April 6, 2018 / 5:23 PM / 5 months ago

UPDATE 1-Latest Puerto Rico fiscal plan does not budge on pensions, layoffs

(Adds insight on fiscal plan negotiations, based on sources)

By Nick Brown

NEW YORK, April 6 (Reuters) - Puerto Rico’s latest turnaround plan boosts the insolvent U.S. territory’s projected ability to pay debt, but the plan’s absence of pension cuts and layoffs means some alterations may be in store, courtesy of the island’s oversight board.

The plan, published on Thursday night, forecasts a cumulative surplus of $6.3 billion through fiscal year 2023, and $7.36 billion after accounting for non-recurring items.

That projection started as a deficit in January, and has climbed incrementally through a handful of draft plans.

Puerto Rico, which is in bankruptcy with $120 billion in debt while it struggles to recover from the devastation caused last September by Hurricane Maria, is required to submit a turnaround plan as a basis for planned restructuring talks with bondholders.

Puerto Rico’s benchmark GO bond traded at 43 cents on the dollar on Friday, up from a close of 41.06 cents on Thursday , according to Thomson Reuters. It had been trading around 60 cents before Maria hit.

The oversight board, created by the U.S. Congress to manage Puerto Rico’s finances, can impose its own plan if it rejects the one submitted by Puerto Rico Governor Ricardo Rossello.

The two sides remain apart on key issues after months of negotiations. The board has proposed, to Rossello’s chagrin, cutting pensions 10 percent, and setting strict deadlines to implement labor reforms like reducing sick days and axing mandatory Christmas bonuses.

Rossello also believes he can achieve desired spending cuts without layoffs, but the board remains skeptical.

In a letter to the board on Thursday, Rossello said his team has made a good-faith effort toward compromise and “incorporated most of the baseline components you have recommended.”

But the governor said he will not implement specific policies, like pension cuts, that should fall to a democratically elected government, and which would require legislation.

The board has some leverage. It can make cuts to Puerto Rico’s budget, and can take Rossello to court if his administration refuses to implement measures it demands.

PENSIONS A DEAL-BREAKER?

The two sides can keep negotiating until April 20, the board’s self-imposed deadline for approving the fiscal plan. On Thursday, two board sources told Reuters it was unlikely the deadline would be extended.

The board expects to approve a plan that day even if it means imposing measures unilaterally. Absent a compromise, the board would add discrete measures to the governor’s existing framework rather than draw up its own plan, the sources said.

A government source told Reuters on Thursday that Rossello does not want to perpetuate litigation, and was hoping for consensus. The divide on pension cuts may not be a deal-breaker, the source said, because adjustments to Puerto Rico’s untenable $50 billion pension shortfall could be done in the island’s bankruptcy, as part of a debt restructuring plan.

But the two board sources expressed doubt that a majority of the seven-member panel would support a plan without pension cuts, though a third board source said it was possible.

Since the plan’s projections will serve as the basis for eventual debt restructuring talks, pension savings should be reflected in the plan, the initial two board sources said.

Labor reform may provide more room for compromise. One option, according to the board sources, would be to extend the deadline for imposing some of those reforms until after the next gubernatorial election in November 2020.

Reporting by Nick Brown Editing by Daniel Bases and James Dalgleish

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