Puerto Rico has a proposal to address its fiscal morass, but it will likely face a raft of challenges.
Earlier this week, recommendations unveiled by commonwealth officials would cut government benefits, increase taxes and restructure a significant portion of its $73 billion in debt.
The proposal was devised by the Working Group for the Fiscal and Economic Recovery of Puerto Rico, a group established by Gov. Alejandro Garcia Padilla and comprised of government officials.
Many of its aspects dovetail with a government-commissioned analysis issued in June led by former IMF managing director Anne Kreuger.
The Working Group calls for increasing revenue, lowering expenses and stimulating the economy. To oversee a number of the changes, the group recommends creating a financial control board.
Major gaps without reforms
Despite previous measures undertaken by the government, the group sees “significant financial gaps for at least the next five years” without major reforms.
“The cumulative financing gap for the commonwealth is projected to be $27.8 billion from fiscal years 2016 to FY 2020 absent corrective action.”
Excluding the power utility PREPA and PRASA, the water authority, Puerto Rico has $47 billion of debt, of which $18 billion in principal and interest is due in the next five years and would be targeted for restructuring.
About half the gap would be addressed by reform measures, but that would still leave a shortfall of at least $12 billion.
Among its proposals, the group recommends consolidating public schools, cutting aid to some cities, controlling health care costs, installing new accounting and financial systems, diversifying Puerto Rico’s fuel base and investing in infrastructure.
Additionally, the group wants the U.S. government to provide “a legal framework to restructure the commonwealth’s liabilities in an orderly process,” as well as Medicaid and Medicare treatment and funding changes and the implementation of tax incentives.
To oversee the proposals, a financial control board would be formed and include five members appointed by the governor serving staggered four-year terms.
The board would have its own revenue source for financing its operations, hire its own staff and possess subpoena powers to ensure its independence.
Litigation likely
Under the proposal, it’s unclear how investors of Puerto Rico’s various classes of debt will fare.
Political considerations will play a role, both in Congress and in the commonwealth, where gubernatorial elections are a little more than a year away. Litigation will also be a factor.
Ted Hampton, vice president at Moody’s Investors Service, said in a statement after the report was issued that while it’s comprehensive, “Moody’s believes the commonwealth’s ability to implement many of the recommended policies will pose political challenges.”
“It is unlikely that holders of the many Puerto Rico bonds will agree to forgo or defer substantial sums of promised principal and interest,” he said. “There is a high probability of protracted litigation, particular on the part of investors holding general obligation or other securities with strong legal protections.”
