[Editorial] Stuffing the Promesa Turkey
Puerto Rico’s never-ending Navidades are very much like the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) in that it has started off with a turkey—slowly stuffed with baloney. Speaker of the House Paul Ryan was unable to find seven wise men and women; that much was painfully obvious during the most recent hearings held by the Financial Oversight & Management Board (FOMB) in Fajardo.
Take, for instance, the fact that the FOMB sat in tow listening to a presentation by Conway Mackenzie, the very same firm that spent the past two years flip-flopping on the Puerto Rico government’s cash position, and is now telling us of cash cliffs that tower at $1.3 billion in February 2017 and $3 billion in June 2017.
In their dog and pony show, Conway managing partner for Latin America Aurelio García Miro and Wade Boyd told the oversight board that the Puerto Rico Treasury’s Single Account (TSA), which is used to fund government entities that do not have separate treasuries, is monitored on a daily basis. Despite that scrutiny, García Miro let on that halfway through fiscal year 2016, Treasury was forced to readjust revenues by some $500 million, from $9.8 billion to $9.3 billion.
Unfortunately, Puerto Rico has a tax base that is stuck in neutral matched by a decade’s long economic decline with no end in sight. Although P.R. Treasury Secretary Juan Zaragoza has made quick work, improving the rate of tax collections from 55% to 67%, more than 1,000 taxpayers leaving the island every week is an enormous challenge. There is no time to waste.
The last thing Puerto Rico needs is a rehash of philosophical views of the García Padilla administration, which is spoken for by the U.S. Treasury Department. This time, the task was left to Luyen Tran, who explained that the García Padilla administration’s plan “seeks to maintain federal funding and expenditure on healthcare. A key assumption of the plan is that it does not achieve structural balance in budgets without new federal action and funding. It includes a plan for debt restructuring, but does not include a debt sustainability analysis.” They might have declared themselves in favor of Mother’s Day and the baby seals as well.
The plan proposes to increase revenue by $9.6 billion, primarily from a temporary extension of the Act 154 excise tax and the transition into a new corporate tax regime. It also proposes a new Earned Income Tax Credit. The plan also assumes about $16 billion in new federal funding for healthcare. That is a lot to assume.
Still, the governor has said he will not contemplate additional austerity measures—as if it were up to him. He insists he is choosing the people over the bondholders. What about local bondholders?
Jorge Irizarry, who gave testimony in representation of Bonistas del Patio, pointed out that the administration’s plan fails to mention the effect that not paying debt held by the local bondholders (around $1.2 billion annually) would have on the economy, which would lead to a reduction of 1.9% in the gross national product (GNP). The vast majority of the 60,000 local bondholders depend on the payment of interest for basic living expenses, yet they are not taken into account.
A quick glimpse at the Washington, D.C. Revitalization model used in the 1990s, would help limit the mistakes made in the past. All cuts and no work will lead to more than a decade of pain. The Democrats on the Hill will have to fight doggedly to secure some growth measures to help offset the certain contraction that will come with cuts to the public sector, hikes in electricity rates and the continued flight of our most talented people.
Life in the times of Promesa cannot be an exercise in austerity alone.