GDB President Stresses Need for Quick Action on Deficit

SAN JUAN -  First things first.

So says Carlos Garcia, president of the Government Development Bank for Puerto Rico. The bank yesterday kicked off a two-day credit conference to highlight the commonwealth’s strengths to bondholders, municipal bankers, and other market participants, and to also show that officials are working toward closing the island’s $3.2 billion deficit in its current $9.48 billion fiscal 2009 budget.

Now that the federal stimulus package is signed, sealed, and delivered, Puerto Rico has a better idea of how it can move forward locally to address the sizeable budget shortfall that officials believe is the largest state-level deficit on a percentage basis in the country. The commonwealth will gain $5 billion from the federal rescue package, with 20% of those funds supporting capital projects and other funds going to programs such as Medicare and education.

In addition, Puerto Rico will offer its own $500 million local stimulus package to help boost its economy even further. Details of that plan will be coming in the next few weeks, officials said.

With the federal support on its way, Garcia said the commonwealth can move forward to close the $3.2 billion budget gap.

“We want to be sure the people understand that the government will take action, that we have plans,” Garcia told The Bond Buyer during a break at the conference. “But this is no longer about plans. There’s a sense of immediacy that there are actions that need to be taken in order to balance the budget, meaning a reduction of expenses and implementation of certain additional tax measures. That analysis is in a very advanced stage, having received this week already a better sense of what will be the impact of the federal stimulus program and being able now to coordinate it with the local stimulus program. Now we have all the ingredients to be able to present to the governor and to the administration in the next 30 to 45 days what should be the actions that should be taken.”

And those budget alterations will come before the GDB heads to market with a new sales-tax bond deal to help the central government pay vendors and address loans the commonwealth owes the GDB. Garcia said his team is reviewing underwriting proposals for the deal, but officials have yet to select a banker.

“We haven’t made any decisions,” Garcia said. “We received some proposals that were interesting, but we get the sense that, in general, the market is expecting the government to take action first before there’s a significant commitment to do a large financing transaction. So in that sense, we will continue to move along, but we would expect that it may be the best time after we have already implemented the plan already outlined, before we carry out the significant financing plan. That’s the sense that I get from different conversations with investors.”

Last month, Gov. Luis Fortuño ordered government agencies to cut their budgets by 10%, implemented a hiring freeze and reduced the commonwealth’s payroll. The governor, who took office Jan. 2, also announced his administration would evaluate potential tax increases on gasoline, cigarettes, alcohol, and cell-phone use. It’s those possible revenue enhancers that Garcia and others are currently reviewing.

The GDB organized the conference to reach out to underwriters and investors during a time of tight credit markets and growing budget challenges for the island. More than 180 people attended, including at least half of the top 20 principal bondholders from Puerto Rico, Garcia said. The GDB president pledged the contact will continue.

“This is not just a blitz effort, this is an ongoing effort,” Garcia said. “We understand that given our circumstances we will need to have access to the markets. And in order for us to be able to continue to earn the trust of investors, we need to do an outreach that is well beyond what anybody has done in the past. So we do expect that we will continue to make a very significant outreach and to provide information as quickly as it develops and as quickly as it can be discussed.”

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