Puerto Rico May Shut Down Government Without Loan

April 25 (Bloomberg) -- Puerto Rico may shut down its government next week unless the legislature approves a loan needed to cover a $738 million deficit, Standard & Poor's said today, citing government officials.

 The loan from the U.S. commonwealth's Government Development Bank includes provisions to cover government employee salaries through the end of the fiscal year on June 30, S&P said. A shutdown would affect all nonessential government departments including the 1,562 schools and 75,000 employees in Puerto Rico's education system as well as an estimated 200,000 government employees, the credit-rating company said.

 ``It remains uncertain whether there will be enough consensus in Congress to approve the amount requested,'' said S&P analyst Horacio Aldrete in a statement.

 The Caribbean island -- whose per-capita debt burden is $5,758, 61 percent more than Connecticut, the U.S. state with highest tax-supported per-capita debt -- has repeatedly borrowed money from the development bank to balance its budget. The latest fiscal crisis has been exacerbated by a political stalemate between Governor Anibal Acevedo Vila and lawmakers over tax increases and spending cuts the governor says are necessary to keep Puerto Rico solvent.

 ``The potential for a temporary government shutdown comes on the heels of a polarizing legislative debate over fiscal reform and the approval of a sales tax aimed at solving the commonwealth's chronic budget deficits,'' Aldrete said.

 David Hitchcock, another S&P analyst, said any government shutdown would likely be temporary.

 Near Junk

 Puerto Rico's debt rating has fallen to near-junk status as it has continued to borrow to cover operating deficits. The government has borrowed $5 billion from the Government Development Bank as spending on education and employee payroll rises faster than revenue.

 Three out every 10 workers in Puerto Rico are employed by the government and employee payroll represents about 80 percent of government spending. The Commonwealth is also saddled with a pension shortfall of about $10 billion.

 S&P rates Puerto Rico's debt BBB, the second-lowest investment grade ranking, and on March 22 signaled it may cut the rating when it put the commonwealth on ``CreditWatch.''

 ``We will continue to closely monitor the commonwealth's progress toward adoption of a balanced budget and expect to reevaluate the CreditWatch designation within the next two months,'' Aldrete said.

 Lower ratings may reduce the value of Puerto Rico's $24 billion in outstanding debt and raise borrowing costs as investors may demand higher yields for taking on the risk of the debt.

 `Downside Risk'

 The extra yield or spread, investors demand to own Puerto Rico bonds maturing in 2036 rather than top-rated municipal debt has widened to 0.45 percentage point, or 45 basis points, from 37 basis points in the past two months, according to trade data reported by the Municipal Securities Rulemaking Board.

 ``The commonwealth has been under intense scrutiny by the rating agencies for quite a while,'' said Tom Gamello, head of municipal credit research at Dreyfus Corp., which holds $25 billion of municipal bonds. ``You'd have to have some extra compensation for the downside rating risk.''

 Senate President Kenneth McClintock said the government has enough money to last through the first week of June and that shutting down nonessential services was premature. Puerto Rico's current budget is $9.6 billion.

 ``Its very risky to shut down schools on April 27 when you only have a week and half of classes. That will wreak such economic and social havoc,'' McClintock said.

 Statehood Scrap

 Governor Acevedo Vila, a member of a political party that supports having Puerto Rico remain a commonwealth, has battled with pro-statehood legislators over the size of a sales tax increase to help close the budget gap.

 Acevedo supports a 7 percent increase in the sales tax, while leaders in the Legislature lower chamber have proposed a smaller 4 percent increase.

 Acevedo has built a coalition with McClintock, who was expelled from the pro-statehood party in 2005 after battling with its party leader, former Governor Pedro Rossello. The House, which is controlled by Rossello, has blocked efforts to push for a bigger sales tax increase and has balked at legislation that would cut 3,000 to 5,000 government jobs a year.

 McClintock said he supported securing a ``loan to end all loans'' of up $600 million from the development bank to cover the commonwealth's deficit combined with guarantees the government wouldn't borrow for operating expenses again.

 The loan would be paid back with 1 percentage point of the new sales tax. The portion of the sales tax would also pay down the other $5 billion it owes the bank.