Puerto Rico's just-released financial report was more ominous than its previous ones, as the government looked to spur legislative action to address its "fiscal crisis."
The commonwealth in fiscal 2016 "may lack sufficient resources to fund all necessary governmental programs" requiring "emergency measures [possibly including] a moratorium on payment of debt service," the report said. The report was billed as a quarterly, although it was the first one issued since October.
The earlier report had similar language, but didn't specifically mention the coming months or fiscal year as periods for concern.
Since the start of 2014 Puerto Rico's government has highlighted risks to its finances in these reports, while striking a more positive tone in its occasional investor webcasts. This time, it was followed by a press release from Puerto Rico's New York publicity firm, which said the report "demonstrates the impending nature of Puerto Rico's fiscal crisis."
If the government is not able to achieve a balanced budget in fiscal 2016, the commonwealth "may be forced to take emergency measures," the report said. These could include measures to reduce spending. They could also "include a moratorium on the payment of debt service, a debt adjustment, or the utilization for the payment of the commonwealth's debt service of certain taxes and other revenues previously assigned by law to certain public corporations to secure their indebtedness."
Both the October and the May reports refer to the possibility of turning to the U.S. Congress to allow Puerto Rico to restructure its debt. The October report had a sentence in bold that said it did not plan to do this at the time, a qualifier that's been dropped from the May report.
The fact that the commonwealth is talking about non-repayment of debt with regards to fiscal 2016, which starts on July 1, "tells that they are a little more serious about this possibility than they were when they did the last report," a municipal analyst who follows Puerto Rico said.
AllianceBernstein Director of Municipal Research Joseph Rosenblum agreed in an email that "it seems more dire." He added that the change in tone "is not totally surprising given the events over the last few months - inability to access the market; weaker revenues; failed tax reform (more because of its needed added revenue); and continued economic weakness. So that all means weaker liquidity and the challenge of trying to maintain service levels and honor debt commitments."
In the press release, Governor Alejandro García Padilla said: "The Commonwealth Report clearly lays out the fiscal situation and I hope it serves to motivate the Administration, Congress, the Puerto Rico Legislature, and other important allies to work with us to find a reasonable and orderly solution to our fiscal crisis."
The report said that due to several revenue and expense factors, the government faces a $2.4 billion deficit in the coming fiscal year, assuming no steps are taken to increase revenue or cut expenditures. For comparison, the current fiscal year budget is $9.56 billion.
The report projected that the current fiscal year will end with a deficit of $191 million. It indicated that the government believes it has resources to pay off its debts in the current fiscal year. It raised concerns about the commonwealth's and the Government Development Bank for Puerto Rico's ability to make roughly $800 million in payments in July and August.
The report also talked about a potential concern for the Puerto Rico Aqueduct and Sewer Authority. On March 2 the authority extended a $200 million bank loan until May 29, anticipating it would sell a bond that would, among other things, pay off this loan before May 29. The report indicates this bond sale is still a possibility dependent on "market conditions."
However, PRASA may not make the sale or find other sources of liquidity. In anticipation of this the authority's bond trustee is drawing upon gross revenues from May 1 to May 29 to pay the banks. If the bond sale isn't made by May 29, this money wouldn't be enough and the bond trustee would draw from various collateral accounts.
This draw would "materially affect PRASA's liquidity and, as a consequence, its ability to perform essential public services," the report said. As a consequence, PRASA may have to increase utility rates before July 31, 2016.
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Puerto Rico s Latest Financial Report is More Ominous
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