Puerto Rico Gov. Alejandro García Padilla reached an accord with the island's mayors that may allow them to sell bonds backed by the commonwealth's sales tax and would make it optional to deposit their money in the Puerto Rico government bank.
García Padilla reached the agreement with the mayors of San Juan, Trujillo Alto and Carolina, the vice-mayor of Mayaguez, and the president of the Association of Mayors, who is also mayor of Comerio.
Adjustments to the sales tax and a drive to boost deposits to the government bank are key elements in Garcia Padilla's efforts to reduce the deficit and protect Puerto Rico's investment grade credit rating. In the fourth quarter, Fitch Ratings and Moody's Investors Service put the commonwealth under review for a downgrade, expressing concerns about the government bank's liquidity and the territory's ability to access the capital markets.
Puerto Rico's current fiscal year budget passed in June 2013, specified that the sales tax rate would decline to 6.5% from 7% in the fall. Under that budget, central government's 5.5% sliver would have been untouched and the municipalities' 1.5% sliver would have been cut to 1%.
In the fall the reduction was postponed. The government is now proposing canceling it and leaving the sales tax at 7%.
The governor and the mayors on Monday agreed to create a structure similar to the Puerto Rico Sales Tax Financing Corp. (COFINA) for the municipalities. A 1% sliver of the sales tax will pass through this new vehicle, known as COFIM, and allow the municipalities to sell bonds backed by this sales tax sliver.
Using this new vehicle, the Government Development Bank of Puerto Rico plans to be able to refinance approximately $600 million in municipal loans on its books.
The agreement specifies that a final 0.5% sales tax sliver will pass through COFINA before being delivered to the municipalities' redemption, development and improvement funds. Like all COFINA money, in fiscal years' early months it will be used to cover debt service of the national government's COFINA bonds.
The mayors also reached an agreement with the governor about the cities' bank deposits.
The Puerto Rico Senate has passed a bill requiring public corporations and agencies to shift most of their deposits from private banks to the Government Development Bank of Puerto Rico. The Puerto Rico House is expected to consider it when it reconvenes this week.
Commentators on the bill have been unsure whether the public agencies included in the bill would include the commonwealth's municipalities.
Under the accord, the governor has agreed to make the cities' deposit of their assets in the GDB optional. Compared with other island public agencies and corporations the cities have fairly small amounts of deposits, a source close to the governor said.
Both the sales tax and the deposit agreements require approval of the legislature before they become legally binding.
In other Puerto Rico news, public school teachers went on a two day strike today to protest the recently adopted reform of their pension plan.
