SAN JUAN - Puerto Rico Gov. Luis Fortuño on Friday promised he will bring fiscal change to the commonwealth to help cultivate long-term growth and address immediate budget challenges.

The pledge comes as officials announced that the fiscal 2009 budget deficit now totals $3.4 billion, up from the $3.2 billion shortfall calculated in January. Treasury Secretary Juan Puig-Morales Friday released the new deficit figure during a credit conference hosted by the Government Development Bank for Puerto Rico.

Fortuño said he will unveil in two weeks details of how the government will close the $3.4 billion funding gap and also end structural imbalances by 2013. At the same time, the administration will release details of its $500 million local stimulus plan that officials are working on to complement $5 billion that Puerto Rico will gain from the federal stimulus package that President Obama signed into law last week.

Alterations to the budget will include spending reductions of 15% to 25% and will also contain tax increases. Officials are reviewing all tax programs, such as gasoline and tobacco, and were reluctant to say whether they will boost the 7% sales tax.

"I never met a tax that I liked, to be honest," Fortuño told The Bond Buyer after addressing the conference crowd of municipal bankers and investors. "I believe that a dollar in people's hands goes a long way than a dollar in any government's hands. So having said that, we're working on a balanced package.

"This may have some temporary tax measures. Where we want to be is that in a couple of years it will be clear to us that we're growing as an economy and that our budget is almost balanced if not balanced, and then we can talk about taking other steps tax-wise and otherwise to grow our economy even further."

The governor - who began his speech by expressing his gratitude to bondholders and municipal-bond participants for their trust over the years - said he is committed to improving Puerto Rico's credit quality and its fiscal reputation among the investment community. The island's credit rating is just above investment grade.

"I fully understand why some may have doubts because in recent years there's been a lot of talk about making tough decisions, but no decisions were made - on the contrary," Fortuño said after his speech. "This time around, they'll see us taking action right away and they'll understand that we mean business and that will then provide the necessary trust that has been lost by some in what Puerto Rico will be doing in the years to come."

Budget details provided so far include reducing expenditures by $1 billion to $1.8 billion, or by 15% to 25%, respectively, according to GDB president Carlos Garcia.

"Obviously the amount between the 15% and the 25% will depend on the impact of the different measures that are being finalized within the next two weeks, as we're [evaluating] all the cash flows of the federal and the local stimulus plans to be sure what effect it will have in our economy," Garcia said during his presentation.

In addition, the Treasury Department's main goal is improving its tax collections. For example, the commonwealth captures 60% to 62% of its sales tax base because of delinquent payments. If it caught 75% of that base, it would gain an additional $250 million annually. Such increases in tax collections could lower expenditure cuts, Garcia said.

To help alleviate the potential recessionary effects of reducing expenditures and increasing current taxes and potentially implementing other taxes, Garcia pointed to the $5 billion federal and $500 million local stimulus packages. In addition, the GDB may inject $1 billion to $1.5 billion of additional funds into the local economy if more stimulus is needed.

"That is a total investment of $6.5 billion to $7 billion, which is more than 11% of the [gross national product] of Puerto Rico," Garcia said. "So we're talking about a very, very significant amount of stimulus. This is basically what will guarantee that we can work with the required fiscal reconstruction measures and we will have an economy growing by the year 2011.

The administration has an internal March 15 deadline to craft its fiscal 2010 budget. Fortuño will then review the spending plan before submitting it to the legislature. The goal is to have operating budgets that reflect fiscal conditions beyond a one-year time frame.

"What we're doing is using multi-annual budgeting mechanisms and zero-based budgeting, both," the governor said. "So we'll have a multi-annual budget process and that has already commenced. By March 15, we must have everything before me and then the fun can begin so I can introduce our budget in the legislature."

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