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Budget Struggle May Result In Better Credit
By Iván Román
March 17, 2002
Copyright © 2002 Orlando Sentinel. All Rights Reserved.
SAN JUAN, Puerto Rico -- Any responsible parent would take out a loan to add a room or fix the roof, but not to buy rice, coffee and meat on the monthly trip to the supermarket.
But the equivalent of that is what the Puerto Rico government did during the 1990s -- getting into debt not just for the big permanent development projects, but to pay recurrent expenses and balance the budget.
That's enough of that, says Gov. Sila Calderon, who has been in office 14 months.
She pledged not to borrow any more money without identifying a way to pay it back. And she presented a $22 billion balanced budget to the Legislature this year by opting for new taxes that she knows could cost her politically.
Some on the island complain about the possibility of having to pay more to have a beer, smoke a cigarette or buy a sport utility vehicle.
But economists, and those who rate the island's credit, like what's happening. The Puerto Rico Constitution limits government borrowing to 15 percent of the island's average income in the two years prior to incurring the debt.
To get around that, former Gov. Pedro Rossello's administration created the so-called extra constitutional debt to cloud the real level of debt and finance huge projects such as the Superaqueduct and the Coliseum of Puerto Rico. With so many public-works projects going up, that "extra constitutional debt" skyrocketed to $5 billion, while the constitutional debt also jumped to $6.4 billion.
Other places, such as New York, use similar mechanisms to borrow more, but Puerto Rico ended up going to its central bank for lines of credit to, in effect, balance budgets.
Now the Calderon administration is combining all the debt and wants to bring it down to the 15 percent limit in two years. Jumping at last year's lower interest rates, officials refinanced part of it, saving about $600 million in the long term, and allowing officials to put new money into the economy with construction projects.
Even so, almost 18 percent of the general fund -- some $1.2 billion -- will be used to service the debt in the next fiscal year.
"That extra constitutional debt got a little out of hand in the last few years, and now they want to pull it back," said economist Jose Joaquin Villamil, president of the Puerto Rico Chamber of Commerce. "It's better because that way the credit-rating agencies are seeing there is no funny business."
One of the government's biggest annual expenses -- $1.25 billion -- pays for the health card Rossello established to give health insurance to more than 1 million people. The plan to pay for it didn't quite work, so the budget was balanced with more debt.
This was a factor in Puerto Rico's credit rating ranking a couple of notches lower than Louisiana, the state with the lowest rating.
"It's pretty unusual for such a boom period of the 1990s to generate such high deficits," said Timothy Blake, a senior analyst with Moody's Public Finance Group, which reviews the island's credit rating. "That's not good financial management, and it confirms our lowest ratings. Getting rid of deficit financing, that would be terrific and it would be beneficial for them to do."
Calderon administration officials seem to have understood the message. That doesn't mean they didn't borrow last year -- $800 million for new schools and office buildings, and $1.3 billion for road projects. But balancing the budget, they hope, is a good first step to helping the island's credit rating in the long term, despite unpopular taxes now.
"If the government of Puerto Rico continued accumulating long-term debt to pay budget items, that would be irresponsible for the future generations," said Cesar Miranda, Calderon's chief of staff. "We looked for the alternatives that would hurt the people less."