“Note: Due to lack of clarity from Puerto Rico officials about how they were treating $575 million in debt service refinancing in its budget and deficit calculations, this story in its original form provided an incorrect deficit percent. The fiscal 2014 deficit is 7.9% of planned expenditures, not 8.4%, as the story had stated.”
Puerto Rico Gov. Alejandro García Padilla signed a fiscal 2014 budget with a 7.9% operating deficit on Sunday.
The Puerto Rico government anticipates spending $10.35 billion in fiscal 2014. Its official budget for the fiscal year is $9.77 billion, which does not include $577 million of debt service restructuring.
The fiscal 2014 budget will decrease planned refinancings of Puerto Rico’s general obligation bonds to $575 million in fiscal 2014 from $775 million in fiscal 2013 and decrease deficit financing to $245 million in fiscal 2014 from $332 million in fiscal 2013, according to Gov. García Padilla. Taken together, Puerto Rico plans to seek $820 million in bonds for the operating budget in the coming twelve months.
The operating deficit of 7.9% ($820 million/$10.35 billion) for fiscal 2014 will be a decrease from the roughly 13.1% operating deficit ($1.3 billion/$9.9 billion) that occurred in fiscal 2013, which ended June 30. According to Moody's Investors Service Puerto Rico had a $2.1 billion structural deficit if non-recurring revenues are removed from the fiscal 2013 revenues. An example of a non-recurring revenue source was a tax amnesty in fiscal 2013 that increased tax revenues.
The budget includes several tax measures raising a total of $1.38 billion in new revenue, a source close to the governor said.
These tax measures include a new business-to-business sales tax for certain industries, a tax on business sales above $1 million, and an increase in the tax rate on corporate profits.
The budget’s tax measures are “very encouraging,” said H. J. Sims senior credit analyst Richard Larkin.
“It is not Gov. García Padilla’s original plan, but achieves the same purpose,” he said.
“Puerto Rico’s picture is not pretty …, but I continue to see the commitment to restoring fiscal balance from the new Gov. García Padilla, following the former Gov. [Luis] Fortuño’s austerity budgets,” Larkin said.
“I told them I would keep my word and I am doing that today,” Gov. García Padilla. “This has been a difficult process, intense, dynamic, participatory and deeply democratic, typical of open government and transparency based on dialogue and mutual respect. It has been a collaborative effort between the legislative and executive branch but what is even more significant, we have considered and heard a diverse group of interests in order to continue the path of reconstruction.”
The Puerto Rico economy continues to struggle. On Friday the Puerto Rico Government Development Bank said that the island’s economic activity index in May had a 3.4% decline from the previous year.
The GDB compiles the economic activity index. Studies have shown that the index is highly correlated with the commonwealth’s gross domestic product. The index is composed of four indicators: total payroll employment, total electric power consumption, cement sales, and gas consumption.
Of the four measures, gas consumption showed the least slippage and is about the same as in May 2012. Both non-farm payrolls and electric generation were down about 3%. The number of bags of cement sold plunged 24% from May 2012 to May 2013.
“Puerto Rico’s economy is not faring well at all,” said Federal Reserve Bank of New York president William Dudley on Thursday.
As bad as May’s performance was, it was an improvement from April when the index was down 3.5% from the previous April.