Assurances of fiscal stability and continuing debt service coverage followed a 19-count indictment against Puerto Rico Gov. Anibal Acevedo Vila yesterday, while the municipal bond community wondered how the charges - which include wire fraud and conspiracy - will affect the island's $1 billion structural deficit and its budgetary process.

Along with the first-term governor, 12 other individuals were charged by the U.S. Department of Justice in the 27-count indictment that involves suspected false statements, wire fraud, tax crimes, federal program fraud, and conspiracy related to Acevedo Vila's campaigns for resident commissioner, the island's non-voting congressional representative, and his 2004 gubernatorial campaign.

In response to the allegations, the Government Development Bank for Puerto Rico, the commonwealth's financing arm, released a statement assuring bondholders and the financial community that Puerto Rico would continue honoring its obligations and that officials were continuing with business as usual.

"As fiscal agent of the [commonwealth] and liaison with the investors and financial community, the [GDB] reassures all holders of Puerto Rico bonds that today's developments have no impact on the fiscal affairs of the commonwealth and its instrumentalities or the payment of any obligations they have issued," the bank said. "The good faith, credit and taxing power of the commonwealth are irrevocably pledged for the prompt payment of the principal and interest on the [general obligation] bonds. The constitution of Puerto Rico provides that public debt of the commonwealth, including its bonds, constitute a first claim on available commonwealth revenues."

The island has $46 billion of total outstanding debt, including $8.16 billion of GO bonds. Standard & Poor's and Moody's Investors Service rate the credit BBB-minus and Baa3, respectively. Fitch Ratings does not rate the island.

Moody's and Standard & Poor's said there would be no immediate credit action taken on the commonwealth, as the charges of improper use of campaign funds does not directly affect Puerto Rico's fiscal state. Yet the island has other challenges it must address, first and foremost a $1 billion structural deficit for fiscal 2009, which begins July 1.

Earlier this month, Acevedo Vila released his $9.48 billion fiscal 2009 budget and proposed filling the budget gap with a portion of proceeds from a potential long-term lease of the island's lottery system and possibly selling $500 million of debt backed by delinquent tax receipts the government anticipates receiving through a more efficient collection system.

"We'll be observing how the budget moves through the Legislature," said Standard & Poor's analyst, Horacio Aldrete. "There's still time for the Legislature to approve the budget on time and we'll be monitoring that."

Yet lawmakers could have less time to work on next year's fiscal plan if the Legislature chooses to impeach the governor. Calling this a "very tragic situation for all the people of Puerto Rico," Senate President Kenneth McClintock said Acevedo Vila's indictment will not have any effect on lawmakers' capacity to approve a budget and also to honor Puerto Rico's commitments, yet acknowledged that a possible impeachment process by the Legislature would affect the movement of the budget through the two legislative chambers.

"If there were any constitutional procedures, that would distract the Legislature for awhile," McClintock said.

Along with the fiscal 2009 budget, commonwealth officials have been working on refinancing or converting more than $600 million of auction-rate securities into variable-rate mode or fixed-rate bonds and closely watching the market to see when best to price $3 billion of taxable pension bonds. The GDB addressed those developments in its press release yesterday.

"Puerto Rico's plan of finance remains unaltered, including our P3 strategy, variable rate restructuring, and upcoming bond transactions," according to the GDB statement.

In addition to those issues, the GDB has been working with the administration on possibly reducing the island's 7% sales tax to 2.5% and replacing that revenue loss with a revamped 6% excise tax. Bondholders have been observing the issue carefully as the island has $2.6 billion of debt backed by a dedicated 1% sales-tax revenue stream, with the remaining sales-tax receipts providing additional support if the 1% ever failed to cover debt service costs sufficiently. While McClintock and House Speaker Jose Aponte have expressed strong opposition to the revenue change, investors yesterday said Acevedo Vila's indictment could end his proposed change to the sales-tax for good.

"It's a shame this happened, but from a bondholder's perspective if this takes his reduction of the sales tax proposal off the table, which it probably does, then it's actually going to help those bonds," said Bob MacIntosh, vice president and co-director of Eaton Vance's municipal bond group.

The charges against the governor include allegations that Acevedo Vila, 48, and key staff members within his campaign committee solicited and received donations from conduit contributors, or gifts made by one person in the name of another, and also failed to report the total amount of monies the committee received in political donations.

In addition, the Department of Justice claims the governor instigated meetings between cooperating donors and several government departments, including the Executive Office of Management and Budget, the Puerto Rico Housing Department, and the Puerto Rico Pension Fund in order to procure business opportunities with those government divisions, according to the 55-page indictment.

The DOJ in San Juan, along with the Federal Bureau of Investigations have been probing the governor's campaign finances for more than two years, during which time Acevedo Vila, a member of the Popular Democratic Party, has denied any wrongdoing and has said that the investigation is the work of political rival U.S. Attorney Rosa Emilia Rodriguez and current Resident Commissioner Luis Fortuno, a member of the New Progressive Party. Fortuno and Acevedo Vila now face each other for the island's top political seat in the upcoming general elections in November.

"This action, politically motivated and timed, is the result of three years of leaks, rumors and public spectacles designed to harm me," the governor said yesterday in a prepared statement. "I want to reassure the people of Puerto Rico that I have never asked or accepted a donation in exchange for any government contract. Also, I have never allowed misuse of public funds."

Acevedo Vila was the island's Resident Commissioner from 2001 through 2005, the year he became governor.

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