Puerto Rico Gov. Alejandro García Padilla expects to deliver his annual state of the commonwealth speech this week without its usual centerpiece - a budget for the coming fiscal year.
It is 95% certain that García Padilla will deliver the speech this week to meet a constitutional requirement for timing, a staff member in the governor's office said Monday afternoon. The speech won't include a budget, because the legislature hasn't passed tax reform legislation that would determine how much revenue is available for the fiscal year starting in July.
The Puerto Rico Treasury and Budget Committee is holding hearings on a tax overhaul featuring a 14% value added tax and scaled back income taxes. The net effect of the changes has not been publicly announced. However, the governor's original tax reform was estimated to increase annual revenue by $1.2 billion when fully adopted. Puerto Rico's government, which ratings agencies have said has between $38 billion and $54 billion in net tax supported debt outstanding, lost its investment grades in early 2014.
It is expected that the House will pass a bill in the next few days, said Stephen Snowder, associate editor at Reorg Research Inc.
The Puerto Rico Senate will then take up the matter.
A commonwealth Treasury spokeswoman said Tuesday that April revenues will come in $100 million to $200 million short. This is because Puerto Rico revoked the patente nacional tax on gross receipts of large companies in December. The governor had expected these revenues would be replaced immediately with an increase in money generated by tax reform, she said.
Puerto Rico had been planning to sell in May a Puerto Rico Infrastructure Finance Authority bond of as much as $2.95 billion.
According to the El Vocero news website, the governor's chief of staff, Victor Suárez, said Monday that the governor wants three things to happen before Puerto Rico sells a bond that would prevent a government shutdown, apparently a reference to the PRIFA bond: the government needs to adopt a tax reform that generates adequate revenue in coming fiscal years; the governor needs to present a responsible balanced budget for fiscal 2016; and the government must adopt a five year plan of revenues and expenditures assuring a balanced budget.
Suárez's conditions for a bond sale are similar to the conditions Secretary of the Treasury Juan Zaragoza, Government Development Bank for Puerto Rico chairman David Chafey, and other GDB board members urged in a letter they sent to House and Senate members on April 21. The only deviation is that Suárez called for the presentation of a balanced budget while the GDB board called for its adoption.
Puerto Rico wants the PRIFA bond to, among other things, give a $2.2 billion boost of liquidity to the GDB. As of March 31 the GDB had $1.1 billion in net liquidity.
On Friday Standard & Poor's downgraded the GDB's long-term issuer credit rating to CCC from B-minus. S&P said that the GDB has nearly $900 million in notes maturing in fiscal year 2016 and that a successful PRIFA bond sale would be credit positive for the GDB.
S&P analyst Sunsierre Newsome said that either Puerto Rico or the GDB must access the credit markets in the next 12 months if the GDB is to avoid default and that it seemed questionable whether they will be able to do so.
On Monday S&P downgraded the underlying rating of the long-term debt of University of Puerto Rico to CCC-plus from B. S&P, citing its Friday downgrade of Puerto Rico's general obligation rating to CCC-plus from B. At least some of the university's debt is insured by MBIA /National Public Finance Guarantee.
