Puerto Rico’s fiscal year 2019 revenues were 34.5% higher than the Oversight Board had originally projected, possibly strengthening bondholders’ hand in negotiations.
On Tuesday the Puerto Rico Treasury reported the General Fund revenue of $11.38 billion, 22% higher than the fiscal year 2018 revenue level.
“The revenues came in very strong, beating every estimate coming out of the [board]. It may make it more difficult to extract concessions from bondholders with how significantly they did beat estimates," said Cumberland Advisors Portfolio Manager Shaun Burgess. "Bondholders are likely going to point to them in negotiations as justification to accept less of a haircut.”
The biggest revenue categories in the fiscal year were corporate taxes with $2.49 billion, sales and use tax with $2.3 billion, individual income taxes with $2.22 billion, and foreign corporate profit taxes (Act 154 tax) with $2.08 billion. Puerto Rico’s fiscal year 2019 ran from July 1, 2018 to June 30, 2019.
Sales and Use Tax revenue totaled $2.81 billion, with most of the difference from the $2.3 billion figure above due to money going to Puerto Rico Sales and Use Tax (COFINA) bondholders.
The board on Oct. 23, 2018, raised its General Fund revenue projection to $10.24 billion and raised it again on May 9 to $10.7 billion. Actual revenues outstripped both estimates.
The tax categories that most outperformed the October 2018 estimate in dollar terms were corporate taxes with $577 million and foreign corporate (Act 154) taxes with $252 million.
Treasury Secretary Francisco Parés Alicea said it was the third consecutive fiscal year that General Fund revenues had come in above revenue projections. Despite being hit by two very strong hurricanes in late summer 2017, Puerto Rico’s General Fund revenue in fiscal year 2018 was 1.5% above budget.
Parés Alicea attributed fiscal year 2019’s strong results to four factors: “economic activity associated to recovery and reconstruction efforts after the passage of Hurricanes Irma and Maria; the New Tax Model that became effective in January 2019; the successful implementation since last December of the second phase of the Internal Revenue Unified System (SURI, by its Spanish acronym); and the Taxpayer Rehabilitation Program.”
Parés Alicea also praised the work of Treasury Department workers.
“The hope is that these revenues will continue to grow, or at least be maintained, at these increased levels." said Howeard cur, director of municipal research at Evercore Wealth Management Director of Municipal Research. "However, as pointed out in the communication, a large portion of the revenues are attributed to recovery and reconstruction efforts related to the hurricanes, and you have to assume that this effect will dissipate once rebuilding slows.
“The question for the immediate future in regards to this issue is if the federal government will withhold additional recovery monies until the political turmoil is over,” Cure said. “Also will federal monies be withheld based on continued investigations into how government programs were conducted?
“Also noted was the fact that a more modern Internal Revenue Unified System (SURI) to collect taxes and increase compliance helped in revenue collections and that is welcomed,” Cure said. Cure said he was curious about federal tax laws’ impact on the island and what changes in these laws are being contemplated.
