Puerto Rico's Governor Completes First Month

After a month in power, Puerto Rico Gov. Alejandro García Padilla has answered some of the financial community’s questions while raising others.

In mid-January, Garcia Padilla introduced a plan that he hopes will create 50,000 jobs in the next 18 months.

If the Puerto Rican legislature passes the plan, the government would allow new businesses to delay payment of impact fees to state-owned water and sewer companies. Companies that open operations on properties that had been unused in the last 18 months would be exempt from property taxes for their first two years of operation.

García Padilla is promising that certain business permits will be approved within 24 hours. He is also promising an annual energy credit of up to $2,000 for every job created through June 2014.

“It catches my attention that no one is saying how the subsidies, reimbursements and incentives promised to the private sector will be financed,” Rosario Rivera Negron, a University of Puerto Rico professor, told the Associated Press.

The Puerto Rico Department of Treasury did consider the effects on revenues of the energy credit proposal, said Pedro Cintron, under secretary of the Treasury. In the first year Puerto Rico expects to lose $58 million but add $93 million to its government revenues, or have a net gain of $35 million, said Treasury chief economist Edwin Rios.

The costs of the energy subsidy to government revenues would last only 18 months, while the benefits to jobs and government revenues would extend out many years, Cintron said.

Bond investors attention to Puerto Rico was heightened on Dec. 13, when Moody’s Investors Service downgraded the territory’s general obligation debt to Baa3, just above speculative grade. Standard & Poor’s rates the island’s GO debt BBB and Fitch Ratings gives it a BBB-plus.

Administration officials have promised a plan to reform the government’s pension plan in the next few months. In June 2011 the plan’s assets were only 7% of what the plan owes.

The governor will also introduce a proposed budget for the coming fiscal year in April or May.

Meanwhile, in late January García Padilla warned that he may oppose the privatization of the island’s main airport unless certain conditions are met. The U.S. Federal Aviation Administration has been considering the privatization of the Luis Muñoz Marín International Airport in San Juan since 2009.

García Padilla said that he wants to see guarantees of jobs, the development of regional airports and affordable rates. If these are not provided, he said he would bring his opposition to the airport’s privatization to the FAA, according to El Nuevo Dia newspaper.

The FAA has already given a preliminary approval and selected a potential airport private operator. It is now considering giving final approval. 

Meanwhile, García Padilla is proposing increased water and electricity rates. Since electricity rates are already high on the island, some are voicing opposition to this proposal.

In the background, revenue news has been bad for the government. Revenues were $55 million lower than expected in December alone, according to Municipal Market Advisors. Through December the fiscal year is off by $258 million in revenues.

A corporate tax rate on non-island-based businesses doing business in Puerto Rico is set to drop 1 percentage point from 3.75% in the middle of this month. García Padilla is proposing the rate be kept at 4% for another five years.

The new administration is also making a big effort to improve tax enforcement and tax collections, Cintron said.

Meanwhile, in January bond investors have been looking kindly on Puerto Rican bonds in the secondary market. Spreads of its bonds’ yields relative to AAA bonds’ yields widened in the second half of last year. These yields have since contracted by 0.4 percentage points, according to Bloomberg News.

The price of Puerto Rico bonds improved by 2.44% over the course of January, according to Barclays data. None of the 50 states had improvements of even 1% during January.

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