Puerto Rico officials proposed cuts to teacher pensions, a new financial control board and restructuring $18 billion of debt due in the coming five years, as part of a long-anticipated plan unveiled on Wednesday to pull the island out of a wrenching fiscal crisis.
The financial overhaul plan, drawn up by a task force created in June by Governor Alejandro Garcia Padilla, anticipates the island running out of money by next May or June.
Even with sweeping spending cuts, Puerto Rico needs concessions from bondholders who include mom-and-pop investors and big Wall Street hedge funds, according to the plan.
Garcia Padilla's administration now faces the hurdle of trying to implement it in the face of potential legislative gridlock and possible resistance from teachers' unions.
Puerto Rico has suffered nearly a decade of recession. Its $72 billion debt load has accumulated, while the number of taxpayers shouldering the burden has dwindled, with thousands moving to the U.S. mainland each year.
Only 40 percent of the working population is in the workforce and island pensions face combined unfunded liabilities that topped $37 billion in fiscal year 2013.
A bailout from Washington is not expected, and while some on Capitol Hill are pushing laws or reforms that could help Puerto Rico, their prospects are uncertain.
Garcia Padilla said in a public address that cutting spending was not sufficient to solve the island's problems without sacrifices from bondholders and called for talks between the commonwealth and creditors to start.
According to Garcia Padilla's so-called working group, comprised of officials including the Governor's chief of staff, Victor Suarez, and the head of the Government Development Bank, Melba Acosta, Puerto Rico has $47 billion of debt excluding public agencies like power utility PREPA and water authority PRASA.
Of that, $18 billion in principal and interest are due in the next five years, and this piece is targeted for restructuring, according to working group officials. This includes general obligation debt - widely seen as sacrosanct by the municipal bond market - and COFINA sales tax bonds.
Puerto Rico general obligation bonds due 2035 traded at 72.75 on the dollar Wednesday versus 74.30 late Tuesday, according to Electronic Municipal Market Access.
The plan anticipates that tax increases and spending cuts would generate around $12 billion of a $28 billion budget gap by 2020, while economic growth would reduce the shortfall by another $2 billion.
Working group officials said there remains still a deficit of roughly $12 billion to $13 billion that needs to be eliminated. The working group said that only $5 billion would remain for debt service on the $18 billion.
That could mean difficult negotiations with creditors. The commonwealth will follow the approach it adopted with restructuring PREPA, a deal it struck earlier this month that saw bondholders accept a 15 percent reduction in their principal, a member of the working group said.
The plan also recommends a voluntary exchange offer be made to creditors.
Control Board, Cuts
Planned reforms include imposing a control board on the island's finances, according to working group officials. This could be made up of members suggested by creditors as well as the Federal government.
The group also recommended cutting the size of the department of education through school closures, attrition and changes to teachers' pensions, and cutting subsidies to the University of Puerto Rico and to some cities and towns, according to background materials provided.
The group suggested Puerto Rico explore public-private partnerships at certain hospitals, as well as at the island's highway, transit, port and building authorities, the materials showed.
Addressing Puerto Rico's inefficient tax collection, the group suggested overhauling collection methods and changing tax laws to promote growth.
It advised continuing to invest in infrastructure, diversifying energy sources, and reducing central government spending through attrition and potentially by changing pensions.
The group also said Puerto Rico must control healthcare costs by standardizing health protocols, and install new accounting systems.
It said Puerto Rico should the push U.S. government for help, notably to provide access to court-sanctioned restructuring laws, exempt the island from the Jones Act, offer equitable treatment under Medicaid and Medicare funding schemes, and pass tax legislation that would promote corporate growth.
But questions remain over the plan's political chances. Passing legislation could be an uphill climb, especially 14 months ahead of a gubernatorial election in which the opposition party, which may not be inclined to continue the reforms, is expected to make a strong push for power.
There is also the possibility of public opposition, including protests from University of Puerto Rico students and labor interests. (Reporting by Nick Brown and Megan Davies; Editing by Frances Kerry and Alan Crosby)
© 2022 Thomson/Reuters. All rights reserved.