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Sources: Puerto Rico’s fiscal board to announce furlough program

By on August 2, 2017

SAN JUAN – As Gov. Ricardo Rosselló’s administration and the financial control board lock horns over the matter, the seven-member panel would announce Friday, Aug. 4, a furlough program that could affect more than 100,000 public employees in Puerto Rico, according to sources with ties to the board.

The reduction of workdays across the central government would kick in Sept. 1.

One source told Caribbean Business that the measure—first announced in early March as part of the certification of the island’s fiscal plan—would be would be toned down by the board to only two days a month. The original proposal called for a reduction of four days a month for most public employees, while teachers would face a two-day reduction. The measure excludes front-line public safety employees.

Gov. Ricardo Rosselló staunchly opposes furlough to public employees and the elimination of the Christmas bonus, both suggested by the island’s fiscal board. (Juan J. Rodríguez/CB)

As for the proposed elimination of this year’s Christmas bonus—which would save an estimated $50 million—the board would decide on the matter come Sept. 30.

“There is $200 million to $250 million in savings that have yet to be accounted for [by the Rosselló administration]. And that is not simply holding on accounts payable. They have to be structural [savings]. The government has yet to meet the numbers, although it has done a lot toward meeting what was agreed to—not ‘recommended,’ but agreed to,” the source said on why the board sees as inevitable the enforcement of the measure. The commonwealth’s fiscal plan called for $440 million in savings during this fiscal year.

As for the Rosselló administration, it strongly opposes both measures and vows to fight them utilizing every last recourse.

“I appeal to [the board’s] reason. There is no need to implement this. Secondly, such initiatives cannot be imposed unilaterally: Promesa’s Section 205 is clear. Thirdly, with the [fiscal adjustment] measures implemented so far, as well as new ones, we already have results,” Rosselló told Caribbean Business during a phone interview from New York early this week.

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How much would the economic impact be in eliminating a day’s work and salary each week to more than 100,000 public employees? Will it take effect Sept. 1? Is the government ready to implement a furlough program? Who has the last word?

These are only some of the questions that still remain unanswered with less than a month before the proposed kick off for the measure, which expects to generate more than $40 million in monthly savings, according to estimates by the board. The government, for its part, prefers to point to the $500 million hit on the local economy, according to its own estimates.

In a dynamic reminiscent of the Cold War era, the dispute over the furlough program between the government and the board has been months in the making.

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In a nutshell, both the government and the board claim the federal Promesa law is on their side and assure they are ready to battle the issue in court. The decision, therefore, could ultimately rest in the hands of federal Judge Laura Taylor Swain.

“I absolutely believe it will end up in court,” said John Mudd, a bankruptcy attorney and political analyst.

In making their case to go to court—if necessary—to defend its position, the Rosselló administration argues that Promesa does not oblige it to comply with the board’s request to implement the furlough program. Sources, moreover, say political motivations would be drivers in the decision to fight the board in court over the implementation of the measure.

The government wins by suing the board since it would be viewed as defending the people and taking it to the last instance. Win or lose in court, it is a win-win for the administration, politically speaking,” said one source close to the board. The source also warned about the implications of delaying the commencement of the measure by litigating the issue, as it could trigger a longer, more significant furlough down the road.

Cash Crunch?

In several instances, board members have pointed to cash-flow needs and the government’s inability to meet targeted savings as some of the reasons a furlough program must be promptly implemented.

The cash-flow argument is wrong,” Rosselló warned. He said that last week, Christian Sobrino, the governor’s new emissary to the board, presented the entity with the commonwealth’s latest cash-flow projections.

“Expectations were there would be about $200 million. There is about $1.4 billion to $1.7 billion. Cash flow is there and is a result of the measures we have taken so far,” the governor noted.

Treasury Secretary Raúl Maldonado recently told this newspaper that liquidity projections are in line with that of the fiscal plan and “at times exceeding estimates.”

There is yet a different argument on the government’s liquidity, one that is pending Judge Swain’s take on it.

The board—in representation of the commonwealth—recently filed a stipulation that, if accepted by the court, would establish a timetable and procedure to solve the longstanding dispute between the government, general-obligation (GO) bondholders and Sales Tax Financing Corp., or Cofina, creditors over who is entitled to more than $700 million in pledged sales tax revenue.

“Time is of the essence to resolve the commonwealth-Cofina dispute because, if the commonwealth is not entitled to any of the pledged sales taxes, it may, absent borrowing or further slashing expenses to a counterproductive extent, face acute cash management issues beginning Dec. 15, 2017,” reads the board’s motion filed July 21.

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The island’s fiscal plan first assumed pledged sales tax revenues would be available for the commonwealth beginning this fiscal year, but rulings on the proceedings related to the Cofina dispute forced the commonwealth to revise its revenue projections and exclude over $500 million that would remain set aside.

“When the fiscal plan was certified, amendments included the furlough and the elimination of the Christmas bonus, unless the government proved otherwise. The government is making everything possible, but it cannot tell the judge that it needs to [tap into Cofina funds] while not doing anything,” Mudd said, adding there have been no layoffs and pension benefits remain mostly unchanged.

Is the government expecting access during the second half of the fiscal year to the pledged Cofina funds?

“We are working two scenarios. One depending on a positive result and another assuming that [funds won’t be available] because we don’t receive them by the date we expect it to, it is delayed or any other short-term unfavorable result,” answered Maldonado, who added that under the latter scenario, additional fiscal adjustments would be needed.

Rosselló’s Latest Measure

Amid the board’s unwavering intent to implement the furlough program, the Rosselló administration went back to its playbook and pulled up what many would consider to be a Hail Mary play.

Dubbed the “Voluntary Transition Program,” the governor announced he is working on a retirement window for public employees working in nonessential duties that would save roughly $1 billion through the next 10 years. It would be incentivized with a cash payment equivalent to the worker’s salary for the remainder of fiscal year 2018, which ends June 30.

“We would offer public servants to accept [to enter the program] or continue on their jobs. If they accept, they will enter into one of several transition programs,” the governor told Caribbean Business.

Nevertheless, the administration’s latest effort to avert the furlough program would come short of convincing the board to suspend its implementation, according to sources close to the entity created by Promesa.

“Most of the time, those additional measures come at the last minute. They fail to show reliable numbers,” said one source, who recalled how the administration recently sought a similar tactic to avoid a $13 million reduction to the Legislature’s budget.

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The transition programs proposed by Rosselló include a “talent bank” where employees would have to register in a bid to tap jobs in the private sector or nonprofits. Participants could also choose to complete educational degrees, as well as start entrepreneurial initiatives, with the government handing out incentives for these. If the public employees chooses not to participate in these programs, they will still be required to perform voluntary work through a period of time in exchange for their cash incentive.

For Rosselló, regardless of his latest proposal to reduce government spending in line with the fiscal plan’s targets, the commonwealth has “exceeded savings estimates, implemented fiscal adjustment measures and, thus, there is no need to implement the furlough.”

Court Could Decide

Both the government and board argue that Promesa favors their arguments against and for, respectively, the furlough matter. Meanwhile, analysts and sources consulted by Caribbean Business all agree that the dispute would be decided by the court, namely by Judge Swain.

In a June 22 letter to the board, Rosselló doubled down on Section 205 of Promesa, arguing it is “intended to give the government sole discretion whether to adopt the oversight board’s recommendations.” It adds that the administration has “flexibility” to reject measures that are “unsound,” such as the furlough program.

“In contravention of Promesa Section 205, the oversight board is now trying to strong-arm the government into accepting the expenditure controls,” the letter further reads.

As for the board, it argues the furlough program is an amendment without which it would not have certified the fiscal plan. In public comments made in late June, board chairman José Carrión stressed both the furlough and elimination of Christmas bonuses were not recommendations pursuant to Section 205 of Promesa, as the government argues. The board believes that since the furlough program is an integral part of the certified fiscal plan, it is not a recommendation and, as such, the government is bound to comply with it.

“Even though I don’t like it to be that way, I have to agree on that one with the board,” Mudd said.

Effects on the Economy

While it is hard to validate at this point the $500 million figure that the administration uses in establishing the economic impact a furlough program would have in Puerto Rico, any reduction to a worker’s salary will inevitably be a drag on any economy. Add to that 10 years of continuous contraction and rampant outmigration eroding a tax base that is fragile at best, and the prospects are daunting.

“It is a very regressive measure and tremendously unfair,” said Argeo Quiñones, an economist & professor at University of Puerto Rico. He noted how it would affect yet another vulnerable sector of Puerto Rican society, adding to a list that already comprises education, healthcare, special communities and the environment, among others.

Quiñones added that the furlough program of public employees will only exacerbate unemployment, loss of income and economic inequality. “It is a totally unnecessary medicine. They are not looking where they should,” the economist said in reference to other areas where the government could tap much-needed resources. He suggested looking more toward corporate, high-income earners, tax incentives and fighting tax evasion.

Several local trade organizations, such as the Chamber of Commerce and Bankers Association, have also urged against the furlough measure and warned about the dire effects it would have on the economy.

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Moreover, one financial analyst who asked to remain nameless questioned whether the fiscal plan contemplates the impact of the furlough program on its macroeconomic projections. “If the plan fails to correctly assess the impact of the measure, then amendments would be needed, thus affecting revenue projections and so on,” the source noted.

According to the most recent version of the commonwealth’s certified fiscal plan, Puerto Rico’s gross national product is projected to bottom out at -2.8% this fiscal year.

“The board doesn’t see this as a neoliberal triumph. It is hard, lamentable and extremely sad. This happens because of 40 years or more of politicians doing as they pleased,” said one source with ties to the entity.

For economist Quiñones, “it is a maelstrom of looting what is being unleashed on this island against the sectors that traditionally did not enjoy the so-called process of economic development. That’s my opinion.”

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