The Puerto Rico financial control board in a closed meeting late yesterday rejected both the $9.256 billion budget for the territory’s central government for the fiscal year beginning Saturday and the debt restructuring agreement for the Electric Power Authority (PREPA). Both had been approved by the islands’ elected leaders, with the PREPA debt deal also representing creditors of some 70% of the agency’s $9 billion plus debt.
The Financial Oversight and Management Board (FOMB) also gave the elected officials a deadline of 5 PM tomorrow for taking $319 million in “corrective actions” on the budget and scheduled a public meeting for 8:30 AM Friday in San Juan to take final action on the budgets of the central government, PREPA, the Government Development Bank, the Highways and Transportation Administration, and the Aqueduct and Sewer Authority.
The Board was reportedly willing to renegotiate the PREPA agreement but suggested in a news release that a PROMESA Title III bankruptcy process “is the most likely course of action.”
Regarding the central government’s Fiscal Year 2018 budget, the Board wrote the presiding officers of the Legislative Assembly that it would unilaterally adopt a final spending plan if its corrections were not adopted, suggesting that these would include a reduction in working hours for government employees beginning September 1st and elimination of the annual ‘Christmas bonus.’
Senate President Thomas Rivera Schatz and House of Representatives Speaker Carlos “Johnny” Mendez replied in a statement that, “We will only consider changes requested by the Governor,” but Governor Ricardo Rossello Nevares later said that actions would be taken that would be worked out with the Board.
The Governor emphasized that the actions would not include the reduced working hours or annual bonus elimination. He continued to insist that the Board could not force these measures because the panel did not reject his 10-year fiscal adjustment plan that did not include the measures and, instead, approved it contingent on establishment of $200 million in budgetary reserves. He reiterated his argument that this made the measures advisory under PROMESA and not mandatory.
Bond insurers National Public Finance Guarantee and Assured Municipal Guarantee, that together represent about 27% of PREPA’s debt, went to the U.S. District Court to ask PROMESA Judge Laura Taylor Swain to recognize the PREPA ‘Restructuring Support Agreement,’ (RSA) which had been submitted to the Board by Puerto Rico’s Fiscal Agency and Financial Advisory Authority two months ago. National CEO Bill Fallon complained in a statement that, “After three years of negotiations and of a broad consensus between PREPA and its creditors, we are disappointed to see that the FOMB refuses to comply with the law and, instead, attempts a last minute renegotiation of the RSA.”
The monolines and PROMESA co-author Rob Bishop (R-UT), Chairman of the U.S. House of Representatives Committee on Natural Resources, which has jurisdiction over PROMESA and other territory matters, contend that PROMESA approved the RSA, required the Board to treat it as a voluntary debt restructuring agreement under Title VI of the law,and permits no second-guessing of the accord by the Board.
The Board, PROMESA promoter Representative Nydia Velazquez (D-NY), and Committee Ranking Minority Member Raul Grijalva (D-AZ) dispute that assertion, however, and Velazquez last night praised the Board’s rejectionof the RSA.
The Board’s objections to the central government budget cited —
* $119 million characterized as “overspending and ineligible spending.”
* An increase in the Legislative Assembly budget from $131 million to $147 million.
* $78 million for “payroll, operating expenses, subsidies to municipalities, sports activities, and entities previously financed by other sources.”
* $25 million in subsidies to “industries, associations, museums, foundations, choirs, ballets, operas, marathons, festivals, municipalities, scholarships, and professional athletes, among others.”
* “At least $200 million” of $440 million in savings from “right-sizing targets” that lacked specific implementation plans.