Puerto Rico debt analysts expressed optimism ahead of Gov. Alejandro García Padilla's budget speech Tuesday evening that the revenue and spending plan would be a major step forward, even if it isn't perfectly balanced.
While some proceeds from Puerto Rico's $3.5 billion bond sale in March will be used to pay for debt service - meaning it won't be structurally balanced - the governor will otherwise make a good-faith effort, Herbert J. Sims senior credit analyst Richard Larkin said, after Padilla's chief of staff said the governor was set to announce the first balanced budget in 20 years.
AllianceBernstein director of municipal credit research Joseph Rosenblum also said that perfect balance was not necessary, though his firm would like to see something close to it. He said he would appreciate a true structurally balanced budget much more than one that was filled with gimmicks like pushing back payments to later years.
Professionals and retail investors would find a balanced budget to be very significant, Larkin said.
The rating agencies would be less impressed, but the budget should still be enough to avert further downgrades, he said.
Puerto Rico debt was downgraded to junk levels by the big three rating services before its March debt sale.
The budget's anticipated combination of increased government revenues and decreased spending will not help the economy, according to Rosenblum, so it will be critical to see what the governor is proposing for the economy.
In addition to the budget, the governor will unveil a four-year agenda of measures for economic recovery, chief of staff Ingrid Vila Biaggi said.
Many of them will be drawn from recommendations from the task force on growth and competitiveness that she led, she said.
The government will primarily achieve balance through cuts in government spending, according to Vila Biaggi. But there will be some revenue increases as well, she said.
The governor will propose the consolidation and reorganization of several government agencies starting in the coming fiscal year. Puerto Rico's fiscal year starts on July 1.
The changes will make the government more agile and efficient, though the budget contains no government layoffs, Vila Biaggi said.
The balanced budget will be a tremendous achievement for the government, she added. When the governor came into office in January 2013 there were projections of a government deficit of over $2 billion for the fiscal year. The governor's team reduced that in the early months of 2013. Since then the team has brought the deficit down to $640 million in the current fiscal year, Vila Biaggi said.
The governor originally planned to balance the budget in fiscal 2016. Now, he will do it a year earlier, in fiscal 2015, she said.
In March, Nuveen Asset Management published a piece questioning the governor's promises of a balanced budget. In "Puerto Rico's $3.5 billion GO Deal: Cure or Symptom?," Nuveen vice presidents Shawn O'Leary and Molly Shellhorn said that the March general obligation bond sale included $423 million of capitalized debt-service interest for fiscal years 2014, 2015 and part of 2016. It included $270 million for fiscal 2015. The money is to be used to pay at least some of the debt-service bills coming due, they wrote.
While $270 million would be around 2.6% of the fiscal 2014 budget, it is unclear what it will be in fiscal 2015 since Vila Biaggi declined to release the spending and revenues figures for the budget.
"A budget that relies on bond proceeds to partially pay for debt service as it comes due is, by definition, not a structurally balanced budget," O'Leary and Shellhorn said. "By virtue of earmarking $269.8 million of bond proceeds for fiscal 2015 debt service, Puerto Rico has already failed to deliver on its promise of a balanced budget in fiscal 2015."
In response, Vila Biaggi said that for the first time in a long time the budget has zero deficit financing and repays interest.
The governor's budget and other proposals will be subject to revision and approval or rejection by Puerto Rico's Senate and House of Representatives.
