Puerto Rico's fiscal challenges may loom large, but the government successfully moved legislation to address a $3.2 billion structural deficit and help offset declining revenue with temporary tax measures, as Gov. Luis Fortuño yesterday signed his first fiscal budget into law.

The $7.6 billion spending plan, which the legislature passed Tuesday evening, is smaller than the $9.48 billion fiscal 2009 budget. The commonwealth will use $2.5 billion of sales tax bond proceeds to finance temporary spending measures and pay overdue bills.

The plan cuts the budget by nearly $2 billion, due in part to a reduction of 30,000 government workers, to begin closing a $3.2 billion structural deficit. To help individuals find new employment, the government is offering temporary services and programs and investing in capital projects to help spark economic growth.

The fiscal 2010 budget does not vary greatly from the plan that Fortuño, a member of the pro-statehood New Progressive Party, submitted to lawmakers in late April. In an interview with The Bond Buyer, the governor expressed his satisfaction in getting a fiscal 2010 budget passed for the new fiscal year, which began yesterday, while such states as California, Pennsylvania and Illinois continue to work through budgetary problems.

The new budget follows a first-ever public-private partnership bill that Fortuño signed on June 8 that will provide the framework for private investment in public projects throughout the island. He will now review an amendment to Law 7 that would increase property taxes for three years after lawmakers approved the temporary tax hike Tuesday evening.

"We got the budget at the levels we requested," Fortuño said. "Our structural deficit will come down from $3.2 billion to $500 million in one year. Secondly, we had some amendments that we wanted on Law 7, the fiscal stabilization law, and that got through as well.

"In addition to that, in this session we were able to get public-private partnership legislation and other very positive legislation in terms of the creation of jobs and economic growth - including one that created a local stimulus package and another one that established the rules to manage the federal stimulus package.

"So, I'm very pleased in the sense that we have kept our commitments not just to our taxpayers but to bondholders that we will bring back fiscal constraints and fiscal responsibility, and we've done it in partnership with the legislature, contrary to many states," the governor said.

Under the property tax proposal, homeowners and businesses would pay higher property taxes for three years or until the government gains $690 million, whichever comes first, Fortuño said.

The possible increase follows temporary tax hikes of 5% for four years on individuals earning more than $100,000, and businesses which the governor signed into law in early March. In addition, prior legislation placed a permanent tax boost on cigarettes and liquor.

Along with spending cuts and reducing the government's payroll, Puerto Rico will use $2.5 billion of deficit spending via sales tax bond proceeds to pay down money owed to government suppliers and support $1 billion of job-assistance programs to aid laid-off government workers. Puerto Rico also plans to push out maturities on outstanding bonds to help ease debt service payments this year. Officials have said that such financing is temporary until the commonwealth regains fiscal stability.

"I wasn't expecting a deficit as large as the one we inherited," Fortuño said. "I was assuming it was going to be one-fourth the size of the actual deficit. But then again, that just requires us to work harder and with a greater sense of discipline. I've been overusing the word 'discipline,' but that's exactly what we're doing. We're sticking to our plan, we're staying the course, and that's exactly what taxpayers are expecting from us."

Not everyone is a fan of the newly enacted budget. The Popular Democratic Party believes that cutting government by 30,000 employees will hurt consumer confidence as the island's unemployment rate is nearly 15%. The PDP also does not support the use of deficit spending.

"The budget is based on a number of assumptions that I'm not sure will come through, including the hefty property tax that is being levied," said Senate deputy minority leader Edwardo Bhatia. "Number two, it's based on the number of employees that have to be fired and so there are many variables. It will be difficult to forecast the real behavior of this budget because I think it's a very new exercise for Puerto Rico to base the budget on so many different variables that have a great degree of uncertainty in all of them."

To reduce the size of government, Bhatia said he prefers working with government employees and unions to reduce salaries, as well as combining agencies to gain cost savings.

The legislative work may continue this summer. Fortuño said he is debating whether to call a special session for lawmakers to work on a bill that would help speed up the island's permitting process, along with other measures.

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