Puerto Rico Governor Alejandro Garcia Padilla (Popular Democratic Party/PPD) this morning refused to amend the fiscal adjustment plan that he submitted to the territory’s federally-imposed Financial Oversight and Management Board five weeks ago. The refusal contradicts the Federal PROMESA law that the Governor sought, which established the Board and gave the panel overriding control of government decisions affecting finances and the ability to propose elimination of debts to a Federal court.
Gov. Garcia Padilla’s refusal came after the Board made clear Friday its rejection of the proposal and request that it be revised by December 15th during a meeting of the panel and after in Board Member comments to reporters. Members and witnesses invited to the Board meeting criticized the plan as “unrealistic,” particularly in its reliance on Federal assistance that is uncertain and in its assumptions regarding the economy. They also found the plan deficient in not proposing more: structural reforms in government benefitting the economy; budgetary spending and revenue adjustments; and detail. Board Members suggested an over-reliance on unspecified debt restructuring, although they underscored that debt restructuring is needed.
Board Members also surprised Governor-Elect Ricardo Rossello (New Progressive Party/PNP) by asserting that they would not approve more government borrowing until a plan is approved. They said that they hoped to do this by January 31st, the day that the insular law authorizing the governor to withhold debt payments expires and 29 days after Rossello takes office.
With the territory unable to meet debt and other obligations by February 1st without a moratorium on debt payment according to the Garcia Padilla Administration’s contracted experts, Rossello has said that he will try to borrow $2 billion on a short-term basis and cut annual debt obligations by up to $900 million by February 15th through voluntary agreements with creditors. These would preserve principal due as much as possible but defer debt payments. He has placed a premium in restoring market confidence in the Government of Puerto Rico.
Garcia Padilla, who is in Spain on a ‘lame-duck’ official promotional trip, gave being governor only until January 2nd as one reason for not revising the plan. His main objection, however, was to what he termed the Board’s call for more “austerity.” He argued that, “It is not right and it is not necessary,” noting that he had “protected” government employees, pensions, and the University of Puerto Rico subsidy. “Anyone asking me to reverse that does not know me,” he declared. He added that he would oppose any further austerity effort, citing the International Monetary Fund — which has no jurisdiction with respect to the U.S. territory — as having pointed out that “austerity can be counterproductive for the economy.”
In a lightly veiled reference to Rossello, he disputed “suggesting the solutions to the loans are more loans.” Instead, he reiterated his call for the Board to develop a debt elimination plan under PROMESA Title III.
Insular House of Representatives Treasury and Budget Committee Chairman, Rafael “Tatito” Hernandez, who was just elected Minority Leader for the legislature that takes office January 9th, was more transparent about the politics. He asserted that Rossello called for Garcia to “do the dirty work” of proposing austerity. He also contended that Rossello’s short-term borrowing plan is “irresponsible.”
Late Friday, the U.S. Treasury Department released a letter that Secretary Jacob Lew sent Board Chairman Jose Carrion last Wednesday, providing requested comments on the Garcia plan. Lew called for the Garcia Padilla Administration and the Board to work together to finalize a plan. His first points about the Garcia submission were to emphasize a need for debt restructuring and advise against excessive austerity, in part because the islands’ economy continues to contract.
He also sought more local measures to make it easier to do business and to incentivize work in Puerto Rico, and he called for more realistic economic assumptions than Garcia used. He noted that those were more optimistic than the experience of the past decade and did not include an “analysis of the downside risk.”
Lew also reiterated the Obama Administration’s call for the Congress to continue Federal contributions to the islands’ Medicaid program at the current level (although the spending is higher than contemplated by ‘Obamacare’), phase-in equality with the States in Medicaid funding, and extend the portion of the Earned Income Tax Credit that provides payments to workers to the extent that they do not have a Federal income tax liability.
The warnings of Garcia Padilla and Lew against greater austerity were not echoed by the territory’s most prominent economist, Joaquin Villamil, who was quoted this morning as saying that government should seek to save “at least $2 billion” annually, depending on varying factors.
It was also disclosed this morning that the U.S. Treasury Department provided a report to the Board September 21st on Puerto Rico’s finances. It reportedly advised that the territorial government “exhausted sources of liquidity over one year ago” and that Garcia Padilla did everything possible “to keep the government open.” The effort included delaying tax refunds, payments to suppliers, and pension contributions, and internal borrowing as well as not making debt payments.