SAN JUAN/NEW YORK, Sept 9 Puerto Rico officials are proposing the island cut teacher pensions, impose a financial control board and restructure $ 18 billion of its debt due in the coming five years, as part of a long-anticipated plan unveiled on Wednesday to pull the island out of a wrenching fiscal crisis.
The financial overhaul plan, the product of a task force created in June by Gov. Alejandro Garcia Padilla, anticipates the island running out of money by next May or June, and says even with sweeping spending cuts Puerto Rico needs concessions from bondholders who include mom-and-pop investors and big Wall Street hedge funds.
Padilla’s administration will now prepare for the test of trying to implement the plan in the face of potential legislative gridlock and possible resistance from teachers’ unions.
Puerto Rico has endured nearly a decade of recession despite its pristine beaches and year-round sun, slowing growth in its tourism industry, to the benefit of other Caribbean islands. Its $ 72 billion debt load has accumulated while the number of taxpayers shouldering the burden has dwindled, with thousands moving to the U.S. mainland each year.
Only 40 percent of the working population is in the workforce and island pensions face combined unfunded liabilities that topped $ 37 billion in fiscal year 2013.
A bailout from Washington is not expected, and while some on Capitol Hill are pushing laws or reforms that could help Puerto Rico, their prospects are uncertain.
DEBT TARGETED
According to Padilla’s so-called working group, comprised of officials including the Governor’s chief of staff, Victor Suarez, and the head of the Government Development Bank, Melba Acosta, Puerto Rico has $ 47 billion of debt excluding public agencies like power utility PREPA and water authority PRASA.
Of that, $ 18 billion in principal and interest are due in the next five years, and this piece is targeted for restructuring, according to working group officials. This includes general obligation debt – generally seen as sacrosanct by the municipal bond market – and COFINA sales tax bonds.
One working group official said reform measures would account for around half the $ 28 billion budget gap with revenue growth adding a bit more, but that there is still roughly a $ 12 billion to $ 13 billion deficit that needs to be eliminated.
That could mean difficult negotiations with creditors. The commonwealth will follow the approach it adopted with restructuring PREPA, a deal it struck earlier this month which saw bondholders accept a 15 percent reduction in their principal, a member of the working group said.
CONTROL BOARD, CUTS
Planned reforms include imposing a control board on the island’s finances, according to working group officials. This could be made up of members suggested by creditors as well as the Federal government.
The group also recommended cutting the size of the department of education through school closures, attrition and changes to teachers’ pensions, and cutting subsidies to the University of Puerto Rico and to some cities and towns, according to background materials provided.
The group suggested Puerto Rico explore public-private partnerships at certain hospitals, as well as at the island’s highway, transit, port and building authorities, the materials showed.
The group tackled Puerto Rico’s inefficient tax collection, suggesting overhauling collection methods and changing tax laws to promote growth.
It advised continuing to invest in infrastructure, diversify its energy sources, and reduce central government spending through attrition and potentially by changing pensions.
The group said Peurto Rico must control healthcare costs by standardizing health protocols, and install new accounting systems.
It said Puerto Rico should the push U.S. government for help, notably to provide access to court-sanctioned restructuring laws, exempt the island from the Jones Act, offer equitable treatment under Medicaid and Medicare funding schemes, and pass tax legislation that would promote corporate growth.
NEXT HURDLES
But questions remain over the plan’s political chances. Passing legislation could be an uphill climb, especially 14 months ahead of a gubernatorial election in which the opposition party, which may not be inclined to continue the reforms, is expected to make a strong push for power.
Public outcry could also pose a challenge, including protests from University of Peurto Rico students and labor interests.
The measures may need either legislative change or can be made by legislative order, said one member of the working group, who acknowledged it was a political process.
(Reporting by Nick Brown and Megan Davies)
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