A fiscal advisory committee today in San Juan is scheduled to release updated budget shortfall and revenue projections as the incoming administration prepares to take on Puerto Rico's most immediate challenges.
Along with forming a special 14-member fiscal reconstruction team to examine the island's finances, Governor-elect Luis Fortuño's transition into office includes introductory meetings with credit rating agencies.
Yesterday, the governor-elect and Carlos Garcia, the incoming president of the Government Development Bank for Puerto Rico, the island's fiscal agent, sat down with The Bond Buyer after visiting Standard & Poor's and Moody's Investors Service.
Fortuño said the fiscal advisory panel is taking a pragmatic approach to where the commonwealth's finances stand. The current administration anticipates a $2 billion deficit by the end of fiscal 2009 on June 30, and the GDB has already extended $700 million of short-term loans to help the central government meet cash flow needs, according to outgoing GDB president Jorge Irizarry.
"It's really a full analysis of how serious the deficit is, assuming the worst," Fortuño said. "We're assuming the federal economic stimulus package does not get approved even though everyone has told us it will get approved and that it will be in full parity with the states. Based on the worst-case scenario, those are the numbers that you'll see [today]."
Along with new deficit and revenue projections, the committee will also release suggested public-private partnership guidelines for the island. Allowing the business community to operate existing facilities and construct new infrastructure projects is one of Fortuño's main initiatives and an issue that he plans to move quickly on as the Legislature is eager to work on the framework for P3 agreements.
"They will be recommending the P3 parameters that will guarantee that it will be a transparent, agile process and that it will be market friendly in the sense that each transaction will not be going back and forth through the Legislature and all that," he said.
Along with passing P3 legislation, the next governor has other immediate plans. Fortuño will implement a government hiring freeze on his first day in office, Jan. 2, and ask agencies to cut their budgets even further by 5%.
"The steps that we'll be taking will be serious," he said. "We don't have a choice. I was very clear during my campaign that we would need to bring balance back to a budgeting process and that the government had to shrink in size, and I intend to do that."
Currently, the GDB is working on a $1 billion note deal to be sold Monday in the local market to help boost the commonwealth's liquidity. UBS Puerto Rico, Santander Securities Corp., and Popular Securities Inc. are the three co-lead underwriters.
The transaction has already received roughly $800 million of pre-orders, according to Garcia. That local debt issuance is an example of how the outgoing and incoming GDB financing teams are working together during this period of change.
"I think it has been a very cooperative transition," Garcia said. "I speak two or three times a day with [Irizarry]. He was kind enough to support my idea that we needed to do this note offering now and he has put all the resources of the GDB behind it. So, I think it has been a very collaborative approach, as it should be in any transition, in a very professional way."
Garcia also stressed Puerto Rico's need to work with the business community through P3 agreements to help finance public works projects on the island, rather than relying on a difficult municipal bond market.
In addition, Puerto Rico has roughly $46 billion of total outstanding debt, including $8.16 billion of general obligation debt, according to the GDB, and holds credit ratings at the lowest investment grade. Standard & Poor's and Moody's rate the commonwealth BBB-minus and Baa3, respectively. Fitch Ratings does not rate the credit.
"What we're doing is working on the public-private alliances," Garcia said. "The way to be able to fund many of these projects will have to be through the public-private alliances, given the difficulties of the market."
Yet long-term borrowing will continue to be one financing vehicle for infrastructure projects.
"Some of them may have to be supported directly by the [GDB]," Garcia said.
In looking at Puerto Rico's P3 current candidates, Fortuño said that he does not support leasing the island's lottery system to a private company. Fortuño and Garcia said they will continue with the outgoing administration's plan to enter Route 22, the island's main east-west tollway, into a concession agreement.
But for now both men said they were pleased with the meetings with Standard & Poor's and Moody's and that they plan to maintain an open dialogue with the rating agencies and the investor community.
"We didn't know all the people that are currently at Standard & Poor's and Moody's and we thought that it was important for them to get to know us and to discuss the challenges that we're going to be facing," Garcia said. "And, what is the type of open and transparent relationship that we want to have with them? And I think that we achieved both things."
