Muni Analysts Don't Accept Puerto Rico's Bleak Picture

Municipal analysts reject Puerto Rico's claim it can't pay any debt service in the next 10 years without federal help.

Puerto Rico made the claim last week in a fiscal plan presented to the federal Oversight Board that was appointed to help the commonwealth boost its economy and work through its $68 billion debt crisis.

"From a U.S. bondholder perspective, the latest proposal is disheartening," said Howard Cure, director of municipal bond research at Evercore Wealth Management. "The plan seems to maintain current spending levels and avoids laying off any public sector workers where there are obvious opportunities to help balance the budget based on bloated employee levels."

The commonwealth states near the start of its fiscal plan: "The past decade's material austerity measures, ranging from layoffs to tax increases, have not abated the commonwealth's fiscal and economic crisis. Further austerity will only exacerbate outmigration and accelerate the commonwealth's economic decline."

However, AllianceBernstein director of municipal credit research Joseph Rosenblum said, "some cost cutting seems doable; I am not that confident that there is much more room on the revenue side for new taxes, though better collections continues to be an opportunity."

Cure also noted the importance of improving tax collections. However, he said "I would contend that would prove difficult as various current federal programs provide workers a disincentive to take up jobs because the welfare system providing generous benefits that often exceed what minimum wage employment yields…. Welfare needs to be made consistent with local labor market conditions rather than the U.S. mainland conditions. Until that happens, there will continue to be an underground economy and well below average labor participation rates."

Beyond changes to government taxation and spending, Rosenblum said "fundamentally, what they need is to see the economy grow and that is one of the great challenges."

Another municipal analyst, who declined to be identified because his company doesn't allow him to speak publicly on Puerto Rico, said the fiscal plan amounts to "the current governor staking out an opening negotiating position as the new board settles in." That could "help his successor, while ramping up pressure on feds to make Medicaid type payments and consider other changes," he said.

Municipal Market Analytics partner Matt Fabian wrote in MMA's Weekly Outlook, the Oversight Board members "have an implicit bias to accept the first reasonable, executable, and nominally 'sustainable' plan presented to them." However, any such plan would have to include some bondholder participation in its creation and the current plan doesn't have this.

The plan indicates "the current commonwealth government as incapable of even participating in the discussion, never mind beginning it," Fabian said. "The federal price tag is almost surely a non-starter."

In Fabian's view, "the PROMESA board may be forced to wait for the next administration to begin planning discussions in earnest." Puerto Rico has a gubernatorial election in early November.

Current Governor Alejandro García Padilla isn't running. Opposition party candidate Ricardo Rossell- is polling well ahead of his principal opponent David Bernier.

The fiscal plan Puerto Rico submitted on Oct. 14 showed that the commonwealth had taken a significant step towards pessimism about its ability to pay its debt. In September 2015 the government had estimated it could pay somewhere between $2.2 billion and $4.1 billion of $18.2 billion in due debt service from fiscal 2016 to fiscal 2021, even without significant improvements to federal programs and federal regulations for Puerto Rico.

In a scenario of reasonable economic growth but no federal help found in the September 2015 Fiscal and Economic Growth Plan, Puerto Rico projected an average availability of $830 million per year of surplus before debt was paid from fiscal year 2016 through fiscal year 2021. The surplus could be used for debt payments. In a January 2016 revision of the plan, this number had shrunk to $131 million per year for the same period.

Even this June, Puerto Rico had made offers to bondholders that would have entailed paying about $600 million for debt in fiscal year 2017 and this payment rising steadily to about $1.8 billion in fiscal 2021 and to $2.05 billion in fiscal 2030, according to the appendix to the Oct. 14 plan.

But in the Oct. 14 plan Puerto Rico said without federal help it will have no money to pay debt service not only in the next four fiscal years but in the next 10. To be sure, Puerto Rico paid $2.5 billion in debt service in fiscal year 2016 and July 1.

A commonwealth spokesperson explained the shift by saying, "Actual revenues since the September 2015 FEGP was published came in well below what was forecasted at the time, compounding the issues the commonwealth faces."

The plan also sheds light on the shift, stating: "The commonwealth is significantly revising its future cash flow assumptions based on new economic data. This includes revising (downwards) its assumptions of cash flow available to pay debt service."

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