Despite enacting pension overhaul, a long list of hurdles still confronts Puerto Rico, its governor said Friday.
“We have work to be done. We have big challenges, but we’re ready, willing and able to conquer them,” Gov. Alejandro García Padilla said at an investor conference in San Juan, the first such event since his election last year.
Officials from the commonwealth and the Government Development Bank for Puerto Rico cited as its major challenges recurring budget deficits, credit-weakening public corporation struggles and the pending teachers’ retirement system overhaul.
The three major credit rating agencies over the last seven months have lowered Puerto Rico to just above junk, all with negative outlooks. Fitch Ratings and Standard & Poor’s rate the commonwealth’s general obligation bonds BBB-minus, while Moody’s Investors Service rates them Baa3.
Moody’s, however, said Wednesday that the pension overhaul, which calls for reduced benefits and increased contributions, and García Padilla’s proposal to increase sales tax revenues are credit positive. The commonwealth’s pension funding level is just under 7%.
Puerto Rico’s unemployment rate on March 31 stood at 14.2%, about double the U.S. rate overall.
In a budget presentation Friday, officials said Puerto Rico will continue to phase out the restructuring of GO and Public Buildings Authority bonds in fiscal 2014. Though debt restructuring and deficit financing, though down, is still $775 million, paid from Government Development Bank lines of credit. The intent, officials said Friday, is to “bond-out”with tax-exempt refinancing.
The proposed budget includes increased sales tax revenues from expanding the business-to-business sales and use tax. Broadened collections of that tax should enhance debt coverage levels of the Puerto Rico Sales Tax Financing Authority, known commonly as Cofina.
García Padilla’s proposal to expand sales and use tax base revenues would coincide with a 0.5% rate reduction, to 6.5%, after Dec. 1. The rate reduction would not affect Cofina bondholders, he said Friday.
“A number of measures in the budget may prove politically challenging, and what form the final budget will take after legislative debates is uncertain,” Moody’s said.
Puerto Rico has $10.6 billion in GO debt. The tentative bond calendar for 2013 includes $600 million in restructuring for fiscal 2013; $400 million in marketing; and $175 million in restructuring and takeout bonds for the Public Buildings Authority. It also plans some Highways and Transportation Authority issuance.
Aqueduct and Sewer Authority executive president Alberto Lázaro Castro, speaking in the afternoon, said electricity costs and capital requirements to comply with environmental regulations are the authority’s primary challenges.
The authority’s board has proposed a 67% rate increase which if enacted, would take effect in July or August.
The authority’s most recent downgrade came last month, when Fitch lowered its senior revenue bonds to BBB-minus from BBB, affecting $3.5 billion of debt.
“Our system is complex and unique and that’s what makes it difficult to operate,” Lázaro said Friday. Debt service obligations, he added, will continue to increase in future years.