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Is government reform possible without layoffs?

By on October 20, 2016

Editor’s note: This is the third installment in a series of reports analyzing the government platforms of Puerto Rico’s gubernatorial candidates and their implications along with the Financial Oversight & Management Board.

SAN JUAN – If the president of the Popular Democratic Party (PDP), David Bernier, results elected as the next governor of Puerto Rico, the first thing he would do would be to meet with the financial board established by the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) to discuss his own five-year fiscal plan and make the corresponding adjustments to the document presented by the current administration.

Popular Democratic Party gubernatorial candidate David Bernier (CB photo/Juan J. Rodríguez)

Popular Democratic Party gubernatorial candidate David Bernier (CB photo/Juan J. Rodríguez)

“Regardless of [the fiscal plan] the current administration has presented, we’ll proceed to make the adjustments necessary to establish the route that the people will democratically validate at the polls,” Bernier told Caribbean Business.

The party leader assured he will be “the first governor who won’t be talking politics” or about ideological issues when coming into power because he will focus on “giving Puerto Rico fiscal stability and moving the economy forward.”

His Strategic Plan for Puerto Rico focuses on “transforming and regenerating” the economic and governance model by attracting foreign capital—with Acts 20 and 22, as well as the creation of section 245 A in the federal Internal Revenue Code—tied to the investment in and development of local business people. He would also develop public-private partnerships (PPP) in areas other than education or health.

See also: Cidre Program: Should a business vision for Puerto Rico?

With specific policies aimed at women, the LGBTTQ communities and immigrants, the PDP platform promotes reforming government by transferring employees between agencies, without layoffs, and regionalizing functions. He will attack corruption with greater limits in government contracts, eliminating cash for campaign contributions and creating a lobbyist registry, among others.

He also proposes transferring government assets to a trust to make efficient use of these, and negotiate the public debt using the “entry point” mechanism, which consists of paying the debt according to the creditor’s purchase price instead of the bond’s value when issued, which he belives will protect cooperatives that own island bonds.

Reforming government without layoffs is ‘unsustainable’

For political analyst Carlos Díaz Olivo, it is “unrealistic and unsustainable” that gubernatorial candidates propose government reform without laying off public employees because Gov. Alejandro García Padilla confirmed that “the deficit is larger” than expected. “Without paying the debt, there isn’t even enough to pay the expenses and employees there are,” he said.

“The things no party would in principle do, they may have to because the budget they want won’t be approved,” the attorney said referring to the financial oversight board’s analysis of the government’s fiscal decisions.

See also: PIP program: Outside of reality or fighter against the board?

On Bernier’s proposal to transfer employees between agencies, economist Ramón Cao told Caribbean Business that the policy “has existed for many years” and could have “benefits.” However, it could run into problems to the extent money has to be invested to train an employee or when specialized professions are sought, as in the case of doctors or nurses, not available in the rest of the government.

Bernier said his proposal is geared toward agencies forming collaborative partnerships “in the areas that are necessary,” without affecting the reality of each entity, collective bargaining agreements or seniority. “Employees maintain their agency’s classification and pay,” he said about the variety of pay scales in the different agencies.

Regarding the regionalization of services, Cao said, although it has been done for decades, “these haven’t happened much” because of the cultural factor and the fact that in many instances the agreements could represent “disempowering mayors,” especially if it is the administrative area.

See also: Pierluisi and Bernier request urgency in starting debt restructuring

The PDP president acknowledged there have been regionalization agreements with “mixed results,” as with the transfer of sports facilities to municipalities, which in many cases was worse. For that reason, he rejected that the agreements include their administration and instead be agreements between the state and municipal governments “with clear parameters [in] the conditions that have to be met.”

Meanwhile, political analyst Ángel Cintrón criticized tht Bernier didn’t promote employee transfers or regionalization while he was secretary of State.

In addition, the former New Progressive Party (NPP) representative considered it inappropriate that the PDP depend largely on the extension of section 245A because the “[U.S.] Congress won’t approve it in a hundred years.” The amendment to the federal Internal Revenue Code seeks an 85% federal tax credit to multinational companies that establish subsidiaries on the island and would reduce to nearly half the tax rate of U.S. companies on the island.

Díaz Olivo added that Section 245A would be like reliving Section 936, which resulted in a “policy of dependence on foreign capital”, and which in turn could be seen as an impediment to “create our own opportunities.” Such a policy, together with Acts 20 and 22, which were put in place to attract foreign investment in exchange for tax benefits, would “discourage local businessmen” because “we pay taxes in a way that outsiders do not,” said the analyst.

However, the PDP gubernatorial candidate denied such a claim, since “all tax incentives would be linked to local businessmen,” who would also be given priority in the procurement of goods and services. He added that Acts 20 and 22 would be amended to “impose additional controls.”

Bernier also noted that he would negotiate with the federal Treasury to continue allowing eight companies to deduct from their federal taxes what they pay in excise taxes on the island through Act 154 (foreign corporate tax), an injection that represents 20% of the country’s budget, beyond 2017.

Although said foreign corporate tax could also pass through the sieve of the control board, the aspiring governor said he confidence that Act 154 will be extended because “it is a matter of common sense.”

See also: David Bernier proposes to limit the governor’s elective period

Difficult to restructure the debt with entry point mechanism

On the other hand, Cintrón said he was concerned that the PDP insists in the “auditing the debt,” due to the implications this could have on the financial market and the island’s financing problem.

Meanwhile, Cao questioned if the mechanism of “entry point” can be used to renegotiate the debt, because “that’s not what Promesa says. [The law] does not specify [that]” and it will be up to the board to lead negotiations with creditors.

“I doubt that hedge funds or vulture funds, would be willing to settle for the value in which they bought [the bonds]. If the transaction does not occur, or if the holder does not accept the board’s offer, then they will go to bankruptcy court to square things off. It is well-intentioned, but unlikely,” said the economist.

However, Bernier insisted that “what I’m proposing is that it is only fair that the purchase value is considered, the value at which the bond was purchased” when renegotiating the debt. This would not represent a preferential treatment to certain creditors, he added, although his intention is to protect cooperatives that own Puerto Rico bonds, who mostly “bought at par value (paying higher prices for bonds).”

Regarding the creation of a trust that would include government assets, Díaz Olivo said the board could ban it, as many of these assets represent a guarantee of payment of debts, which could “erode agreements with creditors even further.”

“The board would have no problem because this would achieve greater efficiency and allow government assets to perform better,” said Bernier.

PDP platform “repetitive”

According to Cintrón, only 10% of the PDP program is positive and doable, while the remaining 90% are “things that already exist, [and that] cannot be carried out by Congress,” or there are “legal impediments” or “no money” to put them into effect.

The former representative said that proposals such as tighter controls on government procurement and campaign finance law, as well as an act regulating access to information, already exist in the government. Meanwhile, issues such as leveling the purchasing conditions through the internet with local commerce correspond to federal law.

With regards to prohibiting cash donations in political campaigns, the analyst said it could not be done because it falls under freedom of speech. Lawmakers could, however, limit the quantities, as has been done in the past.

Cintrón looked favorably on the creation of a new lobbyist registration and removal of the business to business tax, but censured the intention to switch to a unicameral system in the Legislature, “because it creates an imbalance of democratic power,” and highlighted that there are very few such systems worldwide.

Given this, Bernier said the unicameral legislature was something that the country voted for “and we have to respect the democratic judgment of our people.”

Other criticisms against the candidate include the lack of a specific mechanism to change the political status of Puerto Rico. On this, the PDP leader said that he is the “first gubernatorial candidate” from PDP to acknowledge that “the current relationship is colonial [in nature]” and insisted that he will seek consensus among all parties to bring the complaint to Washington D.C.

“We have been trying to find a consensus for 50 years. He is playing with the PDP’s left-leaning sector,” Cintrón responded.


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