Fiscal board establishes plans for Puerto Rico and its power and water utilities
SAN JUAN – The Financial Oversight and Management Board for Puerto Rico voted and certified Thursday its own version of fiscal plans for the commonwealth, the Puerto Rico Electric Power Authority (Prep) and the Puerto Rico Aqueduct & Sewer Authority (Prasa).
Although supporting the certification of the fiscal plans for the electric and water utilities, Ana Matosantos was the only board member to dissent from the vote to certify the commonwealth’s plan, contending its fiscal measures were too strict and its numbers overly optimistic. She said she could not support “too much pain with too little promise.”
The document replaces the fiscal plan approved in March 2017, which was revised to take into account the impact of hurricanes Irma and Maria. The vote came despite government efforts to convince the fiscal oversight board that its own fiscal plans unveiled April 5 achieved savings and complied with the Promesa law.
After the board’s vote, the governor and several lawmakers rejected the fiscal plans. Fiscal board Chairman José Carrion said that if the governor does not implement the plans as approved, “we would have to consult with our lawyers.”
Christian Sobrino, the government’s representative to the board, asked the panel to present the debt-adjustment plans as soon as possible to help the government reduce the costs related to the island’s bankruptcy-like Title III proceedings. However, board Executive Director Natalie Jaresko said they had to see the results of the implementation of the plan.
Most of the differences between the board and the administration were centered around the commonwealth’s and Prepa’s fiscal plans. Prasa’s fiscal plan and the government’s version had very few differences. Jaresko said, in fact, that Prasa had a very good chance of restructuring its debt through Title VI, a mostly out-of-court process under Promesa in which debt-restructuring agreements are negotiated between the commonwealth and its creditors.
In his arguments, the director of Puerto Rico’s Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym), Gerardo Portela, noted that the fiscal plan was based on solid data and that it implemented strict fiscal measures not seen in more than 50 years. The government continued to object board-sought cuts of over 10% to pensions, which are unfunded by about $50 billion, and the repeal of labor protection laws, including the elimination of the statutory Christmas Bonus and two-week vacation and sick leave.
In a televised message last month, Gov. Ricardo Rosselló proposed labor reform that would cut vacation time and sick leave, eliminate the Unjust Dismissal Act and the Christmas Bonus Act to increase labor-force participation, but the proposals were rejected by many of his New Progressive Party lawmakers. He then opted not to include labor reform in the government’s fiscal plan but kept the earned-income tax credit.
Portela warned that repealing labor protection laws would exacerbate outmigration, saying the prudent course of action was to allow Act 4 of 2017, the Labor Transformation and Flexibility Act, and Act 26 of 2017, the Single Employer’s Act, to take their course instead of repealing protection laws after the island had been struck by Hurricane Maria. Sobrino noted that in the 1950s, there were hardly any labor protections and the labor-force participation rate was still an extremely high 48%.
The fiscal plan proposed by the board would make Puerto Rico an at-will employment jurisdiction, which allows employers to dismiss workers for any reason. The plan also calls for raising the minimum wage 25 cents to people older than 25.
The board-certified fiscal plan estimates labor reform could bring $330 million to government coffers, but any related changes will require legislative approval. If the expectations of the fiscal plans are not met, officials said they may have to draft more fiscal plans.
Portela reiterated that pension cuts and reducing future pensions for public workers would further hurt retirees. He also noted that the board’s formula to address pension liabilities was inequitable because it would cut the same amount for retirees who live alone as to those with families.
“The cut in pensions will have a minimal impact in the government’s cash flow but will be great on individuals,” Portela said.
Board member Andrew Biggs said the government must stop thinking about short-term impact and think about long-term benefit and growth. In defending labor reform, Biggs said studies have shown that in jurisdictions where there are more labor protection laws, firms tend to stay away from hiring low-skill workers in favor of high-skill ones and use of technology.
In defending the board’s decision to impose its own fiscal plan, Jaresko said the government’s version does not include all of the reforms possible and would not achieve the required economic growth. She noted that the board wants to ensure retirees have pensions in the future and that as “unsecured creditors,” they must share the pain of the needed cuts.
Another point of contention was that the board’s version of the commonwealth fiscal plan achieves a $1.6 billion surplus, some of which may be used to pay debt, compared to a surplus of $1.4 billion in the government’s plan. The board’s document reflects a 6% increase in revenue and an 11% spending reduction.
Jaresko presented graphs to illustrate that if the government were not to implement labor or energy reforms, the island would be back in deficit by 2029.
“This plan is ambitious but realistic. Before measures and structural reforms, there is a pre-contractual debt service surplus in [fiscal years 2018 to 2020], due to revenues buoyed by a positive macroeconomic trajectory resulting from the massive disaster relief funding stimulus, as well as significant federal Medicaid funding. Over the long term, in the baseline forecast, this surplus is not sustainable, as federal disaster relief funding slows down, supplemental Medicaid funding phases out, Act 154 and non-resident withholding revenues decline, and pensions and healthcare expenditures rise. Without major government action, the island would suffer an annual primary deficit of over $1.9 billion starting in [fiscal year] 2021,” she said.
Fiscal measures and structural reforms contained in the new fiscal plan will transform the deficit into a surplus for the life of the plan, as structural reforms will drive a 1.8% increase in growth, and fiscal measures will drive $12 billion in savings and extra revenue by fiscal 2023, she added.
During the meeting’s public comment period, Catholic Archbishop Roberto González of San Juan urged the board to approve a plan that delays the payment of island debt or interest for five years. He urged the panel to approve a consensual fiscal plan. He said he had noticed a sort of “edginess” or concern among island residents.
Attorney John Mudd asked if some of the $6 billion in accumulated surplus would be used to pay debt, to which Jaresko replied she could not commit all of it because there is a high degree of volatility in the numbers.
Regarding Prasa’s fiscal plan, Jaresko said Prasa may need to borrow money from the commonwealth similar to what Prepa recently did to prevent a larger deficit.
During the discussion of Prepa’s fiscal plan, Portela said the board’s version interferes with the establishment of public energy policy.
Todd Filsinger, Prepa’s chief financial adviser, said the board’s plan for the power company was too optimistic in its rate projections. For instance, it stated projections for a reduction in fuel costs.
The board’s fiscal plan for Prepa calls for the lowering of utility rates to 20 cents per kilowatt-hour and lower.
Filsinger said the utility has come a long way in reducing costs. He noted that the utility has already paid half of the $300 million loan it recently borrowed from the government, and added that both sides want to have a reliable and economic power system. Prepa, as well as the board, support the utility’s privatization.
A member of the public questioned the board about approving Prepa’s fiscal plan when member Matosantos allegedly has a conflict of interest because she is a partner in a renewable-energy firm. Board chief counsel Jaime El Koury said the matter was reviewed several times and no conflict was found.