Puerto Rico Gov. Anibal Acevedo Vila last week released a $9.48 billion budget for fiscal 2009, including a proposal to lease the commonwealth's lottery system to generate $500 million of revenues to help balance next year's budget.
Officials are pegging fiscal 2009 revenues to reach $8.48 billion after taking into account certain tax credits, yet expenditures are expected to total $9.48 billion, according to a press released issued by the Government Development Bankfor Puerto Rico, the island's financing arm.
To help fill that gap, the governor will file legislation for two initiatives that could bring in $1 billion of revenue for the commonwealth. The first proposal calls for officials to enter the island's lottery system into a concession agreement, with that transaction potentially including $500 million of an up-front payment going towards next year's budget and remaining proceeds going into a fund that would generate interest equal to what the government receives now in yearly lottery receipts.
During the past five years, Puerto Rico has received $150 million, on average, in annual lottery revenues, according to Emily Raimes and Robert Kurtter, analysts at Moody's Investors Service.
"I think the idea is they would do this lottery concession, take some of the money up front to plug the budget gap, and put the rest in some sort of a trust that would throw off a revenue stream," Kurtter said. "The goal is roughly akin to roughly what the lottery generates now, which would be used to fund current operations of things that they currently use now for health and other things."
The second initiative would generate an additional $500 million if Puerto Rico were to leverage delinquent income, corporate, and potential sales tax receipts that it anticipates collecting in the future.
"They have a lot of tax receivables going back about five years and the idea is that they have sort of a calendar with which they could collect some of those receivables using the manpower they have," Raimes said.
Both the lottery concession bill and the tax receivable financing proposal need to pass through the Legislature before the commonwealth can proceed with the proposals. Raimes and Kurtter said the two plans take future revenues to help address current operating expenses, although the strategy to borrow against delinquent tax revenues that the island will collect in the future still has to be worked out to determine whether it would qualify as deficit financing.
"I think the receivables one, we would have to think about it a little more," Kurtter said. "Until we saw really what they were doing and how much they were borrowing against and what their annual collection rate looked like, I think maybe I'm a little reluctant to categorize it, but it certainly will have aspects of a deficit financing."
GDB president Jorge Irizarry said that while officials recognize that the $1 billion to help balance the budget is nonrecurring revenue, he said that the supplemental funds are necessary as the island has been in a recession for 24 consecutive months. .
"The ones we are using do not sacrifice future revenues, do not increase taxes on anyone, and do not have a negative economic effect, and we are one of over 20 different states that have budget deficits that must be covered, and are much bigger than ours," Irizarry said.
Anibal Acevedo Vila's $9.48 billion budget proposal is $260 million higher than the current budget of $9.22 billion, an issue that both Senate President Kenneth McClintock and House Speaker Jose Aponte, both members of the New Progressive Party, said was unacceptable considering the island is in a recession and officials do not expect revenues to increase dramatically in fiscal 2009.
"It is really a very irresponsible budget, what he is presenting," McClintock said. "If we really have revenue around 9%, how can you dare submit a budget of $9.4 billion again?"
Aponte agreed that the governor's proposal was too high. "I think that the budget should be smaller because the net income is less for the next year," he said.
Yet Irizarry points to mandatory cost increases the government had to take on, with the state commission of elections gaining an additional $41 million to help cover expenses for the upcoming general elections in November, and another $70 million going towards municipalities, the University of Puerto Rico, and the judicial branch - all added costs that the government was required to tag on to the budget.
In addition, while the fiscal plan does include an overall 5% spending cut within the executive branch, Irizarry said the government can only reduce spending by so much before it begins to negatively impact the island's economy.
"We're just trying to keep expenditures flat, we're not increasing them in any significant way, and in a recessionary environment if you try to cut spending, it just exacerbates the recession because government expenditures have the highest multiplier in the economy," Irizarry said. "Expenditure reduction has a big impact on the economy, so it's not an advisable thing to cut expenditures. And what we're doing is we're maintaining where we are by absorbing things that increase by cutting others and keeping expenditures below the 2006 level, which was our long-term commitment."
Connected with the fiscal 2009 budget is the commonwealth's $425 million bond bill for fiscal 2008. While the Senate passed that borrowing initiative in December, Aponte has declined to move on the bill until Acevedo Vila, a member of the Popular Democratic Party, filed his fiscal 2009 budget.
Even with next year's budget before him, the speaker still has issues with the bond bill and said that he would only support a lower borrowing plan of about $240 million and that the House may not pass a borrowing measure for the current fiscal year until this summer.
"We are evaluating the bond issue in prior form with the budget, so if we approve something, we'll approve it in about June," Aponte said.
Puerto Rico has $46 billion of outstanding debt. Standard & Poor's and Moody's rate the island BBB-minus and Baa3, respectively. Fitch Ratings does not rate the credit.
