Puerto Rico governor promises salary increases and tax cuts

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Puerto Rico Gov. Ricardo Rosselló’s annual state of the commonwealth speech on Monday promised salary increases and tax cuts for government workers, but made no mention of Puerto Rico’s debt.

The governor said he would propose $1,500 annual salary increase for police and the same for teachers. He said the latter would be the teachers’ first increase in 10 years and the former’s biggest increase in 10 years.

“Candidate Rosselló stated that the government debt could be paid in full while cutting taxes and avoiding reductions to retirement pensions,” said Advantage Business Consulting president Vicente Feliciano. “Governor Rosselló found out that choices had to be made, and these choices are reflected in the speech.”

Puerto Rico, its authorities, and municipalities owe more than $70 billion in debt. More than half of this is in Title III bankruptcy.

The governor promised to reduce the business-to-business tax sales tax each year until it is eliminated. Preceding governor Alexandro García Padilla and Popular Democratic Party legislators introduced the tax.

Rosselló said he will reduce the sales and use tax rate to 11.5% from 7%. Finally, he said he would reduce individual and corporate income tax rates.

Rosselló said he would introduce the Earned Income Tax Credit to the island, something that would require the approval of the U.S. Congress and President Trump since this is a federal program.

“Two months ago we submitted our first [version of a revised fiscal] plan,” Rosselló said in his speech. “In this plan we identified economies of over $5 billion during a period of two years. After an intense defense of public servants and government retirees before the [Oversight] Board, we managed to prevail by maintaining the stability of their jobs and avoiding a devastating cut in pensions.”

Commenting on the proposed police and teacher pay increases, Howard Cure, director of Municipal Bond Research at Evercore Wealth Management, said “under the financial circumstances of the commonwealth, there needs to be some justification for these salary increases as well as [Oversight Board] approval.”

In the governor’s speech “there are expected savings due to a reorganization and reduction of government agencies,” Cure said. “Given the prior lack of success in efficiently managing departments, these savings have to be called into question.”

The governor said he had introduced a bill Monday to privatize the Puerto Rico Electric Power Authority. He said PREPA’s employees would have the option to work for the electric system’s new private sector owners or to switch to working for the central government. The privatization wouldn’t lead to lay-offs, at least immediately.

According to the bill the governor introduced Monday, the proceeds from PREPA’s sale would go to capitalize the retirement system of PREPA employees, which he said was bankrupt. He said the goal of the sale was to reduce the cost of electricity to 20 cents per kilowatt-hour and have a more reliable, efficient, and environmentally friendly system. Consumers now pay about 21 cents per kilowatt-hour.

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PROMESA Utilities Commonwealth of Puerto Rico Puerto Rico Employees Retirement System Puerto Rico Electric Power Authority Puerto Rico Sales Tax Financing Corp (COFINA) Puerto Rico