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Puerto Rico Muni Bonds Extend Rally as Budget Avoids Borrowing

April 30 (Bloomberg) -- Puerto Rico bonds rose to a three- week high after Governor Alejandro Garcia Padilla announced a budget plan that avoids deficit financing.

The $9.64 billion proposal for the fiscal year beginning July 1 is $710 million less than the current budget. Garcia Padilla, who took office in January 2013, wants to merge 25 agencies into other departments, freeze public workers’ salary and benefit increases and close about 100 schools to fill a $1.5 billion budget gap, Carlos Rivas, director of the Office of Management and Budget, said in an interview from San Juan.

Junk-rated general obligations maturing in July 2035 traded today at an average price of about 92 cents on the dollar, the highest since April 9, data compiled by Bloomberg show. The U.S. commonwealth sold the securities March 11 at 93 cents, and they peaked at 99 cents the following day.

Balancing the budget without selling debt is “credit positive,” said Gary Pollack, who oversees $6 billion of munis as managing director in Deutsche Bank AG’s private-wealth unit in New York. “It’s another step in a number of small steps that the new administration has taken to put the commonwealth on a stronger financial and economic path.”

Garcia Padilla’s proposal is the first spending plan in 20 years that doesn’t use borrowing to fill budget gaps, Ingrid Vila Biaggi, the governor’s chief of staff, said in an April 28 interview.

April Stretch

Puerto Rico securities gained the past seven trading days, the longest stretch since March 10, according to S&P Dow Jones Indices. The territory’s debt has gained 5.9 percent this year, more than any state.

With the budget, Puerto Rico will “move forward without going to the market to either ask for money to operate the government or to keep refinancing debt,” Treasury Secretary Melba Acosta said in the interview today.

Puerto Rico’s economy may grow 0.2 percent in fiscal 2015 and 0.1 percent this year, according to the Planning Board. The economy has shrunk in five of the past seven fiscal years, casting doubt on the ability of the island and its agencies to repay $73 billion of debt.

Officials expect to collect $9.64 billion of revenue in fiscal 2015, $110 million more than this period, Acosta said. To curb expenses, the budget recommendation includes $547 million of cuts in appropriations, including reductions to employee benefits, Rivas said.

“That’s the core of the budget reduction,” Rivas said.

Garcia Padilla wants to lower spending after boosting taxes last year to raise revenue. Lawmakers increased taxes on manufacturers not based on the island and expanded the sales-tax levy to help balance this year’s budget.

While the governor’s proposal won’t include debt sales to support operating expenses, it uses proceeds from the $3.5 billion March 11 bond sale to pay some of the interest on the deal over the next two years, according to bond documents.