Swain’s World: Puerto Rico gov’t pressed to adopt fiscal board dictates
Editor’s note: The following article was originally published in the April 5-11 print edition of Caribbean Business.
The Puerto Rico governor’s fight with the Financial Oversight & Management Board (FOMB), related to the contents of the government’s fiscal plans, is futile because the board can always impose its own fiscal plan, and without it, the island will not be able to adjust its $70 billion debt.
“When you take into account the power of the board to make recommendations under Section 205, together with its power to approve the fiscal plans, budgets and even the power to repeal laws, it is evident the balance of power leaves the government with no choice but to adopt the Oversight Board recommendations,” said a lawyer, who spoke on condition of anonymity because he represents a stakeholder in the government’s bankruptcy proceedings under the P.R. Oversight, Management & Economic Stability Act (Promesa).
The governor is slated April 5 to submit a fiscal plan for the commonwealth excluding Oversight Board recommendations that include labor reform and a 10 percent cut in pensions. P.R. House Minority Leader Rafael Hernández said the governor’s actions were merely a tactic to be in the electorate’s good grace because the FOMB suggestions were already in the original fiscal plan certified in March 2017.
“These new fiscal plans were aimed at making the modifications less strict because the government had less money [as well as the costs of] the hurricanes, but the truth is that [the governor] already had agreed to those items in March of last year,” Hernández said.
What happens if the governor opts not to follow the recommendations of the FOMB in the fiscal plan? The consequence is that the board under Promesa can take all needed measures to ensure compliance with the fiscal plan. The board could even go to court to force the government to act.
Unless there is a fiscal plan and a budget to implement it, the board is the only entity with the exclusivity under Promesa to submit a plan for debt adjustment under Section 302. “If there is no board, there is no plan for debt adjustment, and all the debt would be subject to an embargo,” the lawyer said.
The lawyer provided the example of Argentina, which was the target of numerous lawsuits after defaulting on its debt in 2002. It was not until 2016 that the South American country was able to reach a settlement in a class-action lawsuit by U.S. bondholders.
Last week, the Oversight Board requested changes to the fiscal plans of the commonwealth, and Electric Power and Aqueduct & Sewer authorities. The board also informed the government that the fiscal plans for the Highways & Transportation Authority and University of Puerto Rico violated Promesa.
At the same time, Congressman Rob Bishop, whose Natural Resources Committee has jurisdiction over Puerto Rico, censured the Oversight Board for lack of progress on the island’s debt restructuring, directing the board to allow Puerto Rico’s financial creditors to steer the island out of bankruptcy. Rosselló wrote him a scathing letter, defending his administration’s right to help steer the insolvent, storm-ravaged island out of bankruptcy.
The governor also attacked the board, stating that while he acknowledges its role, its members are trying to micromanage Puerto Rico. “What happens is that it is not just a matter of numbers. If they want me to reach those numbers, I can reach them, but the strategy should be dictated by the government, and that is the difference,” Rosselló said.
According to Promesa, the fiscal plan must meet certain requirements, including funding of essential services, eliminating structural deficits, improving governance, achieving fiscal targets, providing debt-sustainability analysis, respect liens, and lawful priorities, and providing for adequate funding of public pensions. On this latter matter, the board has proposed a 10 percent cut to pensions, except for those that are less than $1,000 a month.
The fiscal plan must also include any recommendations provided by the FOMB under Section 205 of Promesa, which is dubbed the “killer section.”
Section 205 states the Oversight Board may at any time submit recommendations to the governor or Legislature on actions to ensure territorial compliance with the fiscal plan.
These include suggestions on the management of the territorial government’s financial affairs, economic forecasting and multiyear fiscal-forecasting capabilities, information technology, placing controls on expenditures for personnel, reducing benefit costs, reforming procurement practices, and placing other controls on expenditures; the structural relationship of departments, agencies and independent agencies within the territorial government; modification of existing revenue structures; establishment of alternatives for meeting obligations to pay pensions; modifications or transfers of the types of services that are the responsibility of, and are delivered by, the territorial government; modifications of the types of services delivered by entities; effects of the territory’s laws and court orders on operations of the territorial government; establishment of a personnel system for the territorial government based on employee performance standards; improvement of personnel training and proficiency; and privatization of entities.
If the governor or Legislature notifies the Oversight Board that it will not adopt any recommendation, they must include explanations for the rejections. The governor and Legislature must submit such a statement of explanations to the U.S. president and Congress, but Promesa is silent about whether these entities must act on them.