Puerto Rico Gov. Alejandro García Padilla signed a bill that will allow the government to suspend general obligation bond set-asides early in the fiscal year and will require the government to address deficits as they develop.
Most of Puerto Rico's revenues come in late in the fiscal year, which has required the government to issue short-term debt at the start of the fiscal year and pay it off near the end of the year.
However, over the last several months the financial community has become increasingly reluctant to lend to the commonwealth, which now has indicated it won't be able to pay its $72 billion in public bond debt if the economy doesn't improve.
Government Development Bank for Puerto Rico President Melba Acosta Febo has said that the government is seeking $1.2 billion in tax and revenue anticipation note intra-year financing for fiscal year 2016, which started July 1.
The bill the governor signed Thursday will allow the government to borrow about $400 million from three commonwealth-run insurance funds. The State Insurance Fund, the Administration for Compensating for Automobile Accidents, and the Insurance Fund for Temporary Non-occupational Incapacity will lend the money, according to a press statement from the governor's office.
Acosta Febo has said she hopes to borrow the balance of the TRANs from banks.
The bill also will allow the suspension of monthly monetary set-asides for the amortization and redemption of GO debt. A 1976 law required the government to set aside a proportionate amount of upcoming interest and principal coming due. The bill signed Friday overturns this earlier bill.
"The suspension of these deposits does not imply a breach with the bondholders on the date of payment," the press statement said.
Article VI, section 8 of the Puerto Rico constitution reads, "In case the available revenues including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid, and other disbursements shall thereafter be made in accordance with the order of priorities established by law."
Puerto Rico House of Representatives Treasury and Budget Committee Chairman Rafael Hernández Montañez said that the government will only stop the set-asides if it cannot borrow the $1.2 billion in intra-year funding or the Puerto Rico Infrastructure and Finance Authority cannot sell a $2.9 billion gas-tax supported bond. Hernández Montañez told The Bond Buyer that the suspension of GO set asides would be justified by the devastating impact that even a temporary government shutdown would have on Puerto Rico's economy.
The bill signed Friday also sets up a budget stabilization mechanism for the commonwealth. The bill requires the government use its normal reserves and set up a separate budget reserve at the GDB. In this way the amount in reserve can be more easily monitored.
The bill requires that if the reserve is drawn on, steps be taken to replenish it.
