The latest fiscal plan submitted by Gov. Ricardo Rosselló sets up a clash with the Puerto Rico Oversight Board.

The new plan was submitted Thursday after the board refused to certify a March 23 version. It leaves out most of the board’s demanded changes, including a cut to pensions, an elimination of the Christmas bonus both in the government and private sectors, and a reduction in mandatory vacation and sick leave for both sectors.

Matt Fabian
Municipal Market Analytics Partner Matt Fabian said there is too much uncertainty about Puerto Rico's future for a fiscal plan to be properly certified right now.

The governor’s plan includes steps to introduce counties and county-based services on the island, even though the board directed their elimination.

The board, which was appointed under the Puerto Rico Oversight, Management and Economic Stability Act, certified a fiscal plan last year, then authorized a revision after Hurricane Maria wiped out much of the island's infrastructure.

The new plan lowers economic growth assumptions. The average growth rate over the six years is projected to be 0.25%, rather than the 0.82% that the March 23 plan had projected.

According to the El Vocero news website, the governor said in a roundtable interview on Thursday that the plan addressed 20 of the 48 orders that the board made in its letter. Rosselló ruled out responding to further board fiscal plan orders, saying that he believes he has rightful legal authority on many of the plan’s topics.

The board has made it clear that it disagrees. It has given itself to April 20 to certify a new version of the plan, which covers public entities that as of February 2017 owed $51.5 billion in debt.

The board may choose to approve its own version of the plan, quite different from the governor’s, setting up a legal and political fight for control of the government.

The new plan anticipates $6.33 billion of spare cash flow before making any debt payments through fiscal year 2023, an increase of 4.7% from the $6.05 billion found in the governor’s fiscal plan presented on March 23.

The new plan introduces a line for contractual debt service in the years through fiscal year 2023 that says $15.7 billion is due during the period. However, the board’s certified and conformed March 13, 2017 fiscal plan said the entities in it owed $20.2 billion from fiscal 2018 to fiscal 2023. Puerto Rico’s Fiscal Agency and Financial Advisory Authority didn’t respond to an email inquiry on the apparent discrepancy.

If all the cash flow were used to pay debt, something not stated in the plan, the new version of the fiscal plan would lead to 31.3% of Puerto Rico’s debt service being paid through fiscal 2023. This compares to 29.9% of the debt service in the March 23 version. Both figures assume that the entities have $20.2 billion in debt principal and interest due in the period.

“There’s so much uncertainty in Puerto Rico, still,” said Municipal Market Analytics managing partner Matt Fabian on Friday. While it is good the plan is showing a surplus (excluding debt payment), “In the past the market has had trouble relying on projections from Puerto Rico. Investors should take these numbers with a large grain of salt.”

Fabian says it is unclear how the board will respond to the plan.

The plan like the other fiscal plans for Puerto Rico entities shouldn’t be completed until the bondholders either reach a negotiated settlement over the debt or all court proceedings on the debt are completed, Fabian said. Otherwise, the ultimate debt settlement could always upset the cart of the fiscal plan.

As an example Fabian mentioned the future of money from the island’s sales tax. The plan anticipates having access to all this money for General Fund expenditures. However if a court were to find that the Puerto Rico Sales Tax Corp. (COFINA) has rightful claim to this money several years from now, the whole plan could be thrown up in the air.

Fabian said that unless there is a negotiated resolution of the debt dispute, the court wrangling could take five more years.

For Puerto Rico it would be a big problem if the court battles continued for five years, because investors are unlikely to lend to the government again until the government’s financial path is certain, Fabian said. And without that lending it will be hard to get private investors to invest in Puerto Rico’s private sector as well.

Over the last week Puerto Rico general obligation bond prices have rallied by about five cents on the dollar, according to Markit. A general obligation bond maturing in 2035 sold on Friday several times at 43 cents on the dollar. Also on Friday a GO bond maturing in 2033 sold at 45.375 cents on the dollar.

The new version of the fiscal plan has an “implied debt capacity range,” based on the experience of the 10 U.S. states with the highest debt load. Using this, Puerto Rico claims that an appropriate load would be $9.3 billion, less than a fifth of the current debt load of the fiscal plan’s entities.

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