Puerto Rico's Governor Announces Plan To Reduce $72 Billion Debt

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Puerto Rico has unveiled a plan aimed at restoring financial stability and reducing the island's $72 billion debt. The plan announced today by Governor Alejandra Garcia Padilla cuts spending and increases revenue through improved tax collection. But Puerto Rico also seeks to save billions in the short term by renegotiating its debt with lenders. Here's NPR's Greg Allen.

GREG ALLEN, BYLINE: Governor Garcia Padilla rocked the municipal bond market in June by calling the island's massive debt un-payable. After months of discussions with lenders and outside financial experts, today the governor came back with a plan to pay down the debt and get Puerto Rico's economy back on its feet. In a televised address from the governor's mansion, Garcia said it's time for the island to face up to its financial responsibility.

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ALEJANDRO GARCIA PADILLA: (Speaking Spanish).

ALLEN: He said, "let's not do to our children what other governments have done to us." The detailed 78-page plan recommends cuts and subsidies to Puerto Rico cities and universities, closing schools and reducing the government payroll. It also looks to the federal government to lift caps on Medicaid and Medicare funding. And by next spring, Puerto Rico hopes to boost revenues as it moves to a new value-added tax. Overseeing all of this would be a fiscal control board appointed by the governor.

Putting those measures into place, though, won't be easy. Puerto Rico's House and Senate must approve the plan. Past cuts have sparked protests by government workers and university students. And so far, Congress has been reluctant to offer any help to the island's government.

No matter what, Puerto Rico will still have a $14 billion gap over the next five years, money it owes to lenders which Garcia says the island can't pay. He wants to renegotiate the terms of that debt. Not all lenders though may be willing to come to the table. Gerry Durr, a municipal credit analyst with Wilmington Trust, says Puerto Rico's Constitution has special protections for lenders who hold one particular type of debt - general obligation bonds.

GERRY DURR: They have other mechanisms to enforce their legal rights. They may not be so willing to take a haircut right off the bat.

ALLEN: In his address, Governor Garcia acknowledged the challenge he faces selling the plan to hedge funds and money managers.

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GARCIA: (Speaking Spanish).

ALLEN: "If the creditors are unwilling to do this," he said, "then Puerto Rico will have no alternative but to proceed without them." Garcia said it could mean years of legal battles and choosing between paying the salaries of teachers or the island's creditors. There's an urgent need for action. Puerto Rico's expected to run out of cash by June. Greg Allen, NPR News. Transcript provided by NPR, Copyright NPR.