In his first year in office last year, Puerto Rico Gov. Luis Fortuño reduced government spending and cut the island’s payroll while at the same time raising taxes and implementing property taxes.

The goal at that time was to retain Puerto Rico’s investment-grade ratings. High debt levels and recurring structural deficits threatened the ratings, which were BBB-minus from Standard & Poor’s and Baa3 from Moody’s Investors Services. Following Moody’s recalibration, the rating is now A3.

While Puerto Rico continues to have its fiscal challenges, Fortuño Monday evening was set to release a fiscal 2011 budget that does not include any tax hikes or implementation of new taxes. Instead, the administration aims to realize additional revenue from its ongoing tax-compliance initiative to generate needed funds to help balance the budget.

In a telephone interview with The Bond Buyer before delivering his fiscal 2011 budget address before a special session of the Legislature, the pro-statehood governor stressed that if his budget is adopted, fiscal 2011 expenditures would come in $2 billion below fiscal 2009 spending levels. Fiscal 2011 begins July 1.

“The fiscal situation has improved dramatically, but at the same time what it means is that we have to continue maintaining our fiscal discipline as we move forward and as we begin experiencing the first clear signals that our economy is starting to move again,” Fortuño said in the interview.

“So it is key that we maintain the course and that’s exactly what we intend to on the budget side. And we intend to, at the same time, continue to budget responsibly in terms, not just of expenses, but also collections expected. And thirdly, we will continue to implement all the economic development strategies that should generate additional economic activity.”

Fortuño’s fiscal 2011 budget proposes spending $9.2 billion, which includes $8.2 billion of revenue and another $1 billion of deficit financing through sales tax bond proceeds to help support operating costs.

In fiscal 2010, the administration budgeted for $2.5 billion of sales tax bonding to finance recurring expenditures and one-time spending initiatives such as a local stimulus package to help boost the island’s economy. Carlos Garcia, president of the Government Development Bank for Puerto Rico, said the commonwealth does not plan on using the full $2.5 billion in this current fiscal year.

The $8.2 billion of anticipated fiscal 2011 revenue includes $7.6 billion of the current tax base along with $550 million of additional revenue from increased collections. Officials expect to receive $240 million more through better tax compliance, and another $220 million from cracking down on bar owners and other establishments that do not pay taxes on video lottery revenue.

“The secretary of the Treasury charges a license fee for them, but not all of them report that they have a machine,” Garcia said in a phone interview. “And, they don’t report all the revenues that they generate. So basically what we’re doing is expanding the tax compliance of this industry.”

In addition, officials anticipate collecting $89 million next year from an ­initiative for the self-assessment of property taxes.

For the governor and Garcia, reducing Puerto Rico’s spending has been crucial.“We are presenting a budget that would be $2 billion less than the expenditure base of fiscal 2009,” Garcia said.

The GDB president anticipates restructuring general obligation debt and Puerto Rico Public Building Authority bonds to ease fiscal 2011 debt service costs. The commonwealth also did such refinancings in fiscal 2010.

Garcia said he anticipates the ­government will complete its more than 14,000 employee layoffs by June 30. Officials are still on track to file before the end of 2010 a major tax-reform initiative that would lower individual and corporate taxes while also ending certain tax breaks and subsidies.

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