Puerto Rico governor presents zero debt payment budget under cloud of uncertainty

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Puerto Rico Oversight Board director Natalie Jaresko said Gov. Ricardo Rosselló's budget will have to be revised and may be rejected if the local government doesn't follow through on a labor reform agreement.

The governor released the $8.73 billion general fund budget on Friday and promoted it in a speech to Puerto Rico’s legislature Tuesday night.

On Sunday night the governor and the board announced an agreement on a compromise on reforming labor practices as well as agreeing to other changes in the board-certified fiscal plan. In exchange for the board waiving its demands for the abolition of the Christmas bonus and reduction of the island’s mandatory 27 days of vacation and sick leave, the governor agreed to bring at-will employment to the island by repealing Law 80 from 1976. Jaresko, in a teleconference with reporters Wednesday, described this agreement as an “accommodation.”

Law 80 requires employers to provide causes for employee terminations.

On Monday the leaders of the Puerto Rico House and Senate, who are both members of the same party as Rosselló, expressed hesitancy about at-will employment, according to the El Vocero news website.

“If, as agreed in this accommodation, by June 27th Law 80 is not repealed than this accommodation is not in place and we will have to go back and revise for the reality. We had an agreement with the governor who represented that the legislature was in agreement,” Jaresko said in video on the El Nuevo Día news web site.

If the board’s agreement with the governor were to unravel, then the board could question the budget’s allocation of money for the Christmas bonus. In general the board would return to a more confrontational position with the governor. This would affect further developments in the effort to reform Puerto Rico and restructure its debt.

“The landmark event of the budget is outside the budget," Vicente Feliciano, president of Advantage Business Consulting said. "The government and the board agreed on a way forward, which is critical for debt restructuring. Without the board, there is neither a certified fiscal plan nor a debt plan of adjustment. Without the government, the chances of a successful implementation of the fiscal plan would have been slim at best.”

Feliciano continued, “The budget will be approved with minor changes. Otherwise, it would not be certified by the board. Law 80 will be repealed. Ditto.”

Howard Cure, director of municipal research at Evercore, said the agreement on labor reforms was important to investors.

“Maintaining the Christmas Bonus and vacation /sick day policies without significant changes to the restrictive employment rules would be disheartening to many of Puerto Rico’s creditors," he said.

“In exchange for maintaining the vacation and sick day rules, adopting an at-will employment policy would certainly be an encouraging sign and make the island more attractive to businesses looking to develop and expand. I think in the long run, adopting at-will employment is critical for economic growth and supplies some hope that whatever debt restructuring takes place the exchanged bonds will not have to go through yet another restructuring.”

On Wednesday afternoon Jaresko said that the first step for Rosselló should be to resubmit a fiscal plan consistent with the new agreement with the board. Then the board would certify the new plan, Jaresko said in a conference call.

After that the governor should resubmit a budget consistent with the new plan, she said. Finally, the board could certify the budget. All this should be completed by the end of June.

The agreed-to changes to the fiscal plan are expected to reduce the 30 year surplus to $35 billion from $39 billion in the April certified fiscal plan, Jaresko said. She said most of the surplus is expected to be used for debt payment. Having less surplus would normally mean Puerto Rico would pay less debt.

In Tuesday night’s speech Rosselló said, “The approval of the agreed budget makes it easier for Puerto Rico to be in a stronger position to renegotiate the terms of the debt. We have significantly improved the management and controls over the cash flow of the General Fund. Contrary to the past, there is now visibility on how cash flows in government operations. At present Puerto Rico has robust and reliable cash balances.”

As in earlier versions of the budget, the current version allocates no money for debt service.

The new budget includes annual raises of $1500 per year for teachers and police. It also includes introducing an earned income tax credit of $300 to $2,000 per year.

In other Puerto Rico news, on Wednesday Jaresko said she expected it would take 12 to 18 months for the board to create a plan of adjustment on the debt and pensions for the central government. It would take the Title III bankruptcy court several more months to confirm the plan, she added.

Jaresko said creating a plan of adjustment for the Puerto Rico Aqueduct and Sewer Authority and some other Puerto Rico debtors could be done sooner.

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