Puerto Rico told its federal Oversight Board it would have $0 to pay for debt service in the next 10 years unless the federal government passed measures to improve the island's economy.

The island's government made the argument in a 100 page fiscal plan presented to the Puerto Rico Oversight Board on Friday.

If neither Puerto Rico nor the federal government deviated from the status quo except for planned changes in federal laws and spending, the plan projected a $59 billion gap from this fiscal year to the end of fiscal year 2026 between Puerto Rico's revenues and necessary expenditures including debt payments. It called this the base case scenario.

The Puerto Rico Oversight Board plans to deal with Puerto Rico's fiscal year 2018 budget on Friday morning.
Getting to work: Puerto Rico Oversight Board members Andrew Biggs, Carlos García, Arthur Gonzalez, Puerto Rico Gov. Alejandro García Padilla, Board Chairman José Carrión III, Board members José Ramón González, Ana Matosantos, and David Skeel on Friday.

If Puerto Rico were to take various steps to improve revenues, reduce spending and improve economic growth, the commonwealth would still face a $6 billion gap in the 10 fiscal years. This would leave no money for commonwealth-supported debt, Puerto Rico's government told the Oversight Board.

The plan didn't address the financial outlook for the island's public corporations and municipalities, which also owe roughly $17 billion of debt. The plan treated $50.2 billion of debt as being addressed by the fiscal plan and the remainder of the island's debt as independent of it, because it is supported by the public corporations, municipalities and other public entities.

In order to have money to pay the bondholders there must be federal support and its concomitant increased economic growth on the island, Puerto Rico Gov. Alejandro García Padilla said in a press conference after the board meeting. The presentation left some bondholders cold.

"In his new fiscal plan and his remarks to the Oversight Board, Governor García Padilla continued to demonstrate a wholesale disregard for fiscal soundness, factual accuracy, and his obligations under PROMESA and Puerto Rico's constitution," the Ad Hoc Group of GO Bondholders said in a statement. "We look forward to working with the Oversight Board and the next governor to reach a solution for Puerto Rico."

For federal measures, Puerto Rico's first priority is to get the federal government to continue Affordable Care Act funding to the commonwealth beyond its planned end in fiscal year 2018. Puerto Rico's government projects this could mean an additional $16.1 billion in direct Puerto Rico government revenues and an additional $8.4 billion in indirect revenues due to improved economic performance.

Along with an indefinite extension of Affordable Care Act funds, García Padilla is seeking to have the federal government treat the island similarly to the 50 states with regards to Medicaid spending. He is also seeking an extension of the earned income tax credit program to Puerto Rico and the introduction of permanent and cost-effective federal tax incentives to spur investment on the island. Finally, he wants changes to Medicare funding to improve funding.

In terms of federal aid, García Padilla also proposed having the feds allow the government to keep Act 154 for a transition period to a new tax system, assist in financing infrastructure and other sorts of projects, and end the Jones Act (which increases shipping costs).

The additional funds would leave the government with an $18.9 billion surplus, which could be used for the payments. This would be out of a total scheduled debt service of $34.2 billion.

The base scenario assumes Puerto Rico's real gross domestic product declines by between 1.54% and 1.79% per year each year through fiscal 2026. The scenario with Puerto Rican measures but no federal help assumes an average annual real growth rate of 0.1% in the period. The scenario with federal ACA help assumes an average annual real growth rate of 1.28%.

In its plan Puerto Rico says seven principals must be followed to reduce the government financing gap and restore economic growth. First, any austerity must be minimal and introduced in a way to limit its impact on economic growth. Second, the government must introduce improved budgetary controls and financial transparency.

Third, Puerto Rico's government needs to improve tax enforcement, consolidate agencies, reduce workforce, and reform its tax policy to eliminate the revenue impact of the planned end of the Act 154 tax in fiscal 2018. Act 154 revenues are expected to account for 21% of fiscal year 2017 revenues.

Fourth, the government must change local labor regulations and simplify permitting in order to promote economic growth. The government must also invest in strategic growth-promoting projects.

Fifth, Puerto Rico's government must continue to protect vulnerable members of the population like the elderly, young, disabled, and poor through government services. It must also protect the credit union system, which generally serves low income depositors.

Sixth, Puerto Rico's debt must be reduced to a "sustainable" level.

Seventh and last, the federal government must be involved to help generate economic growth.

In the plan Puerto Rico also outlined the principals of any debt restructuring offer. First, it must offer a holistic solution that covers all forms of government debt and solves "inter-creditor disputes."

Second, since the early years of the plan are critical in terms of turning the economy around and stopping the net emigration from the island, the government should provide "lower or minimal cash debt" service during this period. Payments-in-kind may be considered.

Third, annual debt service must not exceed the projected surplus before debt service in the fiscal plan.

Fourth, "a contingent value right or growth bond that pays creditors in the event growth targets set in the plan are exceeded should therefore be considered as part of any debt restructuring."

Fifth, because local bondholders are believed to hold $8 billion to $12 billion of the debt, according to an official with the Puerto Rico Fiscal Agency and Financial Authority, the plan says there must be consideration of the impact of debt restructuring on the local economy.

Sixth and finally, there must be restrictions on any new indebtedness that would include all commonwealth indebtedness.

Also during the meeting, Puerto Rico Secretary of the Treasury Juan Zaragoza told the board that Puerto Rico's government currently owes $1.3 billion to $1.35 billion to suppliers.


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