Even with massive reforms, the U.S. commonwealth must still shed $12 billion to $13 billion in debt through negotiations with creditors or a debt-cutting process imposed by Congress, said an adviser to the governor who was not authorized to speak publicly.
The new report, delivered by the
Some 6 in 10
The recommendations come about a month after the island defaulted on a $58 million debt payment — the latest confirmation of Puerto Rico’s emergence as a serious crisis for the municipal finance community.
The island’s governor,
The adviser to the Working Group said the best road map is to ask Congress to implement a legal mechanism through which Puerto Rico can complete a settlement with creditors without the use of bankruptcy.
"The key finding of this plan is that even if we implemented all the measures contained in it, they wouldn’t be enough to achieve the necessary balance," García Padilla said in prepared remarks. "The massive public debt of Puerto Rico is an impediment to growth. It is time for the creditors to come to the table and share the burden of the sacrifices."
For now, the governor is expected to consider the recommendations in the Working Group’s report before delivering his own plan to Puerto Rico lawmakers.
Those recommendations include cuts to government subsidies for pension and health care costs, which have ballooned to more than $50 billion in unfunded promises. But García Padilla ruled out cuts to any current workers.
“Some union leaders have said publicly that current workers have already been asked to do enough. And I think they are right," he said. "Therefore, we cannot add any burden on current workers. Nor have I recommended additional taxes besides those that have been adopted in the past decade."
Ratings agency Moody's said any plan to slash debt portends a "high probability of protracted litigation," with investors battling the commonwealth's plan. The agency said it's clear the Puerto Rican government "will need to ask creditors to make sacrifices," but suggested the road to those cuts will be rocky.
"While the Puerto Rico plan is comprehensive, Moody’s believes the commonwealth’s ability to implement many of the recommended policies will pose political challenges, and it is unlikely that holders of the many Puerto Rico bonds will agree to forgo or defer substantial sums of promised principal and interest," Moody's said in a statement.
Among the conclusions in the Working Group report:
- The island should establish a control board that would have responsibility for implementing reforms. The board would consist of five appointees, with members recommended by creditors and lawmakers but appointed by the governor.
- Creditors won’t get paid back in full due to the island’s unsustainable debt load, requiring a compromise between creditors.
- Congress must remove its $300 million annual Medicaid spending limit in Puerto Rico, a limit that is not applied to the states.
- Washington should allow Puerto Rican workers younger than 25 to work for below minimum wage standards for two years, a move designed to encourage companies to hire more employees.
- Congress should implement tax credits to incentivize U.S. business activity in Puerto Rico.
- Puerto Rico must cut government jobs through attrition, implement freezes on spending, negotiate viable collective bargaining agreements and implement other cost cuts to governmental agencies.
- The island must implement drastic institutional reforms and adopt new information technology to upgrade its outdated accounting systems and bolster tax receipts.
The recommendations come about a month after the island defaulted on a $58 million debt payment.
Nathan Bomey
Puerto Rico advisers: Reforms, debt cuts needed
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