The Puerto Rico government will delay decisions about restructuring its debt until at least mid-September, according to a source close to the Puerto Rico government.
He disputed a report commissioned by some hedge funds that concluded the commonwealth could still pay its debts without a restructuring. He said the government won't decide on the form of the restructuring until after the Working Group for Economic Recovery finishes its work.
Puerto Rico Gov. Alejandro García Padilla formed the group in late June, after declaring the commonwealth's debt to be "unpayable" with the current level of economic growth. The working group will focus on developing plans for long-term increases in revenues and decreases in expenditures and will be deciding on changes to the island's labor market and other conditions, the source said. The plan the group submits will address these issues rather than what Puerto Rico will do with its debt, he said.
One "can't decide how much debt can be sustained until one figures out how much revenues one will have coming in," he said.
After the working group submits its plan, the García Padilla administration will work to get the legislature to approve the plan and appoint a fiscal oversight board.
Once this is done, the government will combine projected revenues with projected expenditures to determine the amount of free cash flow is available for paying the debt, he said. In mid or late September, the Puerto Rico government's financial branch will reach out and try to organize the creditors.
By late September or early October the financial and fiscal leadership of Puerto Rico will make proposals to various groups of creditors as to how to handle their debt, he said.
Most of the creditors understand that the economy needs to grow to support repayment of, for example, 30-year bonds, the source said. The failure to focus on the necessity of Puerto Rico experiencing economic growth was the key defect of the report commissioned by some hedge funds owning Puerto Rico bonds, the source said.
That report, "For Puerto Rico, There is a Better Way," by Jose Fajgenbaum, Jorge Guzman, and Claudio Loser, became public Sunday and Monday. The authors, working for the consulting firm Centennial Group International, wrote that Puerto Rico has a deficit problem rather than a debt problem.
In the report the authors said that 39 states have higher state and federal tax collections as a percent of their economy than Puerto Rico, indicating the commonwealth has room to increase its revenues.
Tax compliance in Puerto Rico is significantly lower than in the 50 states, the authors stated. "An increase in compliance rates would provide additional revenues to the government without increasing the burden on the existing tax base," the authors wrote.
Puerto Rico also has room to lower its expenses since they went up by $4.4 billion, or 29%, in fiscal year 2013 from fiscal 2004, even as the island's population declined by 5.5%, they wrote.
Additionally, real estate held by the Public Building Authority, Puerto Rico Convention Center District Authority, and Puerto Rico Industrial Development Authority has $4.1 billion in carrying value. The Ports Authority and Ports Authority of the Americas have capital assets not under concession agreement worth about $1 billion. The government could enter into public private partnerships with these assets to generate cash, the authors wrote.
The government faces a $519 million deficit in the current fiscal year, and after that could generate increasingly large surpluses, the report says.
Responding to the report, Puerto Rico chief of staff Victor Suárez Meléndez said: "We have already enacted significant fiscal reforms, including reforming the pension system, cutting expenses and increasing taxes, and the working group is considering additional difficult measures to address our financial crisis. However, the simple fact remains that extreme austerity placed on Puerto Ricans with less than a comprehensive effort from all stakeholders is not a viable solution for an economy already on its knees."
The source close to the government said a bar graph in the Centennial Group report, projecting a surplus starting in fiscal year 2017, assumes that all government debt is refinanced as it becomes due at affordable interest rates. It is unlikely this is possible, he said. The graph also assumes that federal spending on Medicaid continues at the current level, though it is scheduled to be reduced, and that the Internal Revenue Service continues to validate the Act 154 tax measure, which some have suggested is illegal.
The source said the comparison of Puerto Rico with other states in terms of taxes paid as a percent of their economies was unfair, because most states in the U.S. have economic growth and the commonwealth does not.
Puerto Rico's government has fallen behind on making its payments for bills, the source said. Partly because of this, the government needs $2 billion in revenue increases and expenditure cuts to create a structurally adjusted budget.
