Puerto Rico government cites 'substantial doubt' about its solvency

[February 17, 2016]  By Nick Brown
 
 SAN JUAN (Reuters) - Puerto Rico's government said it had "substantial doubt" about its ability to operate long-term, and cited a threat to public services if its Government Development Bank misses debt payments, in a draft of long-delayed fiscal year 2014 financial data released Tuesday.

The 366-page draft, which has not yet been audited, follows criticism from some U.S. lawmakers and financial creditors that Puerto Rico has not been transparent with its finances.

The U.S. territory is mired in economic crisis, facing a 45 percent poverty rate and a dwindling tax base as locals flock to the mainland United States. It is hoping for help from Congress in resolving its $70 billion debt load.

"The commonwealth's management believes that there is substantial doubt as to the ability of the primary government" and other governmental entities "to continue as a going concern," the report said.

Under federal accounting standards, a government is evaluated on whether it is likely to be a "going concern" 12 months after the accounting is done. Governments are not going concerns if there are doubts about abilities to meet financial obligations.

Puerto Rico said it expects to miss at least some of its July 1 general obligation (GO) debt payment -- about $800 million, according to a debt schedule obtained by Reuters -- even with the benefit of so-called "clawbacks" wherein revenues earmarked for other debt are redirected to pay GO debt.

The report said Puerto Rico faced a $49.2 billion deficit as of June 30, 2014, $2.5 billion higher than in 2013.

The Government Development Bank (GDB), the island's fiscal agent, is at risk of missing debt payments and falling below legal reserve requirements in fiscal year 2016, which could threaten government services because GDB is the main depositary for public agencies, the report said.

Puerto Rico's fate remains one of the key questions in the U.S. municipal debt market. It has sought help both from creditors, by proposing voluntary cuts to repayments, and Congress, by lobbying for legislation letting it cut debt.

Both efforts have faced resistance, in part thanks to a perceived lack of transparency, as 2014 financial disclosures have been months behind schedule.

Tuesday's release may have been aimed at quelling some of those complaints, but the draft does not include audited financial information from the GDB, or from the island's biggest pension, which, with a funding shortfall of more than $30 billion, is a key part of its crisis.

(Reporting by Nick Brown; Additional reporting by Megan Davies in NEW YORK; Editing by Bernard Orr, Leslie Adler and Kim Coghill)

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