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After months of high-level discussions, Puerto Rico officials are proposing a huge raft of changes to address their island's $72 billion debt burden, including installing new accounting and financial systems, consolidating schools and decreasing tax evasion while increasing the revenue capture rate.
The long-awaited fiscal adjustment plan was released Wednesday. It was developed by Puerto Rico's Working Group and delivered Tuesday to Gov. Alejandro Garcia Padilla, who established the panel shortly after he declared on June 29 that the island's debt was not payable. Among other things, the plan identifies a gap of about $28 billion between the U.S. territory's revenues and expenses over the next five years absent corrective measures.
Even with all recommendations implemented, there would still be a gap of about $12 billion to $13 billion that will need to be closed.
And beyond that, even if the group is able to negotiate deals with a majority of the creditors, it is expected that Puerto Rico will still need to seek federal support to give the island a way to restructure the bonds through Chapter 9 bankruptcy laws. Puerto Rico will also seek from the U.S. government equitable Medicare and Medicaid treatment and funding.
Speaking on a media call, one of the five working group members explained the Fiscal and Economic Growth Plan and stressed the dire financial and economic emergency in which the U.S. territory finds itself. The group is projecting the commonwealth will face significant liquidity problems by the end of the calendar year and will experience a full-blown liquidity crisis by the summer without an injection of capital.
However, and perhaps most importantly, the plan only addresses $47 billion of the $72 billion in total outstanding debt. The plan includes 13 of the Puerto Rico-issued bonds, excluding two major ones: the Puerto Rico Electric Power Authority and the Puerto Rico Aqueduct and Sewer Authority, with $8.6 billion and $3.7 billion in outstanding debt, respectively.
A fiscal control board will also be established to create a credible group independent of the government that will be tasked with overseeing and implementing the five-year plan. The five-member control board will be put together by the working group based upon suggestions by creditors and potentially the U.S. government, with Puerto Rico's governor having the final stamp of approval.
What has not been revealed is a set timeline for when the legislation will be ready to be introduced—the governor had originally set Oct. 1 as the deadline, as stated in the last update to the Commonwealth Operating Report issued on June 30, for a plan to be filed with the legislature to effectuate the plan. Presumably all negotiations with creditors will have to, at the very least, be initiated before January as coupon payments are expected to spike for Puerto Rico, when about $945 million in bonds come due.
Clarification: This version changed the amount of the possible gap in the headline to $12 billion, the best-case scenario under the plan. The $28 billion gap would result if the plan were not implemented.