NEW YORK - Standard & Poor's Ratings Services said it has revised its outlook on the commonwealth of Puerto Rico’s general obligation and appropriation debt ratings to negative from stable.
The outlook revision is based on a challenging economic and fiscal environment, which has the potential to delay structurally balanced budgets beyond fiscal 2013. Structural balance by the end of fiscal 2013 remains critical to reducing the growth in the commonwealth's tax-supported debt, which has increased nearly 44% over the past three years primarily as a result of deficit financing.
"In our opinion, the current administration has taken decisive measures to restore fiscal balance," said Standard & Poor's credit analyst Horacio Aldrete-Sanchez. "However, a steady economic recovery has failed to take hold, which we believe limits the government's ability to implement additional expenditure cuts and revenue enhancement measures in the near term," he added.
Given the disproportionate reliance of Puerto Rico's economy on federal transfers, a significant reduction in these transfers as a result of the implementation of the Federal Budget Control Act of 2011 could result in additional headwinds for the island's economy.
Furthermore, the upcoming legislative and gubernatorial elections could forestall progress on the adoption and implementation of a meaningful solution to the commonwealth's unfunded pension and retirement obligations, which could further complicate the achievement of structurally balanced budgets.
Standard & Poor's assigned its BBB rating to the Puerto Rico Public Buildings Authority's series U refunding bonds, guaranteed by Puerto Rico, and its BBB-minus rating to the Puerto Rico Public Finance Corporation's (PFC) series 2012A refunding bonds.
In addition, Standard & Poor's affirmed its BBB rating on Puerto Rico's GO debt and its BBB-minus rating on the commonwealth's appropriation debt. The commonwealth's full faith and credit pledge, including a constitutional requirement that provides a first claim on available commonwealth resources, secures the GO bonds.
In our opinion, Governor Fortuno's $9.08 billion proposed fiscal 2013 budget continues to build on the same tenets of fiscal discipline of the last three fiscal years. Act No. 70, which reduced the commonwealth's payroll headcount by 37,986 employees (19.7% reduction from fiscal 2009 levels), has resulted in a nearly 34% reduction in total government payroll expenditures in fiscal 2013, compared to fiscal 2009.
Despite the significant progress made by the current administration, structural budgetary balance remains elusive. A challenging economy, with anticipated GDP growth of 0.9% for fiscal 2012 and 1.1% for fiscal 2013, has delayed the administration's initial goal of achieving structurally balanced budgets by fiscal 2013.
While the identified deficit of $333 million (3.6% of general fund expenditures) for fiscal 2013 is significantly lower than the $3.3 billion deficit in fiscal 2009 (30.3% of general fund expenditures), the estimation of expenditures for fiscal 2013 relies on the planned refinancing of approximately $575 million in GO debt to reduce the commonwealth's debt service requirements during fiscal 2013, which increases Puerto Rico's deficit funding needs for fiscal 2013 to $908 million, or approximately 10% of general fund expenditures.
The negative outlook reflects a challenging economic and fiscal environment, which has the potential to delay structurally balanced budgets beyond fiscal 2013. Structural balance by the end of fiscal 2013 remains critical to reducing the growth in the commonwealth's tax-supported debt, which has risen nearly 44% over the past three years primarily as a result of deficit financing.
The current administration has taken decisive measures to restore fiscal balance. However, a steady economic recovery has failed to take hold, which limits the government's ability to implement additional expenditure cuts and revenue enhancement measures in the near term.
Given the disproportionate reliance of Puerto Rico's economy on federal transfers, a significant reduction in these transfers as a result of the implementation of the Federal Budget Control Act of 2011 could result in additional headwinds for the island's economy.
Furthermore, we believe that the upcoming legislative and gubernatorial elections could forestall progress on the adoption and implementation of a meaningful solution to the commonwealth's unfunded pension and retirement obligations, which could further complicate the achievement of structurally balanced budgets.
S&P said it could revise its outlook back to stable if the economy gains positive momentum, fiscal discipline is maintained through fiscal 2013, and officials adopt and implement a credible solution to the commonwealth's unfunded pension and retirement liabilities.
S&P said it could lower the rating by one notch if the economy deteriorates, the projected deficit for fiscal 2013 widens, or decisive action on pension reform is delayed beyond fiscal 2013.
