In a shift away from previous legislative gridlock, Puerto Rico lawmakers moved quickly this month to pass tax increases and spending reductions to help address severe budget problems. But analysts say they have yet to see any positive reaction in prices for the commonwealth's barely investment-grade debt.
In the past two fiscal years, Puerto Rico legislators and the prior administration battled over annual general obligation bonds bills, holding up borrowing plans for months. In spring 2006, when then-Gov. Anibal Acevedo Vila, a member of the Popular Democratic Party, and lawmakers failed to reach agreement on how to deal with a deficit, the government shut down all non-essential services for two weeks after it ran out of money and eventually had to borrow funds from the Government Development for Puerto Rico.
Conversely, Gov. Luis Fortuño, who took office on Jan. 2, Senate President Thomas Rivera, and House Speaker Jenniffer Gonzalez are all members of the New Progressive Party and so far that common ground has lead to quick passage of fiscal measures.
In early January, lawmakers worked though a weekend to pass fiscal initiatives that Fortuño had filed just days before. Those measures allow the government to temporarily borrow from the GDB to help meet operating expenses and direct an additional penny from the island's seven-cent sales tax to the fund that backs sales tax bonds, which carry higher ratings than the commonwealth's general obligation debt.
On March 6, lawmakers approved bills to temporarily raise personal and corporate income taxes, property taxes, suspend certain business tax credits, and cut the government's payroll by 30,000.
These most recent actions should help Puerto Rico tackle a $3.2 billion deficit through revenue enhancements and reduction of expenditures, as well as implementing a $500 million local stimulus plan and setting the framework for receiving roughly $5 billion of federal stimulus funds.
Lawmakers passed Fortuño's fiscal reform measures in part to help the commonwealth retain its credit ratings, which are just above investment grade.
Market participants said the recent legislative actions have not created a noticeable, positive shift in the secondary market for Puerto Rico's billions in outstanding debt. And last week it was learned that the GDB is seeking a $3 billion to $5 billion loan from the Federal Reserve and a potential $5 billion advance from the federal Troubled Asset Relief Program.
"I don't think I see a tremendous change in the market. I don't think I notice necessarily that Puerto Rico paper is now somewhat richer and not as cheap as it was," said Tom Dalpiaz, portfolio manager at Advisors Asset Management. "I still think there are some people who are staying away from it ... and there are others all along who have felt maybe that there are good values there and that they've been comfortable with it."
Ken Meiselman, executive vice president of J.B. Hanauer & Co., said the market was down slightly overall last week and that recent legislative events have not played a big part in how Puerto Rico bonds traded since March 6.
"Puerto Rico trades a lot by supply and demand ... the positive credit developments have been slightly ignored," Meiselman said.
Not everyone viewed the tax increases and payroll reductions adopted this month as a plus for the island. Minority leaders in the PDP said they wanted more time to look over the bills, in particular Act 7, which raises additional revenue and cuts 30,000 government jobs.
"There was just one public hearing and I'm sure that most of the legislators didn't know what they were approving ... and the effect it's going to have on the economy," said House Minority Leader Hector Ferrer. "I think it's going to be counterproductive because you will raise the cost of living for the consumers in Puerto Rico through new taxes."
Sen. Edwardo Bhatia, the deputy minority leader, called Act 7 "draconian." Like Ferrer, he believes that many legislators were not fully aware of what they were approving due to the fast action on the bills.
"We raised our objections from the minority perspective and the excuse was that Puerto Rico bonds were going to be downgraded to junk and we had to do this in 24 hours," Bhatia said. "I personally requested that both [Moody's Investors Service and Standard & Poor's] certify that that was true, but of course the majority did not comply with my request."
Standard & Poor's and Moody's rate Puerto Rico BBB-minus and Baa3, respectively, both with a stable outlook.
Puerto Rico has $46 billion of total debt outstanding, including $8.16 billion of general obligation debt.
Long-term unenhanced Puerto Rico bonds issued by various entities have been trading in the secondary market with yields around 7%.
Political commentators on the island point out that due to the more congenial nature between the new administration and the Legislative Assembly, officials in both branches of government together crafted bills that had already undergone fine-tuning before the governor filed the measures to the legislature.
Fernando Batlle, the GDB's executive vice president for financing and treasury, said the administration worked with legislative leaders to evaluate the best course of action. He disputes the notion that the measures were pushed through too quickly.
"I think that comment assumes that there were no discussions beforehand with the legislative leadership and their advisers," Batlle said. "And so this is something that has been worked together with the legislative leadership before then."
According to Rafael Hernandez Colon, a former PDP governor who served as governor from 1973 to 1977 and again in two terms from 1985 to 1993, PDP lawmakers may still have a strong voice in the legislature if they develop a clear message that critiques the current administration's initiatives.
"I think they have to address the policies of the government and try to improve upon them," Hernandez said. "But if they try to do their own thing as a minority, that's not going to get anywhere."
Speedy legislative action or not, analysts at Moody's and Standard and Poor's have said passage of legislation is one step toward fiscal stability, and that they will ultimately be looking for positive fiscal results.
Local political commentators are in a wait-and-see mode as well, said Luis Davila Colon, a prominent political analyst who hosts a daily political radio show in San Juan.
"This governor means business," Davila said. "Whether he his going to accomplish it, that's another story. Whether his plan is going to work is another story."