on Tuesday and lawmakers approved the bills Friday evening.
Moody's Investors Service analyst Edith Behr said that while the enactment of the governor's fiscal plan is an important step, the results of Fortuño's agenda remain to be seen.
"We think this is a positive development," Behr said. "It represents follow-through on the governor's proposals. We still need to see how well these corrective actions are implemented."
Officials are working on possibly leveraging a $1.00 per-pack cigarette-tax hike, with that increase generating roughly $70 million of additional annual revenue and potentially backing a tentative $300 million tobacco bond deal. The transaction is under consideration and subject to market conditions, Batlle said. Officials have yet to release a request for proposals for underwriters.
This would be the island's first bond sale backed by tobacco revenue. Puerto Rico already has about $1.3 billion of outstanding tobacco settlement bonds through its not-for-profit entity, the Children's Trust. Batlle said officials are hoping to craft a transaction that would garner a rating of single-A.
In addition, lawmakers approved increasing the Puerto Rico Sales Tax Financing Corp.'s sales-tax receipt allocation. The fund will gain an additional three-quarters of a cent from the island's seven-cent sales tax.
In January, Fortuño signed into law a bill to increase the fund's revenue stream from one cent to two cents to help support $4 billion of bonds to be sold in the next few years. That allocation will now reach 2.75 cents. Puerto Rico's sales tax bonds are called COFINA bonds, under its Spanish acronym.
Boosting COFINA's trust gives more revenue power to Puerto Rico's strongest credit, which carries single-A ratings from all three rating agencies. In contrast, Standard & Poor's and Moody's rate the commonwealth BBB-minus and Baa3, respectively.
Batlle said the three-quarters-of-a-cent allocation will increase the fund's capacity, yet officials plan on issuing smaller transactions on a more frequent basis, due to market conditions. Batlle anticipates finalizing this week the underwriting team for the $250 million to $500 million deal. Pricing will depend on market conditions.
Officials will also refinance previous debt, including commonwealth general obligation bonds and Puerto Rico Building Authority debt to help ease debt service costs in the short term. The refinancings will not generate debt service savings, but restructure principal and interest payments in order to alleviate debt service costs in the next couple of years.
While not fiscally ideal, Batlle said the restructuring will help Puerto Rico as the government cuts its spending by $2 billion and implements tax increases on the island.
"If it's used in a vacuum [in order] to not make the decisions you have to make and just push the problem into the future, I think that's not responsible fiscal management," Batlle said. "In the context of what we're proposing, which is that we're putting a plan together for an overall $2 billion expense reduction combined with revenue increases and then a little bit of this cash-flow relief, then I think it's something that is reasonable to do."
This is the second time this year that the legislature has passed fiscal legislation within days of Fortuño filing the measures. House Minority Leader Hector Ferrer, who is also president of the Popular Democratic Party, said that only one public hearing was held last week to discuss the recent measures and as a result most lawmakers do not understand the potential negative impact of raising multiple taxes all at once.
"Basically it's not a stimulus package because it's a tax-increase package, which they're hoping to get enough money to bail out the government," Ferrer said. "But if you put a burden with that kind of weight on the consumers, what you're going to do is in the long run, you're going to have a contraction of the economy because the consumers are going to stop spending."