Puerto Rico’s flat budget
Puerto Rico’s plan for a balanced budget for fiscal year 2015 is ambitious. Economic conditions continue to worsen and the commonwealth had a massive tax revenue shortfall in April. Although bondholders were a promised a balanced budget, uncertain tax collections are threatening a smooth transition away from deficit financing. There appears to be a growing political struggle as Puerto Rico attempts to cut $1.5 billion in operating expenses from a $9.6 billion budget.
The effort to achieve a balanced budget reverses years of deficit spending. In a paper, Moody’s describes the new budget: “The proposed budget carries material risks associated with its implementation and projected revenues. Despite these risks, the budget does indicate positive movement toward structural balance and avoidance of new deficit financing.”
I’m less positive than Moody’s. Some in Puerto Rico have pointed out how spending moved up in 2012 as part of the electoral process to gain support from voters. Post-election spending fell in 2013, inched up slightly in 2014 and is expected to be flat between 2014 and 2015.
Although the overall level of spending is flat between 2014 and 2015, spending on social services and employees will decline by $1.5 billion as payments to bondholders increase and some non-recurring revenue is eliminated.
Is the economy robust enough to slash government spending without slowing employment and economic growth? Moody’s notes that the island’s total non-farm employment last year was 10.2 percent, down since 2007, while mainland employment was just 1 percent less than six years earlier. I think the new budget will add to unemployment figures, while lower personal consumption will decrease tax revenues for the government.
I’m hearing chatter of new taxes on cash transfers and aviation fuel in Puerto Rico. The government is pushing to collect corporate tax revenues from companies that filed extensions for their April tax payments. I’m hearing that some firms are waiting for payment from the government for services and are unable to make tax payments until they receive those funds.
There is enormous pressure on all parts of the government to lower expenses and pay funds owed to other parts of the government. Noticel reports on the University of Puerto Rico’s effort to reduce the annual charge it pays to PREPA, the government electric utility:
Although the president of the University of Puerto Rico, Uroyoán Walker celebrates the operating budget of the institution remain ‘intact,’ the financial stability of the UPR requires a series of measures, which are still under evaluation. Among them is a project of self-sufficient energy to escape the charge of $50 million annually by the Electric Power Authority (PREPA).
Reducing government employment will cut costs, but it could also raise pension costs for some categories of employees:
According to http://t.co/gMjRW5YTfZ, nearly 1,700 PREPA employees may retire shortly, requiring an immediate pension cash injection of $75MM
— PRTaxCheck (@PRTaxCheck) May 19, 2014
The next twelve months may be more critical for Puerto Rico than the period before the $3.5 billion general obligation offering in March. The government has set a high threshold for performance.
My comments on Puerto Rico for RT start at 14:28 in the video.