Puerto Rico is at a critical juncture. The Governor has promised investors a balanced budget in the face of fewer tax receipts and a slow economy. Two of the local economists that we met on our last visit suggested that Governor Padilla needed to focus his efforts on reducing govt spending side as opposed to raising taxes.  

We heard many stories from the locals about the excess spending and waste at the Govt agencies;  a) mechanics coming to work when the buses were on their routes and only working overtime hours b) billing systems that resulted in 3.50 dollars per bill spent and c) electricity and water "leakage" or theft that reduced revenues by more than 30%. These are just a few.

Cutting spending is not an enviable task for a politician. Its naive to think that Union leaders will generously offer concessions to their contracts which is why legislature is passing the Fiscal Sustainability Act. This Act gives the Govt the authority to amend otherwise protected Union employment contracts. The House passed the Act last week and it is now sitting in the Senate, to be voted on any day. 

This is why we have seen the flurry of Union protests and strikes. The Unions do not want it to pass and will  increase their protesting and publicity in hope that the Senate does not pass the bill.

For Puerto Rico, the Act needs to be passed and the cuts need to be made. In addition, tax reform needs to be proposed and passed all before year end. After year end, most politicians will go into campaign mode and nothing new and meaningful will be passed before the elections. 

As investors, we are watching for these two events to occur as they are important stepping stones on the road to recovery.