LegiStorm

Summary:

The government of Puerto Rico faces multiple fiscal challenges in the fall of 2015. Concerns regarding the sustainability of Puerto Rico's public finances have intensified over the past year, despite several measures taken by the island's government to reduce spending, increase revenues, and restructure its obligations. The Puerto Rican government outlined a medium-term strategy to address those challenges in a fiscal plan put forth in mid-September 2015. A recent financial liquidity analysis projects that the government would likely run out of money by November 2015. Much of the island's liquidity challenges stem from substantial debt service costs facing the central government and its public corporations. The Puerto Rican government had warned that it may "lack sufficient resources to fund all necessary governmental programs and services as well as meet debt service obligations for fiscal year 2016," although it had earlier contended that it has sufficient funds available. Much of the Puerto Rican government's revenue stream for the first part of its fiscal year, which began on July 1, is earmarked to redeem revenue bonds. At the beginning of August 2015, Puerto Rico did not make a full interest and principal payment due on bonds issued by the Public Finance Corporation, a subsidiary of the island's Government Development Bank. On June 29, 2015, Puerto Rico's governor, Alejandro García Padilla, stated during a televised address that "the debt is not payable." García Padilla said his administration would seek concessions from the island's creditors as part of a new fiscal strategy, which would be developed by a newly established working group on economic recovery and debt restructuring. On the same day, the Puerto Rican government released a report it had commissioned from three former International Monetary Fund economists. The report described severe short-term funding challenges as well as long-standing issues with key parts of the Puerto Rican economy and public sector. On September 9, 2015, a working group appointed by the governor released a plan that outlined a strategy for addressing the island's fiscal and economic challenges. Puerto Rico's financing gap over the coming five years, according to the plan, is nearly $28 billion. Proposals put forth in the plan, along with a hoped-for improvement in economic growth, were said to cut that gap in half. Some criticized the plan, calling for sharper cuts in spending or for better protections for creditors, and have questioned some of the plan's underlying assumptions. The island's ability to access credit markets appears highly uncertain. The Puerto Rican government, either directly or through financing arms, had been able to issue bonds, but on relatively expensive terms. On July 3, 2015, the government enacted a law to enable issuance of revenue bonds by publicly owned insurers with the aim of providing liquidity for the public sector for the first part of the fiscal year, which began on July 1. The Puerto Rican government and its electric power utility made scheduled bond payments at the beginning of July 2015. The power utility and certain investors reached a preliminary debt relief agreement on September 1, 2015. The island's ability to meet future debt service payments depends in part on the willingness of investors to roll-over existing debt. A $2.9 billion bond sale which the Puerto Rican government had contemplated appears to be on hold. The island's water and sewer authority, however, may issue new revenue bonds to fund infrastructure improvements. The precarious state of Puerto Rico's public finances stems in part from prolonged economic weakness. Economic growth has been sluggish even before the 2007-2009 recession, and official forecasts project a continuation of slow growth. Previous analyses have pointed to low employment and labor participation rates, high rates of outmigration leading to a decline in population, an economic structure shaped more by tax advantages than comparative advantages, and the effects of intensified global competition, among other factors. Others have pointed to weaknesses in fiscal and operational controls. This report will be updated as events warrant.