SAN JUAN, Puerto Rico (AP) — Puerto Rico's governor on Tuesday presented the territory's first balanced budget in more than a decade, fulfilling a promise to cut spending at a time when the island's economic problems have spread fear among U.S. investors.
Gov. Alejandro Garcia Padilla proposed more than $1.4 billion in cuts and adjustments by consolidating 25 government agencies and imposing an average 8 percent spending cut for most agencies, among other things. He also pledged $775 million to pay off debt — $525 million more than in last year's budget.
The $9.64 billion budget aims to strengthen and revive the economy as the U.S. territory enters its eighth year in recession and struggles to reduce some $73 billion in public debt.
The budget does not call for layoffs or new taxes.
"We are finally paying off the debts of the past," Garcia said during a televised address to a joint legislative session. "Our island needs radical changes. For too long, previous proposals have only been cosmetic or sought a collective applause."
The governor is scheduled to formally submit the budget Wednesday, and legislators will debate it in upcoming weeks, with approval needed before June 30. Last year's budget stood at $9.77 billion.
U.S. investors and bondholders were awaiting details of the budget and are expected to monitor its impact on the economy after Puerto Rico sold a record $3.5 billion in general obligation bonds last month in part to generate more liquidity and refinance debt.
David Tawil, co-founder and portfolio manager of New York-based Maglan Capital, praised Garcia's push for a balanced budget, although he said reservations remain.
"It's an important achievement beyond the financial soundness," Tawil said. "It is all critical and goes a long way but may not necessarily be sufficient."
Opposition legislator Lourdes Ramos criticized Garcia for not acknowledging the island's contracting economy, the lack of jobs and dwindling funds. "It was disappointing," she said of his speech.
Hundreds of unionized workers gathered outside the seaside Capitol to protest the cuts.
Puerto Rico economist Gustavo Velez said the last balanced budget for the U.S. territory's government was in 1999, with governors borrowing over the past 14 years to finance deficits while violating the island's constitution requirement for balanced budgets. He said the government borrowed an estimated $29 billion from 2004 to 2013, adding that the money wasn't put into public works but rather was just used to let the island live beyond its means.
"That should never have occurred," he said, adding he feels Garcia had no other option but to balance the budget. "This is happening because of the current fiscal reality. They cannot go to the market to borrow more money. ... They have no choice but to face reality, to operate with the resources they have."
Garcia, a lawyer who became governor in January 2013, inherited a more than $2.2 billion deficit and the highest unemployment rate compared with any U.S. state, among other economic problems.
He has sought to diversify the economy and strengthen its industrial base, attracting international companies with tax incentives while also courting wealthy investors such as New York hedge fund executive John Paulson.
Earlier this month, German company Lufthansa Technik announced it would invest $20 million on a facility for aviation maintenance, repair and overhaul, while Arizona-based Honeywell Aerospace said it would spend $24 million to expand its business on the island.
Garcia also has made changes to two major public pension systems, noting they would run out of money soon if nothing was done. He also previously implemented new taxes and various measures to help generate some $1.5 billion in new revenue.
The island of 3.67 million people is struggling economically. More than 450,000 people have left in the past decade, and just 41 percent of working-age Puerto Ricans are in the labor force, compared to 63 percent in the U.S.
Tue Apr 29, 2014 6:49pm EDT
(Updates throughout with details from speech, adds announcement)
(Reuters) - Puerto Rico's governor announced a $1.4 billion cut in public spending on Tuesday as the commonwealth government agencies braced for measures that will be taken to produce the first balanced budget in years.
Governor Alejandro Garcia Padilla unveiled his $9.64 billion budget proposal for 2015 in an address to the legislature that included a $775 million payment for Puerto Rico's long-term debt.
The current general fund budget is $9.835 billion for fiscal year 2014, which runs through June 30.
"We are beginning to pay for today's expenses with today's
earnings. This balanced budget complies with my commitment to prepare a budget without deficit financing nor refinancing of debt," the governor said.
"We have accomplished this without firing anyone, respecting the daily bread of public workers," the governor said.
The governor said that he would cut government spending by an average 8 percent and would freeze hiring but added he would not make cuts to the Police Department or the University of Puerto Rico.
The governor also announced the fusion of 25 government entities, which he said would be undertaken without affecting services or employee rights. He also said he ordered a 10 percent cut in the budget for senior executive staff positions and for professional service contracts.
The government will also seek savings of $236 million in government payroll expenses through negotiated cuts in marginal employee benefits, as well as transferring school transportation service to island municipalities. Officials also said the least utilized and most obsolete schools would be shut down to save money.
There will also be savings through changes to Christmas bonus and sick leave benefits to public workers.
On a positive note the governor highlighted plans and recent achievements in the areas of manufacturing, high tech and financial services, tourism and agriculture.
Hundreds of public workers gathered outside the Capitol building in the afternoon to pressure the government to respect their collective bargaining contracts.
In February, when Garcia Padilla pledged to investors to deliver a balanced budget, he said making the government's public corporations self-sufficient is "one of the most significant, greatest challenges" facing Puerto Rico.
"We have to adjust to the reality of a smaller
economy with less resources and we can't maintain a government structure as if this was an economy with much greater productive capacity," said economist Jose Joaquin Villamil, of Estudios Tecnicos.
While no new taxes are expected following a year in which the administration levied $1.5 billion in new taxes, the government could see added revenue because some new taxes are still being implemented, including a levy on Internet purchases and a plan to charge the sales and use tax on goods imported into the island.
Earlier this year, concerns over the Puerto Rico government's ability to deal with its debt, with an
economy and population in decline since 2006, prompted all three credit ratings agencies to cut Puerto Rico's credit to non-investment grade, or a junk bond rating.
Last month's $3.5 billion bond deal gave the Puerto Rico government "breathing room" and analysts have awaited the budget to see how the administration will address fiscal challenges.
The commonwealth government is seeking to make the case that the economy is turning the corner.
In March, the island economy fell for a 16th straight month, but the 0.8 percent year-over-year decline was the smallest drop in more than a year, according to the Government Development Bank Economic Activity Index.
While the EAI is down 3.4 percent overall through the first three quarters of the current fiscal year, it has been on the rise for three straight months. (By Reuters in San Juan.; Editing by David Adams, David Gregorio and
Ken Wills)
