Puerto Rico’s federally-imposed fiscal control board this morning decided that the Government of Puerto Rico would have to reduce hours of employees other than police by two days per month September 1st — but the Governor’s non-voting representative on the Board said that the Government would not comply.
The Financial Oversight and Management Board established by PROMESA:
- cited a $218 million budget gap during the fiscal year that began July 1st
- contended that the Government had not submitted adequate plans to eliminate the gap since the Board’s March 13th adoption of a 10-year fiscal plan for the Government and its June 30th approval of the Fiscal Year 2018 budget that were both conditioned on the such plans
- and emphasized that the payroll cut had been reduced from cutting hours equal to four days per month and eliminating the “Christmas bonus” based on Government measures that reduced the budget gap from $880 million.
It explained, however, that a decision to suspend the annual bonus could be made in September based on the budgetary situation by that time.
The Board resolution on the matter also included provisions to empower Executive Director Natalie Jaresko to act to ensure more reliable budget numbers from the Government and to determine whether there should be a new treasury manager for the Government.
Christian Sobrino, the Governor’s representative, economic adviser, and Government Development Bank (GDB) President, was not allowed to speak on the issue until after the Board approved its resolution. He asserted that the administration of Gov. Ricardo Rossello Nevares would continue to cooperate with the Board but was “drawing the line“ on the furloughs and the Board “could take it to the bank” that the pay reductions would not be implemented.
He insisted that the furloughs were not mandatory because the cuts were not included in the fiscal plan itself but in the resolution conditionally approving the plan. This made the furloughs Board advice that the Government did not have to follow under PROMESA Sec. 205 but only needed to explain why it would not to the Congress and the President of the United States. “There is only one fiscal plan. Other documents are only recommendations,” he said.
Sobrino several times stressed that “the people must be assured that there is only one government in the islands,” referring to the elected local government. He stated that, “We will ‘right size’ the Government because we want to and we need to, not because of an . . . imposition” that was not authorized in law. He quoted from statements that Puerto Rico’s resident commissioner in the U.S. House of Representatives at the time that PROMESA was being enacted, Pedro Pierluisi, made to the effect that the law would not institute “a parallel governing structure” for the territory and “the Board would provide guidelines but the Government would make the decisions.” Sobrino added that, “The Government will meet the fiscal goals but the Government will make the decisions” as to how.
Gov. Rossello has previously threatened to go to court over the matter.
Sobrino also complained that the Board privately made its decision on the furloughs based on its ’scoring’ of the budget before discussing its projections with the Rossello Administration and Board leaks to reporters were further proof that the decision was “predetermined.”
Board Member Carlos Garcia explained that the fiscal plan would not have been approved without the Board’s conditions on approval and that the conditions were discussed with the Government, which asked for more time to show that furloughs would not be needed because of other measures it was taking and did not object to the conditions on the plan for several months.
Sobrino, who only recently became the Governor’s representative on the Board, maintained that Rossello had never agreed to the conditions and was opposed from the time that he was advised of these.
He also noted that the Board had revised its numbers since the March 13th approval of the fiscal plan.
During a public comment period, the Executive Director of the territory’s Fiscal Agency and Financial Advisory Authority, Gerardo Portela, also contended that the furloughs would reduce economic activity in the territory another $600 million and that said that the furlough decision should have been made after October 15th, when the numbers from the budget’s first quarter should be available.
Jaresko disputed the $600 million impact claim, noting that the fiscal plan already called for $218 million in lesser spending.
Board Member Ana Matosantos agreed with Garcia. She and Jaresko pointed out that spending cuts would have to be made elsewhere if there were no furloughs and the spending reductions in this first year under PROMESA were much smaller than those that would have to be made in Years Two and Three. Spending needs to be cut 30%, Matosantos said.
In responding to Sobrino, Matosantos, Jaresko, and Board Member Andrew Biggs also pointed out alleged “inconsistencies” in Rossello’s position on payments of Government pensions — another major topic of the meeting. Biggs noted that the Governor had originally proposed a 2.5% cut in pension payments above the poverty level but, after the Board increased the amount to 10% in the fiscal plan, provided for no reduction in his FY 2018 budget. Instead it uses current revenue to pay 100% of benefits and make up for insolvency in the main government pension system expected this month and in the teachers retirement system estimated to be reach next month. “The Governor’s current position is not consistent with his fiscal plan proposal, let alone the approved fiscal plan,” Biggs contended.
The leader of a local group of bondholders, claiming to represent 60,000, pointed out that they were “suffering even more” than government pensioners under the fiscal plan with its three-quarters reduction in debt payments over the 10 years. He contended that more than 95% of the local bondholders were depending upon bond payments for their primary retirement income.
Recalling that a quarter of Puerto Rico’s bonded debt was owned locally in 2012, he projected that these individuals would not buy Puerto Rico bonds again, undermining PROMESA’s objective of enabling the territory to borrow in the markets at reasonable rates.
The Board also approved, with conditions, a fiscal plan for the Corporation for Supervision and Insurance of Cooperatives: credit unions in Puerto Rico that have some one million members.
The institutions own $965 million in territorial bonds, with much of the paper issued by the GDB. Puerto Rico attorney John Mudd asked if the plan reflected the proposed debt reduction agreement for the GDB. He was told that it did not but was given no explanation of the inconsistency.