Fiscal board publishes 2nd annual report to U.S., Puerto Rico governments
SAN JUAN – The Financial Oversight and Management Board for Puerto Rico has published its second annual report to the U.S. president, Congress and the governor and legislature of Puerto Rico, as required by the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), which created the panel.
The report covers “the assistance provided by the Oversight Board to the Government of Puerto Rico in meeting the purposes of PROMESA”; “recommendations to the President and Congress on changes to PROMESA, other Federal laws, and Federal actions that would assist the Government of Puerto Rico in complying with the Fiscal Plan”; “the manner in which the Oversight Board has spent funds allocated to it”; and “other activities of the Oversight Board.”
“During this past fiscal year, the Oversight Board redoubled its work toward improving public sector financial accountability and transparency, and developing a fiscal plan that reflects the Island’s post-Hurricane reality,” Chairman José Carrión said in a press release announcing the publication. “Much work remains to be done, but we have made progress on PROMESA’s objectives of achieving fiscal balance, resolving the debt crisis, and putting Puerto Rico on the road to economic recovery.”
In the report’s executive summary, the board says: “Immediately after Hurricanes Irma and Maria struck, the Oversight Board provided the Government with the flexibility to reapportion up to $1 billion in budgeted expenditures to cover disaster related expenses. The Oversight Board also worked with the Government to forecast the liquidity needs of the Government in the months ahead, which eventually led to Congress providing Puerto Rico with access to specialized forms of Community Disaster Loans to offset the projected revenue shortfalls caused by the hurricanes.”
The report goes into the impasse with the government, which led to the board developing and certifying its own fiscal plan for the commonwealth, saying that “the Government initially rejected the most critical component of labor reform – changing the law of Puerto Rico to make it an at-will jurisdiction for private sector employees like 49 of the 50 states,” which it believes would increase the island’s “exceptionally low” labor-force participation rate.
“While this fiscal plan contains many of the fiscal measures necessary to rightsize the Government, it contains only those structural reforms that the Government agreed to implement, such as ease of doing business and energy reform, but not comprehensive labor reform because of the Legislature’s failure to pass the requisite legislation. Accordingly, the Commonwealth’s certified fiscal plan projects merely tepid economic growth past FY2023, after the effect of the federal disaster recovery stimulus wears off, and structural deficits after FY2030,” the report reads.
Besides disaster relief funding, the board also requests federal support with Medicaid and Medicare by legislating a “long-term Medicaid program solution to mitigate the drastic reduction in federal funding for healthcare in Puerto Rico that will happen next year,” as well as providing “fair and equitable treatment to residents of Puerto Rico in all Medicare programs.”
Another recommendation offered to the federal government is including special provisions to increase Puerto Rico’s attractiveness for investments in the U.S. Tax Code’s Opportunity Zone (OZ) rules, such as for property acquired from the Puerto Rico Government, extending the time in which an OZ fund must invest in Puerto Rico, providing “special basis rules for investors that invest in a Puerto Rico OZ Fund,” and reducing the holding period applicable to an investment in a Puerto Rico OZ Fund.”
The board recommends Congress “explore ways to minimize the challenges and maximize the opportunities of extending an Earned Income Tax Credit to residents of Puerto Rico,” as well.
The establishment of Puerto Rico as a regional logistics hub for air cargo is possible, the board says, “by supporting waivers for the Century of Aviation Reauthorization Act” to allow foreign civil aircraft to exchange cargo with other air carriers, as occurs in Alaska.
Any amendments to Promesa “would distract and detract from the Government of Puerto Rico and the Oversight Board doing the hard work of balancing the Commonwealth’s budget, restructuring the Commonwealth’s obligations, and turning around the Commonwealth’s economy,” the board added in the report.
The board, which has spent $52.4 million of its $60 million budget–paid by Puerto Rico–in professional services, acknowledged “the long road ahead for Puerto Rico but is resolute in fulfilling its mission of helping Puerto Rico to achieve fiscal responsibility, regain access to capital markets, restructure its outstanding debt, and return to economic growth,” it said in its conclusion.
While reporting on the amount of cash flow available to pay debt service was required, the board said it was unable to do so because it will depend largely on the completion of the government bank account probe underway.
The board said the U.S. Tax Reform provides new international tax and base erosion rules for income generated by foreign subsidiaries, known as CFCs, of U.S. parent companies. These new rules apply to CFCs operating in any part of the world, including Puerto Rico.
“CFCs operating in Puerto Rico are crucial to Puerto Rico’s economy and are the main tax revenue generators for the Government of Puerto Rico. The new international tax and base erosion rules of the U.S. Tax Code should be framed in a manner that will help Puerto Rico, as a U.S. territory, retain the current CFC base and to favorably compete with foreign jurisdictions in attracting new investments, and to comply with the fiscal plan,” the board wrote.
The board also called upon Congress to avoid funding loss for the Arecibo Observatory by speaking to the National Science Foundation; to establish a manufacturing “USA Puerto Rico institute” to encourage resources for manufacturing; to give the Small Business Administration greater flexibility in dealing with Puerto Rico and to assign funds to the Census Bureau to carry out a “Special Census of Governments for Puerto Rico for 2017, that would provide much needed up-to-date comparable financial information for credit markets.”
See the full text of the board’s fiscal year 2018 report here: FOMB – Annual Report – FY 2018 and Annex A