Puerto Rico oversight board publishes fiscal plan it would certify
SAN JUAN – The fiscal plan that Puerto Rico’s Financial Oversight and Management Board is expected to certify for the commonwealth Thursday would consolidate its agencies from 114 into 22 groupings, impose a five-year payroll freeze in the public sector, repeal labor protection laws, cut pensions, and reduce municipal and University of Puerto Rico subsidies.
The “proposed” plan was one of several unveiled by the fiscal oversight board Wednesday, which contain numerous changes to the versions submitted by Gov. Ricardo Rosselló on April 5, and atypically revealed a day ahead of the public meeting for their certification, which could result in heated reaction by the government.
“The Government of Puerto Rico has been straightforward in outlining its public policy for the Fiscal Plan after the devastation of a catastrophic hurricane like María. Our position is firm regarding pension cuts and other measures that we consider unnecessary and would hamper economic development,” Christian Sobrino, the governor’s representative to the fiscal board, said in a statement issued Wednesday evening.
The board-drafted fiscal plan projects that $62 billion in hurricane disaster relief funding will enter the island economy from federal and private sources. Of that, some $35 billion is expected to be used for public assistance such as major infrastructure projects and road and school improvements by the Federal Emergency Management Agency (FEMA); the U.S. Housing Department, via its Community Development Block Grant (CDBG) program; other federal agencies; and “commonwealth match-spend.
Some $19 billion would be for individual assistance in the form of home reconstructions and hurricane-related expenses such as clothing and supplies; and about $8 billion will be used for private and business insurance payouts.
About $375 million in CDBG funding is estimated to be allocated to offset the commonwealth’s expected cost-share requirements under the federal programs, which is $1 billion over six years.
The plan proposes structural changes that would have a negative impact on the gross domestic product.
Judicial, teacher retirement plan freeze
The board also called for “improvements to the financial stability” of public employees’ retirement funds, which must result in $185 million in run-rate savings by fiscal 2023.
“To avoid creating future pension liabilities and to stabilize the system for the benefit of both taxpayers and future retirees, the Judicial Retirement System and Teachers Retirement System plans must be frozen as quickly as possible. Members will retain the benefits they have accrued to date, subject to the benefit reduction formula,” the plan reads. “Future benefits must be based on contributions and earnings in new defined contribution retirement accounts.”
Although the average benefit reduction will be 10%, there will be no reduction for those with combined retirement plan and Social Security benefits below the poverty level of $1,000 per month. This formula is equivalent to giving each beneficiary a reduction of 25% in the monthly benefits they receive over $600, and $1,000 for those without Social Security.
“Under this approach, about 25% would receive no reduction in their benefits while and an additional 18% of retirees will experience a benefit reduction of 5% or less. About 60% of retirees will experience a benefit reduction of 10% or less, and over 80% of retirees will experience a benefit reduction of 15% or less. Very few retirees will have more than a 20% reduction, and none will have a reduction of 25% or more,” the fiscal board’s draft plan reads.
Any pension changes would need to be passed by the island’s legislature.
Labor reform back
The board acknowledged that changes to labor and welfare laws are controversial, saying that residents would have to give up benefits and job protections when, “through the economic downturn and then Hurricane Maria, they already have lost so much.”
Nevertheless, it added, “dramatic changes to Puerto Rico’s labor market policies are necessary to provide opportunity for a greater standard of living at home, reversing the Island’s history of high poverty, constrained budgets, and pressure for young Puerto Ricans to leave their home for the mainland.”
The board told the government it should aim to increase the labor force participation rate to 47% and reduce the youth unemployment rate to 20.2% by fiscal year 2023. It says labor reform is projected to lead to $50 billion in revenue.
To accomplish reform, the government must implement flexible labor regulations; reform welfare, including an earned-income tax credit (EITC) for low-income workers and a work requirement for “able-bodied” Nutritional Assistance Program beneficiaries; and implement programs to develop “critical skills” in the workforce.
To reduce the cost to hire and encourage job creation, including movement of informal jobs to the formal economy, the board says Puerto Rico must become an employment-at-will jurisdiction; reduce mandated paid leave, including sick leave and vacation pay, by 50%; and make the Christmas Bonus voluntary for employers. The at-will employment, which means the repeal of the Unfair Dismissal Act, should be in place by January, according to the plan, along with the repeal of the Christmas Bonus law.
The reduction of paid leave should be effective immediately as “most U.S. states do not mandate any vacation or sick leave,” the plan reads.
Minimum wage proposal
To offset some of the reduced employee protections and compensation, these reforms can be accompanied by a modest increase in the minimum wage for workers age 25 and older. Under the proposal, the minimum wage would increase by 25 cents an hour, “effective as soon as the Christmas bonus is made voluntary.”
Workers younger than 25 would remain at the federal minimum wage of $7.25 to “increase opportunities for youth to gain valuable experience and skills in the workforce and avoid worsening the high youth unemployment rate.” Small employers would also be exempt from the increase.
Regarding welfare structure reforms, the government must launch an earned-income tax credit (EITC) program by January, as well as a work requirement for the Nutrition Assistance Program (PAN) by July 1, “with no transition period.”
To make it easier for businesses to operate, the board said reducing occupational licensing requirements; deregulating on-island freights; streamlining permitting; making the registration of property easier; improving the ease of paying taxes and providing access to reliable power is needed.
To enable the energy sector’s transformation, the board proposes a new regulator, using the Public Utilities Commission model used to oversee stateside utilities. The regulator would be independent of the government and operate under public service ethics and conduct rules.
The transition to a new regulatory structure “must occur immediately,” the draft plan stresses, with an amendment to the Puerto Rico Energy Commission’s (PREC) organic law that the Public Services Commission not have the authority to hear appeals of the Energy Bureau or “engage in any substantive review” of its work.
Energy sector oversight
“This is needed to ensure that the structure and funding of the Energy Bureau are established before bids are solicited for the transaction. The Energy Bureau’s authority and funding should have a transition period to account for the Oversight Board’s authority pre-transformation, which will continue until PREPA [Puerto Rico Electric Power Authority] exits Title III [bankruptcy-like process under the Promesa law]. During this transition period, the Governor will appoint new regulatory commissioners, and the regulator’s funding can be lower than the future state as the Oversight Board will perform some oversight responsibilities,” the document reads.
“During the transition period,” the fiscal board will be approving revenue requirements and expenditures, including a capital plan, in Prepa’s certified fiscal plan. It will also be in charge of budget and rate-making, approve new debt for the utility, and approve contracts and asset sales.
As for structural reforms, the plan the board would certify proposes a reduction and consolidation of the island’s 114 agencies into 22. It includes initiatives in the Education, Health, Public Safety, Corrections, and Economic Development departments, as well as Treasury and its proposed Office of the CFO. The efficiency measures must result in $1.62 billion in run-rate savings by fiscal 2023.
“In some cases, the consolidations are designed to better focus the competing efforts of multiple agencies, such as the Economic Development grouping which will consolidate ten agencies into one. In other cases, the consolidations should serve to move services closer to citizens, such as the Healthcare and Social Services groupings which will consolidate access points to important services like Medicaid,” the document reads.
In addition, five government-run entities have been proposed to be closed: the Model Forest; Culebra Conservation and Development Authority; Company for the Integral Development of Cantera’s Peninsula; Economic Development Bank; and the Industrial, Tourist, Education, Medical, and Environmental Control Facilities Financing Authority (Afica).
The board also says the Education Department, which has had numerous cuts, must achieve $53 million in net personnel savings and $6 million in non-personnel savings in fiscal 2019. To accomplish this, the plan says, the department “could consolidate its footprint,” as well as “modernize facilities, revise the curriculum, and equip teachers with what they need to succeed.”
The measures “must generate $465.8 million in run-rate savings inclusive of funds needed for requisite reinvestments to increase quality. However, these savings are offset by $160 million in reinvested funds from increased revenue from labor reform for youth development programs and education materials,” the plan adds.
Citing a reduction in crime, the Police Department also gets cuts, but to ensure the Department of Public Safety continues to retain officers, despite the presence of significantly higher-paying positions at stateside police departments,” it should institute a $1,500 annual raise for all sworn personnel by Fiscal Year 2019.”
The fiscal plan certified in March included a measure to freeze all payroll expenses, which became law in fiscal 2018. “However, the freeze was due to expire at the end of FY2019. To extend the savings from freezing payroll increases, the freeze must be continued through the duration of the New Fiscal Plan. This measure should amount to $276.6 million in annual savings by Fiscal Year 2023,” the plan says.
It also proposes reducing commonwealth subsidies to municipalities and the University of Puerto Rico to obtain annual savings of $451 million by fiscal 2023.
The plan calls for the consolidation of municipal services and strengthening oversight of property tax compliance.
“In partnership with the Municipal Revenues Collection Center (CRIM), the municipalities should identify and register tens of thousands of non-registered properties to begin collecting taxes,” the plan reads.
Draft of “New Fiscal Plan for Puerto Rico”: