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U.S. Reps, Puerto Rico gov’t and its fiscal board spar at congressional hearing

By on June 12, 2020

Gov seeks Promesa amendment to curb authority of board whose director warns that would hinder island debt’s restructuring

SAN JUAN – During an often contentious congressional hearing between Democratic and Republican House members, the executive director of the Financial Oversight & Management Board (FOMB) and Gov. Wanda Vázquez’s liaison to the federally created body sparred Thursday over the oversight board’s powers in determining Puerto Rico’s fiscal policy and daily governance.

While the three-hour hearing by the U.S. House of Representatives’ full Committee on Natural Resources, chaired by Rep. Raúl M. Grijalva (D-Ariz.), was focused on the implementation of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) during the Covid-19 pandemic crisis, discussion turned to amendments to Promesa proposed by Grijalva to limit the oversight board’s powers to impose austerity measures.

Rep. Raúl M. Grijalva (D-Ariz.)

Being the first committee hearing held via teleconference due to the Covid-19 pandemic emergency, Republican lawmakers on the committee, including Puerto Rico Resident Commissioner Jenniffer González, initially called for a vote to adjourn because they objected to not being able to convene in person, citing the lifting of lockdown measures across the United States.

In a statement Friday, Gonzaléz and committee Ranking Member Rob Bishop (R-Utah) said Democrats attempted to “undermine and politicize Puerto Rico’s economic recovery,” adding that they had offered the motion to adjourn “the Democrats’ virtual hearing and bring Members back to work in Washington,” but Grijalva, whose “controversial legislation concerning Promesa” he drafted “without input from González,” questioned her for voting to postpone the hearing.

Resident Commissioner Jenniffer González

“If the Majority of this Committee were truly interested in conducting bipartisan work towards improving PROMESA, then they would seriously consider re-opening the Committee here in Washington D.C. and rise above the shameful rhetoric they engaged in yesterday,” González said.

“Mr. Chairman, you are better than that. You are a better person than that,” Bishop said. “It is deeply troubling to me to hear that the Chairman of this Committee would blatantly engage in partisan attacks on the Resident Commissioner during a virtual fiasco dubbed an official oversight hearing…. What a mockery this has been and I hope the Committee will proceed immediately to regular order so we can finally get back to the work of the people of this country.” 

Rob Bishop (R-Utah)

The hearing proceeded after the motion was defeated by the committee’s Democratic majority.

In his testimony, Omar J. Marrero, executive director of the Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym) and the governor’s non-voting representative to the oversight board, said that Congress must “clarify the unique power-sharing relationship” between the commonwealth government and the FOMB by “limiting each to their respective public policy and financial accountability roles.” He said this would be “the best way” for Congress to improve the “efficiency and effectiveness” of Promesa.

Omar J. Marrero, executive director of the Fiscal Agency and Financial Advisory Authority

The official said that specifically Promesa sections 201 and 202, which gives the oversight board authority for approval of the island’s fiscal plans and budgets, need to be modified because they have established a “flawed process” that “continues to be the subject of ongoing friction between the elected government of Puerto Rico and the board.

Promesa, enacted in 2016, created the oversight panel to lead the commonwealth’s debt restructuring process under the law’s Title III bankruptcy provision and put its finances in order so it could make the resulting restructured debt service payments.

“Despite our best efforts to minimize disagreements, the language and structure of Promesa as currently adopted by Congress, allows the board to blur the delineation of power between the government and the oversight board,” he told committee members. “Because the respective roles of the government and oversight board often overlap, the lack of clarity in the statute creates too many opportunities to waste time jockeying for power rather than creating and implementing meaningful solutions for the people of Puerto Rico.”

He added: “Especially now as Puerto Rico continues to respond to the Covid-19 pandemic and rebuild from past and ongoing natural disasters, clarifying the roles of the board and the government would substantially improve the collaboration and cooperation that we have cultivated to date.”

Marrero contended that the FOMB has taken advantage of this “unclear separation of powers” to gain control over day-to-day operations of the commonwealth government. He noted that an example of this attempt to “micro-manage virtually all aspects of public governance in Puerto Rico” include the board’s appointment of a chief transformation officer to oversee the Puerto Rico Electric Power Authority (Prepa) in the aftermath of Hurricane Maria in 2017.

Subsequently, U.S. District Judge Laura Taylor Swain, who is overseeing the commonwealth’s debt restructuring process under Promesa, denied the board’s request.

Marrero contended that after its failed attempt to take over Prepa, the FOMB “pivoted its strategy to subvert the duly elected government’s policy objectives through significant lobbying efforts, which have cost a disturbingly considerable amount of Puerto Rico taxpayer dollars….”

He said that an example of this was the defunding, in its recently certified fiscal plan, the state-owned television station, WIPR, to force government compliance in “an unreasonable and unrealistic timeframe” with plans to hand over the station to a private nonprofit. He said this move could jeopardize the station’s Federal Communications Commission licenses.

“The board’s use of such anti-democratic tactics to undermine the elected government’s policy preferences should be a primary concern of this committee,” he said, noting the board’s inclusion in the fiscal plan of a detailed K-12 education reform plan that requires the Puerto Rico Department of Education to implement non-financial reforms. “While the government does not necessarily disagree with these measures, the government believes that these types of detailed public policy initiatives—which have nothing to do with fiscal responsibility, ensuring sustainable debt levels, exiting the Title III bankruptcy, or maintaining balanced annual budgets—go far beyond the intent of Promesa’s fiscal plan and budget processes. These are matters for the people of Puerto Rico to decide.”

Marrero stressed that any amendments to Promesa must ensure that “the public policy of Puerto Rico is fully respected. The best way of saying this is that Promesa and the board should be able to set the size of the room, but the elected government of Puerto Rico should have the ability to decide how to arrange the furniture.”

However, FOMB Executive Director Natalie Jaresko countered that Marrero’s recommendation is based on a “false construct,” stressing that if Promesa is amended so that the oversight board “is no longer responsible for fiscal sustainability, then it will be difficult, if not impossible, to ever restructure the debt without clarity and confidence that the debt is sustainable.” She said this change would make creditors unwilling to participate in the restructuring process of a debt in excess of $120 billion, which includes $50 billion in unfunded pension liabilities.

FOMB Executive Director Natalie Jaresko

Jaresko said that this issue has been settled in the courts, noting that the board has won three out of four cases it has litigated with the commonwealth. Last week, the U.S. Supreme Court ruled that the appointments of the board members was constitutional and need not be confirmed by Congress.

“In all of four of those cases since 2018, the court has agreed the clarity and the authority that has been provided by Promesa to the board,” she said.

During her testimony, Jaresko credited the board with controlling government spending and setting the basis for restoring the island’s economic health, contending that certified fiscal plan policies adopted by the commonwealth government enabled it to have an emergency fund to face the earthquakes that have been occurring in the southern part of the island and Covid-19.  

The oversight panel’s director contended that without the board and its certified fiscal plans, government spending would have “ballooned” from $19 billion in fiscal year 2018 to $22 billion in fiscal 2025, a 16 percent increase. She said board policies have contained expenditures to a 2 percent increase since fiscal 2018, or up 12 percent on a per-capita basis, given the decline in population, while “providing valuable investments in frontline services in the wake of multiple crises.”

Moreover, Jaresko expressed reservations concerning one of the proposed amendments to Promesa that would allow the Legislative Assembly of Puerto Rico to cancel some unsecured financial debt, which she said will “lead existing commonwealth bondholders to demand secured debt during ongoing negotiations, which is more expensive and restrictive than the unsecured debt.” She added that this provision could render the issuance of future municipal debt in Puerto Rico and throughout the United States more expensive, and will cause purchasers of new debt to require that it be secured debt in all instances.

“The board’s legal advisers also believe the criteria for the application of this new discharge may only allow Puerto Rico to qualify, in which case the statute will be subject to constitutional challenge as not being a uniform bankruptcy law,” she testified. “Additionally, the constitutionality of discharging the unsecured financial debt for nothing, while other debt is paid, will be challenged.”

Resident Commissioner González asked Jaresko about concerns raised by Puerto Rico cabinet members that board austerity measures were leading to a lack of personnel with the “experience and the expertise” to manage and comply with the new requirements of federal grants, contending that fiscal plan austerity measures limited funding for training and hiring employees to work with proposals to comply with federal grants. She partly attributed the slow disbursement of federal disaster aid to the island to this situation.

A personnel problem

While Jaresko acknowledged that the fiscal plans reduced payroll spending over the past three years, she held the commonwealth government responsible for adopting payroll reduction strategies involving “early retirement and voluntary transition” that pushed out essential “frontline employees.”   

“The intention and the agreement reached with the previous governor was that the bulk of the rightsizing would happen through back office consolidation, consolidation of bureaus into single departments. And those actions happened for the most part,” she said. “So what has happened instead is that the government has used a very blunt tool, [namely] early retirement or voluntary transition, which has been offered across practically in all front and back offices, and when that has happened, it is very hard to direct who stays and who leaves, because people have a voluntary choice to early retire. And, indeed, by implementing the reductions in payroll in that fashion, I believe they have caused a problem in terms of capacity.”

However, Jaresko said that employees in charge of handling federal funding for the island, like those who work at the Central Office for Recovery, Reconstruction and resilience, or COR3, are paid with federal funds. She said that implementation of Federal Emergency Management Agency and federal Community Development Block Grant-Disaster Recovery (CDBG-DR) program funding is a “very long and complex process.”

Asked by González about government allegations that the board takes too long to review requested documents and that this is causing delays in the implementation of programs, Jaresko countered that the time frame depends on the issue at hand, and that most delays are caused by the government not complying in full with such requests. The resident commissioner requested that the board provide a log of responses and response time, to which Jeresko acceded.

“The most basic issue we have is whether submission is complete,” she said. “If it is complete, it could take one day to seven. With regard to budget reapportionments, similarly, if they are complete, it could take up to a week, sometimes a bit more. However, the longer delays have to do with incomplete documentation, lack of bids that go with costs, or other incomplete submissions.”

Jaresko reminded committee members of a lawsuit the FOMB filed against the commonwealth government in U.S. District Court earlier this week to obtain documents regarding transactions for the purchase of Covid-19 testing kits and healthcare supplies. She said that the board had made seven requests for the missing information.

In fact, at one point, Marrero was asked by Rep. Bruce Westerman (R-Ark.) why the government had not submitted the $40 million in controversial Apex General Contractors and 313 LLC contracts to the board for their review before attempting to issue them. The Aafaf chief answered that the agencies involved considered them to be purchase orders that did not require such a review.

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