Puerto Rico sent a mixed message to bondholders in a fiscal plan released Thursday, suggesting in one passage that it won’t have any money for debt service and in another that it should have the capacity to pay.

Gov. Ricardo Rosselló’s central government fiscal plan leaves the appearance that it will have no money for debt service through fiscal year 2022, though it never explicitly states that the government won’t pay debt service. When a spokesman for an Rosselló government official was asked if the plan assumed nonpayment, he said he couldn’t comment.

Rep. Rob Bishop, R-Utah
U.S. House Rep. Rob Bishop said debt holders should be involved in the creation of the Puerto Rico fiscal plan. Brian Tumulty, The Bond Buyer

The revised fiscal plan was necessitated by Hurricane Maria, which devastated the island's infrastructure and economy in September. An earlier 10-year fiscal plan approved by the Oversight Board provided that about 24% of debt service due would be paid over 10 fiscal years. The one presented Thursday is for five fiscal years.

The new fiscal plan assumes that Puerto Rico will get a substantial amount of federal aid after the hurricane, but doesn’t factor any of this as resources in its central table of revenues and expenditures. While none of the forms of federal aid being contemplated could be used directly for the payment of debt service, some of it could relieve the government’s General Fund and other spending funds from being used for other purposes.

In Rosselló’s central government fiscal plan, presented on Wednesday night to the Puerto Rico Oversight Board, the government claims it will run a deficit of $3.4 billion through fiscal year 2022. This figure excludes “federal transfers” and any debt service. It also excludes $35.3 billion in federal disaster aid and more than $4 billion in federal Community Disaster Loans, both of which the government expects during the period.

“Federal transfers are for specific purposes, they aren’t available to pay debt,” said Brad Setser, Council on Foreign Relations senior fellow. “That said, obviously more Medicaid funding would reduce the need for Puerto Rico to raise its own medical spending in the next few years, and thus reduce its projected budget deficit and need for additional borrowing.”

The fiscal plan says Puerto Rico expects to receive $35.3 billion in Federal Emergency Management Agency aid. The current plan estimates that the federal government would expect Puerto Rico’s government to contribute $1.3 billion through fiscal year 2022, as a required “cost-share.” Yet the plan also notes that Puerto Rico is seeking to have this amount zeroed out and that there is precedent for the federal government to zero out the cost-share requirement after severe storms.

The plan also says that the U.S. government has approved a $4.9 billion loan for Puerto Rico and the U.S. Virgin Islands as part of the Community Disaster Loan program. Though this hasn’t yet been disbursed to Puerto Rico, Puerto Rico expects it to fill in the fiscal gaps in the coming four fiscal years.

The plan says the loan would not be “additive to the economy,” suggesting the loan would be paid back. However, at press conferences about this loan Rosselló has said that the U.S. government has forgiven this type of loan 90% of the time.

“I think there is a political consensus among both political parties in D.C. that the CDL loan should not be used to make payments to creditors,” Setser said. “Realistically, so long as Puerto Rico is relying on emergency funding from the federal government, debt service will likely be very close to zero (absent a legal ruling that forces Puerto Rico to pay). Indeed, I think it is likely that debt service will remain close to zero so long as the CDL loan is outstanding – it isn’t clear to me that the CDL loan will be forgiven if the only effect of forgiveness is that funds that otherwise would have been repaid to the federal government are now available to creditors.”

The plan also states that an examination of the 10 most indebted states shows that Puerto Rico should be able to pay some debt service each year. For example, the plan states Puerto Rico has an “implied debt capacity” of up to $7.7 billion in the current fiscal year, 2018. This would be the maximum of debt that the model suggests Puerto Rico and its corporate units is capable of carrying. The amount would grow over time.

For comparison, the central government and component units in the plan have about $51.4 billion outstanding.

The pages that project the capacity don’t reconcile the capacity with Puerto Rico’s apparent plan not to pay any of the debt in the next five years.

U.S. Rep. Rob Bishop, chairman of the House Natural Resources Committee that oversees Puerto Rico, said, “It is imperative [that] the Oversight Board and governor fully integrate those who hold the debt into the development of these plans, thereby guaranteeing accuracy and transparency in the underlying assumptions. After all, the board’s stated goal under [the Puerto Rico Oversight, Management, and Economic Stability Act] is to return Puerto Rico to fiscal accountability and the capital markets, and this can only occur if the fiscal plans respect the lawful priorities and liens of debt holders.”

Andrew Rosenberg, of Paul, Weiss, Rifkind, Wharton and Garrison, an advisor to the Ad Hoc Group of General Obligation Bondholders, agreed “that more transparency is required about the information and economic assumptions behind this fiscal plan, and that creditors should be fully integrated into the process. Absent this level of transparency and integration, which to date has been actively opposed by both the commonwealth and the board, there is no means available for stakeholders to evaluate the fiscal plan.”

Compared to the board-approved fiscal plan, which assumed a 3.9% decline in real gross national product in the current fiscal year, the current one assumes a much larger (11.2%) decline in the current fiscal year. However, it assumes growth in the following years whereas the original assumed continued declines.

On the other hand, the new proposed fiscal plan assumes much steeper population declines. While the previous plan assumed that population would go down 0.2% per year through fiscal 2022, the current one expects a cumulative 19.4% decline in the period.

The plan assumes that sales and use tax revenues are fully available to the General Fund.

Puerto Rico also released plans for the Puerto Rico Aqueduct and Sewer Authority and its electric power authority Wednesday. The former explicitly laid out two scenarios – one without federal aid and one with federal aid. In the former scenario PRASA could pay 17% of debt service through fiscal year 2022 and in the latter scenario it could pay 47% of debt service.

The power authority plan didn’t address assumptions about debt payment. The government’s Fiscal Agency and Financial Advisory Authority didn’t respond to inquiry about PREPA debt service assumptions.

The plans unveiled Thursday are just proposals by Rosselló and his electric and water and sewer authorities. The Oversight Board has ultimate authority in approving these plans.

In late 2017 the board's chief Title III bankruptcy lawyer reportedly said that the fiscal plan would hold no money for debt service in the next five fiscal years.

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