Puerto Rico plans to slash 30,000 government jobs

SAN JUAN, Puerto Rico, March 3 (Reuters) - Puerto Rico Governor Luis Fortuno said on Tuesday he would slash 30,000 jobs, freeze salaries of government workers and raise some taxes, as he warned the U.S. Caribbean territory must confront "the reality of a bankrupt government."

Fortuno said in a televised address that he would implement a series of temporary tax hikes on both businesses and individuals aimed at stabilizing the government's finances and avoiding a credit downgrade.

A Republican who took office in January, Fortuno said his administration aimed to cut government spending by $2 billion annually. The island's current deficit is $3.2 billion and could reach $4 billion the end of this fiscal year, June 30.

He also announced plans to jump-start the economy, which has been in recession for three years, by increased infrastructure investment, providing guarantees for loans to small- and medium-sized businesses and incentives to home buyers.

"We all must confront the reality of a bankrupt government," Fortuno said. "The moment for action is now. It's up to all of us to put our house in order."

Despite the dire situation, Puerto Rico is counting on $5 billion from the Obama administration's stimulus package over the next two years and $125 million that it expects to get for infrastructure spending from its government development bank.

Fortuno said a credit downgrade would spark the loss of some 130,000 private sector jobs and cut the value of government pension funds in half.

"If we do nothing the negative impact on the island economy would be massive, and it would take eight to 10 years to recuperate," he said.

Noting that the public payroll jumped to $5.53 billion in 2009 from $3.748 billion in 2001, a 6 percent annual growth rate, Fortuno said cutting the public workforce was necessary.

He said "more than 30,000" jobs would be cut during the next year. Departing workers will be offered a voluntary retirement, then layoffs will begin, based on seniority, starting on July 1.

Wage and benefits will be frozen during the next two years, he said.

To shore up revenues, Fortuno said he would implement a two-year moratorium on tax credits to many businesses and impose a two-year, 5 percent tax on banks, corporations, insurance companies and cooperatives, as well as on individuals earning $100,000 annually.

Permanent tax increases will be levied on cigarettes and alcoholic beverages to pay for a healthcare program for the poor, the governor said.

Bondholders and credit rating agencies had been pressing the government for immediate action.

Fortuno's administration wants to borrow up to $4 billion in municipal markets over the next four years, but large institutional investors said during a meeting in San Juan last month they would not buy more bonds until they see steps taken to improve the budget situation.

Moody's and Standard & Poor's analysts have called Fortuno's plans "ambitious." They said Puerto Rico must improve its finances to avert a credit downgrade, which would plunge its debt to non-investment grade, or junk bond, levels.

Puerto Rico's credit is just a notch above junk status, and the government is trying to avoid a downgrade at all costs.

Political opponents and union leaders attacked the Fortuno plan, saying they will fight to save every government job. A protest against the job cuts is planned for Friday.

"The Fortuno administration has to understand it can't mess with the rice and beans of workers," said Victor Villalba of the Puerto Rico Workers Central. (Writing by Jim Loney; Editing by Leslie Adler)