Puerto Rico Governor Weighs Raising Taxes for Highway Agency
Puerto Rico Governor Alejandro Garcia Padilla is considering raising taxes on oil products and increasing license fees on luxury cars to support $2.2 billion of planned borrowing this year that will help shore up the island’s highway authority.
The governor, 41, who took office in January, described his plans to restore the finances of the Puerto Rico Highways and Transportation Authority in an interview today in San Juan during the commonwealth’s annual credit conference with municipal-bond investors and bankers.
Any plan for tax and fee increases would need legislative approval. Garcia Padilla said he doesn’t support raising tolls or gasoline taxes that drivers pay at the pump. In the past six months, the governor has passed pension changes, proposed a 67 percent water-rate increase, and found revenue to balance the budget for the fiscal year ending June 30.
“We will tackle the highway authority issue with the same seriousness,” Garcia Padilla said.
The governor expects to sign legislation to raise revenue for the highway authority by June 30. Increasing the agency’s take would help repay $2.2 billion that it owes to Puerto Rico’s Government Development Bank, the island’s investment office and fiscal manager of its debt. The unpaid loans to the highway authority account for 24 percent of the bank’s debt portfolio, according to Javier Ferrer, president of the institution.
Debt sold by the self-governing U.S. commonwealth is tax free nationwide and its bonds are found in many portfolios, giving the securities an outsized role in the $3.7 trillion municipal-debt market.
The highway authority has been relying on development-bank loans to balance its operating budgets. The road agency owes the bank $2.2 billion, up from $84 million in fiscal 2008, Ferrer said. It also has about $5 billion of municipal debt.
Even with the agency’s growing liabilities to the development bank, investors are demanding less additional yield on its debt. Highway authority bonds due July 2039 were valued May 16 by BVAL at a yield spread of about 2.6 percentage points above benchmark municipals. That compares with 2.9 percentage points at the start of the year. The bonds are rated Baa3, Moody’s Investors Service’s lowest investment grade, with a negative outlook.
Garcia Padilla, a member of the Popular Democratic Party, which seeks to maintain Puerto Rico’s status as a commonwealth rather than fighting for statehood, is trying to keep the island’s credit ratings from falling to junk. All three major credit-rating companies grade Puerto Rico’s general-obligation bonds one step above non-investment, with a negative outlook.
The governor said he wants to reduce deficit financing to balance operating budgets and add private-sector jobs. While Puerto Rico’s unemployment rate fell to 13.7 percent in April, the lowest level since December 2008, it’s higher than any U.S. state.
“We are working to upgrade Puerto Rico,” the governor said regarding the commonwealth’s credit rating. “Puerto Rico is in better shape than it was” in December, when Moody’s cut its rating.
The administration is working with the legislature to pass a $9.8 billion budget for the fiscal year beginning July 1. That spending plan relies on $1.05 billion of new revenue by expanding the sales-tax base, including imposing the levy on business-to-business transactions, and cutting the rate to 6.5 percent from 7 percent.
The governor wants to avoid using other types of taxes to raise revenue, Treasurer Melba Acosta said.
“There are other taxes, income taxes, but we understand it’s more fair to increase the base and lower the percentage,” Acosta said in an interview. “More people take a bit of responsibility and that’s the philosophy of the budget that was presented.”
After growing in fiscal 2012 for the first time since 2006, officials expect Puerto Rico’s economy to contract this year and then grow by 0.2 percent in the fiscal year beginning July 1, according to the Puerto Rico Planning Board.