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UPDATE 2-Puerto Rico fiscal plan includes cash and cuts -report citing draft
August 26, 2015 / 6:45 PM / 2 years ago

UPDATE 2-Puerto Rico fiscal plan includes cash and cuts -report citing draft

(Adds quotes from commentators)

NEW YORK, Aug 26 (Reuters) - Puerto Rico is proposing to inject $1.5 billion into the island in capital expenditure over five years, as part of a turnaround plan which includes cuts to schools, its university and healthcare, Puerto Rico paper El Nuevo Dia reported citing a draft plan it had received.

Puerto Rico’s Governor Alejandro Garcia Padilla shocked investors in June when he said the island’s debt, totaling $72 billion, was unpayable and required restructuring. He said at the time that a fiscal and economic plan for the island would be developed by Aug. 30.

The island has been in recession for nearly a decade.

The capital injection would come from a combination of debt restructuring, cutting $1 billion in operating expenses and increasing revenues by $1 billion, the paper reported.

Cuts would include consolidating and closing schools, cutting university subsidies and cutting health spending, the paper said. Christmas bonuses would be eliminated and vacation days would be reduced, the paper said.

“I received a working document of the fiscal plan some time ago, but I haven’t been presented with the final plan,” Padilla told press Wednesday when asked about the story. “The information being published today has some data that I have never been presented with related to the plan. For instance, shutting down campuses. In my administration, the university is seen as an investment and not as a cost.”

Cuts to the university would generate savings of $400 million and would include closing campuses, the paper said citing the draft plan.

An additional $400 million savings would come from reducing the number of teachers, incentivizing retirement and from school closures. The remaining $200 million would come from reduced health care costs, the paper said.

Hitting public workers hard could cause a backlash.

“If they are hit hard, you will probably see some protests ... but at the end of the day, they have been very receptive to whatever this administration has proposed,” said Marcos Rodriguez Ema, partner at private economic development group Puerto Rico Economic Development Co and a member of Puerto Rico’s pro-statehood New Progressive Party, an opposition party.

“It will be difficult for the labor force not to support this governor,” said Rodriguez Ema, who was previously head of the island’s Government Development Bank and was chief of staff for the prior governor Luis Fortuno.

The $1 billion revenue increase would come from a recent sales tax increase to 11.5 percent, implementing a 4 percent services tax as of Oct. 1 and transitioning to a value-added tax in April 2016, the paper said.

The plan also proposes adjusting the value of properties to current market prices, the paper reported.

“Everyone is going to have to sacrifice, that includes the people who live here as well as bondholders,” said Ben Eiler, managing partner at First Southern Securities in Puerto Rico, which trades Puerto Rico debt. Eiler also holds Puerto Rico debt personally.

El Nuevo Dia citing sources said the draft was finished during mid-August and the Economic Recovery Working Group aims to finalize and deliver it to the governor before the end of the month.

Other structural changes being evaluated by the group include reducing labor, energy, welfare and transportation costs on the island, it said, as well as freezing automatic federal minimum wage hikes in Puerto Rico. (Reporting by a contributor in San Juan and Megan Davies; additional reporting by Nick Brown and Jessica DiNapoli; Editing by Chris Reese and Meredith Mazzilli)

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