Puerto Rico's government is considering a bill that would allow postponement of monthly set-asides for long-term general obligation debt payments.
The option to postpone the set asides is part of Puerto Rico House Bill 2542 and Puerto Rico Senate Bill 1434. Gov. Alejandro García Padilla proposed the bills, which are being sponsored by Puerto Rico House President Jaime Perell- and Senate President Eduardo Bhatia.
Puerto Rico officials have said they are unsure if the government has sufficient funds for debt service and spending needs. The set-aside proposal to help deal with the problem may be "the most alarming" to bondholders of several recent developments in the commonwealth, according to Municipal Market Analytics.
The bills address the Puerto Rico government's intra-year borrowing needs and what to do if it cannot sell $1.2 billion in tax and revenue anticipation notes. Tax revenues come in disproportionately at the end of the fiscal year, so the government has sold TRANs to help fund early fiscal year spending. At the end of fiscal years it has paid them off.
The newly introduced bills would require the state insurance fund to lend $335 million, the Administration for Compensating for Automobile Accidents to lend $50 million, the Insurance Fund for Temporary Non-occupational Incapacity to lend $15 million to the General Fund. All three bodies would lend money to the government's General Fund early in the fiscal year and be repaid by the General Fund late in the fiscal year.
Government Development Bank President Melba Acosta Febo has said she hopes to combine the lending of the semi-autonomous bodies with bank loans to gain the $1.2 billion TRANs. The bills authorize that the TRANs debts incurred in fiscal 2016 and fiscal 2017 be subject to New York state law and jurisdiction.
The bills specify that if $1.2 billion cannot be gained through banks and the semi-autonomous bodies, then a 1976 law requiring Puerto Rico's government to equally set aside its interest and principal general obligation debt service on a monthly basis would be annulled. The 1976 law requires the Puerto Rico to set aside each month one sixth of all interest coming due in the coming six months. It also requires the commonwealth to set aside monthly one twelfth of all principal coming due in the coming 12 months. The funds are set aside in a redemption fund.
Article VI, section 8 of the Puerto Rico constitution reads, "In case the available revenues including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid, and other disbursements shall thereafter be made in accordance with the order of priorities established by law."
In Municipal Market Analytics' Weekly Outlook on Monday, managing directors Robert Donahue and Matt Fabian wrote, of several recent Puerto Rico developments, this one is "the most alarming."
They continued, "We do caution, however, that, while this bill could be seen as an interruption of constitutional payment priority for GO bondholders, it is unclear whether or not Puerto Rico has actually and consistently made GO debt service segregations in the past. Note that Senate Bill 1434's authors define the bill's intent as not to stop paying debt but as a 'necessary and prudent alternative' to manage cash flow and allow continuation of 'essential services affecting safety, health and being of millions of residents of Puerto Rico.' This is precisely the 'police power' scenario at the heart of GO and COFINA bondholder concerns for their repayment."
The GDB declined to comment on the proposal. The governor's office, Bhatia, Perello, and chairman of the House Treasury and Budget Committee Rafael Hernández Montañez and chairman of the Senate Finance Committee José Nadal Power did not respond to requests for comment.
The El Vocero news site on Tuesday quoted Hernández Montañez as saying that the project "distances itself from the government public policy that segregates and agrees to pay the general obligation debt." He added, "some of the [bill's] language breaks with the obligations and it would distance us from the responsibility that we have tried to safeguard for the general obligations since the government started."
However, El Vocero quoted Nadal Power as saying, "It is not that debt is not going to be paid; the debt is guaranteed by the constitution." The point of the bill is to guarantee that the General Fund is stable, he said.
Sergio Marxuach, public policy director at the Center for a New Economy, said he didn't think the bills would "necessarily" imply a GO default. "However, it is clear that the Commonwealth is gambling that by Jan. 1, 2016 it would have enough funds at hand, due to the increase in the sales and use tax rate and the new 4% tax on services not currently subject to the SUT, to honor all its obligations, including the debt service on the GOs."
Assuming that the government did not have the money in the General Fund's accounts to pay the Jan. 1 debt payment, the constitution would require the Secretary of the Treasury to seek funding from other sources for the GO bonds. Hypothetically, government workers could go unpaid or the secretary could raid other debt service pots and those bonds could go unpaid, Marxuach said.
If the government were to not pay the GO bonds, section 2 of article VI of the Puerto Rico constitution would allow bondholders to sue the government to force payments, Marxuach noted.
"In the end, however, I want to make clear that Puerto Rico is currently in uncharted waters," Marxuach noted.
Neither the House nor Senate bills have passed. The current legislative session ends on June 30.
In another government effort to assure adequate revenue early in the fiscal year, the senate passed a bill on Monday that would require that the extra revenue from the recently approved 4.5% increase in the sales and use tax go directly to the General Fund.
Currently, revenue from the sales and use tax goes to the COFINA fund for COFINA bond holders up to December or January of each year. If the bill becomes law, this would continue and just the additional revenue would go to the General Fund at the start of the fiscal year.
