(Bloomberg) -- Puerto Rico Governor Ricardo Rossello released a $9.6 billion spending plan that devotes about a fifth of the budget to covering government workers' pensions because the island's retirement funds are poised to run out of money as soon as July.
It's the U.S. territory's first budget since a federal oversight board was given sweeping authority to review its spending under a U.S. rescue law enacted last year to help it deal with its escalating fiscal crisis. It's also the first since the island resorted to bankruptcy-like proceedings this month, seeking to reduce its $74 billion debt.
The budget largely adheres to the fiscal recovery plan approved by the oversight board in March, which promised deep haircuts for bondholders. It allocates about $400 million for principal and interest, a fraction of the $3.26 billion due in the fiscal year that begins July 1. With its retirement system rapidly going broke, Puerto Rico must also cover $2 billion of pension payments as they come due.
“It has been necessary to protect one of the most vulnerable sectors of our people: our pension recipients who were in danger of completely losing their pensions,” Rossello said during his budget address.
Rossello and administration officials declined to say during a press briefing Wednesday with reporters in San Juan whether the plan will cover bills by redirecting sales-tax revenue that's been pledged to some bondholders. Typically, those receipts start to flow on July 1 to the bonds' trustee to pay what's due on the $17 billion of outstanding debt known as Cofinas. Puerto Rico's general fund then begins to receive its share starting in January.
The island's legislature this year gave the commonwealth the authority to take that money earlier, if need be. Creditors say allowing such a change violates bond contracts and puts the debt into potential default.
After years of borrowing to fill budget gaps, Puerto Rico must now balance the budget, despite an economy that has shrunk in the past decade and is constrained by persistently high unemployment.
The federal control board certified the main components of Rossello's budget proposal, the governor said. The U.S. board will again review the spending plan after the legislature makes any changes.
The governor's budget proposal follows his recovery plan, which allocates only $7.9 billion to pay principal and interest through fiscal 2026, less than a quarter of the $33.4 billion due during that time. Puerto Rico's creditors have balked at that, asking for a break down of the essential services the island says it needs to cover before repaying investors.
As the island's retirement funds' dwindle, the government will have to increase payments to cover retirement benefits, unless they're sharply reduced during the court proceedings. Puerto Rico's pension system has the weakest funding level among U.S. states and has a combined unfunded liability of $48 billion.
To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net, Alexander Lopez in San Juan at alopez180@bloomberg.net.
To contact the editors responsible for this story: Christopher Maloney at cmaloney16@bloomberg.net, William Selway
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