Puerto Rico revenues in the first six months of the fiscal year exceeded budget projections by 2.1% while spending in the first five months was 3.2% below expectations, signaling progress in the government's efforts to defend the commonwealth's investment grade rating.
Puerto Rico General Fund revenues jumped 26% in December from a year earlier, beating projections by 0.1%. Puerto Rico Secretary of the Treasury Melba Acosta Febo announced the preliminary revenue estimates Thursday.
December revenues rose to $912.6 million from $722.7 million in December 2012. The government had estimated $911.3 million in Devember revenue in the budget.
The revenue gains "are a positive reflection on the administration's fiscal efforts," said Janney Capital Markets managing director Alan Schankel. "December is the largest revenue month of the first half of the fiscal year, so meeting projections for the month was particularly important, especially since the rating agencies are closely monitoring the commonwealth's fiscal progress."
Through the period General Fund net revenues were $3.946 billion, up $525 million, or 15.3%, from the first half of fiscal year 2013. In the first six months of this fiscal year actual revenues surpassed budget-projected revenue by $79.9 million or 2.1%.
The December increase was due principally to a big jump in corporate income tax revenue and foreign company revenue, Acosta Febo said.
Corporate income tax revenues more than doubled from a year earlier to $316 million. The increase was caused by new tax measures, and specifically the introduction of a gross profit tax, that Puerto Rico Gov. Alejandro García Padilla signed in June.
"This increase in corporate income tax is even more relevant if we consider that on Dec. 18, 2013 a lawsuit was established by a Puerto Rico association of food distributors that questioned the constitutionality of the gross profit tax," Acosta Febo said. "On Dec. 31, 2013 the lawsuit was dismissed and the constitutionality of the tax was ratified. We noted that several taxpayers did not make the December payment of the gross profit tax, probably waiting to see the outcome of the case. Given the favorable decision upholding the constitutionality of the tax, we expect to receive additional payments during the current month of January 2014."
Due to an increase in the tax rate on foreign companies in the current fiscal year, revenues for this source came in at $177 million for December, a 53% increase from December 2012.
Sales and use taxes are still being diverted to a fund to pay off Puerto Rico Sales Tax Financing Corp. (COFINA) bonds. The government had anticipated this tax contributing $26 million to the December General Fund revenue figures but instead it contributed $0 to this fund.
The December figure for collected sales and use tax revenues of $107.7 million was $23 million short of the month's anticipated sum though it was 8% greater than last year's December figure.
December sales-and-use tax revenue was based on November sales. The Christmas peak in this revenue will be reaped in January sales-and-use tax collections.
Through the first six months of the year the sales-and-use tax revenues have come in $63 million or 10.4% less than had been anticipated.
In the first five months of the fiscal year Puerto Rico government spending in the General Fund was $135 million or 3.2% under projections.
The budget had anticipated $4.18 billion in spending in the first five months. Instead the government spent $4.055 billion.
The $135 million amount would also represent 16.5% of what had been the commonwealth's expected $820 million deficit for this fiscal year.
Carlos Rivas, director of the Office of Management and Budget, released the expense report on Wednesday.
"We expect the surplus to narrow very substantially as we continue to issue liquidation payments for retired employees and register further back-loaded expenses," Rivas said. "However, we do not presently expect the surplus to fully disappear."
The lower-than-expected spending is due primarily to a 6% decline in payroll expenses compared with the first five months of fiscal 2013 and to a fiscal improvement program at the education department, Rivas said.
"Sales tax revenues were short of projections and although they are not part of the Treasury's revenue stream (until the COFINA allotment is satisfied), it is disappointing to see sales tax revenues fall short, especially in light of announced plans to market a third lien COFINA issue in coming weeks, which will be secured by these sales tax revenues," Schankel said.
"The five month expense numbers are encouraging," Schankel said. "Overall, I believe the administration has delivered on its commitments so far, with the achievement of revenue and expense targets in the first six months a positive signal for investors."
Municipal Market Advisors managing director Robert Donahue said: "The [government press] releases are a much needed breath of relief for the island, which has had a challenging couple of weeks with a weak Economic Activity Index report, continued bond trading volatility, ongoing speculation about the Government Development Bank of Puerto Rico's market access and liquidity, the threat of a teacher strike, and Moody's action which placed the island on a 90-day review for downgrade.
"Despite a stubbornly weak economy, the tax hikes incorporated in Puerto Rico's 2014 budget are holding up and spending remains contained," Donahue continued. "Investors and rating agencies are keenly focused on whether these trends will continue, given the island has limited capacity to absorb midyear shortfalls."
Puerto Rico's government is taking steps to shift up to $2.8 billion in public deposits from private banks to the GDP in order to improve the bank's liquidity and help ward off downgrades of its bonds to junk."Continued access to external capital at affordable levels is essential," Donahue said. "The Senate's extraordinary authorization to pull billions in government deposits to the GDB is only a stopgap measure that bought time. The market will soon find whether sufficient investor appetite exists, as the island is preparing to bring a bond issue from either COFINA (using the recently approved third lien) or the newly created Municipal Finance Corporation within the next few months."
