Puerto Rico Governor Says Deficit Could Climb to $59 Billionby
Garcia Padilla gives cumulative 10-year deficit forecast
Governor says more austerity will have intolerable effects
Puerto Rico Governor Alejandro Garcia Padilla said the island’s budget shortfalls will total as much as $59 billion over the next decade, underscoring the need to secure federal aid and reduce its debts.
Garcia Padilla’s projection was made at a meeting in New York of the Financial Oversight and Management Board for Puerto Rico, which was created by Congress to pull the territory from a years-long fiscal crisis. The estimate includes an end to $16 billion of federal health-care funding, the loss of manufacturing-tax revenue starting next year and rising contributions to its nearly depleted workers’ pension system.
“Without a change in federal policy and without a change in the trajectory of the island’s economy toward real growth, there will be no money for any debt service at all without jeopardizing the commonwealth’s ability to provide essential services,” Garcia Padilla said.
Puerto Rico has been defaulting on a growing share of its $70 billion debt as Garcia Padilla conserves cash to avoid shutting off services to the island’s 3.5 million residents, nearly half of whom live in poverty. Garcia Padilla said the government would be forced to resort to a costly loan -- similar to those secured by businesses operating in bankruptcy -- if the island’s debt-moratorium law is overturned and it must cover its bond payments.
The impact of the crisis has rippled beyond Puerto Rico because its securities are held by U.S. mutual funds, hedge funds and individuals, as well as by many island residents.
The sheer number of bondholders has complicated efforts to negotiate in an effort to persuade them to accept less than they’re owed: Puerto Rico’s Fiscal Agency and Financial Advisory Authority has identified more than 350,000 different owners that account for about 68 percent of its debt. As much as $12 billion is held by island residents or institutions, according to Fernando Oronoz, deputy director of the advisory authority.
The oversight board was created through legislation signed by President Barack Obama in June after Garcia Padilla made little headway with creditors during months of fitful negotiations.
The governor’s ability to wrest concessions was weakened because Puerto Rico isn’t eligible to file for bankruptcy, so he couldn’t threaten to use that to impose losses on recalcitrant investors. The law signed by Obama gave the board authority to oversee a debt restructuring that can now be ordered by a court if bondholders resist.
The panel will also work to halt the borrowing the government has long used to paper over budget shortfalls. That’s left residents worried about the scale of service cuts that may be imposed and how their interests will be balanced against obligations to bondholders.
The meeting was periodically interrupted by protesters shouting “shame on you” to the board and “you sold out Puerto Rico to Wall Street” to Garcia Padilla. Protesters were escorted out by security.
Puerto Rico has skipped about $1.8 billion of bond payments since it began defaulting in August 2015, according to Oronoz. The commonwealth’s next major payment is Jan. 1, when $940 million is due.
In the first three months of 2017, the commonwealth will release its audit for the fiscal year that ended June 30, 2015, Treasury Secretary Juan Zaragoza told the board. Puerto Rico has a history of filing financial documents late.
Year-to-date tax collections are slightly below projections. The commonwealth took in $2.06 billion of revenue from July through September, $14.7 million less than budgeted estimates, according to Zaragoza.
The crisis stems from a legacy of government borrowing while the island was mired in recession. Puerto Rico’s economy has shrunk by an estimated 16.5 percent since 2007 and is forecast to contract by 2 percent in the year ending June 30, 2017, according to the island’s Planning Board, which calculates economic growth. A record number of Puerto Ricans have left the island to find work on the U.S. mainland.