On the one hand, early results of Puerto Rico’s aggressive plans to raise revenue and cut its debt look promising.
On the other hand, creditors of Puerto Rico debt held a meeting last week with restructuring experts, reportedly over concern that payments of the territory’s $70 billion in public sector debt and $40 billion more of unfunded pension liabilities would be halted.
Such is the seemingly contradictory state of Puerto Rico’s complex financial picture.
Uncertainty prompts discussions
The meeting in New York, first reported by the Financial Times, comes as the commonwealth faces between $3.4 billion and $3.8 billion in yearly debt service over the next four years.
“The numbers are untenable,” a restructuring advisor told the FT. “To issue new debt, the yield would have to rise, and where they can’t raise new money, they will have to stop paying.”
Complicating the matter is the ambivalent legal status of Puerto Rico, which, unlike Detroit, for example, is currently prohibited from filing for Chapter 9 bankruptcy.
Government making headway
Puerto Rico officials, however, said they are making headway on their reform plans and such discussions among creditors are routine.
“We believe it is not unusual, as part of the normal investment process, for private investors to meet with advisors to discuss a range of issues, and we understand that meetings of this nature occur periodically,” according to a statement released by Jose v. Pagan Beauchamp, interim president of the Government Development Bank for Puerto Rico, and Treasury Secretary Melba Acosta Febo.
The talks come amid a ray of positive news on the territory’s finances. Though Puerto Rico has been racked by a long recession, Gov. Alejandro Garcia Padilla last year unveiled a series of aggressive measures that has significantly decreased its budget deficit and increased tax revenue, as well as strengthened its tax-collection processes. The governor signed a budget in 2013 that included $750 million of deficit financing, the smallest gap in several years.
“We did not call for, were not invited to and are not participating in this meeting,” the statement said. “We made significant progress in implementing our fiscal and economic development plans in 2013 and are determined to continue that progress in 2014. As we have stated publicly in the past, Puerto Rico will take every step necessary to continue honoring its obligations.”
Preliminary revenue collections for the first half of fiscal 2014 were $80 million above projections. Its December revenues of $913 million were the most ever for the month, while government spending from July through November was lower than planned.
Last month, the governor signed into law a plan that would reform teacher and judicial pension plans. Though the Puerto Rico Supreme Court issued a stay last week, the governor is confident the law will ultimately be upheld, as was reform of the public employee pension fund.
Options for assistance
Meantime, the U.S. government has taken steps to assist the commonwealth.
During a panel discussion last week in New York sponsored by the Global Interdependence Center, Robert Kurtter, of Moody’s Investors Service, said an excise tax on manufacturing, permitted by the federal government, is responsible for about $175 million in revenues for the territory, and U.S. officials are working to maximize Puerto Rico’s access to federal spending, according to a report in The Bond Buyer.
The report further states that another option would be for the federal government to renew a $2.75 per gallon rum tax that expired at the end of last year. The tax brought in $225 million in revenue for the Puerto Rico government last year. There is also a $10.50 tax per gallon, which is ongoing.