Puerto Rico expects to adopt a balanced budget in the next few years, according to José Pagán, the interim president of the Government Development Bank of Puerto Rico.

Pagan became interim president in mid-July after predecessor Javier Ferrer resigned.

In emailed answers to questions from The Bond Buyer, Pagán also said that revenue measures at Puerto Rico’s public utilities and the Puerto Rico Highways and Transportation Authority will strengthen their financial independence. In April Ferrer said the GDB was in a “fragile” position. The revenue measures will improve the GDB’s finances, Pagán said.


Bond Buyer: What are Puerto Rico’s long-term plans for deficit financing and debt? Does it plan to shrink the deficit to a small percent of the budget? Does it plan to ultimately submit a balanced budget and, if so, when?

Pagán: We are subject to the cycles of the US economy and monetary policy. The General Fund budget deficit has reflected a significant reduction from $3.3 billion in FY2009 to $1.6 billion in FY2013 (revised to $1.29 billion in a July GDB presentation), and is projected to decrease to $820 million for FY2014. We expect to continue reducing our budgetary deficit, discontinue the use of deficit financings, reduce our recent reliance on debt service restructurings, and finally submit a balanced budget within the next two fiscal years.


BB: The fiscal 2014 budget calls for the refinancing of $575 million in general obligation bonds and the financing of $245 million with “new money,” both for the operating budget. Do you expect that all of this will be raised through the sale of general obligation and COFINA bonds in the coming fiscal year? Do you have any plans as to when these bonds will be sold?

Pagán: GDB is currently monitoring market conditions in order to execute this year’s plan of finance. We expect to place these transactions before the end of FY2014.


BB: In late April your predecessor, former GDB president Javier Ferrer, told a Puerto Rico legislature committee, “The debt that most worries the GDB and used to be our diamond, is the operational gap the [Puerto Rico] Highway [and Transportation] Authority has remedied with GDB loans last year.” The Puerto Rico legislature and governor approved new revenue for the PRHTA at the end of June. Will these new sources of revenue be enough to bring fiscal stability to the PRHTA? What will the improved fiscal health of the PRHTA mean to the GDB?

Pagán: These revenue enhancement measures are an essential step on HTA’s road to financial stability and will allow it to repay its outstanding loans with GDB. The new measures are expected to increase HTA’s annual revenues by $276 million, a year-over-year growth of 64%. HTA’s improved financial position will allow it to address a portion of its operating deficit and reduce its reliance on interim GDB financings. With the repayment of the HTA’s loans, GDB will significantly improve its liquidity position and effectively place its investments-to-loans portfolio ratio to more acceptable levels.


BB: In the GDB’s economic activity index for May, gasoline consumption showed a small improvement. Non-farm employment and electric power generation were down about 3% from a year ago. However, cement sales plunged 24%. Why are cement sales down so dramatically?

Pagán: Cement sales during 2012 experienced a dramatic increase mainly due to several government sponsored infrastructure projects and privately funded renewable energy projects. These projects have now been completed and cement sales are now been compared to higher nominal sales.

Cement sales increased by 7.3% during FY2012, and real public construction investment increased significantly during FY2011 (13%) and FY2012 (18%), which is mainly associated to the election cycle. This cycle was observed in FY2003 (3.4%) and FY2004 (4.6%), and in FY2008 (5.7%). Notice, though, that the magnitudes of growth rates from the last election cycle were significantly higher than the ones experienced previously. After the election cycle, public construction investment retakes a more “normal” pattern, which helps to explain the reductions observed immediately after September 2012.


BB: Is a localized problem in the construction industry giving an overly harsh picture of the state of the Puerto Rican economy?

Pagán: Technically, the economic activity index is a composition of four variables.

Each variable is adjusted for volatility prior to including the variable in the economic activity index. Being the variable of cement sales is highly volatile, the volatility adjustment makes its real contribution less intense than what it shows as a raw variable. The recent reduction of the index is mainly related to the decline of employment. Given the last BLS payroll benchmark revision, published in March 2013, increased the level of payroll employment previously reported by more than 18,000 employees; it changed the growth of the EAI from a virtual stagnation of 0.1% in 2012, to a welcomed growth rate of 1.4% for the same period. Several employment sectors were changed significantly, including the construction and the service sectors. Being the EAI of 2012 is at a higher level than previously reported, the corresponding level for 2013 is shown at a sharper drop than it would be without the revision.


BB: The economic activity index shows that the economy has declined significantly from November. What is the García Padilla administration doing to revive the economy?

Pagán: A significant part of the growth experienced through the EAI during 2012 could be attributed to the election cycle. Therefore, given the current state of the economy, it is natural to observe some contraction. Nevertheless, if the current employment promotion policies are successful, we could be experiencing better economic conditions and performance during fiscal year 2015 and beyond.

It is the Administration’s immediate goal to create 50,000 jobs as an urgent and necessary response to ease the unemployment rate affecting our people. However, our economic development plan goes beyond this immediate goal of relief. We do not want a short time of harvest, followed by a long time of insecurity. We know that a higher level of employment closes inequality gaps, stimulates investment in small and medium enterprises, and reduces the levels of dependency and debt among our people.

This Administration’s program aims to create a new economic system sustained by the consolidation and expansion of the industrial base, production and consumption of clean and cost-effective energy, renewal of public and private infrastructure, strengthening of our human resource, strategic construction, increased export rates, job retraining, full exploitation of the opportunities offered by our fiscal autonomy, intensified promotions, and greater encouragement for development research.


BB: In late May Gov. García Padilla announced that the Puerto Rico Electric Power Authority would cut its rates by 17% effective the month of May. Given the authority’s weakened financial state, was this a wise move?

Pagán: The 17% reduction in residential rates does not affect PREPA’s current financial condition. The rate reduction in May can be attributed to three events:

• A 10% reduction after recovering foregone revenues of the Rate Stabilization Program.


In December 2011 PREPA implemented a Rate Stabilization Program to temporarily reduce the fuel adjustment charge to residential clients. The Rate Stabilization Program cost PREPA $79.4 million in FY2012 and $53 million in FY2013.  When this subsidy was removed, rates increased temporarily to recover the forgone revenues during the period of the Program. Now that rates no longer reflect the cost of the subsidy, rates have reduced by 10%.

• A 4% reduction because the average cost of fuel was reduced in the last month. PREPA remains heavily reliant on oil as an energy source (61% in FY2012).

• The remaining 3% is due to improved efficiencies attained by this Administration.


BB: What is going on with the proposed water increase for the Puerto Rico Aqueduct and Sewer Authority?

Pagán: On July 15, 2013, PRASA implemented a 60% rate increase (on average) that will provide additional revenues to cover operational expenses. This increase will allow PRASA to become a financially independent entity that does not rely on Commonwealth or GDB contributions.


BB: When will the audited fiscal 2012 government results be available?

Pagán: On July 22, 2013, the GDB posted on EMMA a second notice of failure to timely file the Commonwealth’s FY 2012 audited annual report. The Audited Financial Statements of two public corporations—University of Puerto Rico and the Ports Authority—have delayed the completion of the CAFR, but we will comply with the new filing date of September 16, 2013. The Commonwealth however, will publish and file selected unaudited financial data for the fiscal year ended June 30, 2012 on or about August 15, 2013. The Commonwealth is implementing measures to ensure future timely filings on its audited financial statements.


BB: In March the GDB and the Treasury Department hosted an investor presentation in New York City and only allowed actual investors to attend. Some analysts and reporters were concerned about not being allowed to attend. A few weeks later the GDB posted the slides to the presentation on its web site. Why did the GDB and Treasury Department keep reporters and analysts from the investor presentation?

Pagán: GDB posted the slides presented at the investor meeting held in New York City in March the business day immediately after the day the meeting was held. Our latest investor presentation was held in the form of a webinar open to investors, reporters, and analysts alike on Thursday, July 18 at 2:30PM. A copy of the presentation was posted on the GDB website a few days before.


BB: In late April Ferrer said the GDB’s financial condition was “fragile.” What steps are you and the García Padilla administration taking to improve the GDB’s condition?

Pagán: Since April, major steps have been taken to improve GDB’s condition. First, legislation was enacted to approve $276 million in new revenues to HTA. These new revenues will allow HTA to repay its outstanding loans with GDB. In addition, with the FY 2014 Budget approved, and with the expected publication of the 2012 CAFR, we can now move towards issuing General Obligation bonds. Both of these steps will provide significant liquidity to the GDB.


BB: Given the GDB’s financial situation, could you see a situation where the GDB would default?

Pagán: No, GDB’s financial position is currently stable. We expect that the timely execution of projected transactions will enhance our liquidity position going forward.


BB: Would you like to add anything else?

Pagán: We are proud of all the progress we have made. In January 2013 we set out to tackle very challenging tasks—pension reform, general fund deficit, and strained public corporations—and one by one we have corrected the problems that were weakening our credit. We will continue to address the fiscal and economic challenges facing Puerto Rico in order to protect our investment grade credit rating.

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