Fiscal board certifies its version of 2020 budget for Puerto Rico government

The Puerto Rico Capitol in San Juan (CB photo)

Legislature passes larger budget, which could result in court fight

SAN JUAN – The Financial Oversight and Management Board for Puerto Rico announced Monday that it certified a fiscal year 2020 consolidated budget of $20.2 billion, including General Fund, Special Revenue Fund and Federal Funds.

The executive director of the board, Natalie Jaresko, sent a letter to the legislative leaders Sunday, giving them a deadline.

“If the Legislature submits a budget by 5:30pm Atlantic Standard Time, the Oversight Board will be able to review it for consistency with the certified Fiscal Plan to either approve it or issue a notice of violation. If the Legislature fails to submit a budget by 5:30pm Atlantic Standard Time, the Oversight Board will have no choice but to develop a revised, compliant budget for the Commonwealth for fiscal year 2020 and submit it to the Governor and the Legislature before the beginning of the new fiscal year tomorrow,” Jaresko said in her letter to House Speaker Carlos Méndez and Senate President Thomas Rivera Schatz.

The Legislative Assembly ended up passing a $9.62 billion budget hours later, which included some $380 more in spending than the board’s version. Méndez said the Constitution gave him until 11:59 p.m. of June 30 to pass a budget.

The legislature’s budget added $286 million to cover municipalities’ contributions to the government’s health and retirement plans.

“We are going to approve a budget that the Board will be able to veto and do whatever it wants, but we have acted in accordance to what is required of us by mandate of our Constitution,” Rivera Schatz said minutes before the legislation was passed by voice vote. “The federal Senate went to recess and did not address the [fiscal board’s] appointments, what do you think? Maybe they confirm them, maybe not. They were declared illegitimate by a court. The Board had an individual named Zamot who was in charge of the strategic development projects: one of high-cost housing and left there amid hints of illegal acts. That’s the Board.”

The Senate president further said the island’s main problem is its colonial status.

“If we were a state we would not have a Board. We would have the tools to move forward. People who were not elected or have our vote decide for us today. While we are a colony, we will be subordinated to the whim of some person in the federal government,” Rivera Schatz said, defending the budget presented by the executive branch.

According to the press release with the Senate president’s remarks, the budget bill says the state has more than $6 billion in cash, “and even if we were paying the debt, which is frozen through the litigation of Title III of PROMESA, we would have over $4 billion in the Federal Treasury,” Rivera Schatz added.

The fiscal board said in its press release Monday that its certified budget “ensures adequate funding for government services and focuses resources on priorities of public safety, healthcare, and education. It secures pensions now and enables them to be secured in the future. It maximizes the potential of federal disaster funding and includes significant capital expenditures to improve Puerto Rico’s infrastructure, while continuing to right-size the government with efficiencies in personnel and non-personnel spending.”

Gov. Ricardo Rosselló had said he would wait to see the board’s budget to determine the next steps to take, but that he would not discard taking the matter to court to implement his proposed spending plan.

“Obviously we will take the actions we understand are pertinent, I have spoken and I have said I will not limit myself to using resources in the courts and what is appropriate now is to certify and validate the budget in the Legislative Assembly,” the governor replied to questions from the press.

Puerto Rico fiscal board Chairman José Carrión, foreground, listens while Gov. Ricardo Rosselló delivers a speech, on July 27, 2017. (CB file)

“The budget the Oversight Board certified is a budget that the Government of Puerto Rico can afford and that provides sufficient funds for the services the people of Puerto Rico need and deserve,” board Chairman José B. Carrión said. “The Government has to remain within this budget to comply with the fiscal plan. That is the law under PROMESA.”

The board bulleted what the central government budget includes:

• The $9.1 billion General Fund, which is the fund the government uses for its day-to-day operations. The General Fund increases by about 3.4% from the previous fiscal year, reflecting the need to cover healthcare costs in light of the reduction of federal Medicaid appropriations, and an increased focus on public safety. 

• The $3.5 billion in Special Revenue Funds, which is comprised of revenue the government generates from fees and services dedicated to particular uses, reflects a more than 30% increase. This increase is partly a result of including previously unbudgeted expenses to ensure transparency of all government spending going forward. 

• The $7.6 billion in Federal Funds, reflecting a more than 17% decline in expected funding from the U.S. Government, primarily as a result of reduced appropriations to fund the Island’s Medicaid program. 

“The budget prioritizes spending in areas identified as government priorities,” the board said, adding it includes the following:

• $4.3 billion for healthcare, reflecting continued agency consolidation and personnel efficiencies, as well as critical investments, including $25 million for the Comprehensive Cancer Center, $12 million over two years to enable the Psychiatric Hospital to increase standards of care and achieve Medicare certification, and $6 million in targeted investments of equipment and medical products. 

• $2.9 billion for education to improve educational outcomes – reducing the achievement gap in proficiency tests and improving the graduation rate – and reflecting savings from the schools that have already been closed in previous years that reflect the decline in students. Teachers and school directors will receive a salary increase of $500 a year in addition to the $1,500 and $5,000 increase they received in fiscal year 2019, respectively. 

• $2.6 billion in PayGo that ensures central government pensions are fully paid. 

• $1.1 billion directed to public safety, which includes pay increases for police and firefighters and money for new equipment for both groups. Police officers will receive a 30% salary increase over two years; firefighters will receive a salary increase of $1,500 in the 2020 fiscal year. 

• $46 million in employer social security contributions for police officers, teachers, and judges who have not been covered previously under Social Security and would enroll during the 2020 fiscal year. 

“The central government budget continues to support the right-sizing of the Government of Puerto Rico to ensure that government agencies deliver services more efficiently and that the government is more appropriately sized to the population. The government’s payroll expenses decrease 11% across fund types, to $3.8 billion,” the board wrote.

The fiscal panel said the General Fund budget savings include “a roughly 10% reduction from the previous year in the government’s back office expenses. The General Fund budget also includes a 30% cut in professional services expenses, and an about 13% reduction in spending for the Legislature to bring it in line with other states’ spending on full time legislatures,” and that the board reduced its own budget by 11% “to fund payroll increases for the Department of Health and Emergency Medical Services, as well as funds to cover salary increases for firefighters.”

Capital expenditures in the General Fund increase 38%, to $298 million. Including federal funds, capital expenditures for the central government totals $942 million.

“The budget also reflects a significant improvement in fiscal transparency, which allows the people of Puerto Rico to have a better understanding of what the government spends money on,” the board said. “For the first time, the budget includes appropriations for the Municipal Improvement Fund, the Municipal Development Fund, and the Municipal Finance Corporation, which together total $209 million. All cash subsidies to industry, including the Rum Excise Tax cover-over that subsidizes rum production and the Rums of Puerto Rico subsidy to promote Puerto Rican rum, are also detailed in this budget to present the most accurate picture of spending and ensure fiscal responsibility.”

The board also certified the fiscal 2020 budgets for the Puerto Rico Electric Power Authority (Prepa), the University of Puerto Rico (UPR), the Puerto Rico Aqueduct and Sewer Authority (Prasa), and the Puerto Rico Highways and Transportation Authority (HTA).

At the Capitol’s upper chamber, the report of the conference committee on the budget was signed by Rivera Schatz and the Sens. José Nadal Power, Ángel “Chayanne” Martínez Santiago and Treasury Committee Chairwoman Migdalia Padilla Alvelo. Signing for the House were Méndez Núñez and Reps. Luis Pérez Ortiz and Pedro Julio Santiago Guzmán.

Other measures passed

On the last day of the fifth ordinary session, the House also passed the conference committee report on House Joint Resolution 1635, which establishes the new “Code of Incentives of Puerto Rico.”

Among the other approved conference committee reports, were House Bill 1716, which amends the “Law to Guarantee Payment to Our Pensioners and Establish a New Defined Contribution Plan for Public Servants”; as well as House joint resolutions 509 and 518, which reassign funds to the municipalities, agencies and government instrumentalities.

Likewise, House Bill 1578, which adds a new statute to the “Insurance Code of Puerto Rico”; House Bill 1976, to create the “Law to facilitate the Implementation and Use of Small Wireless Installations,” or Small Cells in the Telecommunications System in Puerto Rico”; Joint Senate Resolution 390, which reallocates funds to municipalities, agencies and public instrumentalities; and Senate Bill 1293, which modifies the “Act of the Inspector General of Puerto Rico.”

Others passed were conference reports for House Bill 799, which amends the “Government Personnel Retirement Act”; House Bill 1237, which modifies the “Pharmacy Law of Puerto Rico”; House Bill 1438, which adds a new subsection to the “Puerto Rico Public Safety Department Law”; House bills 1468 and 1698, which also add to and modify the “Law of the Department of Public Safety of Puerto Rico.”

Furthermore, conference reports on House Bill 1982, which adds an article to the “Agricultural Insurance Act of Puerto Rico”; House Bill 2038, to create the “Puerto Rico Government Gambling Commission Act”; House Bill 2112, which establishes the “General Services Administration Act for the Centralization of Purchases of the Government of Puerto Rico of 2019”; Senate Bill 713, to adopt a protocol to determine cause of death in cases in which environmental factors related to a weather event or catastrophic disaster were a factor; and Senate Bill 1050, which establishes the “New Weapons Law.”

On the other hand, the final report of the Federal and International Relations and Status Committee was received on House Resolution 1042, which investigated security protocols at the island’s airports; and the first partial report of the Integrated Development of the Northeast Region Committee, under House Resolution 1073, to investigate the situation of the municipalities that make up this region, in the areas of socioeconomic development, unemployment, housing, education, health and public safety, among others. All reports were referred to the related agencies.

Before concluding the session late Sunday evening, the term to submit reports by the committees on the Integrated Development of the Eastern Region; Treasury Budget and Oversight, Management and Economic Stability of Puerto Rico, “PROMESA,” were extended via  House resolutions 1460, 1461 and 1462 respectively.

The House of Representatives concluded the work of the fifth Ordinary Session, sine die.

The Senate also endorsed the conference committee report on House Bill 2038, which proposes establishing the “Law of the Gaming Commission of the Government of Puerto Rico,” as well as the report of the conference committee of Senate Bill 1050, which proposes a New Weapons Law.

Budgets certified by the board on June 30 2019

—CyberNews contributed to this report.

Concerns over Incentives Code cleared up, Puerto Rico official says

Pridco Director Manuel Laboy (Screen capture of

Governor announces arts-related amendments

SAN JUAN – Puerto Rico Economic Development Secretary Manuel Laboy Rivera has provided more details regarding potential amendments to the administration’s proposed incentives code.

“There are the concerns that had been outlined by the agricultural sector. We already sat down with them and we believe that we have been able to address their concerns. We have also met with different heads of agencies to try to be as inclusive as possible, to ensure that their concerns are addressed,” Laboy said.

In the original bill, introduced last year, several incentives for the farming sector and the youth were slated to be repealed such as Act 42 of 1971, or the Agricultural Worker’s Bonus Law; Act 46 of 1989, the Law to Establish a Wage Subsidy Program for Eligible Farmers; and Act 225 of 1995, the Agricultural Tax Incentives Law.

The bill was also expected to repeal Act 26 of 2008, known as the Program for Financing Research & Development of Agricultural & Food Technology Law, and also section 1033.12 of Act 1 of 2011, known as the Internal Revenue Code for a New Puerto Rico, to eliminate 90% deduction to the net income of agricultural business.

The amendments to the original bill were presented to the legislature earlier this week and Laboy and his team have met with the chairs of the House and Senate Treasury committees.

“I hope that in the next two or three weeks, possibly earlier, the public hearings begin in order to have this broad discussion. There must be a good discussion. I would say that once we have this code duly approved and enacted into law, it will possibly be the biggest change in the way we handle incentives and subsidies in past decades in Puerto Rico,” he said.

The original bill could not be passed in the previous session but officials wanted to amend it to include new subsidies. For example, the legislation will include a subsidy for medical students to allow them to pay their student debt if they commit to practicing for seven years in Puerto Rico. In addition, the code includes a $1,000 contribution to public school students known as Cuenta Mi Futuro, or My Future Accounts.

Last year, the island’s Financial Oversight and Management Board told the government it had to reduce incentives, raising concerns among the manufacturing sector, which has been hurt by the U.S. tax reform.

Music industry benefits

Meanwhile, Gov. Ricardo Rosselló said some of the amendments include incentives for the arts, design and music services, providing benefits to turn the island into the hub of the human cloud, or the workforce that performs tasks or projects remotely.

“We must continue to look for the tools that develop that potential and that allow us to retain our residents, as well as attract anyone who has an interest to return or reside in Puerto Rico,” the governor said.

The export of art-related services is included in the amendments, such as sales of event tickets abroad; the sale of tickets that tourists buy on the island; income related to online broadcasts; and the rights to recordings for audiences abroad, as well as shows and musical productions on the island.

In addition, a proposal for a new section of incentives for the music industry, establishing a financial incentive “aimed at promoting the ideal conditions to turn Puerto Rico into a world-class center,” the governor’s release says.

“These new incentives will allow the artists and producers of the creative industries – which includes both locals and those who want to establish themselves in Puerto Rico – to have the opportunity to develop, present and expand their work and talent,” the document further reads. “Any natural or juridical person dedicated to presenting or producing musical events will be eligible for these incentives.”

For his part, the governor’s chief of staff and director of the Puerto Rico Trade & Export Co., Ricardo Llerandi, added that, “in Puerto Rico, we have a lot of artistic talent to export. We see it every time one of our artists gains worldwide recognition. To prevent our artists from moving, to attract those who left and others to come from abroad, we have pushed these incentives” for the music industry, which “allow royalties, monetization of content and others to be covered by the decree. That is precisely what we are doing to convert Puerto Rico into the human cloud of jobs with geographic independence.”

–CyberNews and CB’s Eva Lloréns Vélez contributed to this report.

Puerto Rico incentives code slashes individual investors law

Editor’s note: This report first appeared in the June 21-27 issue of Caribbean Business

Wording contained in the proposed new Incentives Code for Puerto Rico could virtually destroy the tax advantages and credits provided under Act 22 of 2012 to attract high-net-worth individuals to the island.

Act 22, the Individual Investors Law, was enacted to attract new residents to Puerto Rico by providing total exemption from local income taxes on all passive income realized or accrued after such individuals become bona fide island residents.

Fernando Goyco Covas, counsel for Pietrantoni Méndez & Álvarez, said wording in the new Incentives Code would not only deter potential investors from moving to the island because they will not enjoy tax incentives but would also promote investment off-island instead of in Puerto Rico.

First, according to Goyco Covas, the proposed Incentives Code limits the kinds of investments that can be made under Act 22. Under the Incentives Code, the term “valores” is defined as securities, referring to bonds, stocks or notes, which is very limited. He said the bill should use the broader term “investment assets,” which would cover investments in real estate or even virtual coins.

Act 22 uses the term capital gains on “valores” or securities, but the law does not define the term, Goyco Covas said. When the government began to grant decrees under Act 22, it used the term “investment assets,” which is broader and can include a stamp collection but not things such inventory or commercial property that depreciates.

“But when you define the word “valores” as securities or bonds and notes, those are things sold on the Stock Exchange, outside of Puerto Rico. Individuals who moved to Puerto Rico because they trade in crypto or properties, will have to go back to the [U.S.] mainland because they would not qualify for the incentives,” he said.

Another area in the proposed Incentives Code that will cause problems for Act 22 investors is that the wording limits tax exemptions on capital gains to long-term capital gains, leaving out tax exemptions for short-term capital gains. Act 22 currently grants tax exemptions to short-term capital gains, which are investments held for a year or less before they are sold, as well as for long-term capital gains, which are gains on assets held for more than a year and are usually taxed at a lower rate.

Section 2022.02, titled “A special tax rate for resident individual investors on long-term capital gains,” provides a special 5 percent tax rate on the portion of the long-term capital gain yielded by an individual investor on securities held before becoming an island resident. Section 2022 also says individual investors will not have to pay any local taxes on the net capital gains resulting from the appreciation of securities after the investor becomes a resident. The specific disposition does not mention any tax exemption for short-term capital gains.

“Because the section is titled ‘special tax on long-term capital gains,’ it appears the tax exemption only applies to long-term capital gains and excludes short-term capital gains. Because of that, individuals who are traders or whose capital gains are short term, will think twice about moving to Puerto Rico,” he said.

The proposed Incentives Code, filed as House Bill 1635 and Senate Bill 1013, is being evaluated by the Finance committees of the two legislative chambers and is slated to go to a vote in a special session that will be convened by the governor.

Lobbyists from different business groups are pushing for changes in the legislation, which consolidated Puerto Rico’s incentives into one document. As it is written, the bill is slated to achieve $300 million in savings to help the government implement tax reform, which is separate legislation.