Key Findings
Two radically different budget methods are being employed here—one by the Oversight Board and one by PREPA.
The deficit for operations is $3.7 billion. After the board applies a series of savings and revenue increases worth $4.5 billion, it produces the $800 million in an “implied surplus” for debt service. The board also notes that the $800 million may be overstated.
Executive Summary
The Puerto Rico Oversight Board (PROMESA) issued a letter on Jan. 18 that sketches the outlines of a broad path to fiscal stability for the Commonwealth. We key in on the point that in the fiscal year 2019 Puerto Rico’s taxpayers can potentially afford only $800 million for debt service. The commonwealth actually owes $3.9 billion under contractual obligations on approximately $64 billion of outstanding debt. That means Puerto Rico’s taxpayers can afford only 21 percent of the government’s current debt obligation. This is the first real clear acknowledgement of this reality by the board.
The oversight board also extended the deadline for Puerto Rico’s governor to submit a 10-year financial plan consistent with the broad fiscal outlined in the letter. The significant reduction in debt service for 2019 outlined in the letter sends a signal to bondholders that they will face a substantial reduction in the value of their holdings as part of Puerto Rico’s financial solution. We note that in his Jan. 18 response to the Oversight Board, the governor acknowledged that an average 79 percent haircut for bondholders was in play as a real budget consideration. Puerto Rico’s economy is expected to decline by 1.1% annually over the next decade, driven by substantial contraction in 2018 and 2019.
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