Puerto Rico Gov. Ricardo Rosselló’s proposed fiscal year 2019 General Fund budget allocates $0 for paying the island's central government debt.

“The governor is clearly trying to lay the responsibility of debt service on the feet of the [Oversight Board] so he can disavow any money going to creditors,” said Shaun Burgess, portfolio manager for Cumberland Advisors, which owns some insured Puerto Rico debt.

Puerto Rico Gov. Ricardo Rosselló, right, said he wasn't going to follow the Oversight Board's directives in several parts of his budget.

According to the April 19 board-certified fiscal plan, the central government and its related borrowing entities are contractually obligated to pay $2.54 billion in debt service in fiscal year 2019. The board’s March 13, 2017 certified fiscal plan put the figure at $3.84 billion in that year.

The earlier plan included four entities that were not included in the April plan. These entities are contractually-obligated to pay $398 million in fiscal year 2019 so this only partially explains the $1.3 billion distinction between the plans.

“Bondholders have to wait until the commonwealth makes a secured or otherwise legally protected provision to pay debt service before they can begin to (dis)count their chickens,” said Municipal Market Analytics partner Matt Fabian. “The alternative, which is where we are today, is an assumption that debt service will be paid out of surplus funds. ‘Surplus funds’ haven’t happened in a decade and the storm has only made things worse.

“A better base case assumption is the commonwealth spending every dollar of cash and credit at its disposal, regardless of what the budget says,” Fabian said. “That doesn’t leave much room for the payment of debt service and is good reason for bondholders to continue to litigate.”

Neither a spokeswoman for the governor nor spokespeople for the Puerto Rico Fiscal Agency and Financial Advisory Authority, responded to a request for comment.

The board’s approved fiscal plan said the commonwealth should have $1.13 billion in surplus funds available for debt service in fiscal year 2023. The board directed Rosselló to follow the fiscal plan in his budget, but the governor chose not to do so in this and in other respects.

In its fiscal plan, board didn’t say how much of the $1.13 billion should be used for debt service.

The governor’s proposed General Fund budget is for $8.79 billion, which is 8% less than the $9.56 billion approved for the current fiscal year.

According to a statement from the governor’s office, the proposed budget for operational expenditures of $7 billion is 6% less than that for the current fiscal year and 22% less than the final budget of former Gov. Alejandro García Padilla.

The proposed budget for pensions of $2.22 billion proposes no cuts be made in these benefits. In a written statement the governor explicitly said that his budget doesn’t follow the demands of the Oversight Board for 10% cuts in pension spending, a new labor reform, and the elimination of a long-standing Christmas bonus for government workers.

Evercore Director of Municipal Bond Research Howard Cure said possible cuts to the islands’ pensions are one of the bondholder’s prime concerns.

In a letter dated April 24 the board told Rosselló that he must provide a proposed budget to the board consistent with the board’s fiscal plan by May 4. According to FAFAA executive director Gerardo Portelo Franco this letter wasn’t delivered until April 26.

In a letter he attached to the governor’s budget, Portelo Franco complained that the Puerto Rico Oversight, Management, and Economic Stability Act requires the board to give the government reasonable amounts of time to develop a budget schedule in consultation with the governor and legislature. Portelo Franco says neither has been done.

“The proposed schedule is so unrealistic that it suggests this timeline was designed to set up the government for failure so that the [Oversight Board] can swiftly impose its own budget on the commonwealth,” Portelo Franco wrote in his letter to Board Chairman José Carríon.

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