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Puerto Rico oversight board rejects government’s proposed fiscal plan

By on March 18, 2019

The Puerto Rico fiscal oversight board’s executive director, Natalie Jaresko; member Ana Matosantos; and chairman, José Carrión (CB file)

Requests more than 40 revisions by March 22

SAN JUAN – Puerto Rico’s Financial Oversight and Management Board on Monday rejected the latest version of the central government’s fiscal plan and requested more than 40 revisions, arguing that the document, submitted March 10, did not include certain requested structural reforms.

The letter to Gov. Ricardo Rosselló, signed by board Executive Director Natalie Jaresko, said October’s certified fiscal plan identified the structural reforms and fiscal measures the panel determined were necessary to comply with Promesa.

“Accordingly, the Oversight Board intended for this revision to the Certified Fiscal Plan to be focused on incorporating the latest material information and certain technical adjustments, not for renegotiating policy initiatives. Unfortunately, not only does the Proposed Plan not include detailed critical structural reform initiatives or the latest information for baseline projections, but it includes several new policies that are inconsistent with Promesa’s mandate,” Jaresko said.

In a statement late Monday, Christian Sobrino Vega, the governor’s representative to the board and executive director of the Puerto Rico Fiscal Agency and Financial Advisory Authority, wrote that the government rejects “that our proposal does not comply with the law. Quite the opposite. Our Fiscal Plan proposal reflects the most accurate and recent figures of the fiscal behavior of the Island.

He questioned “the accuracy with which our proposal was evaluated” and urged the board “to exercise greater diligence in evaluating the next proposed Fiscal Plan that the Government will submit this week, as required.

See the full text of the board’s letter to Gov. Ricardo Rosselló here.

The following are some of the “changes to and/or explanations” the board listed as required by noon March 22:

–Disaster funding totals: The Proposed Plan references that the Federal Emergency Management Agency (FEMA) now estimates $60 billion in total public assistance funding and discounts that funding by a factor of 23%. Meanwhile, FEMA’s 12-month Report issued October 2018 indicates that funding (excluding Individual Assistance and Administrative categories) will amount to $65 billion over the life of the storm.

“Please revise the Proposed Plan to reflect the full amount of fund that FEMA reports,” the board requested.

–Disaster funding roll-out: The Proposed Plan shows $3.7 billion in FEMA funding (excluding Individual Assistance and Administrative categories) across FY18 and FY19. Published data from the government’s COR3 office shows that $6.2 billion has already been disbursed, with several months remaining in FY19.

“The Government must update the values for FY18 and FY19 to reflect documented obligations and disbursements to date. Further, from FY19 to FY49, the Government has not adjusted roll out for new information regarding the pace of spend,” the letter says.

–Disaster funding pass-through: The Proposed Plan includes a pass-through rate of 18% across FEMA Public Assistance, HUD [U.S. Department of Housing and Urban Development] CDBG [Community Development Block Grant] funding, FEMA Individual Assistance, Other Federal Funding, and Private Insurance. Please justify this one-size-fits-all approach across programs.

“The Oversight Board’s position is that pass-through rates for disaster funding vary between those which are directed just toward consumption (where a 100% pass-through rate applies), those just toward capital investment (where an 18% or 23.5% pass-through rate applies based on whether investment is in utilities or standard structures), and those that will be directed toward programs, in which funds will be spent both on and off Island (in which a 23.5% pass-through rate applies),” the board wrote.

–The Board asked for FY18 & FY19 GNP estimates used in the Proposed Plan, including sources of assumptions and modeling methodology for growth estimates. It also said the plan must use U.S. mainland GDP growth rate and inflation rate estimates from Congressional Budget Office (CBO) projections.

“The Proposed Plan should use CBO fiscal year projections (which are closer to Puerto Rico’s fiscal year) instead of calendar year projections,” the letter says.

–Population figures do not appear to have been updated in line with the macroeconomic projections contained in the model.

–Damage assessment: The Proposed Plan still uses the original damage assessment from the Planning Board (based on data from October 2017), the board said.

–Power & water rates: The Board asked for additional information and an explanation for the power and water rates used in the Proposed Plan, including sources of assumption.

Regarding baseline revenue projections, the board requested the following:

–Recovery revenue methodology: The Proposed Plan forecasts above-trend revenue collections attributable to disaster-related spending by tying such funds to the rate of roll out of funding directed towards capital.

“Please align these funds to the rate of roll out to all disaster funding given their potential impact on revenues,” the board asked.

–Impact of changes to the tax law of Puerto Rico. The Proposed Plan must incorporate the effects of the recent changes in tax law.

–Medicaid: The Proposed Plan contains substantive updates to Medicaid expenditures which require further information.

–Federal funding: The Government assumes that it will receive unlegislated sources of federal funds in the amount of $1B annually starting in FY21, in addition to the $400 million federal matching funds (allotted under Social Security Act Section 1108 and federal CHIP program).

The board asked that the funding assumption be excluded.

–Medicaid enrollment: The board asked why the proposed plan projects significant drops in Medicaid and Platino enrollment numbers starting in Fiscal 2020.

–Medicaid long-term projections: The Proposed Plan contains a long-term healthcare inflation rate that is higher than the Certified Fiscal Plan. Part of this difference relates to the Proposed Plan’s population assumptions for the Island as a whole; however, there are also updates to the per capita healthcare inflation rate.

“Please provide any new documentation to support this assumption,” the board wrote.

–Pensions: Baseline pension expenses in the Proposed Plan are $1.4 billion lower than in the Current Fiscal Plan, “without sufficient explanation.” The board asked for census data evidence.

–Restoration of federal funds held at Government Development Bank: The Proposed Plan assumes the Commonwealth will have to pay to the federal government $105 million to restore federal funds that were held at GDB to avoid the risk of offsets under the US Treasury Offset Program.

“Please provide detailed support and documentation for this amount, especially as it relates to amounts outside of the Commonwealth Fiscal Plan,” the panel requested.

–Payroll & non-payroll expenditures: The Proposed plan uses Fiscal year 2019 as the baseline year and includes some FY19 measures in this baseline, reducing transparency in government reform needed, implementation progress, and results in the macroeconomic model inadequately representing fiscal reform. The Government should adjust the Proposed Plan to show the baseline separate from the measures.

–Utilities: The Proposed Plan includes the outstanding historical Commonwealth utility payments to the Puerto Rico Electric Power Authority and to the Aqueduct and Sewer Authority. However, it assumes the Commonwealth will have to pay $0.1 billion less in utilities between FY19 and FY23 than in the Current Fiscal Plan.

“Please provide an explanation for why there is a discrepancy in this amount,” the board said.

The panel also required changes and explanations in the scoring of structural reforms in the proposed plan including labor reform, energy reform and ease of doing business. It also required explanations as to changes in fiscal measures. For instance, the proposed plan reduces total savings through agency efficiencies by $1.1 billion through additional spending in Fiscal 2023.

The proposed plan also puts forward a different set of agency groupings than was included in the certified plan last year.

“While the Government may make changes to the groupings in the Certified Fiscal Plan, all agencies must still achieve the savings specified in the Certified Fiscal Plan and the total amount of savings that must be achieved has not changed.

“Please provide detail on how savings will be achieved given the change in groupings and future reorganization plans proposed,” the board said.

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