Puerto Rico faces a $153 million cash deficit by December and a $512 million shortfall by June unless it takes additional financial measures, according to a consultant to the government.
The projections by Conway MacKenzie, which was hired by the Government Development Bank for Puerto Rico to perform liquidity analysis, assume that the government borrows $400 million from its own insurance funds and suspends set-aside payments for its general obligation debt.
The results of Conway's analysis completed since the start of the new fiscal year were reported in the preliminary official statement of the Puerto Rico Aqueduct and Sewer Authority, released Monday night. Results of an earlier Conway analysis were reported in the commonwealth financial report issued May 7, 2015.
In the May report Conway projected that if the commonwealth government didn't take steps to increase revenues and/or reduce spending, the Treasury would run out of money in September.
"At that time, absent new financing from GDB or third parties, Conway projects that the commonwealth would not be in a position to continue funding all governmental programs and services while continuing to meet all of its debt service obligations in a timely manner," the commonwealth said in its May 7 report.
Since then, Puerto Rico's government has instituted measures including spending cuts and 4.5 percentage point increase in the sales tax. In mid-July Puerto Rico Treasury Secretary Juan Zaragoza told the El Vocero news web site that the government had adequate resources to continue operations through October.
Puerto Rico government's revenues disproportionately arrive near the end of the fiscal year. For more than 10 years the governments has relied on short-term borrowing from banks of investors for within-year bridge loans. However, the rates it must borrow at have been going up.
At this point the government has suspended GO set-asides and is negotiating with one or more banks in Puerto Rico for a within-fiscal year loan. However, the banks are aware that the government has stated it plans to restructure its debt. At least one bank has said that it may be willing to loan Puerto Rico money if a loan structure is created to assure the bank that it will get its money back.
Conway's projection report "takes into account certain risks Conway has identified to the Treasury's projections, including $306.4 million in revenue risks related to the fiscal year 2016 General Fund budget, $123.8 million related to deferred appropriations from fiscal year 2015 and $132.1 million of expenditure risks related primarily to unbudgeted debt service payments to GDB," the PRASA POS stated. Puerto Rico's government didn't immediately provide an explanation of how these risks were taken into account
The report also notes undefined risks between $100 million and $1.093 billion in the fiscal year.
Finally, the report stated that there are other "unquantified" liquidity risks which are not reflected in the stated cash deficits. "These risks include, but are not limited to, risk of spending in excess of appropriations, unfavorable economic factors, pensions, litigation and extraordinary expenses associated with any restructuring activities, any or all of which could materially and adversely affect [Conway's] projections," PRASA stated in its POS.
Conway calculated the cash deficits on the assumption that the government takes no corrective measures to reduce spending or increase revenues. In reality, the government's Fiscal and Economic Recovery Working Group is working on such measures. The group consists of the five executive and legislative leaders close to Gov. Alejandro García Padilla. They are expected to submit a plan addressing government spending and revenues on Sept. 1. To go into effect, the legislature would have to approve it and the governor would have to sign it.
The commonwealth may also succeed in gaining short-term financing from banks or other parties to cover some of the projected shortfall. A limitation to this sort of loan is that the report projects a greater deficit at the end of the fiscal year than in December.
In addition Puerto Rico's government has other options for dealing with potential cash deficits. The GDB has a cash balance that it could lend to the Puerto Rico government to cover the deficits. According to the commonwealth's June 30 report, on May 31 the GDB had net liquidity of $778 million.
Along with projecting cash deficits, the Conway report projected that, absent corrective measures, the Treasury bank account would be in a deficit position throughout most of the current fiscal year on a "book balance basis."
On Aug. 5 Moody's Investors Service vice president Emily Raimes said Puerto Rico's chief concern right now is to find the money to continue its operations in the next few months.
In June President of the Puerto Rico House of Representatives Treasury and Budget Committee Rafael Hernández Montañez said a shutdown of Puerto Rico's government due to lack of funds would be devastating to the economy. He cited Puerto Rico's experience in 2006 when the government shutdown for about 13 days. He said this greatly harmed the economy at the time.
