Puerto Rico Governor Alejandro Garcia Padilla was expected on Sunday to sign a new budget containing $1.38 billion in tax hikes that risk harming the island's fragile economy and a $700 million structural imbalance that worries Wall Street.
The $9.77 billion annual budget will go into effect on Monday, pending the governor signature, and includes tax increases and payments on pension reforms meant to ease worries in America's municipal bond market, where Puerto Rico already pays the highest interest rates of any big borrower on its $70 billion of debt.
The three US major rating agencies grade Puerto Rico just above junk at Baa3/BBB minus and are mulling downgrades, which could prompt heavy selling by institutional investors and raise future borrowing costs for the island, according to analysts.
The budget is nearly $700 million larger than the current one and includes $200 million in debt financing. It also puts off about $500 million in bond payments due during the year through a planned refinancing of existing debt.
With an economy in decline since 2006, Puerto Rico has not had a budget in more than a decade that did not rely on borrowed money.
The main new taxes include an expansion of a sales and use tax known as IVU, mostly on previously exempt business-to-business activities for large companies that is seen raising $287 million, and a gross sales tax for businesses with sales of $1 million annually or more that should bring in $522 million. The budget also lifts the corporate tax rate to 39 percent, an action forecast to net $270 million.
In a related move, the government last week passed legislation increasing revenue at the Puerto Rico Highways & Transportation Authority by increasing an oil tax and other measures meant to raise $280 million for the public corporation. The new revenue was expected to enable the agency to refinance a $2.1 billion loan with the island's Government Development Bank in the municipal bond market.
GDB President Javier Ferrer said the measures needed to be enacted by the close of the island's fiscal year on Sunday or the bank would have had to start making reserves for potential losses on the loan, according to an agreement with its auditors. The GDB wants to begin refinancing the highway debt this fall.
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