Puerto Rico governor offers plan to right island's economic ship

Reuters News
Posted: Oct 14, 2016 12:20 PM

By Rodrigo Campos and Daniel Bases

NEW YORK (Reuters) - Puerto Rico's outgoing governor, Alejandro Garcia Padilla, on Friday presented a fiscal turnaround plan to a federal oversight board, stating if "things do not change" the island faces a 10-year cumulative budget deficit of $34 billion.

Garcia Padilla, in addressing the U.S. territory's $70 billion debt load, reiterated that it was not sustainable even with tax increases and other revenue measures implemented in the last two years.

If Puerto Rico were to lose its current level of federal support for the Affordable Care Act and other measures, the cumulative deficit would rise to $59 billion.

"And, even if spending is reduced to pay the debt, you will soon realize that any reduction in spending implies intolerable effects in aggregate demand and will further throw Puerto Rico into a death spiral that will directly affect creditors' recoveries across the board," Garcia Padilla said.

The turnaround plan, a grand vision of how to right Puerto Rico's economic ship, is a requirement of the Puerto Rico rescue law known by its acronym PROMESA, signed by President Barack Obama earlier this year.

Once again, protesters interrupted the public meeting of the seven-member board with shouts of "shame on you." Many in Puerto Rico are critical of the board's appointment because it is an unelected body and believe it is an attack on its sovereignty.

The island, trudging through a decade of economic contraction, in addition to facing the massive debt, is struggling with a poverty rate of 45 percent and dwindling population as locals flee for the mainland United States.

Puerto Rico has defaulted on $1.375 billion in principal and interest on its debt. Even without servicing debt of more than $34 billion over a 10-year period, Puerto Rico still would have a $6 billion deficit, Garcia Padilla said.

The impact of Garcia Padilla's plan is unclear. The governor is not seeking reelection on Nov. 8, and his successor, likely to be from a more creditor-friendly opposition party, could make significant changes. [nL2N1CA1XX]

Garcia Padilla said Puerto Rico's problems did not accumulate overnight and were not the result of any single factor, political decision or political party. The island's economy has contracted nine of the past 10 years from 2006 through 2015.

"Rather, they are the culmination of decades of misguided and unscrupulous public policies in San Juan, Wall Street and Washington," he said, pointing his finger at all actors in the crisis.

Garcia Padilla restated the need for Congress to fund Puerto Rico's Medicaid and Medicare systems, and to pay its pensioners.

Puerto Rico receives less federal Medicaid reimbursement than U.S. states. The U.S. government foots about $335 million of Puerto Rico's Medicaid bill, or about 12 percent, while the poorest U.S. states receive 75 percent reimbursement. [nL2N1CD13N]

Under the plan submitted on Friday, Puerto Rico is requesting the removal of statutory limits on Medicaid funding.

Its public pensions, meanwhile, which cover more than 330,000 workers and retirees, are underfunded by some $45 billion, a 96 percent shortfall that is one the biggest in U.S. history. Those obligations are separate from $70 billion of bond debt. [nL3N1793K6]

(Reporting By Rodrigo Campos and Daniel Bases; Additional reporting by Nick Brown; Editing by Chizu Nomiyama and Steve Orlofsky)