Ambiguity Over Cash Calls Fiscal Plans into Question

Not knowing how much cash the Government of Puerto Rico really has available makes determining fiscal plans for it difficult, Financial Oversight and Management Board Member Jose Ramon Gonzalez said after today’s Board hearing on the Government’s cash position.

He added that the information was also needed to enable the Government to draw down loans from the $4.9 billion authorized by an October 26th Federal disaster assistance law, with the vast majority of the money intended to go to Puerto Rico.

Gonzalez’s statement raised further questions about the revised fiscal plans for the territorial government as a whole and its Electric Power (PREPA) and Aqueduct and Sewer (PRASA) Authorities that the administration of Governor Ricardo Rossello Nevares (New Progressive Party) is scheduled to submit to the Board Wednesday. Additional questions about the plans — raised by the Board when it initially requested the revisions — are how much additional Federal assistance the territory will receive due to Hurricane Maria and how changes in the economy caused by Maria will affect government revenue.

The Federal Emergency Management Agency and the U.S. Treasury Department have already advised Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA) Executive Director Gerardo Portela Franco and the Governor that the Government has too much cash to justify the loans. The loan funds are for loss of revenue and unbudgeted expenses due to the disaster, with $150 million earmarked to meet requirements for territorial government entities to pay 10% of the costs of hurricane-related projects otherwise funded by the Federal government.

Financial Board Chairman Jose Carrion III reacted to Gonzalez’s observation, however, by saying that, “We have to do many things at once, and use the best information available to prepare the plan.”

He added that, “The plan is not written in stone.”

Another issue raised about the Federal loans raised during the hearing was whether the borrowing would require PROMESA Title III bankruptcy court approval for entities such as the Government and PREPA. Board Member Arthur Gonzalez, a former Federal Bankruptcy Court judge, thought that court approval would be required

FAFAA submitted a report to the Board for the hearing that showed that the territorial government and its instrumentalities had just over $6.88 billion in cash in various bank accounts December 31st.  About $1.75 billion of this was funds of the central government.

Portela noted that some of the funds were “restricted” as to use, such as most Federal grants and monies for which there is a contractual obligation but, under questioning by Board Member Ana Matosantos, he could not say how much of this was merely earmarked by territorial law and could be reprogrammed. Matosantos and Jose Gonzalez pointed out that this was a key question.

After the hearing, however, Gov. Rossello’s non-voting representative on the Board asserted that the $1.75 billion that the central government has directly was really $500 million if operational reserves and other “priority” amounts were not counted.

He insisted that the territorial government does not have enough cash to continue operations for the next 30 days. The assertion was the latest of a number of insular government contentions that a cash shortfall was imminent – with none of those claims proving to be true over time.

The hearing provided more detail on territorial government cash holdings but little beyond that.

Perhaps most interesting were insights from top members of the financial team of Rossello’s Popular Democratic Party predecessor, Alejandro Garcia Padilla, particularly Treasury Secretary Joan Zaragoza. He pointed out that there is no accounting in the territorial government’s annual budgets of the costs of ‘tax expenditures’ – revenues forgone through tax exemptions or other tax ‘incentives.’

Perhaps this is because Government officials “don’t want to know because once we know we will have to act” on revenue voluntarily given up, he offered.

Zaragoza also focused on territorial government political officials regularly overestimating revenue to meet the insular constitution’s balanced budget requirement. “We have been playing games with revenue estimates for decades,” Zaragoza stated.

The former Treasury secretary attributed some of the blame for the lack of reliable data on Puerto Rico’s true financial situation on earmarking revenue for specific purposes that does not show up in annual budgets, decentralizing financial management, and the use of multiple bank accounts – reportedly more than 800.

Another former Garcia Padilla Treasury secretary, who also was his Chief Financial Offier, Melba Acosta Febo, similarly testified that the establishment of numerous autonomous agencies handicapped top government officials in learning the Government’s overall cash position. She and Zaragoza said that compiling and combining all of that information into one account was a U.S. Treasury recommendation that the Garcia Padilla Administration implemented.

 

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