A plan for Puerto Rico
Puerto Rico’s governor, Alejandro García Padilla, announced a six point plan to restructure the government in light of the credit rating downgrades by Standard & Poor’s and Moody’s.
He opened his speech that was delivered live on Monday:
In these difficult times, I want to speak personally to each citizen, whether in the living room or the balcony of their homes. I want talk about the budget of Puerto Rico, the current situation and how we face it together. It is time to pay bills that others left without paying.
The governor went on to outline six steps the government will take:
1. We will reduce the budget $170 million in current fiscal year. Much of the reduction will be in contracts with agencies. To be clear, we will succeed without employee dismissals.
2. Renegotiate loans in which the payments are accelerated by credit downgrade and continue to work on alternative financing.
3. Increase our revenue by strengthening measures against tax evasion. The justice system does not allow a greater burden to be put on the honest citizen. The evader not only mocks the government, but attacks honest Puerto Ricans.
4. In less than a year, propose a new tax structure allowing the best balance between all sectors of the country and promote economic development. These studies include the re-valuation of the SUT to explore if it is the best alternative for all, taking into account the debt issued against that source.
5. The public corporations must take responsibility for the results of its operations. They cannot think that the general fund will remain the lifeline for their resources.
6. I will present a balanced budget. I will not borrow to balance the budget. This has not happened for many years. To accomplish this, we will reduce government spending by at least $800 million, which will require these measures:
- Keep government positions at the current level as a maximum;
- Reduce payroll by an additional 10 percent, this will represent a 20 percent reduction since I started as governor.
- Reduce the cost of professional services by an additional 10 percent
- Every government agency will have to make adjustments required for equal or less than the budget present without compromising the jobs.
In his speech, the governor highlighted the importance of building up the economy. He specifically referenced the need to decrease energy costs for the island. These proposals seem reasonable, but unlikely to achieve savings of $800 million for fiscal year 2015 if there are no government layoffs.
Early Tuesday morning, the Government Development Bank announced that Barclays, RBC Capital Markets and Morgan Stanley would lead a general obligation bond offering for Puerto Rico. They have also rescheduled the investor conference call to February 18.
Caribbean News reported a story (after publishing and removing it several times) that the Royal Bank of Canada and a consortium of banks were structuring a bank loan to backstop the government of Puerto Rico. Loan terms cited yields in the range of 11 to 15 percent. Both RBC and the GDB denied the story. Here is the most important quote:
A new Municipal Revenue Financing Corp. is another likely option, and sources said that a fresh legal opinion on the structure is expected to be ready to present to investors during the Feb. 12 investors teleconference.
There have been numerous suggestions that a new “Cofim” structure would securitize the slice of the sales and use tax that has been flowing to municipalities. Estimates have suggested that it could collateralize $540 million of new Cofina bonds. Look for this in the rescheduled investor conference call on February 18th.
January revenue numbers for Puerto Rico were also released Monday. They suggest continued divergence between increasing corporate taxes and weakening individual taxes. Large gains were seen in corporate income and Act 154 tax revenues. Meanwhile, sales and use tax revenues (SUT) gained only $3 million for the July through January period. Although the Puerto Rico government trumpeted the amount of SUT tax collected as “record,” the sales base for SUT has been expanded. The small gain in SUT revenue is lower than the $76 million that the GDB had projected for the period. SUT revenues are a good proxy for the condition of the underlying economy. Weakening individual taxes suggest that the economy is contracting further. We still await release of the December Economic Activity Index.
Lots of pieces are being positioned ahead of a possible bond financing. Essential questions remain about the stability of Puerto Rico’s revenues and the condition of the economy. Hopefully, when the government brings a general obligation bond to market it publicly files an official statement. We have not seen any financials for the GDB since its June 30, 2012 statement. Stay tuned.