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Governor presents a stringent plan to reduce the $1.7 billion structural deficit next year


March 24, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

In his first budget address last week, Gov. Aníbal Acevedo Vilá announced the Puerto Rico government has a structural deficit of $1.7 billion, and assigned $9.68 billion for fiscal 2006 (July 1, 2005 to June 30, 2006).

Nonetheless, $800 million will be used to pay salary increases, to provide formula (percentage) funds for the University of Puerto Rico (UPR), municipalities, and the judicial branch to fund previously approved legislative measures and cover operational deficits incurred by agencies and debts owed to public corporations. For example, Puerto Rico Electric Power Authority (Prepa) has stated public agencies owe the utility close to $140 million in energy bills.

This fiscal year (July 1, 2004 to June 30, 2005) the government assigned a budget of $8.85 billion, which several agencies spent and then incurred another $443 million in debt. Acevedo Vilá proposed an increase in the central government budget for fiscal 2006 of $830 million.

In his address, the governor didn’t mention the consolidated budget for fiscal 2006, which official 2006 budget document indicates is $25.6 billion. This includes all public corporation budgets, representing a 3.3% increase over the current consolidated fiscal budget.

In contrast to the Calderón administration, Gov. Acevedo Vilá promised his administration wouldn’t resort to loans to pay for government’s operational costs, which he claimed has handicapped the island’s economy.

The proposed budget increases funding for 14 agencies, assigns smaller budgets to 25 agencies, and designates the same amount assigned in fiscal 2005 to another 30 agencies. Among the agencies receiving more funding will be the Department of Education, a $440 million increase, and the Police Department, $120 million more, of which $20.5 million will be for salary increases.

The measures to limit government spending will be transitory strategies, said Acevedo Vilá, who promised the fiscal landscape would change after the fiscal and tax reform is enacted, which is estimated to take between 18-24 months.

Cutbacks expected to reduce spending by $370 million

Central government spends $2.2 million per hour in payroll, a $16 million daily expenditure. Reducing the number of central government employees, agencies, and public spending should reduce fiscal spending by $370 million.

The governor plans to consolidate several government agencies, bringing the total down from 144 to 126. Two agencies to be closed are the Office of Drug Control and the Office of the General Auditor of the Family Department, because the first has never achieved its goals and the second has achieved its mission of aiding the Child Support Administration (Asume) during its operational crisis of 2001, Acevedo Vilá said.

Other measures to be implemented to cut expenses include stopping top-level appointments (puestos de confianza) and not renewing contracts for irregular or temporary positions, now occupied by 4,775 employees. Government will also encourage employees with at least 30 years of service to accept early retirement with a $2,000 monthly pension; and offer a four-day work week to employees willing to accept a 15% cut in salary. Nearly 10% of public employees could benefit from these retirement measures.

Subsidies to public corporations will also be reduced. The General Fund and the Government Development Bank for Puerto Rico currently provide Puerto Rico Aqueduct & Sewer Authority with $400 million for consumer subsidies, which the utility will lose and which could represent an increase in water tariffs. The funds will be reassigned to Education, the Police, and to a new prescription medicine program for Medicare participants.

Although Acevedo Vilá stated the Legislature has increased its budget during the last few years, he left the decision of reducing that government branch’s budget, now at $126 million, to the Legislative Assembly.

Government to recoup $95 million lost in excise tax evasion

The governor said measures to thwart excise tax evasion would recover $95 million. The plan requires investing in eight new x-ray machines expected to increase the percentage of inspections conducted on carrier containers arriving on the island from 3% to 10%.

Acevedo Vilá said all formerly exempt imported basic and luxury items will be subject to the 6.6% excise tax over a two-year period starting in fiscal 2006, until a tax reform is enacted. This should generate an additional $639 million.

"Our government hasn’t seen an increase in its revenue from general excise taxes. The revenue from general excise taxes has remained stagnant at between $500 million and $600 million per year since 1999," pointed out Acevedo Vilá, adding that over the past six years consumption levels rose 26% in contrast to a 3% increase in tax collection.

The governor also proposed the financial industry start paying a special two-year tax, which should contribute $180 million each year to the general fund. Moreover, owners of luxury vehicles costing more than $40,000 will have to pay a higher annual registration fee (marbete). The measure should generate about $30 million.

Ideas to stimulate economic growth

In his March 9 State of Commonwealth address, Acevedo Vilá assigned $30 million to develop 1,000 new small businesses, a measure criticized by the private sector as insufficient given 70% of new companies don’t survive beyond three years. In response, Acevedo Vilá added $4 million for a training program for business entrepreneurs.

The Tourism Development Fund would receive $21.6 million, out of which $10.6 million would go to provide incentives for cruise ships. The governor assigned $4 million to programs aimed at strengthening agriculture. With the help of the Economic Development Bank, the Department of Agriculture will establish a separate program to provide incentives to new agroindustries, with an initial $6 million. The governor didn’t mention an economic plan for the manufacturing sector.

The Puerto Rico Planning Board will receive a $2.1 million increase to restructure the agency and accelerate the island’s Land Use plan, and $2 million more for the Regulations & Permit Administration to speed up the permit-issuing process.

Reducing energy costs will require a $2.1 million investment by Prepa over a five-year period, aimed at reducing the island’s dependency on oil for energy by increasing the use of natural gas.

The bond issue for central government infrastructure capital improvements will reach $575 million, however, more than $400 million will have to be used to cover credit lines approved by legislators in the past, the governor said.

Future outlook on development

Even though Acevedo Vilá made no mention of ideas to attract foreign and U.S. investors to the island, he stated eight strategic projects to create more economic activity and employment growth. These include the Portal del Futuro program to develop the former Roosevelt Roads naval base in Ceiba and Ciudad Red project, which will use the Urban Train route as its cornerstone for urban and economic development. Acevedo Vilá also plans to build the University of Puerto Rico Molecular Science Center near the University Urban Train station in Río Piedras, as well as extending the urban rail line’s route to Carolina.

Three other initiatives included $183 million for the Port of the Americas, $15 million to prepare Mayagüez for the 2010 Central American Games, and $629 million for the Highway & Transportation Authority.

The proposed budget has to be approved by the Legislative Assembly, controlled by the opposing New Progressive Party (NPP). The day after the governor’s fiscal state address, NPP legislators called a press conference during which NPP President Pedro Rosselló expressed the group’s opposition to several of the measures proposed by Acevedo Vilá during his address.

This Caribbean Business article appears courtesy of Casiano Communications.
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