Puerto Rico board says fiscal plans to be revised again

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The Puerto Rico Oversight Board said it will have to revise fiscal plans for the central government, electric power authority, aqueduct and sewer authority, highways and transportation authority, and University of Puerto Rico partly because of forecasting errors.

The board said Wednesday that at least one of the revisions would be positive and one negative in terms of available revenue. The board declined to predict the net impact on the central commonwealth government’s finances.

The board released “certified” versions of the plans for the Puerto Rico Electric Power Authority and the Puerto Rico Aqueduct and Sewer Authority, even as it declared them to be inadequate, and set up a schedule for them to be revised and recertified by Oct. 26.

“The revisions [of the fiscal plans] are par for the course at this point and show just how fluid the situation still remains,” Cumberland Advisors portfolio manager Shaun Burgess said. Cumberland owns insured Puerto Rico debt.

Since being established in August 2016 the board has certified several fiscal plans for the central government, the latest one on June 29. That fiscal plan “reflect[ed] the fact that the legislature failed to pass the labor reform package and failed to repeal Law 80, which would have turned Puerto Rico into an at-will employment jurisdiction,” said Oversight Board Executive Director Natalie Jaresko, in an Aug. 1 letter to Gov. Ricardo Rosselló.

Jaresko said that better-than-expected revenues in fiscal year 2018, which ended on June 30, and revised federal disaster spending estimates, mean that the board should increase the central government fiscal plan’s revenue projections.

In early December 2017 Gerardo Portela Franco, then executive director of the Puerto Rico Fiscal Agency and Financial Advisory Authority, said he expected revenues to come in 25% short of the budgeted number by the end of the fiscal year. As of June 29, one day before the end of the fiscal year, General Fund revenues were 3.7% below the budgeted value. According to the Puerto Rico government, the cash position on June 29 of the government’s central bank account, the Treasury Single Account, was $3.1 billion, or 29.3% above projections.

While the June 29-certified Puerto Rico central government fiscal plan projected a net decrease of population of 12% over five years, the board now expects that fewer people will leave the island. Jaresko indicated this will have at least some negative effect on local government finances by increasing government healthcare costs.

The board will have to combine these factors in determining projected revenues and spending and creating a new central government fiscal plan, which will lay out how much money is potentially available for debt service. Jaresko said that given the need to change the central government fiscal plan, the other public entity fiscal plans should also be changed.

Another analyst said, “Given the Puerto Rico government’s history of poor and tardy release of financial information; the persistent tempo of the oversight board’s push for fiscal plans; and the uncertainty of some [fiscal] plan elements such as future federal source revenues, it is not surprising that errors exist and that updates are required. I suspect this will be an ongoing theme in coming months and years.” The analyst requested anonymity, citing his firm’s policy about commenting on Puerto Rico.

Earlier this week the board announced a preliminary agreement for a PREPA debt restructuring that would include a minimum 22.5% cut in the par value of the bonds held by bondholders. This deal would have to be voted on by bondholders and approved by the U.S. District Court Judge Laura Taylor Swain before going into effect.

Concerning the electrical power authority, which had $9.25 billion of debt as of May 3, 2017, in its Aug. 1 certified PREPA fiscal plan the board said the authority could support a value between $2.1 billion and $7.8 billion. Not all of this sum would be used for debt service. Some would be used for capital spending. The amount varies depending on assumptions about the yearly amount available for debt service and where coupon rates are set between 4% and 6%.

In the Aug. 1 board certified PRASA fiscal plan, the board estimated that after the effects of post-hurricane federal aid, the authority would have enough money to pay about 65% of the non-Public Finance Corp. and non-Government Development Bank debt it owes through fiscal year 2023. It assumes the authority will not pay the PFC and GDB debt and the federal government will forbear on other debt.

The authority had $4.7 billion of non-GDB and non-PFC debt as of June 30, 2017.

The board also estimates the level of total debt PRASA could carry depending on certain assumptions. There is a wide range of levels depending on assumptions but most of the amounts range from $1.8 billion to $4.1 billion of debt.

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PROMESA Commonwealth of Puerto Rico University of Puerto Rico Puerto Rico Highway & Transportation Authority Puerto Rico Electric Power Authority Puerto Rico Aqueduct & Sewer Authority Puerto Rico Sales Tax Financing Corp (COFINA) Puerto Rico Industrial Development Co Puerto Rico