Puerto Rico Gov. Alejandro García Padilla is proposing three measures to strengthen the commonwealth's and its municipalities' finances.

García Padilla has convened the Puerto Rico legislature to consider these measures, along with a reform of the teachers' pension system and some other measures.

The governor is proposing to cancel the planned cut of the island's sales tax to 6.5% from 7%, which was approved as part of this fiscal year's budget in late June. The cut was originally scheduled for Dec. 1. In November the government chose to use a delay provision to postpone the cut to February. Now the governor proposes it not happen at all.

The cut was going to reduce the sales tax going to municipalities to a 1% sliver from a 1.5% sliver.

In the current fiscal year the government has extended the sales tax to a range of services previously not covered. The government had hoped and predicted that the broadening of the base would offset the reduced sliver size so that the municipalities would get roughly the same amount of money.

However, sales tax revenues have been coming in under estimates.

Because of the expected 0.5% cut in the sales tax, the commonwealth government had agreed to pay $52 million of the municipalities' debt service due this fiscal year.

If the legislature approves keeping the sales tax at 7%, the government will not pay for the debt service. This would save the commonwealth $52 million this year, an amount equal to 6.3% of its predicted $820 million operating deficit. It would also save the commonwealth additional money in future years.

A second measure would allow the municipalities to sell a municipal version of the COFINA (Puerto Rico Sales Tax Financing Corporation) bonds. A board of directors would include Puerto Rican mayors.

Some of the municipalities owe the Government Development Bank of Puerto Rico money. Using the new sales tax backed bonds would allow the municipalities to refinance their bonds with 30 year bonds, a government source said. This would allow the GDB to take the municipal loans off their books.

Puerto Rico's municipalities had $3.9 billion in debt as of October, according the Puerto Rico government.

García Padilla is proposing a third measure that would change the relationship of the public corporations to the central government and the GDB.

The measure would amend a 2001 law that allows public corporation debt to the GDB to be refinanced. The new measure would allow the commonwealth to use its general fund to be responsible for some of this refinancing.

The measure would limit the conditions that the GDB could loan to public corporations. In the past the GDB would sometimes loan to the corporations based on rate increases that were anticipated but not yet approved, a government source said. The new measure would prohibit this.

The GDB could still make loans to the public corporations in emergencies, to prevent defaults, the source said.

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