Governor: $9.64B budget; balance means $1.5B belt-tightening
In an address to a joint session of the Legislature, the governor outlined a spending package that represents more than $1.5 billion in belt-tightening measures including $705 million in direct spending cuts and another $814 million in freezes in automatic pay hikes.
“The practice of spending more than we have is over,” García Padilla said. “We are going to make clear to the world that this island pays what it owes.”
García Padilla’s proposal translates into a 2.2 percent reduction in central government spending from the commonwealth’s nearly $9.9 billion budget for the current fiscal year (ends June 30). The proposed consolidated budget, including federal funds, is $28.13 billion for fiscal 2015, a 3 percent decrease from $29 billion this year. (A full copy of the budget is available at www. fortaleza.gobierno.pr.)
The governor framed his budget as part of a four-year economic recovery plan as the government grapples with $73 billion in debt, junk-rated general obligation bonds and an ongoing economic recession dating back to 2006.
“The recovery plan is similar to plans presented by Ireland when its credit was downgraded and which is now today investment grade. It’s about economic development and offering jobs to citizens,” Treasury Secretary Melba Acosta said prior to governor’s speech. “The budget is part of this larger picture. This budget emphasizes spending, But more than cutting costs, this budget rationalizes public expenditures to make sure that each and every dollar is spent as well as it can.”
For the first time in 20 years, the budget also includes money for previous refinancing of outstanding debt — some $575 million for fiscal 2015 — something that was not included before in annual budgets, Acosta said.
The $1.5 billion reduction in projected spending will be obtained through a far-reaching government overhaul that will include the closure of about 100 public schools, elimination of 23 public agencies, restructuring of public corporations, a 7.5 percent reduction in central government spending, and freezing of scheduled annual automatic pay hikes for the judicial and legislative branches, as well as the University of Puerto Rico, Office of Management & Budget Director Carlos Rivas said.
The commonwealth will not cut government jobs or reduce public employees’ work hours or salary. Employees who work at agencies slated for shutdown will be absorbed by related government entities.
Agencies slated for the chopping block include: the Youth Affairs Office, which would be integrated into the Economic Development & Commerce Department; the Woman’s Affairs Advocates Office, which will be integrated into the Family Department; Veterans Advocate Office, which will be integrated into Veteran’s Affairs Administration; the National Parks Co., which will be integrated into the Sports & Recreation Department; the Inspector General’s Office, which will be integrated into the OMB; and the Maritime Transportation Authority and Metropolitan Bus Authority, both of which will be integrated into the Department of Transportation & Public Works.
“We’ve been working on this for the past 13 months. We’ve given a lot of thought to this,” Acosta said.
The elimination of agencies and reduction of schools, which are still under evaluation, will not result in reduced services to local residents or overcrowding and extended hours for public school students, officials said.
Many of the schools slated for closure have too few students and/or are in poor condition while a nearby school in better condition is available to students of schools slated for closure. Under law, there has to a public school within four miles of where a student lives and this will continue to be the case.
“These schools are schools that do not have a reason to be,” Rivas said, adding today there are 430,000 public school students versus 750,000 public school students in the 1980s. “Based on this demographic pattern, the number of public school students will drop to 320,000 students in five years.”
The closures will affect about 3,000 teachers, but these, like their peers at government agencies slated for closure, will be transferred to the Education Department’s central offices to do other work, Rivas said. The commonwealth also is reviewing efficiencies in school bus system, something which costs $200 million a year
Since the Legislature must review and approve these cost cutting measures, the commonwealth has no plans to do further refinancing of government debt for now, Acosta said.
“Reports that we have hired companies to restructure our outstanding debt are untrue as we don’t know what is going to happen with this government overhaul,” Acosta said. “We can’t talk about refinancing until we are sure everything is in place, and right now everything is on the table.”
Plan rests on $652 million hike in revenues
The fiscal 2015 spending plan anticipates $652 million in increases in the commonwealth’s recurring annual income, including Puerto Rico’s inclusion in the multi-state electronic lottery known as PowerBall.
“In net terms, considering loses from other electronic lotteries, Power Ball should net $13 million increase in funds,” Acosta said. “Instead of a chance to win $8 million, people will have a chance to win $400 million, but of course the odds are much smaller.”
Treasury’s review of incoming cargo at island piers to ensure the levying of the sales & use tax (IVU by its Spanish acronym) should glean an added $170 million. Other legislation that has been approved and is in the pipeline plus increased rum sales by Destilería Serrallés are projected to generate $112 million a year in added income for the commonwealth.
The commonwealth also expects to raise $370 million a year through a slew of proposed legislation it will present with the budget.
Proposed measures include reducing the 24 percent alternate tax rates to individuals who earn $300,000 or more versus the current starting level of $500,000.
The government also plans to reduce the exemption on passive income in local certificates of deposit from $4,000 a year in accumulated interest to $2,000 a year.
The commonwealth also will propose transferring the $39 million in fines collected by the Integrated Transportation Authority to the cash-strapped and debt-laden Highways & Transportation Authority and freezing the formula for the Green Energy Fund at its current level of $20 million.
Due to island’s reduced population and tax base, the measures to collect more taxes should amount to a nominal increase of $40 million in Treasury’s projected overall collections for fiscal 2015, Acosta said.