Tuesday, April 24, 2018

U.S. Treasury drafts conditions tied to Puerto Rico’s CDL funds

By on April 11, 2018

U.S. Treasury building in Washington, D.C.

SAN JUAN — When U.S. Treasury Secretary Steven Mnuchin visited Puerto Rico two weeks ago for a meeting with Gov. Ricardo Rosselló and members of the Financial Oversight & Management Board (FOMB), many local government officials were encouraged by news that the feds had increased a liquidity threshold for the release of funds tied to a Community Disaster Loans (CDLs). The original conditions for fund disbursement—that Puerto Rico’s Treasury Single Account had to dip below $800 million—was increased by $300 million to $1.1 billion. The loan agreement is hardly free of terms, according to additional terms being drafted by the U.S. Treasury.

“The conditions tied to the loan are perhaps more complicated because of Promesa [the Puerto Rico Oversight, Management & Economic Stability Act] and what it calls for, which is not something other jurisdictions have to deal with,” one source on the Hill, with ties to the Trump administration, told Caribbean Business. “It is precisely what the governor has been trying to do [get the funds unencumbered,] and the U.S. Treasury has been pushing back because this is not optional. This is the way the U.S. Congress has laid out the law. This is the way it has to be.”

The conditions are mapped out in an addendum that is particular to Puerto Rico’s case, which because of Promesa’s stipulations sets in black and white the CDL funding uses. The doctrine underpinning the set of rules hinges on keeping monies destined far from debt servicing and payment for lobbyists and advisers.

The loan, whose purpose is to support cash needs, may be drawn upon until Oct. 31 and, after that time, no drawdowns can occur. It will be repaid twice a year, in July and January.

The money can be used to fund essential services, payroll and benefits, pensions, facilities maintenance that is not infrastructure improvements and to buy materials or pay suppliers. It cannot be used to pay debt service, refinance debt, pay for capital improvements, restore damaged facilities, provide tax refunds, pay for lobbying or pay for any Title III costs. It cannot be used to transfer funds, pay for administrative costs of federal disaster assistance or pay for disaster-related expenditures.

“The stuff that it cannot be used for seems fairly reasonable, because if you are going to obtain money from FEMA [Federal Emergency Management Agency] to repair things, don’t get charged against this—that is a different bucket of money and we are not going to let you do that,” the Trump source added.

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Two sources with knowledge of the negotiations tied to the loan explained that because Puerto Rico is restructuring its debt through Title III of Promesa, the funds will not be granted unencumbered. “The other important thing to know is that this document is heavily predicated on the Promesa board’s approved budgets—the thing that baffles people is that the governor believes it is predicated on his budget, no matter what the board says. If that is true, he is never going to get that money.”

The Puerto Rico Oversight, Management & Economic Stability Act was enacted in 2016 to provide the island a mechanism for debt restructuring and to chart a course to fiscal austerity led by the FOMB.

Under Promesa, the control board is tasked with the responsibility of approving fiscal plans for Puerto Rico’s government agencies prior to certifying the plans of adjustment in the restructuring of the island’s $69 billion debtload. Thus far, the government has submitted separate fiscal plans for Puerto Rico’s Electric Power and Aqueduct & Sewer authorities, the University of Puerto Rico and the central government.

As of this writing, the Rosselló administration and the control board remained at odds over the final versions of the submitted plans. Gov. Rosselló has taken exception to some of the board’s recommendations because, he says, the board is overstepping its bounds with demands that have more to do with public policy than fiscal affairs.

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“We are recognizing the powers the board has, but also defending the powers of the government of Puerto Rico,” the governor recently said.

The Trump administration source said Puerto Rico could have been receiving this money since the measure was first passed by Congress, and the U.S. Virgin Islands has been receiving money for eight weeks now. Puerto Rico has not received one penny, in part because of the governor’s objections and because Puerto Rico, to the best of everyone’s knowledge, “does not need the money.”

Puerto Rico has twice declared it would run out of money without federal funds. “The point is that Puerto Rico’s own financial forecasting has been wrong at every step of the way. Given the constraints of the Treasury Department—appropriations, the law and that kind of stuff—the money is available until Oct. 31, only if the government needs it. So, this is not a cash infusion for the money to just sit in a bank account.”

Senior reporter Eva Lloréns Vélez contributed to this story.

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