Puerto Rico Gov. Alejandro García Padilla inflamed concern in the bond market by proposing a budget for the coming fiscal year with 86% less money allocated to paying debt service than the approved current-year budget.
The governor's proposal comes as the commonwealth and its public authorities have at least technically defaulted on more than $12 billion in debt. A total of about $70 billion in Puerto Rico public sector debt is outstanding, and the governor's budget Monday is a step towards widening the defaults.
Analysts said the minimal allotment to debt service and a lack of other spending cuts add fuel to the argument that an outside control board, as being considered in the U.S. House of Representatives, is needed.
The governor's budget, unveiled late Monday, includes $209 million for interest payments on the commonwealth's debt. The proposal doesn't including funding for principal payments in the coming fiscal year. Public authorities, municipalities, and the Puerto Rico Sales Tax Finance Corp. (COFINA) may be treated differently, as their debt is not paid from the General Fund.
The current year's budget was approved with payment of $1.475 billion in debt, according to the Puerto Rico Office of Management and Budget in August 2015. The government hasn't disclosed how much of this has been or will be paid through the end of the fiscal year on June 30.
The current fiscal year 2015-2016 budget was approved on June 30, 2015 for $9.8 billion.
In the fall 2015 Puerto Rico Secretary of the Treasury Juan Zaragoza G-mez said he was revising his projections for revenue in the fiscal year downward. The projected revenue fell from $9.8 billion to $ 9.292 billion. At this point the commonwealth is on track to meet this projected revenue level.
García Padilla said that his proposed spending level was $9.1 billion in the coming fiscal year. He said this would not require any borrowing or any tax increases.
By cutting Puerto Rico's debt service by $1.266 billion, the governor was able to avoid cutting several programs. He proposes increases in the budget's contributions to certain items like the teachers' and employees' pension systems and the island's Medical Center. He has created a $91 million cash flow reserve and a $20 million emergency fund.
"The budget aims to reduce payouts on debt service to just a fraction of the required interest for the year with no principal payments at all, and curiously, the Consolidated Budget would appear to allocate some payments on bonds that would otherwise be subject to claw back in the support of GO debt payments," said Daniel Hanson, analyst with Height Securities, LLC. Debt service payments would be less than a third of scheduled interest and less than 19% of total GO debt service for the year, Hanson said.
The proposal will increase intergovernmental transfers from the General Fund by more than $400 million, Hanson said. García Padilla has submitted the budget comparatively late to the legislature. With many legislators seeking reelection in the June 5 primary election, "the legislature will have little time to consider the finer points of the budget over the coming weeks," Hanson said.
The U.S. House of Representatives' Natural Resource Committee's consideration of legislation to deal with Puerto Rico is a potential complicating factor for Puerto Rico's budget process. The committee was expected to start a vote on a revised version of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) Tuesday.
"The bond market is waiting to see if the passage of PROMESA, as drafted, will have an impact on the severe haircut the governor is proposing for upcoming debt payments," said Howard Cure, director of municipal research at Evercore Wealth Management.
Under PROMESA a control board could potentially alter Puerto Rico's budget and debt payment plans. However, any control board may not be seated until July, August, or later.
