Oversight board gives Puerto Rico gov until Feb. 12 to make changes to fiscal plans
SAN JUAN – Puerto Rico Financial Oversight and Management Board (FOMB) sent letters Monday to Gov. Ricardo Rosselló requesting revisions to his administration’s proposed fiscal plans for the commonwealth, Electric Power Authority (Prepa), and Aqueduct and Sewer Authority (Prasa).
These letters, which the fiscal oversight board said served as a notice of violation for not satisfying requirements pursuant to the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), also defended the permanence of a separate and independent energy regulator.
The board also welcomed the governor’s announcement regarding the proposed privatization of Prepa. The panel is calling for a five-year plan focused “on reducing costs, improving reliability, and ensuring resiliency.” The proposed plan, the board said, “should outline the path, timeline, and parameters of the transaction.”
“PROMESA provides the Government with a powerful tool to restore economic growth and opportunity to the people of Puerto Rico,” board Chairman José Carrión wrote. “The Board urges the Government to use this tool to provide for a sustainable fiscal future for PREPA and the Island’s energy sector and to create the conditions that provide for more affordable electricity, more reliable electricity, cleaner electricity, and a more resilient power infrastructure.”
As for Prasa, the board said its plan “forecasts significantly reduced revenues post-Hurricane Maria but does not provide for a commensurate reduction in operating expenses.” It adds that the utility “must adopt a cash management program to actively minimize” its liquidity shortfall.
In asking Rosselló to modify its revised five-year fiscal plan for the commonwealth in order to certify it, the oversight board said pensions must be cut to reduce unfunded liabilities, something the governor has declined to do. The panel also criticized the proposed creation of the Office of CFO because it did not have enough teeth to ensure fiscal governance.
The commonwealth submitted the revised fiscal plan on Jan. 24 to take into account the impact of Hurricane Maria. It modifies the current 10-year fiscal plan that was certified by the board in March of last year.
The board said in a release Monday that the commonwealth’s newly revised plan includes many “important proposals needed to move Puerto Rico to fiscal sustainability and economic growth.”
However, the fiscal board requires changes and further details to the structural reforms in the areas of ease of doing business, labor, taxes, infrastructure, capital investment, human capital, and the power sector.
The board told the governor his proposed plan:
–Should reflect new information on federal disaster relief appropriations and back up general fund revenue projections on a line-by-line plan basis.
–Must include sufficient funds for capital expenditures that are necessary to maintain the assets of the commonwealth as the current plan allocates $400 million.
–Must account for the funding of an emergency reserve, noting that a $1.3 billion reserve is a reasonable amount.
–Must commit, in order to to generate growth, to improving specific World Bank Ease of Doing Business measures in the areas in which Puerto Rico most significantly trails the mainland, in particular the categories of Construction Permits, Registering Property, Paying Taxes, and Getting Electricity.
–Must include additional labor market and benefit reforms to increase participation in the formal labor market, lower the cost of hiring new employees, and drive a more flexible and competitive labor market. These reforms can include becoming an at-will employment jurisdiction to reduce the cost and risk of hiring new employees; making severance pay and a Christmas bonus optional; reducing requirements for vacation and sick leave to stateside levels or eliminating the requirements that employers must pay vacation and sick leave.
–Institute a work requirement for able-bodied adults receiving food stamps.
–Included tax policy reforms must be at least revenue neutral (relative to the baseline) and exemptions and incentives should be phased out before reducing tax rates. Tax incentives, credits and other tax-related subsidies must be shown as an expense, rather than net of revenues, requiring a comprehensive tax expenditure report.
–Needs to specifically include a plan for capital investment that is tied to the government’s broader economic strategy, including a prioritized list of investments and sustainable funding models.
–Should include strategies for youth employment.
–Must include plans for an independent energy regulator as a stand alone agency, rejecting commonwealth legislation that would consolidate the Energy Commission with other entities.
–Municipal subsidies must be cut and that any “plan to consolidate municipal services and create new structures at the regional level must be supported by sufficient detail to ensure such actions will drive operating efficiencies, cost reduction, and improve local administration and citizen outcomes.”
–Must include specific actions the government will take to ensure long-term reductions in pension liabilities.
–Must break down projected healthcare savings by initiative so the board can properly evaluate and score the proposed New Healthcare Model of the government’s health plan, Mi Salud.
–Should include greater detail on agency-level service eliminations for reduction in costs across government agencies, which relies on an assumption that savings will be driven solely by attrition as a result of the Single Employer Model and the Voluntary Transition Program (VTP). The board said it believes the proposed plan’s employee attrition-based model overstates the fiscal impact “such an approach will achieve and does not ensure the permanency of fiscal impact.”
–Must go beyond its proposal for the Office of the CFO, as it “does not sufficiently ensure an improvement in fiscal governance, accountability, and internal controls.”
–Must include a more specific analysis of the commonwealth’s 30-year debt sustainability projections.
The changes must be made by Feb. 12. The plan is slated to be certified by Feb. 23.
“It is imperative that Puerto Rico seize this moment to fundamentally reform an economy that has been in a long-term recession, even before Hurricanes Irma and Maria,” Carrión wrote. “Our goals of achieving balance and renewing access to the debt markets is only possible if we fundamentally change the underlying economic trends that characterized Puerto Rico’s economy prior to the hurricane.”
In a written statement following the board’s release, Christian Sobrino, the governor’s representative to the board said: “The process for drafting and certifying fiscal plans contemplated under PROMESA is an interactive one. Therefore, we will carefully review the comments of the FOMB, as well as meet any additional request for information, included in the letters.”