By Aaron Kuriloff
The Federal Reserve Bank of New York weighed in on the financial
woes of Puerto Rico Thursday with a report that says the island
should overhaul its tax policies, its management of utilities and
its budget practices to reinvigorate its economy.
The commonwealth faces serious fiscal challenges related to its
continuing weak economic performance, William Dudley, president of
the bank, wrote in the foreword to the report, an update of a 2012
study on Puerto Rico's economy originally requested by island
officials and business owners. Mr. Dudley highlighted persistent
government budget deficits and failures to shore up cash for
operations of the island's public agencies such as water,
transportation and power utilities.
As the Puerto Rico Electric Power Authority, known as Prepa, is
contemplating a possible restructuring of about $9 billion in total
debt, Mr. Dudley said the island should consider making changes to
its policies that may include "sacrifice." The report didn't
specify exactly how Puerto Rico should adjust its policies.
On Thursday, Prepa faces a deadline to make payments on or
extend lines of credit with Citigroup Inc. unit Citibank and banks
led by Scotiabank de Puerto Rico, a unit of Bank of Nova Scotia.
Extending the loans would help the power authority overcome its
short-term cash crunch and avoid more uncertainty about its future,
which is roiling the market for Puerto Rico bonds.
Officials have been contemplating restructuring the power
authority's debt after island lawmakers in June approved
legislation allowing such an overhaul. The law doesn't allow Puerto
Rico to restructure its general-obligation or sales-tax debt.
Strengthening the performance of the island's large,
heavily-indebted public corporations is one of six recommendations
made in the New York Fed's report. The island should reform the
public entities' governance and ownership structures, consider
privatizing them, and limit lending to them from the island's
Government Development Bank.
"For any financial reform agenda to be successful, it must
confront this issue head-on," the report said.
Reforming the tax system could also increase growth by
broadening the tax base while reducing rates, the report said.
Improving financial reporting on the island should also increase
access to financial markets, it said, adding the commonwealth
should adopt a capital budget and a binding balance-budget
amendment, as well as a legislative framework for multiyear
budgeting and specific fiscal targets.
Write to Aaron Kuriloff at aaron.kuriloff@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires