Puerto Rico's newly implemented tax-debt trust will help it fill a $1 billion deficit within the $9.48 billion fiscal 2009 operating budget. But administration officials say they may tap into other funding options, including possibly leasing the island's lottery system, if the trust generates fewer than $1 billion of revenue to close the budget gap.

Gov. Anibal Acevedo Vila this past weekend signed the fiscal 2009 operating budget into law, with that fiscal plan including a potential special obligation bond sale and-or a possible loan from the Government Development Bank for Puerto Rico if the tax-debt trust fails to produce at least $1 billion to offset the island's structural deficit. The Legislature, which is controlled by the New Progressive Party, added the potential bonding sale and tapping into GDB funds to the operating budget after removing the governor's lottery concession proposal.

While legislators failed to pass the lottery initiative by the end of the session on June 30, the long-term lease agreement could regain interest when a new legislative body begins on Jan. 1 after the general elections in November. In addition, the commonwealth has time on its side as anticipated funds from the tax-debt trust will maintain the government for the rest of the calendar year, according to Armando Valdes, executive director of Puerto Rico's Office of Management and Budget.

"At this point, with the debt-trust proposal, we will have enough cash to essentially get through this first semester of the fiscal year and well into the second semester," Valdes said. "And so at that point, once the next Legislature comes into office, we believe that the lottery proposal will still be something that will be on the table and that responsibly we could look at to work with whatever gap we have there. And again, even if the lottery proposal were not approved, we do have that authorization for the special bond obligation issue which would allow us to take this to $1 billion."

Both the GDB, the island's financial adviser, and the Treasury Department anticipate that the trust, backed by $2.9 billion of delinquent tax receipts, could generate roughly $500 million to $600 million of revenue via private investment in the current fiscal year, which began July 1. Administration officials and the GDB would prefer filling the remaining gap with potential lottery concession revenues, yet the fiscal 2009 budget now allows the executive branch to either sell special obligation bonds and/or rely on GDB liquidity to obtain the needed funds.

"The lottery revenue measure, we considered a much more fiscally responsible one and we still think we might be able to achieve that revenue measure during this fiscal year," said GDB president Jorge Irizarry. "And I think we all agree that stretching the accounts receivable measure to $1 billion is a stretch and will likely require a financing measure with some GDB support. And that's doable, but it's not the best alternative. So, we will do it if we absolutely have to balance the budget that way. We will, but it's not what we would like to do."

In 2006, lawmakers implemented fiscal reforms restricting the government from using GDB loans to help fill budget gaps and also set a goal of crafting structurally balanced budgets by 2010. Analysts say the 2010 objective may be unrealistic for the commonwealth.

"The triple B-minus downgrade that we did a little over a year ago incorporated the assumption that it will be very hard for the Commonwealth to achieve a balanced budget by 2010 and that they would continue to rely on one-time revenues to balance the budget," Standard & Poor's analyst Horacio Aldrete said.

Standard & Poor's and Moody's Investors Service rate Puerto Rico BBB-minus and Baa3, both with a stable outlook. Yet a July 14 Merrill Lynch & Co. Munis and Derivatives commentary stated that the stable outlooks do not reflect the measures to either sell bonds or obtain a GDB loan to help balance the current budget.

"Notwithstanding the implicit endorsement of the GDB's prolific debt refinancing and restructuring activities that ensued following the commonwealth's spring 2006 financial crisis, the stable outlooks appear to ignore the notable retrenchment from key elements of a 2006 fiscal reform package intended to foster prudent fiscal management and budgetary integrity, in our opinion," according to the Merrill report.

Conversely, Aldrete said the real question is how long will Puerto Rico continue running with a structural imbalance?

"How quickly can the commonwealth start narrowing that gap again?" Aldrete said. "And I think that those are things that will probably have a greater impact on the rating at some point than having to possibly rely this time around on the GDB again. I think the sort of longer-term picture for the commonwealth is something that I think potentially can affect the credit, more so than just this one-time reliance on the GDB."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.