Friday, May 24, 2019

Fiscal Board Expected to Insist on More Budget Cuts

By on May 9, 2019

(Jaime Rivera/CB)

Based on Past Public Hearings, Aafaf’s Sobrino Said Board Likely to Slash Christmas Bonus, Pensions

Editor’s note: The following was first published in the May 9 – 15, 2019, issue of Caribbean Business.

At a hearing held Thursday, the Puerto Rico government expects the Financial Oversight & Management Board (FOMB) to insist upon the elimination of Christmas bonuses, structural reforms and a 10 percent cut to pensions, and then end up giving the green light to its version of a fiscal plan.

“That is what I expect because it is what has happened in past hearings. None of the fiscal plans have lasted more than six months. I reserve a contingency plan for myself,” said Christian Sobrino, executive director of the Fiscal Agency & Financial Advisory Authority (Aafaf), after being asked about his expectations for the FOMB to approve a fiscal plan.

On March 15, the FOMB rejected a draft of the commonwealth fiscal plan submitted four days earlier, stating that after careful review of the baseline economic and fiscal assumptions, as well as structural reforms and fiscal measures, it required significant revisions and additional supporting information. The FOMB continues to insist that Puerto Rico must repeal Christmas bonuses for workers along with other cuts to free up capital.

During the interview earlier this week, Sobrino said he had not received the FOMB version of the fiscal plan.

“There is a reality, there are certain reforms and measures that they have asked of the government of Puerto Rico and the government of Puerto Rico has decided not to take up. I don’t expect them to change their mind, particularly on the matter of retirement and pensions,” he said.

Sobrino also spoke to reporters about claims made by the board’s executive director, Natalie Jaresko, who said some 24 resolutions earmarking $30 million were illegal and had to be a part of the budget. Sobrino said the communication with Jaresko has increased since the weekend and that she is wrong about the resolutions.

He said the vast majority of the resolutions are allocations from the Municipal Improvement Fund, which is money that comes from the sales & use tax.

“There is the wrong impression that money that has not been authorized is being wasted or was not authorized because it was not in the budget or that we are engaging in practices that are not the best,” he said.

He explained that the Municipal Improvement Fund was the product of a law enacted in 2014 that created Cofim, the Municipal Financing Corp., after the portion of the sales & use tax that went to municipalities was reduced to 1 percent from 1.5 percent.

Under the law, a portion, 0.5 percent of the sales & use tax designated for the central government, is deposited in the Municipal Administration Fund and subdivided into three funds.

About 40 percent of the 0.5 percent currently goes to a Municipal Development Fund; another 40 percent of the 0.5 percent goes to the Municipal Redemption Fund, which is used to repay loans; and 20 percent of the 0.5 percent of the sales & use tax goes to the Municipal Improvement Fund. Sobrino said the funds from the Municipal Improvement Fund must be earmarked to towns through legislative resolutions.

He reiterated that handling of the funds has been done according to the 2014 law. The resolutions, he said, are not part of the budget because the money to fund them has never gone to the general fund.

“It is not correct to say as [Jaresko] claims, that if the money is not in the budget, then it is null and void,” Sobrino said.

Although Cofim was excluded from the Commonwealth Fiscal Plan, Jaresko said revenues that flow through the Municipal Administration Fund (FAM by its Spanish acronym) are part of the fiscal plan. The inclusion of expenditures from FAM and the Municipal Improvement Fund in the fiscal plan’s financial model does not exempt these expenditures from the budget approval process required for all appropriations by Section 202 of Promesa.

FOMB Chairman José Carrión sent a proposal to the Legislature that would establish a competitive process for municipalities to submit projects and compete for the fund. Sobrino said that is a matter that needs to be discussed, adding, “I don’t manage those funds.”

The FOMB granted the government until May 15 to provide information on the management of the funds or it will exercise its powers under Sections 203 and 204 of Promesa, which means it will exact its own cuts.

“They are asking for clarifications…. We believe there is no need to declare anything invalid,” said Sobrino, who believes the FOMB is confused about the source of the money for the joint resolutions.

On the other hand, Sobrino said that despite the potpourri of lawsuits the FOMB has filed–against law firms, banks, bondholders and government vendors to recover funds the government may have paid illegally–the central government can reach a consensual deal with creditors and leave bankruptcy within a year and a half.

Nonetheless, he criticized the FOMB decision to sue hundreds of vendors without first verifying whether the government paid them in contravention of the law, to avoid losing the claim before the May 3 expiration of the statute of limitations on avoidance claims.

“Considering that [bankruptcy] was filed in May 2017, I would not have started to verify it two months ago. I would have started before. The fiduciary duty covers the jurisdiction you are dealing with. Filing suits and causing a disruption just to determine if you are correct is not the way to go,” he said.