Two Budgets, One Puerto Rico: Fiscal Spat May Be Bound for Court

(Bloomberg) -- Puerto Rico Governor Ricardo Rossello called for compromise Monday between the island’s legislature and its federal oversight board as a spat over the budget appeared bound for court.

The conflict started when the legislature last month refused to repeal a labor law that protects workers from unjustified dismissal. The oversight board had demanded the reform to, in theory, make the economy more attractive to investment, and Rossello -- as part of a larger compromise over how to overhaul the territory -- promised that the government would deliver. But the legislature went rogue, including leaders from Rossello’s own political party.

As a result, the compromise appeared dead as of Monday, and both sides acknowledged reluctantly that critical questions for the island’s future -- including the budget -- may have to be settled by a judge. In what some called an act of political brinksmanship, the legislature approved its own version of the budget, without the labor reform, knowing that it wouldn’t be considered compliant with the federal law that gives the oversight board power over the budget.

"There’s a lot at stake," Rossello said Monday in San Juan, where he was attending an event to announce an investment in the film industry. "It’s imperative that we take the right action."

Rossello seemed to think little of Puerto Rico’s chances of winning such a court battle, saying Monday that the federal law called Promesa -- under which the oversight board was created -- made clear the board’s power in matters of the budget. He said compromise was critical to create a sense of predictability around the island’s future.

"If we could arrive at an agreement to achieve that, of course that would be a much better path," Rossello said.

But he also said that he had signed the legislature’s budget and that, for the time being, that was the version that was in effect. The board’s budget was unacceptable, he said.

Puerto Rico has defaulted on its bonds and is faced with $120 billion in debt and pension obligations that it can’t pay after muddling through a decade of recession and then being pummeled by Hurricane Maria. But the oversight board installed as part of that process has repeatedly drawn the ire of residents and local politicians, due to its proposed program of austerity, such as ending Christmas bonuses, and business-friendly changes.

Oversight board members said Friday that they viewed the labor reform as essential to the island’s transformation. After adjusting its expectations because of the legislature’s rejection of its recommendation, the body expects a $14 billion cumulative primary surplus over 30 years, compared with a $39 billion projected surplus under the previous scenario.

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Defaulted Puerto Rico bonds due 2035 fell 3 cents to about 38 cents on the dollar Monday.