Good Morning, Presidents and honorable members of the Treasury Commissions of the House of Representatives and the Senate of Puerto Rico. I appear before you today to report our financial position for the present year and also to submit to you our projections for fiscal year 2000.

But before presenting the net revenue estimates of the General Fund, please let us pause to discuss some of the results of our efforts during the past year. This way you will have more and better criteria to evaluate the income estimates included as part of the Budget of the Government of Puerto Rico for fiscal year 2000.

The fiscal expansion registered in previous years continued in 1998 and goals were reached due to the following factors: (1) collection efforts, (2) growth in the number of taxpayers, (3) reduction in tax evasion, and (4) the healthy government credit, in addition to the quality of services provided by the Treasury Department.

General Fund revenues amounted to $5,903 million for 1998, which represents an increase of $302 million or 5.4 per cent compared the year 1997 (See Graph 1). This increase is significant after considering the effect of approximately $152 million in agricultural credits and funds transfers of nearly $136 million to the Highways and the Metropolitan Bus Authorities, for a total effect of $288 million. With this, we have achieved a historic increase during the last five years of $1,877 million, which represents a 47 per cent growth (See Graph 2).

It is evident that this dramatic increase in collections is directly related to the notable rise in the number of individual taxpayers for the same period. For taxable year 1997, that is, the number of returns filed in 1998 rose to 834,000. This represents an increase of 36,000 compared to the number of returns filed in the previous year and of 185,000 with respect to taxable year 1992 (See Graph 3).

In Puerto Rico, the expansion in the tax base is directly associated to the reduction in tax evasion. As we all know, this is one of the principal problems of all tax systems. Tax evasion erodes and limits the growth of the tax base. In the case of Puerto Rico, we have reduced individual evasion from 26 per cent in 1992 to an 18 per cent in tax year 1996. As we have mentioned in other occasions, our goal is to lower this figure to 16 per cent by the end of this four year period (See Graph 4).

Although much has been achieved to combat this problem that affects us all, we know that there is still a long way to go. That is why we are committed to doubling our efforts to reduce tax evasion. When a tax evader pays, justice is done and the moral fiber of those who loyally meet their responsibility is strengthened motivating then to continue complying. Thus, the Treasury receives more resources which can be used to improve services and continue lowering the tax burden of honest taxpayers. As announced by the Honorable Pedro Rosselló, in his January 26, 1999. Address regarding the state of the Puerto Rico government, the measures adopted help to make viable the proposal to continue lowering taxes for all, especially for the working class. Lastly, the responsibility we have with Puerto Rico is shared among all of us who have the good fortune of living in our beautiful island.

As a result of the healthy situation of public finances, the Government of Puerto Rico has improved its credit rating and thus the demand for its bonds in financial markets during the past years. This translates to million dollar savings in the refinancing of public debt. We can also attribute this achievement to the prudence with which government revenue estimates have been prepared. In a recent bond issue, both rating agencies, Standard & Poor’s as well as Moody’s Investor Services, had favorable opinions regarding the financial capabilities of the Government of Puerto Rico.

These favorable opinions are important since they increase the trust of investors interested in securities of the Government of Puerto Rico. This also prevents future generations from assuming the economic costs of administrative and fiscal inefficiencies of predecessors.

Another positive aspect that has contributed to increase this trust is the promptness with which the audited financial statements of the Government of Puerto Rico are made available to the public. In the last three years these statements have been made public no later than six months after the end of the fiscal year (See Graph 5). The reduction from thirteen to six months in the time needed to publish these important documents that are used in financial decision making has been recognized by the Government Finance Officers Association.

All these achievements have been attained without forgetting one of the principal elements of the Vision of Excellence of the Treasury Department: our products and services shall be considered as the best by our clients. In this sense we can assure you that a cultural change has occurred as to the philosophy of service to our taxpayers.

Proof of this are the letters from taxpayers who congratulate us for the expedience in helping them and for the manner in which they are treated. In order to verify this, an external company in May of 1998 conducted a survey in the Taxpayer Services Office. This survey covered areas of quality and customer satisfaction. The results were that 90 per cent of clients surveyed said that the quality of service is good or very good.

Complaints submitted to the Office of the Ombudsman also evidence a considerable improvement in quality and efficiency in our services to clients. In the last two (2) fiscal years, complaints have dropped by 51 per cent, that is, a decrease from 230 in 1996 to 112 in 1998.

Even though we are satisfied with this improvement, we certainly know that more can be done in this important area of public service. We shall strive towards this goal in the years to come.

After this background, we shall now discuss the economic elements and factors taken into consideration in preparing the revenue estimates.

The government revenues depend basically on the present and future economy of Puerto Rico. At the same time, due to our relationship with the United States, the economies, both national and local, are interrelated.

On the other hand, there are other external factors that affect the behavior of the economy and therefore, fiscal collections. The most relevant exogenous factors taken into consideration in the revenue estimates for fiscal years 1999 and 2000 are the following:

the effect of Hurricane Georges;

new federal and local legislation;

crude oil prices;

the 1999 Tax Reduction Proposal;

Enforcement and tax evasion reduction measures, among others.

Allow me to briefly explain the projected effect of these factors on the revenue estimates.

ECONOMY OF PUERTO RICO

The economy of Puerto Rico in fiscal year 1998 continued the growth trend that began in 1993. The Real Gross Product rose by 3.1 per cent. In current terms, the economic increase of the Gross Product was 8.5 per cent, reaching the value $34,817 million. This growth is due mostly to the effectiveness in the implementation of reforms pursuant to the New Economic Development Model, as well as to a vigorous behavior including the United States economy.

As we have indicated, the estimates of government revenues depend on the behavior of the principal macroeconomic variables. As to the recent behavior of the principal economic indicators for the present fiscal year, we can say that some were affected, especially during September and October, by the passing of Hurricane Georges through the Island. However, a speedy recovery was observed principally since December.

In terms of perspectives, Engineer José A. Caballero, President of the Planning Board, reported, in the base scenario, a real growth for the economy in Puerto Rico of 3 per cent for fiscal year 1999 and 2.7 per cent for fiscal year 2000. The growth projections in current terms are 6.6 per cent and 6.5 per cent, respectively.

A survey among the members of the Association of Economists of Puerto Rico and of the Chamber of Commerce of Puerto Rico concurs that the economy will continue its growth trend following similar patterns of the last years.

Perspectives of growth for the local economy are reaffirmed by those of the economy of the United States, which is registering a healthy performance. The year 1998 was the seventh consecutive year of expansion in the economic cycle, with a real growth of 3.9 per cent. The unemployment rate as well as the rate of inflation have been the lowest in decades.

In terms of perspectives, the economic expansion is expected to continue for the next 2 years, although more moderately from the second quarter for 1999 on. Real growth is projected to be 3.3 per cent in 1999 and 2.2 per cent in 2000

Still the most evident and of most consequence affecting collections during fiscal years 1999 and 2000 is the economic impact of Hurricane Georges. In this respect, the Planning Board considered the effect of the hurricane in the estimates of economic growth for the fiscal years 1999 and 2000.

A preliminary estimate of the effect of this phenomenon on collections concluded that losses to be claimed by individuals in their 1998 tax returns shall have a fiscal effect of approximately $30 million. Also, Electronic Lottery sales and horse racing bets were affected, which caused a reduction in collections from these categories.

The Planning board estimated that between insurance payments, and federal and local fund transfers, businesses and individuals shall receive over $2,000 million during fiscal years 1999 and 2000. This income flow will have a positive effect in the economic activity, thus stimulating collections of income tax and the 5% excise tax for fiscal years 1999 and 2000, which will offset the impact of the hurricane, mostly reflected in September and October of 1998. In fact, collection figures for November, December, and preliminary figures of January of 1999 evidence this projection.

The price of the barrel of crude oil is another external factor that directly influences collections. Since March of 1997, the price of crude oil in international markets has had the tendency to decrease. This behavior had repercussions on collections in the category of excise taxes on crude oil and derivatives. As you all know, this excise tax is applicable depending on the oil price, that is, the lower the price, the higher the tax. Forecasts of the market for the next 18 months according to the renowned firm Data Resources Incorporated (DRI) favor a moderate increase in price. Therefore, it is expected that the tax will maintain the present level, that is, $6 per barrel, which tends to indicate that the same level of collections shall be maintained.

The analyses presented offer a general picture of the principal conditions that determine General Fund collections.

The General Fund estimate for fiscal year 1999 is the same as the present estimate, for a total of $6,356 million. As you know, this represents an increase of $453 million compared to fiscal year 1998 (See Table 1 and Graph 7).

During the process of evaluating the estimate, several factors were taken into consideration, such as the trend of collections of the first six months for the fiscal year (See Table 2 and Graph 8). Also, as I said earlier, losses to be reported in tax returns and the effect on collections of insurance payments and transfers received as a result of Hurricane Georges were considered.

After taking into account and quantifying these factors, the resulting estimate of General Fund Revenues for fiscal year 1999 did not vary significantly from the present one, although the detail of income categories shows variations compared to the present estimate. Among the principal changes in the estimate is an increase of $11 million in Total Income Tax (See Graph 9). The item in this category that reflects the most significant change is the growth in Withholding to Nonresidents. On the other hand, the total collections estimated for excise taxes grew by $25 million (See Graphs 10). The items within excise taxes that contribute to this increase are the General 5% Excise Tax and the Tax on Crude Oil and derivatives.

However, Revenues from Non-internal Sources show a reduction of $37 million in the revised estimate (See Graph 11). The reduction is mostly due to Excises on Offshore Shipments. This was revised since legislation by Congress, which proposed to increase the reimbursement of the excise tax from $11.30 to $13.50, unfortunately was not approved, but had been considered in the original estimate.

The reduction in Revenues from Non-internal Sources basically offsets the increase in the other principal categories, thereby contributing to maintaining the present estimate.

These are the principal changes in the estimate for fiscal year 1999. Details of this estimate are included in Table 1.

The General Fund Estimate for fiscal year 2000 reaches the figure of $6,787 million. This amount represents an increase of $431 million or 6.8 per cent compared to the estimate for fiscal year 1999 (See Table 3 and Graph 12). This figure includes the benefits to individuals proposed in the tax reduction of 1999 reported by the Honorable Pedro Rosselló, Governor of Puerto Rico, in his Address on the State of Puerto Rico on January 26, 1999. As you, know this is the second time that this Administration does justice to the Puerto Rican family, especially the working middle class, which will receive close to 89 per cent of the benefits to be granted persuant to our Governor’s proposal. Total benefits of the proposed Tax Reduction are estimated in $282 million.

The estimate of the General Fund Revenues also includes the positive effects on collections of Hurricane Georges. The reconstruction related to infrastructure and fixed capital shall take some time to translate into additional revenues.

Also, during this year and the next, we will continue to implement additional enforcement measures and to combat tax evasion. For these years the emphasis will be on various items of excise tax.

When considering the year 2000 estimate, the items with the largest increases are the Income Tax items, with an increase of $265 million, and Total Excise Taxes with $138 million.

In terms of participation with respect to total collections, Income Tax contributes 67 percent and Total Excises with 23 per cent (See Graph 13). Income Tax is estimated in $4,558 million, of which $2,353 million are expected to be paid by individuals and $1,683 million by corporations (See Graph 14 and Graph 15).

As to the Total Excise Taxes, the estimate reaches the figure of $1,589 million, of which $258 million relates to Alcoholic Beverages, $396 million to Motor Vehicles and $609 million to 5% General Excise Tax (See Graph 16).

Before ending my presentation, I would like to share with you a few experiences of the past year that have provided great satisfaction and pride. The first was to be a part of a team put together by Governor Rosselló, who has an unyielding commitment and genuine dedication to serving the people.

The function of directing the Treasury Department is definitely a reason to be proud, since it bears a great responsibility for the welfare of the people of Puerto Rico but most of all, because it allows me to share with the select group of public servants which make up the Treasury Department.

Another fact that gives me much satisfaction is to be able to collaborate with the Legislative Assembly. The mutual respect, the interest in serving, and the awareness of the role we have as constitutional entities allows us to collaborate and discuss affairs in a respectful and productive manner, thus working harmoniously towards our common goals.

Finally, as Secretary of the Treasury I have the historic honor to present to you the first General Fund Revenue estimates of the transition to the new millenium.

Definitely, we are at the end of a century of radical changes. From the condition of extreme poverty and underdevelopment that Puerto Rico lived at the beginning of the 20^th century, we have reached the present situation, where technology, communications, information, and the daily work have evolved in a dramatic way.

The transformations brought about in the second half of this century, and particularly the last lustrum, have been transcendental. They are a result of the effort and the will of our people, who decided to stand up on their own two feet and march to progress, surpassing adverse conditions. This will for a better future is still here and is reaffirmed today at the threshold of the new millenium, summoning the dedication of all of us who have chosen to serve our fellow citizens in this common enterprise of social and economic progress. It has been up to our Government to establish the basis to receive the 21^st Century. For that:

We have improved our infrastructure

Ours is an avant-garde health services system, where everyone shares the right to better health

In respect to the Treasury Department:

We have achieved a significant fiscal expansion, which has allowed improvement in the quality of services that the people so much needed.

We have made the tax system fair and just, where the tax burden shall be reduced in 30 per cent by the end of the century.

Services to our clients have improved significantly.

A substantial reduction in tax evasion has been achieved, which not only increases government revenues but also promotes fiscal justice so that every one pays a fair share according to his capacity. The trust of the taxpayers in public office has also increased as they have witnessed the commitment to justice and fairness for all.

All this, in addition to the many laws approved relating to the New Model for Economic Development, better prepare us to meet successfully the challenges of 21^st century. The basis for a solid and stable development is already present. All that is expected now is that together, both the Executive and Legislative branches of government, continue this path to progress to assure our people a better future.

Thank you.
And remember, Hacienda is at your service.