Rosselló fiscal plan projects payment of 18% to 41% of debt due

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Puerto Rico Gov. Ricardo Rosselló submitted a 10-year fiscal plan to the Oversight Board that would allow for annual debt payments of about 18% to 41% of debt due.

The plan anticipates having enough cash flow in fiscal year 2018 to pay 17.6% of the government's debt service. In the following eight years the government would pay between 30% and 41% per year.

These figures are for government debt proper and not the debt of issuers of the public corporations (excepting the Highways and Transportation Authority), the municipalities, and a handful of other semi-autonomous authorities. The figures assume that the federal government doesn't restore Affordable Care Act funding, something the governor said Tuesday would allow for greater debt service.

In the plan Rosselló says he plans to determine the amount of debt the commonwealth will pay by first determining the sums needed for "essential services and contingency reserves." The debt burden will be based on net cash available. If possible, the governor wants to use a consensual process under Title VI of the Puerto Rico Oversight Management and Economic Stability Act to decide on the new debt service schedules.

On Jan. 18 the board sent a letter to Rosselló calling for a structurally balanced budget in fiscal year 2019 and laying out $4.5 billion in cuts and revenue increases that it suggested to the governor. In its version of fiscal 2019, the government would pay 21% of debt due. By comparison, Rossell- is projecting in that year the payment of 30% of the debt.

PROMESA requires the creation of certified five-year fiscal plan that would, among other things, provide a balanced budget to the commonwealth, restore access to the capital markets, fund essential public services and pensions, and achieve a sustainable debt burden. The board can accept, modify, or completely redo the plan submitted by the governor. It has decided to seek a 10-year plan.

"This fiscal plan follows the same austerity line started by Governor Fortuño in 2009 and continued under Governor García Padilla," said Advantage Business Consultants President Vicente Feliciano in an email. "It provides for continuing to reduce government employees through attrition, closing of schools and increases in taxes. It also goes into new territory such as special taxes on retirees with government pensions of over $2,000 and cuts in funding to the University of Puerto Rico of $300 million."

Unlike the board's proposals, Rosselló isn't calling for government layoffs.

One of the biggest differences between the governor's plan and the board's approach come in their projections for economic growth. The board took its projections from García Padilla's December "baseline" projection. Included in it was a projected 17.1% decline in GNP in 2018. By comparison, the governor is anticipating a comparatively small 1.6% decline that year. For fiscal 2018, "I would expect the final figure to be closer to the [governor's] fiscal plan than to the board assumptions," Feliciano said.

Whereas Rosselló is projecting an average 0.78% annual GNP increase in the next 10 years, the December report projected an average -1.01% annual GNP decline in the period.

The changed economic assumption is the main reason the governor starts with $9.3 billion in greater baseline revenues in his plan.

Rosselló specifies how much he expects from various revenue sources in his plan. He is less specific about how the money will be spent, since he doesn't break down the expenses by department or spending goal.

He calls for taxes on those making pensions greater than $2,000 a month. This would lead to 3% aggregate reduction in retirement plan disbursements.

The governor called for a series of structural reforms, some of which he has already started. Among the reforms are: private sector labor reform, permitting process reform, tax reform, infrastructure reform, public-private partnerships, energy reform, and two measures to promote economic development.

Howard Cure, director of municipal bond research at Evercore Wealth Management, said the governor has room to further reduce the size of government. "I understand that so many people are employed in the government sector that layoffs would have a negative impact on the economy, but the workforce is bloated, particularly schools and the Puerto Rico Electric Power Authority, so cuts need to be made."

The governor's plan doesn't cover PREPA.

"There seems to be only minor pension reform," Cure said. "The pension fund is essentially a pay-as-you-go system, so not requiring some significant pension cuts just means bond holders will bear the brunt of the restructuring."

On Tuesday night Rosselló said he planned to introduce legislation to increase the minimum wage. This may hurt the economy, Feliciano said, and thus the execution of the fiscal plan. The governor is also assuming it can collect 40% of sales and use taxes due on internet purchases. Since online retailers are not required to collect it for Puerto Rico, this may prove to be optimistic, Feliciano said.

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