Governor Rosello’s most recent Fiscal Plan continues to suggest that the Commonwealth (CW) has unsustainable amounts of debt, outdated infrastructure, and a fleeing population. Why then are Sr Cofina Bonds up 52% for the year and Jr Cofina bonds up 140%?

Implicit in the new Plan are subtle but significant changes. First, the CW is no longer viewing their debt holistically. For example, the PREPA (Electric Authority) and PRASA (Water Authority) budgets are no longer included in the General Fund budget. Their debt is now segregated, and each authority is required to have its own Fiscal Plan (budget). The objective, of course, is to privatize these and other authorities.  Without authority debt, the General Fund is left to support approximately 18 billion of General Obligation debt and 17 billion of COFINA debt as opposed to the 70 billion often quoted in media publications. 

Second, the projected budget surplus is growing. The plan now assumes a 6-billion-dollar surplus over six years (excluding debt service). This surplus assumes that the US Federal Government will decrease Puerto Rico’s Medicaid funding starting in 2020. If we assume the Feds continue to fund PR’s Medicaid needs at current rates, the surplus grows to 12 billion. Keep in mind that GO debt service is 9.5 billion and COFINA debt service is 5 billion over the same period; 12 billion surplus versus 14.5 billion in debt service. The Fiscal Board and the CW continue to press for significant debt restructuring, but their surplus projections don’t justify it.

The State of Connecticut has approximately 3.5 million people (similar to PR) and its annual debt service is 13% of revenues. If we assume that COFINA and Act 91 are legal, then the Fiscal Plan projects 11 billion of annual revenues. Annual GO debt service is approximately 1.5 billion dollars or 13.6% of revenues which is not far from that of CT. A 25% haircut to the GO debt reduces this ratio to less than 10%. The GO debt is now trading at 41.

Finally, Sales and Use Tax collections continue to be paid to the COFINA bond trustee. Bank of New York now holds close to 1.4 billion dollars in trust. We continue to believe that Judge Swain will determine COFINA to be legal and that this entity is the best structure/Issuer to access the capital markets going forward.

Congressman Bishop recently wrote a letter to the Fiscal Board scolding them for their general lack of regard for creditor rights which has impeded restructuring negotiations and prohibited Puerto Rico from moving forward.  Not by coincidence, this letter arrived shortly after the PR Governor refused to incorporate the Fiscal Board’s austerity measures in the revised Fiscal Plan due 4/30. Unfortunately, the Governor’s inability to implement these austerity measures will only delay the passage of a Fiscal Plan , create ill will, and delay/reduce needed recovery aid and investment.