Puerto Rico stumbles on tax collections

May 12, 2014

Puerto Rico

Puerto Rico’s April tax collections suffered a big collapse. The projections were missed by 27 percent, or $442 million. The data was released last Friday. The April shortfall, caused mostly by reduced corporate income taxes, imperils year-end budget figures. It also jeopardizes the recently proposed fiscal year 2015 budget that was proposed by Puerto Rico Governor Alejandro García Padilla.

If tax collections continue to taper, either substantial additional taxes must be levied or cuts larger than the anticipated $1.5 billion will need to be made for the 2015 budget to be balanced. Bondholders have been promised that the 2015 budget will be balanced and that it will not rely on debt borrowing to fill budget shortfalls. April’s tax collections, if not made up in May and June, will make this promise hard to keep.

According to Morningstar, 67 percent of U.S. municipal bond funds (as of March 31) have exposure to Puerto Rico general obligation and agency debt. The gross market value holdings of Puerto Rico bonds held by 486 U.S. municipal bond funds increased to $12.69 billion as of March 31, from $12.51 billion on December 31.

Overall, the number of securities held by municipal funds likely decreased as the market value of Puerto Rico bonds increased an average of 7 percent, according to the S&P Municipal Bond Puerto Rico Index.

While mutual funds have been reducing or maintaining their exposure to Puerto Rico debt, 12 Oppenheimer municipal bond funds and one Eaton Vance bond fund have increased their holdings. These funds held $2.69 billion of Puerto Rico bonds as of December 31, which increased to $3 billion as of March 31, 2014:

Puerto Rico

It is unclear where new demand for Puerto Rico bonds will come from to support these prices. Banks and insurance firms are unlikely to own junk-rated Puerto Rico debt (tax supported COFINA bonds currently remain investment grade) due to regulatory constraints. Some large brokerage houses are requiring their sales representatives and customers to sign waiver documents before buying Puerto Rico bonds, just as they would with any junk-rated debt.

The local Puerto Rico retail investment market was decimated by the implosion of UBS mutual funds, which are currently the subject of FINRA arbitration.

Hedge fund holdings are not publicly available. Yields on Puerto Rico general obligation debt are trading higher than most countries except for Ukraine, Venezuela and Argentina. The yield curve remains inverted as of May 7, according to Thomson Reuters Municipal Market Data:

Puerto Rico

The less-than expected tax revenues is devastating for Puerto Rico. Now a fear that massive tax increases from last year will slow the economy may be realized as corporate tax revenues fall. The near term outlook for Puerto Rico is getting dark.


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> The less-than expected tax revenues is devastating for Puerto Rico… The near term outlook for Puerto Rico is getting dark.

We certainly can count on you for spinning the usual PR doom and gloom at any opportunity, Cate. What you conveniently forget to explain is that the shortfall in corporate tax collection is mainly due to a 3-month filing extension, for which 53% of businesses that applied did not send a tax prepayment. Also, businesses whose fiscal year does not end on Dec 31 now have a deadline other than Apr 15 to file a return. It may turn out that businesses decided to purposely postpone the tax payment and suffer a 10% penalty and interest for cash flow reasons. We will have to wait a few months to get the final tally. Meanwhile, try to stay positive, or at least objective, for a change (I do realize it is a lot to ask).

Posted by CraigL | Report as abusive

“As of today they are not contemplating new taxes. Now, with the information that comes to us today, I would ask the secretary of the Treasury to let us know if here is a pattern of behavior that is atypical and that was what happened, “said Senate President Eduardo Bhatia, who questioned the fact that many employers do not pay their taxes.

Last week, the secretary of the Treasury, Melba Acosta reported that 53 percent of the returns on income for businesses arrived with no request for extension and partial payment, as is customary, when an extension is requested.

“This reduction in estimated income-that is very serious, more than $ 300 million – will know where … More than 50 percent of the companies settled with extra time your return. What we need now is to investigate who they are, and within a particular sector employers in Puerto Rico is, “said Speaker of the House of Representatives, Jaime Perello, while questioning the reason that entrepreneurs may have to request an extension without partial payment.

“What we are asking the Secretary [of the Treasury] is that we interpret what happened because obviously will not tolerate such behavior,” said Bhatia, referring to the possibility that it is a concerted action business sector.

http://www.noticel.com/noticia/160236/me rcado-discute-la-devastadora-merma-en-lo s-ingresos-de-hacienda.html#.U3FpGT9YOLY .twitter

Posted by Cate_Long | Report as abusive

> …referring to the possibility that it is a concerted action business sector.

Yes, if everything else fails, there are always conspiracy theories to lean on, like the one of a tax-deferral/avoidance collusion among 20k+ PR businesses:
“The Treasury Department fielded 38,518 corporate income tax filings by the April 15 deadline: 16,167 were tax returns; 2,009 were extension requests with payments; and 20,342 were extension requests without payment.”

Some people should get their heads examined (of course at their own, not PR’s or Reuters’, expense).

Posted by CraigL | Report as abusive