Puerto Rico Governor Bucks Deep Austerity in Recovery Plan

(Bloomberg) -- Puerto Rico Governor Ricardo Rossello released a plan to steady the island's crumbling finances that depends largely on overhauling the tax system and squeezing cost savings from the government, seeking to avoid deep and swift budget cuts that he has said would deal a devastating blow to an already teetering economy.

The plan, which would cover less than half of its annual debt payments, is the first concrete sign of how the new governor expects to pull the commonwealth out of an unprecedented financial collapse. The blueprint, which will serve as a guide during negotiations with creditors seeking to wrest billions from the government, would need to be approved by the federal oversight board that was installed to end the crisis.

The approach raises the specter of a clash with the board because it doesn't cut spending as much as was previously suggested. Rossello, who took office in January, has said he wants to protect residents from austerity that would delay the territory's recovery. It doesn't mention employee layoffs and shelters the pensions of most government retirees.

"It's our hope that the board follows the path that we are designing here. Our main priority is growth," Elias Sanchez, the governor's representative to the board, said in a telephone interview. "We're doing it in such a way that allows our economy to grow and doesn't exacerbate the situation."

The board said in a statement that it will review the proposal in the coming days.

The release of the governor's plan marks an initial step toward resolving the crisis on the Caribbean island, which has been mired in recession and losing population as residents leave for the U.S. mainland. Puerto Rico borrowed for years to pay bills, waiting for an economic rebound, only to collapse into a record-setting series of defaults that began in 2015.

His approach drew some skepticism over whether it's sufficient to steady the island's finances.

"The governor is clearly trying to satisfy his most important constituent, the voters,” said David Tawil, the president of Maglan Capital, an investment firm. “The plan favors efforts to increase revenue and restructure government offices, rather than to push deep cuts on to the citizens of Puerto Rico. I don't think that even the governor believes that the measures set out will be enough to even put Puerto Rico on the path to turnaround.”

There was little immediate impact on Puerto Rico bond prices. Debt maturing in 2039 that's backed by the government's pledge to repay, instead of specific revenues, traded for about 65.5 cents on the dollar Wednesday, in line with where they've held in recent months.

Rossello's plan states that the island can reach fiscal solvency largely through increasing revenues by overhauling the corporate tax-code and cracking down on tax evasion. It also relies on steps to save money by streamlining government, including reducing the number of agencies -- a move the plan says would encourage employee attrition and reduce the need for temporary workers.

Some of the steps may fall short of what the federal board envisions. In the 2019 budget year, Rossello's plan says health-care spending would be reduced by $300 million -- compared with the $1 billion suggested by U.S. overseers -- while pensions below $2,000 a month would be exempt from a new tax that would raise about $89 million. The board suggested cutting retirement expenses by more than twice that amount.

It also lays out the potential for securing federal health-care funding under the Affordable Care Act, a law that Republicans in Washington are planning to repeal.

It's unclear whether the steps will be acceptable to the board, which can impose a plan if it finds that Rossello's is insufficient.

Rossello's administration estimates it can make $1.2 billion in debt payments by fiscal 2019, more than the $800 million previously suggested by the board. Even so, that's less than a third of the $3.8 billion it owes that year.

"I wonder whether this plan is an opening salvo from the governor to the control board, in order to begin a discussion and negotiation, or whether the control board will take offense to this plan because it ignores the guidance they've previously provided,” said Tawil.

To contact the reporter on this story: Rebecca Spalding in New York at rspalding@bloomberg.net.

To contact the editors responsible for this story: Christopher Maloney at cmaloney16@bloomberg.net, William Selway, Dave Liedtka