Thursday, November 23, 2017

Puerto Rico governor, fiscal board anticipate changes to fiscal plans

By on October 18, 2017

Gov. Ricardo Rosselló Nevares (Jaime Rivera/CB)

SAN JUAN — The physical devastation caused by Hurricane María in Puerto Rico is palpable. But not only homes, bridges, buildings and roads got hit by the most powerful storm ever recorded in the Atlantic.

María also shattered the 10-year fiscal plan certified on March 13 by the seven-member control board established by the federal Promesa law to oversee the island’s finances.

“First of all, I can tell you that the immediate objectives of the fiscal plan […] must be completely reassessed,” said Gov. Ricardo Rosselló Nevares, who seemed to remind days of suit and tie, when he mostly spoke about his plan for the recovery of Puerto Rico.

These days, he wears a cap, jeans, short sleeves and reddish eyes. Fiscal matters got pushed down the priority list; the government is “storm-centric” nowadays, he says.

Before Sept. 20, Puerto Rico faced water- and energy-bill hikes, cuts to pension benefits and health services, the exodus of thousands of residents and a sinking economy.

In an Oct. 11 letter addressed to 11 members of the U.S. Senate, fiscal board Chairman José Carrión said the entity was evaluating how the certified fiscal plans of the government and the Electric Power Authority (Prepa) would change after hurricanes Irma and María.

Yet, before changing any of these documents, the fiscal board wants an official report of damages and the certainty about the “type, date and magnitude” of the federal funds Puerto Rico will receive. Preliminarily, damage estimates range from $30 billion to $95 billion, depending on who you ask.

Once the board has “more clarity,” it will begin to review the fiscal plans, which would include asking the governor to deliver new drafts of these plans for revision, according to the letter.

To date, the board has certified the fiscal plans of the central government, Prepa, the Aqueduct & Sewer Authority, the Highways & Transportation Authority; the Government Development Bank (GDB); and the Cooperatives Insurance & Supervision Corp. (Cossec). The University of Puerto Rico (UPR) is also required to submit a fiscal plan, but has yet to do so.

Blown projections

Shortly after entering La Fortaleza, Gov. Rosselló Nevares said that, except for the devastation of a war, no country suffers a 16% annual fall in its gross national product (GNP), as suggested by the board in its first baseline projections released late last year.

“I remember well, that far from countries plagued by wars, that was not going to happen. We hold on to that. What happens is that if you fly over Puerto Rico, you realize it seems like a bomb was dropped here, literally,” the governor said.

To avoid such a collapse, Gov. Rosselló Nevares is betting on Uncle Sam filling three “buckets”: roughly $4.9 billion in federal loans to provide immediate liquidity; from $4.3 billion to $4.6 billion through a host of federal programs; and a package of “billions of dollars” for long-term economic reconstruction.

A double-digit fall in the Puerto Rico economy was the subject of a dispute between the Rosselló administration and the board before the certification of the fiscal plan. In the end, they agreed on a -2.8% projection in GNP growth during fiscal year 2018. Positive territory would be seen by fiscal 2022.

For economist Vicente Feliciano, a key variable in estimating any impact to the island’s economic activity following María is the speed with which the electric power system is restored.

Almost a month since the hurricane made landfall, roughly 85% of Puerto Rico remains without power. Most businesses remain closed or operating on a limited basis. The few that open depend on generators that run with diesel, which is trading at an average of 66.5 cents a liter in a jurisdiction where the cost of energy was already onerous.

(Juan José Rodríguez/CB)

“Everyone is clear: Puerto Rico is going to run with diesel for the next few months. That’s the reality,” Economic Development Secretary Manuel Laboy said.

The goal is to restore 95% of the electricity system before the end of the year. While that occurs, the mathematics and result of the energy cost scares.

A pharmaceutical company in the south of the island, for instance, devours over 7,000 gallons of diesel each day to power its facilities. As for the nearly 50,000 small and midsize enterprises (SMEs) on the island, 35% of them don’t even have a generator. Those who have it pay an average of $250 a day for diesel.

(Felipe Torres/CB)

Given these conditions, 10% to 15% of SMEs in Puerto Rico could go under at the end of the day, said Nelson Ramírez, president of the United Retailers Association. Retail losses could exceed $10 billion, he added.

To the extent that many businesses can’t reopen or scale back on their future investment plans, “the fiscal plan is destroyed,” Feliciano said.

At the moment, the government and the fiscal board are conducting “a valuation exercise” to establish the extent of the damages and impact on revenues due to the loss of economic activity after María, noted Christian Sobrino, the governor’s representative to the board.

For him, it is still premature to speak of economic projections because “information is missing.”

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Thousands leave for a thousand reasons

The o.2% population decline estimate in the fiscal plan—or roughly 6,600 fewer people each year over the next decade—was already under fire before María hit Puerto Rico. The number of Puerto Ricans who have left the island over the past few weeks could exceed 30,000, according to preliminary estimates.

“They leave with big suitcases and their pets. These people won’t come back for a while,” said an employee at Luis Muñoz Marín International Airport who put the number of people who have left the island since the hurricane struck at 1,ooo daily.

Last week, the Florida state government reported that 27,000 Puerto Ricans have arrived in the state since Oct. 4, mostly through the Miami and Orlando international airports.

Whether because of medical conditions, family sustenance or the mere discomfort of living without food and water, the reasons why thousands of Puerto Ricans decide to leave the island vary widely.

Puerto Rico manufacturing, pharma affected by lack of electric power


Three days before the hurricane, the Puerto Rico Statistics Institute warned that the most recent demographic projections from the U.S. Census Bureau suggested a population decrease seven times greater than estimated under the certified fiscal plan.

The commonwealth’s population would be less than three million by 2025 and just over two million by 2050. Puerto Rico currently has about 3.4 million residents, according to U.S. Census Bureau data.

Fiscal board Executive Director Natalie Jaresko (Juan J. Rodríguez/CB)

“Demographics are a critical assumption of the fiscal plan. They are important because people generate GNP. They also generate revenues. If there are no revenues, you can’t provide services,” said the fiscal board’s executive director, Natalie Jaresko, in an August interview. At that time, she was “nervous” about statistics showing nearly 50,000 fewer students in public schools in Puerto Rico during the current academic year.

As of this writing, a request for an interview had yet to be responded to by the board.

Fiscal adjustments in a vacuum

Before María, the commonwealth had to make adjustments of up to $1.77 billion, only during the current fiscal year. Some $924 million were in additional revenues, while another $851 million would come from “rightsizing” the government structure, or consolidating agencies and reducing payroll costs. Other measures included a $100 million cut in healthcare spending and $411 million less in funding for the University of Puerto Rico (UPR) and municipalities.

But after María, government revenues are nonexistent, Gov. Rosselló Nevares conceded. Nevertheless, he noted “there are some public policy objectives that we want to continue to push, such as with Prepa, what will be the ‘New Government,’ the consolidation of agencies.”

A legislative measure was filed this week to grant the governor the authority to consolidate certain agencies through executive order. According to the administration, it would only be temporary and will help the government comply with the certified fiscal plan.

While there may be some action in the “government rightsizing” front, it is still not known whether hikes to the water and power bills will kick off as planned, whether spending cuts in health and education will take place, whether funding reductions to the UPR and cash-strapped municipalities will stand.

Gov. Rosselló Nevares gave no details about the changes he expects to see in the government’s fiscal plans. For him, just as the fiscal board, you have to see what action the federal government takes on its unincorporated territory first.

 

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