Mayors Blast García Padilla’s Restrictions on GDB’s Cash Outflow
SAN JUAN — Acting under the recently signed Puerto Rico Emergency Moratorium & Financial Rehabilitation Act, Gov. Alejandro García Padilla declared late last week an emergency period on the Government Development Bank (GDB), placing restrictions that could take a toll on local government operations.
Commonwealth employees’ payroll will now be cleared by Banco Popular — which now holds a large amount of local Treasury funds across a number of bank accounts — after the GDB can no longer use the Federal Reserve Bank to conduct this process. As for the government bank’s payroll, Citi will act as clearing house. The restrictions imposed under the GDB executive order don’t allow the bank to continue to use the Fed to this effect.
“I have already opened up accounts in private banks, and I’m depositing,” said Treasury Secretary Juan Zaragoza during a roundtable discussion of the government’s latest fiscal maneuvers with the press. “The message is we intend to safeguard essential services. [The moratorium legislation] gives us time, tools and flexibility.”
García Padilla has also established the Disbursement Committee, which will control cash outflows at the GDB and determine whether they correspond to essential services. The bank will have a weekly limit for disbursements, which could hover around $10 million, GDB President & Chairwoman Melba Acosta told reporters during the meeting attended by the administration’s entire fiscal team.
After hitting the weekly ceiling, only outflows related to essential services would be green-lighted. This situation could affect funding of infrastructure projects and other items that don’t fall under the administration’s definition of an essential government service.
On Friday, García Padilla significantly limited cash outflow at the bank in an effort to preserve its dwindling liquidity and ensure essential government services, according to La Fortaleza. The bank’s liquidity stood at roughly $560 million as of April 1, mere days before the García Padilla administration enacted the moratorium legislation.
A number of island mayors blasted the administration’s decision to restrict disbursements at the GDB and threatened to stop paying what they owe the government bank. Administration officials met on Monday with several mayors to explain the situation and address some of the concerns being voiced.
“Today, for the first time, they told us, ‘prepare yourselves, that the hurricane is already upon us,'” Comerío Mayor Josean Santiago, of the Popular Democratic Party, told Caribbean Business on his way out of Monday’s meeting. When asked whether his municipality would consider depositing funds again in the GDB, he said, “the bank is already nonexistent for all practical purposes. It is in a condition where we can’t count on it.”
Guaynabo Mayor Héctor O’Neill, of the New Progressive Party and president of the Mayors Federation, said the executive order threatens municipalities’ property taxes and the sales-tax share, which are deposited in trusts managed by Popular for the repayment of debt guaranteed by these revenue sources.
“The bank won’t reimburse any money to municipalities,” he said, while warning that economic development in towns would be paralyzed.
O’Neill said municipalities would have no choice but to stop sending the different contributions they are required to transfer to the GDB, “and take the matter to court.” These include municipal contributions to the government healthcare program and retirement systems, among other items.
However, Municipal Revenue Collection Center (CRIM by its Spanish acronym) Director Víctor Falcón said towns would continue to receive reimbursements from municipal property taxes, since these are managed by Popular through a trust created late last year amid a legal feud between CRIM and the GDB over the deposit of these funds.
Falcón conceded that CRIM’s board recently decided to suspend any municipal funds that would have gone to the GDB for the repayment of outstanding loans with the bank, until the situation is clearer.
For her part, in explaining the administration’s course of action, Acosta said it was important to act fast to avoid a possible run on the bank, while adding it was the GDB board that first sought to limit the requests for deposit withdrawals. “The GDB was running the risk of having some entities take out their funds with the stroke of a pen. That was a possibility,” she said.
The executive order doesn’t impose a moratorium on the bank’s debt obligations yet, but it remains a possibility while it holds restructuring talks with its creditors ahead of a $422 million debt payment due May 2. The administration has repeatedly stated there is not enough cash to make the full payment.
In addition to the restrictions the governor can impose on the bank, the moratorium law amends the receivership process under the GDB’s charter law. For instance, a temporary “bridge” bank could be created to carry out some of the GDB’s functions and honor deposits if it were to be placed into receivership.
Zaragoza noted how the new receivership process provides alternatives to shutting down the bank, as the old provisions called for. The receiver figure will no longer be appointed by a local court, as well, and now the governor and the Treasury secretary would be in charge of the appointment.
“[The new receivership process] is one of the best contributions made by the [moratorium] law…. The receiver has as many alternatives as creativity allows,” said Justice Secretary César Miranda, while highlighting the bridge bank mechanism.
“You can perhaps call it a conservator,” Acosa added. While the measures provide various alternatives to choose from, the GDB chief conceded the administration still needs to make some tough decisions down the road with respect to the bank.
Acting under the Puerto Rico Constitution’s police powers, the moratorium law empowers the governor to declare a moratorium for commonwealth entities that have issued debt, whenever he deems necessary, as well as a stay against any litigation that may arise.
Meanwhile, a new entity, called the Puerto Rico Fiscal Agency & Financial Authority, was established by the law essentially to take over the GDB’s roles as the island’s fiscal agent and financial adviser. The entity’s board consists of only one member, and in addition to its fiscal agent duties, will take charge of the commonwealth’s debt-restructuring efforts.
La Fortaleza Chief of Staff Grace Santana said they continue to evaluate who is going to be the fiscal agent’s sole board member, as provided under the moratorium law.