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Commonwealth investors receive fiscal update

GDB outlines the current fiscal situation, explaining reasons behind the budget veto, and the tax measures that are still unresolved

By Georgianne Ocasio Teissonniere of Caribbean Business

August 11, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

As the budget battle for fiscal 2006 rages on between the executive and legislative branches, the Government Development Bank (GDB) offered commonwealth investors a fiscal update of the situation. The report also was sent to Standard & Poor’s Investors Services and Moody’s Investors Services, the agencies that rate Puerto Rico’s credit. Recently, both agencies downgraded the Commonwealth’s general-obligation bonds and assigned them negative outlooks.

In the update, which was distributed July 29, the GDB explained the motives behind Gov. Aníbal Acevedo Vilá’s veto of the budget that was approved by the Legislature. The $9.258 billion budget that was approved by the House of Representatives and the Senate in a Conference Committee was said to be unbalanced by as much as $140 million, according to Treasury Secretary Juan Carlos Méndez. Méndez certified the tax measures that were presented wouldn’t successfully collect the estimated revenue. The governor also considered the budget didn’t grant him the necessary flexibility to shift resources to what he considered important policy areas, such as safety, healthcare, education, and economic development.

The budget the governor originally presented for approval was $9.684 billion, which was $830 million more than the $8.854 billion budget for fiscal 2005 and $426 million more than the budget approved by the Legislature. One of the main problems opponents of the governor’s budget highlighted was it presented a significant increase in government spending despite present deficit challenges, which forced the government to incur a $550 million loan from the GDB.

According to the government’s latest estimates, as presented in the GDB update, government revenue for fiscal 2006 will be $9.005 billion. This sum is derived from the previous $8.775 billion Méndez had certified as base revenue and the $230 million the government expects to bring in through new tax measures.

Government spending for the fiscal year is expected to be $9.988 billion, according to the update. This spending is derived from $5.522 billion from the joint resolution of the fiscal 2005 budget, $2.389 billion from acts that establish formulas or assign resources over a course of years or for the present fiscal year, and $1.448 billion from acts approved during the previous fiscal year that are ordinary government operational expenses under the constitution. In addition, the update provided a breakdown of another $629 million in other spending that wasn’t included in the definition of constitutional budget. That includes $91 million in increases in collective-bargaining agreements, $393 million from payroll deficit, and $145 million in other operational deficits during fiscal 2005. When the expected revenue of $9.005 billion is subtracted from the $9.988 billion in expected spending, this leaves the government with a budgetary deficiency of $983 million.

Cutting spending, increasing revenue

The governor’s original budget of $9.684 billion wouldn’t have sufficed to cover the almost $10 billion in projected government spending. Since the running budget of $9.359 billion, as certified by the Justice Department, is even less, the government is currently in the process of cutting close to $1 billion in spending. Considering that payroll accounts for approximately 80% of government spending, the highest of any state in the U.S., it was the first place government looked to start the spending reductions.

On Aug. 1, the governor announced a plan to reduce the workweek for government employees by 20% in hopes of saving $200 million. Those who decided to enroll in the four-day workweek would see their salaries decreased by 15%, while retaining full benefits. There are 30,000 government employees, who are described as nonessential in the update, eligible for the program. The governor clarified that if not enough workers participate voluntarily by Sept. 1, the program will become mandatory.

Unions aren’t in agreement with the reduced workweek plan and are instructing all public employees to not enroll in the program or sign any papers until union representatives negotiate the conditions of the agreement.

The governor, who claims the reduced workweek is an effort to save jobs, also is contemplating several scenarios in budget cuts for government agencies. Under one scenario, 72 government agencies would have approximately $656 million cut from their total funds to redistribute funds to 32 other agencies that would receive more resources than the previous year.

Tax measures

To increase revenue to complement the spending cuts, the governor approved five new tax measures that were approved by the Legislature. The first one levies an additional tax of 2.5% on the net taxable income of corporations and companies that have net taxable income over $20,000. The Legislature estimated the measure could result in new collections of $118 million, but the executive branch believes the revenue from this measure would only be $68 million. The update specifies this tax will be recurring and the collections will be destined for the Department of Education exclusively.

Another tax authorizes the use of swaps in relation to the issuance of obligations that will generate a credit to the Commonwealth of up to $160 million in some cases, although the recommended amount by the executive branch was $100 million. The revenue of the nonrecurring measure will be destined for the Commonwealth and the Public Buildings Authority.

Increases in yearly car-registration fees were the third tax measure mentioned in the update. The tax on capital gains was amended temporarily until fiscal 2007. The amendment eliminates the reduced tax rate and standardizes the long-term capital-gains rate for individuals at 12.5% and at 20% for corporations.

The tax that applies to insurers with headquarters overseas was amended as well, to 6% on the premiums and 3% on annuity income collected in Puerto Rico.

The governor vetoed two other tax measures that had been approved by the Legislature. Instead he called an extraordinary session to reconsider passing a 4% tax on net interest income for the banking industry and to increase the capital-gains tax to 20% for individuals. The governor also is pushing for the approval of an early-retirement window for public workers to further diminish government-payroll pressure.

Constitutional Budget

Joint-resolution fiscal 2005 budget: $5.522 billion

Acts that establish formulas or assign resources over a course of years or for fiscal 2006: $2.389 billion

Acts approved in fiscal 2005 that are ordinary government operational expenses under the constitution: $1.448 billion

Total constitutional budget: $9.359 billion

Other spending not included in definition of Constitutional Budget: $629 million

Total government spending: $9.988 billion

Expected Revenue for Fiscal 2006

Base revenue: $8.775 billion

New revenue acts approved by Legislature: $230 million

Total expected revenue: $9.005 billion

Difference between government spending and expected revenue: $983 million

Source: Government Development Bank July 2005

This Caribbean Business article appears courtesy of Casiano Communications.
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