by Marshall Kirby, Public Policy Analyst

For the first time since 2008, Puerto Rico will begin a general obligation bond sale.  The exact figures are not yet disclosed, but the President of the Government Development Bank, Carlos Garcia, has announced that the sale of bonds will be to finance infrastructure and significant public projects.  He estimates that there will up to $2.1 billion in other bond sales this year (Plans General-Obligation Sale).  Portions of the bond sale will include financing projects for capital improvements in the electrical and natural gas sectors (the other portion of the project’s financing will be discussed later).

This is a significant step for the Commonwealth, as it could mark a clear financial and credit turn around from impending disaster.  The island currently has a bond rating which is lower than any state in the US (Plans General-Obligation Sale).  For years, the island has been mired in financial and credit issues which have led to trouble financing needed projects/programs and meeting its continuing expenditures.

The bond and credit agencies have slightly upgraded their ratings of the Commonwealth, reflecting stronger public financial management by elected leaders.  Standard and Poor changed their rating from “stable” to “positive” noting spending cuts and the potential for increased revenue.  However, Standard and Poor has rated these general obligation bonds at BBB-, which is the lowest rating before reaching high-risk non-investment grade bonds.  Similarly, Moody’s (another bond and investment rating bureau) has given it an A3, which is only a few steps away from non-investment worthy bonds.  Their reasoning includes a negative outlook on the island’s public debt (Plans General-Obligation Sale).

Prieviously, the island’s low credit ratings made it difficult to secure financing, and the island had to turn to alternative methods.  In 2006, the government created the Sales Tax financing corporation which has sold revenue backed securities.  With the island’s fiscal standing, analysts have estimated that bonds from the Commonwealth will trade at about 1-1.5% higher than US Treasury backed securities (Plans General-Obligation Sale).

The new Governor of Puerto Rico has taken steps to creating sounder credit and fiscal standing.  As Mr. Fortuno took office, he inherited a massive $3.3 billion budget shortfall, which he has since reduced to around $1 billion for this fiscal year.  The governor has taken bold action – including cutting 23,000 government jobs, reducing expenditures, modifying the tax code, and stepping up tax enforcement.  Let us hope that this is another step towards building a stronger foundation of fiscal and budgetary responsibility.  If this general obligation sale turns out to be a success, it will have the potential to improve the island’s credit rating which will save tax payers millions on future interest payments to finance needed infrastructure.

The Commonwealth’s largest public electrical authority has also gotten involved in the bond market.  The Puerto Rico Electric Power Authority announced in December 2010 that it will sell $500 million in Build America bonds.  The bonds under the Build America program were created by the Recovery Act (the stimulus) and are taxable municipal bonds with unique tax credits for the bondholder.  The Electric Power Authority had put a rush on the bond sale after the Federal government announced that it was ending the program December 31, 2010.  This sale of bonds is estimated to save Puerto Rico $130 million dollars over the life of these 30 year bonds.  The sale of these bonds will finance a large portion of the Via Verde pipeline which will transport natural gas to power generating stations.  Estimates show that by using lower cost natural gas, power users in Puerto Rico will save $1 billion dollars.  This will have positive repercussions for the overall economy as it will save businesses and families money (Build Americas).

Earlier events relevant to bonds and public credit and finance have shown that the island is willing to make difficult decisions involving infrastructure.  The decision to lease access of infrastructure such as highways and toll roads has been met with criticism.  After preliminary meetings, the island has chosen several investors which include Goldman Sachs and Morgan Stanley.  Under the proposal, the island will receive bids around March 2011 and will receive an upfront lump sum payout from an investment group and then yield revenues and maintenance of the highways to the winning bid.  The government hopes that this will help to close the budget shortfall, but critics have pointed out the importance of the roads and the current annual yield from tolls totaling $90 million dollars.  Referencing the sale, David Alvarez, the Executive Director of the Public-Private Partnerships Authority, has said that this is “a landmark transaction” ().[MJL1] Additionally, the Commonwealth is pursuing a plan to lease Luis Munoz Marin Airport in San Juan to outside investors (Puerto Rico to Meet).

It is our job as entrepreneurs, innovators, and job-creators to continually remind our elected officials of the importance which public management plays in regards to creating a flourishing business environment.  A well managed city/county/state/nation will allow businesses and entrepreneurs to feel more comfortable investing and growing without fear of future budget shortfalls which must be offset by future taxes.

Mr. Kirby joins The National Puerto Rican Chamber of Commerce with an experienced background in Public Policy Analysis.  He has worked for Americans for Informed Democracy, the Center for US Global Engagement, and for local governments in Virginia on issues ranging from international finance, national security, and other areas of foreign and domestic policy.  He holds a Master of International Development Degree from the University of Pittsburgh.

Marshall can be reached at 866-576-5222 x 8, or MarshallK@NPRChamber.org.

Works Cited:

Baribeau, Simone and Jerry Hart.  “Puerto Rico Plans First General-Obligation Sale

Since 2008.”  Bloomberg Businessweek.  12/30/2010.  http://www.businessweek.com/news/2010-12-30/puerto-rico-plans-first-new-general-obligation-sale-since-2008.html

Baribeau, Simone.  “Puerto Rico to Meet Goldman, Morgan Stanley Groups on Road

Lease.”  Bloomberg Businessweek.  11/30/2010.  http://www.businessweek.com/news/2010-11-30/puerto-rico-to-meet-goldman-morgan-stanley-groups-on-road-lease.html

McGrail, Brendan and Simone Baribeau.  “Build Americas Save Puerto Rico $131

Million.”  Bloomberg Businessweek.  12/24/2010.  http://www.businessweek.com/news/2010-12-24/build-americas-save-puerto-rico-power-131-million-muni-credit.html


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