Puerto Rico Governor loses support of mayors as debt crisis bites

By Nick Brown

SAN JUAN (Reuters) - As Puerto Rico's debt crisis takes its toll on the U.S. territory's economy, Governor Alejandro Garcia Padilla is losing support within his own party, increasing the chances he won't seek reelection next November.

His public approval ratings are dire – just 12 percent in a recent poll by newspaper El Nuevo Dia - but more detrimental to his campaign plan is the growing number of mayors and other local politicians from his Popular Democratic Party (PPD) who have deserted him. Support from such officials in Puerto Rico's towns is crucial for effective governance.

The governor's struggles are good news for the main opposition party, the New Progressive Party (PNP), which in turn may favor holders of the Caribbean island’s $72 billion in debt, including foreign creditors.

PNP gubernatorial candidates, who include Pedro Pierluisi, Puerto Rico's representative in Congress, and Ricky Rossello, the son of a revered ex-governor, have said they support trying to pay back the island's creditors, while Garcia Padilla has called the debt "unpayable" and called for concessions from those who hold it.

"Creditors would have higher priority in the minds of a PNP candidate," said Height Securities analyst Daniel Hanson, who is closely following Puerto Rico's debt crisis. But the island's "budget would likely sustain more cuts," he said.

Garcia Padilla’s predecessor as governor, the PNP’s Luis Fortuno, reduced the government’s workforce by about 15 percent. Garcia Padilla has added some jobs, Hanson said.

UPHILL BATTLE

Garcia Padilla is scheduled to meet with his party's mayors' association - the most influential party faction - on December 5, according to mayors interviewed by Reuters, and they speculate he will announce his decision very soon after that. Candidates have until December 31 to register.

Investors are optimistic about the possibility of a change in the island's leadership, debt traders said.

"A lot of people are waiting on a new administration to negotiate terms," said Ben Eiler, managing partner at First Southern Securities in Puerto Rico, which trades Puerto Rican debt. "I'd welcome and look forward to a change."

These are particularly tough times to govern Puerto Rico. The island, with a population of 3.5 million, has a 45 percent poverty rate. Analysts at Moody's say the island could default on at least some of a $355 million payment due December 1.

Getting help from Washington is seen as an uphill battle, though the U.S. Treasury has recommended changing certain laws to treat Puerto Rico more equitably to U.S. states.

Political status is the key dividing issue in Puerto Rico, with the PNP favoring the territory seek to become a U.S. state, and the PPD opposed. Pierluisi has said he would hold a federally-funded ballot on the question in 2017.

MAYORS HOLD THE CARDS

Under Puerto Rico's electoral system, all political offices are contested on the same day, every four years. With voter turnout rates averaging 80 percent since 2000, whichever party is stronger on election day is likely to enjoy four years of control throughout all levels of government.

As a result, weak governors tend to face internal push-back from other elected officials in the ruling party, particularly mayors.

Unlike in the U.S., all Puerto Rican municipalities elect mayors, who can function almost like local campaign branches for governors they support.

Mayors in the PPD say Garcia Padilla has done a poor job of communicating and collaborating with them, and missed opportunities to gain their support for a second term and bolster his image in the process.

"He could have used the mayors as allies," said Isidro Negrón Irizarry, PPD mayor of San German, Puerto Rico's second-oldest town, near its southwestern corner. "He mistakenly sees us as a burden."

Negrón Irizarry wants an alternative PPD candidate to stand next November.

Garcia Padilla's spokesman, Jesus Manuel Ortiz, said in a statement that the governor has "invested a great deal of time and energy into building productive relationships with Puerto Rico's mayors," and is in "constant communication with the island's mayors".

The governor's current fiscal turnaround proposal, which would cut $300 million in aid to municipalities by 2020, has increased tension in some of his mayoral relationships. Some have accused Garcia Padilla of failing to seek input from the towns.

With business sparse and storefronts vacant in many of Puerto Rico's rural communities, municipal governments are among the island's largest employers.

Carlos Delgado Altieri, the PPD mayor of Isabela, along the northwestern coast, says 40 percent of his town's budget - some $7 million - comes from the central government to fund operations. Cuts could mean reduced hours for its 650 workers, and could jeopardize Isabela's municipal bond payments, he said.

Southeastern Patillas' municipal government needs only 175 of the 450 employees it currently employs, PPD Mayor Norberto said. But with no viable private businesses to scoop up fired workers and unemployment already above 20 percent, he said he won't consider lay-offs.

Garcia Padilla has faced internal revolts before. His plan to close a revenue gap by imposing a value-added tax and raising the sales tax was resisted by a faction of his own party, who engineered an eventual reduction in the tax rate.

(Reporting by Nick Brown; Editing by John Pickering and Martin Howell)