Oversight board calls for local cooperation to complete mandate
New panel member Nixon: Fiscal fix must be structural, cannot be ‘budget exercise’
SAN JUAN — Members of Puerto Rico’s Financial Oversight and Management Board (FOMB) said Friday that its mission of getting the commonwealth out of bankruptcy cannot conclude without cooperation and consensus with the local government and lawmakers to implement measures making debt-restructuring accords effective and to enact reforms that make government more efficient and business-friendly.
“The commonwealth has been in bankruptcy for four years and it is time it gets out of bankruptcy, and everybody agrees with that,” FOMB Chairman David Skeel said during a press conference after the conclusion of the fiscal panel’s 23rd public board meeting, during which two of the three new board members recently appointed by President Donald Trump participated for the first time in board decisions.
“I am hopeful that we can reach agreements with the creditors and the other interested parties that will be consensual as possible, that will have as much support as possible, and that all of the effective parties, including the governor and the legislature will agree,” Skeel assured.
A divided government prevailed in Puerto Rico’s Nov. 3 elections. While the pro-statehood New Progressive Party retained control of La Fortaleza’s governor’s mansion with the election of Pedro Pierluisi, who once served as counsel for the oversight board, the Legislative Assembly will now be controlled by the opposition Popular Democratic Party and will include a decisive block of lawmakers from new political parties that have rejected the board’s austerity measures and the role of the federally created panel in the island’s fiscal affairs.
FOMB Executive Director Natalie Jaresko, who during her presentation in the meeting that noted that the commonwealth government has dragged its feet in the implementation of government reform and ease-of-business measures, stressed that “everyone agrees” that FOMB should “finish its mandate as soon as possible and return governance in full to the democratically elected officials.”
“To do that, we need to exit bankruptcy. To the extent that we are able to reach agreements and [those] agreements aren’t executed, that just keeps the board here longer,” Jaresko told reporters. “I don’t think any of the parties have that interest. I am hopeful that we will be able to convince them that we have done the best possible in terms of negotiating sustainable agreements…”
Present for the first time at Friday’s meeting was two of the White House’s recent appointments, that of Dr. Betty A. Rosa, who is Puerto Rican descent and is interim commissioner of Education and president of the University of the State of New York; and CPA John E. Nixon, who served as budget director for the state governments of Utah and Michigan.
Only two of the board’s original appointments in 2016, Skeel and Andrew Biggs, were at Friday’s meeting. Another original board member, Ana Matosantos, who was present during the last meeting on Nov. 20, was absent on Friday, presumably replaced by Rosa. Nixon presumably replaced former board member José Ramón González, who resigned in August.
Former Puerto Rico Industrial Development Co. (Pridco) Executive Director Antonio Medina Comas, whose appointment was announced on Monday, could not make it to the board meeting, done via teleconferencing due to the Covid-19 pandemic, because he was still in the process of competing paperwork.
One vacancy is left to be filled in the seven-member board, created by the federal Puerto Rico Oversight, Management and Economic Stability Act (Promesa) four years ago with the prime objectives of pulling the commonwealth out from the bankruptcy hole, the biggest of any U.S. jurisdiction, and getting it back into the cash-rich capital markets.
Skeel welcomed the new board members, affirming that “we have a nice combination of continuity and fresh perspective.
Nixon, who said he participated in Detroit’s bankruptcy process beginning in 2013, the largest in the U.S. at that time, said that Promesa “is pretty prescriptive of what we can and cannot do as a board as part of our financial oversight and obligations.”
“As far as getting the board out of Puerto Rico, that is the goal. I am not intending to be on this board forever,” the CPA told reporters, noting that he had visited the island while on vacation with his wife. “We want to return the reigns fully back to the elected officials of Puerto Rico. We need to bring in, not only restructured fiscal responsibility, but within government we need to make sure that we have structurally balanced fiscal plans in place that the commonwealth can afford. It’s going to be a pretty big balancing act.”
Nixon, who is currently a senior vice president of Client Network Services Inc., where he focuses on the healthcare business, said that as Michigan state budget director he was part of the Detroit emergency management board, stressing that “there is a model for success, but everybody has to roll up their sleeves and dig in.”
“I learned that to address issues like this, everyone has to be at the table and everyone has to be willing to cooperate and negotiate. What is happening right now is not in the best interest of everybody in Puerto Rico,” he said, stressing that the FOMB’s task cannot be limited to a “budget exercise.”
“The government is very unstable… and you need a stable government for economic activity. Businesses are not willing to relocate where there is instability in the government and the regulation environment,” Nixon continued. “You must look at these structural issues to create a long-term sustainable environment.”
Island ‘scarred’ by Covid-19
During Friday’s meeting, the oversight board discussed the current state of the Puerto Rico economy, the results of the Oversight Board’s latest business survey, and the second phase of the Oversight Board’s investigation into audit and consulting services performed by BDO Puerto Rico (BDO).
Members voted to certify the Action Plan by the Puerto Rico Department of Housing (PRDOH), which details the use of $8.3 billion from the U.S. Department of Housing’s (HUD) Community Development Block Grant Mitigation Program (CDBG-MIT) and approved several reapportionment requests by the Puerto Rico Government.
Jaresko, citing U.S. Labor Department data, affirmed that the Covid-19 pandemic has ‘scarred’ Puerto Rico to a greater extent than the U.S. mainland. She noted that, so far, job recovery for Puerto Rico has been slower than for the U.S. overall. In Puerto Rico, 46% of the jobs lost in April were recovered by October, compared to 67% on the U.S. mainland.
Tourism is one of the hardest hit sectors in Puerto Rico, with 43% of employment lost in April (~35,000 jobs). Trade, transportation, and utilities lost about 42,000 jobs in April and recovered 69% of these by October. This compares to a recovery of 82% of the lost jobs in the mainland U.S. Construction lost about 10,000 jobs in April and recovered 54% of the jobs by October. This compares to 126% recovery in the mainland United States.
Jaresko pointed out that the Puerto Rico Restaurant Association’s (ASORE) internal surveys and estimates suggest 25% of restaurants will permanently close due to the pandemic, which may represent the loss of up to 30,000 jobs
A survey of 649 mostly small businesses on the island, ordered by the oversight board, found that the pandemic has had a deep negative impact on the private sector, with almost half of the businesses reporting it has laid off or furloughed employees, or reduced work shifts, due to the emergency. Almost 60% said the pandemic reduced demand for their products or services, while half of the respondents said they will need financing, including loans or grants to re-open. More than 40% said they need to re-design their business logistics or require technical expertise for their business to adjust to the new economic reality.
Jaresko said that the survey results underscore the importance of the commonwealth government implementing ease of doing business reforms and digitize services. During the last six months, only 25% of respondents said they could obtain services from the government online, and more than half said they had a bad service experience. Respondents rated services and systems for registering a property, obtaining a permit, and paying taxes as difficult to very difficult.
Moreover, the oversight board certified PRDOH’s Action Plan for the third tranche of HUD’s $20 billion CDBG-DR/MIT funding. The action plan enhances the ability of communities to prepare for, and recover from natural disasters, and more successfully restore basic services and structures in a timely and efficient manner, Jaresko said, who said that the oversight board recommends PRDOH establish a CDBG-DR/MIT Transparency Portal to “promote transparency and accountability by providing the public with visibility into where funds are flowing and where disbursements are lagging.”
The Oversight Board approved a total of about $72 million in reapportionment requests by the government of Puerto Rico, including funds for municipalities, the Department of Corrections and Rehabilitation, the Department of Health, and the University of Puerto Rico.
The oversight board discussed the review of accounting, consulting, and other services performed by BDO, as requested by members of the U.S. Congress. The report, by UHY LLP, did not find any matters indicating that BDO’s integrity in any of the services rendered was impaired or otherwise affected by the alleged activities of its former managing partner or the government’s subsequent action.