While Incoming Governor Rosello has a very difficult task ahead of him, we believe it is possible for his administration to put Puerto Rico back on the path to sustainability.  Some of what needs to happen is beyond his control, i.e. he will need help from the US Congress, though the Commonwealth will have to take the first steps and they will need to be real and substantial.  In our view, this is a very high level fiscal 'plan' for Puerto Rico going forward: 

First, the Commonwealth must buy time to formulate a thoughtful budget plan. Originally, the Oversight Board wanted to formalize a plan by the end of January, which is concurrent with the expiration of the current debt moratorium. Rosello has formally requested a 45-day extension to present his fiscal plan and a 75-day extension to the debt moratorium. Both of these requests are reasonable and should afford Rosello time to develop a realistic plan with the Board and with creditors.

Second, the Rosello Administration must demonstrate to the US Congress and to the Puerto Rican people that it will not only impose austerity measures, but that austerity measures are good for Puerto Rico. To put things in perspective, the US averages approximately 16.5 students per teacher and approximately 500 civilians per police officer. Puerto Rico averages 12 students per teacher and 250 civilians per police officer. This overstaffed government creates a double whammy of current deficits and then future deficits, as these federal employees demand expensive post-employment benefits. A 25% cut in expenses will generate $25 Bn of savings over ten years. Governor Rosello has already ordered a 10% cut by June 2017 and has suggested that he will order another 10% cut in expenses starting in June.

Third, in conjunction with cutting expenses, Rosello needs to convince the US Congress that Puerto Rico needs help and that tax incentives like Act 54 attract business and jobs. In a worst-case scenario, Congress must maintain current subsidies. In a best-case scenario, Congress should introduce new policies and incentive programs that create growth. Extending Act 54 and maintaining health care funding will generate $25 Bn in additional revenue relative to outgoing Governor Padilla’s final projections, which were certainly intended to paint a dire picture.

After cutting budget bloat and convincing the US Congress to maintain current subsidy levels, the projected $32 Bn operating deficit in Padilla's projections becomes an $18 Bn operating surplus. Over the same ten-year period, Puerto Rico owes Cofina debt holders $8.5 Bn and GO debt holders $14.5 Bn. If the Commonwealth pays Cofina in full, as they are contractually obligated to do to the extent the SUT is sufficient to do so, there will be $9.5 billion left for GO holders, which is a 65% recovery.  There is reason for optimism that Governor Rosello will relieve the Oversight Board of much of the burden of making the hard cuts on the expense side, though both the Administration and the Board will need to be vigilant in enforcement of these cuts.  As we have always believed, the toughest challenge for the Oversight Board will be in determining if or how GO holders and pensioners will share prospective shortfalls.  However, without cooperation and support from the US Congress, frankly, the gap is not feasibly bridgeable.