With Court Deadline Looming, Puerto Rico Mayors Scramble to Come Up With Plan to Pay Act 29 Debt
After CRIM Chairman Rejects FOMB Plan, Agency Convokes Meeting to Come Up With Compromise Deal to Cover $200 Million Hole
SAN JUAN – As Puerto Rico’s municipalities run out of time to comply with a federal court order annulling Act 29 of 2019 and ordering them to pay nearly $200 million in pension and healthcare program contributions by the end of the current fiscal year, mayors were meeting Thursday to discuss and reconcile conflicting plans presented by Gov. Wanda Vázquez and the Financial Oversight & Management Board (FOMB) to address the impending budget crisis that could bankrupt many towns.
Cidra Mayor Javier Carrasquillo Cruz, who is chairman of the Municipal Revenue Collection Center (CRIM by its Spanish acronym), told Caribbean Business that he convoked an extraordinary meeting Thursday of mayors on the CRIM board to work on a consensus plan that is accepted by the FOMB as well as by the commonwealth government and mayors.
The leaders of the Puerto Rico Mayors Federation, which is affiliated to the majority New Progressive Party, and of the Puerto Rico Mayors Association, which comprises Popular Democratic Party municipal heads, were invited to the meeting, Carrasquillo said.
“We have to sit down with [the FOMB] and come to an agreement with them, because we only have until May 6, the deadline set by [U.S. District Judge Laura Taylor] Swain to reach an agreement,” he said.
“Otherwise, the money will be due immediately and we do not have those resources to pay that debt. We have a portion, which is the $131 million in the reserve fund, but beyond that we do not have the money,” Carrasquillo said, noting that municipalities would be on the hook for $198 million by the end of current fiscal year 2020, which ends June 30.
The amount due includes $166 million in contributions to the monthly pension payments of retired public employees on a pay-as-you-go basis (PayGo), and $32 million in contributions to the Health Insurance Services Administration (ASES by its Spanish acronym), which runs the government health program for the medically indigent.
On April 15, Judge Swain, who oversees Puerto Rico’s in-court bankruptcy-like proceedings to restructure the island’s debt, annulled the Law to Reduce the Administrative Burdens of Municipalities (Act 29 of 2019), which exempted towns from paying ASES and monthly public pensions under PayGo. The law allowed the commonwealth government to allocate funding to make up for the lost contributions.
In her ruling, Judge Swain concurred with the FOMB’s contention that Act 29 violates several sections of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), which created the oversight board to restructure the commonwealth’s debt. The federal judge stated that the law and related joint resolutions appropriated funding not included in fiscal plans and budgets certified by the oversight board, impairing the board’s task of providing a method for the commonwealth to achieve fiscal responsibility and access to capital markets.
Judge Swain delayed the effective date of the order nullifying Act 29 until May 6, “subject to extension upon joint petition of the parties,” according to the ruling, which cites as a reason “the additional challenges facing the parties during the Covid-19 public health crisis.”
Fiscal board plan
On Tuesday, FOMB Executive Director Natalie Jaresko presented a repayment plan with several options that calculated that municipalities would only have to pay down a debt of $66 million during the current fiscal year, after offsetting the $198 million due with $132 million deposited by the central government into CRIM’s Equalization Fund that has not been distributed to towns due to Act 29.
She said during a virtual press conference that the oversight board identified one-time or incremental non-budgeted revenues municipalities will use to repay the outstanding $66 million balance, including:
• outstanding electronic lottery proceeds $17.6 million from fiscal year 2016 and fiscal year 2017
• higher tax collection than budgeted because CRIM may receive tax revenue not previously budgeted for, such as new properties taxed and collection of outstanding tax receivables
• the proceeds from the sale of uncollected property taxes receivables, a measure that will feature prominently in the CRIM fiscal plan to be certified before fiscal year-end excess funds from the Special Additional Tax (CAE for its Spanish initials), the portion of property taxes collected to cover municipal debt obligations
Moreover, FOMB proposed the creation of a $148 million “short-term liquidity facility to CRIM” ($110 million in fiscal year 2020 and $38 million in fiscal year 2021), funded by the government to offset cash flow shortfalls from deferred property tax collections due to the Covid-19 crisis. The advance would be repaid with tax collections in July, August, and September 2020.
“Repaying the central government is not catastrophic, at all, for the municipalities; for this fiscal year, it will not lead any municipality into bankruptcy,” Jaresko told reporters.
For her part, the governor insisted on Monday that municipalities be exempted from PayGo contributions, with the central government temporarily contributing funding to cover PayGo and ASES payments. She proposed a five-year assistance program, during which the first two years municipal obligations would be completely covered, and then partially during the last three years.
The governor also proposed that FOMB halt proposed cuts to central government subsidies to towns in the next two years so that they can continue offering essential services.
Carrasquillo said the FOMB presented their proposal after rejecting the government’s and mayors’ proposals. He said that FOMB’s plan still falls short of what municipalities need to stay afloat, especially amid the current Covid-19 crisis.
“With the crisis, municipalities have incurred in additional costs over what had been budgeted,” he said. “That’s going to complicate the outlook because we are going to receive fewer resources than what had previously been budgeted. As a result, we are going to receive a decrease in income due to the halt in economic activity.”
Carrasquillo said that FOMB’s plan is based on “certain premises that are not correct,” particularly Jaresko’s contention that municipalities are not going to be affected in their operational costs and budgets during the current fiscal year.
“There are elements that could affect the budgets of municipalities this year, particularly the proposal of utilizing the excess of the CAE, which municipalities always receive at the end of the year after paying all obligations,” the Ceiba mayor said. “Many municipalities contemplate the CAE excess, because it is something you can project, in their operational budgets. So the money has already been earmarked to be spent this year—and to use that to pay debt would have an impact on budgets”
Carrasquillo said municipalities also face a greater long-term debt crisis because the actual total ASES and PayGo contributions add up to $320 million ($160 million with Retirement; and $160 million with ASES). This figure is lower this year because the health system received an extra federal allotment that covered 86 percent of Vital health program costs, which will also apply to next year, he said.
Carrasquillo contends that Act 29 had been a compromise between the central government and towns, in which municipalities forfeited commonwealth subsidies in exchange for the exemption on ASES and PayGo pension contributions. According to the FOMB certified fiscal plan, these subsidies, which started at $350 million, have been reduced to $131 million, and will be cut by another $44 million in fiscal year 2021, which starts July 1, he said.
The Act 29-based system allowed towns’ own money to be deposited into the Municipal Equalization Fund—used to help municipalities with the smallest tax base and with the most exonerated properties, Carrasquillo said, saying that towns such as Maricao, Las Marías, Comerío and Orocovis depend on this fund for their survival.
“This is fair because the state has its biggest facilities and investments in the largest municipalities,” he said.
“With Act 29, the obligations were eliminated but the state transfer to municipalities continued. We did not distribute these transfers and deposited into a reserve fund,” the CRIM board head said. “The oversight board is telling us to use that reserve fund to pay the debt to the state, leaving a deficit of $66 million that must be paid.”
Carrasquillo said that FOMB’s plan only comes up with $17 million in commonwealth Treasury Department debt owed to towns and expects them “to find a way” to pay the remaining $48 million.
“The board says this can be paid with the collections towns will receive from now on—which is not possible because they must be used by municipalities to pay monthly remittances to continue operating – or pay it with the excess money from CAE,” he said. “As I said before, this is not possible because this excess money is already contemplated in the budget of municipalities.”
FOMB’s “shortsighted” alternatives do not take into account municipalities’ future cash flow needs, Carrasquillo said.
“[The FOMB plan] does not consider that next year we must pay the $160 million to retirement, and the 14 percent corresponding to ASES or $22.8 million,” he said. “In addition, there is a reduction in state transfers to municipalities of $44 million less). In other words, the Equalization Fund will be exhausted, which will not enable us to assign resources to municipalities that generate the least income. And finally, when the fund is eliminated, these municipalities will not be able to operate.”
During her presentation on Tuesday, Jaresko contended that the drop in the island’s population did not justify the aggregate increase in municipal budgets. But Carrasquillo said that the central government has been gradually transferring tasks to towns, such as road maintenance, that have impacted their budgets.
“When the states begin to renounce its obligations due to lack of resources, then the municipalities have to take on these tasks of the state without the needed resources,” he said. “That is why municipalities cannot cut their budgets. How are municipalities going to cut their budgets if the state does less and municipalities do more?”
Moreover, Carrasquillo said that Jaresko’s argument in favor of consolidation of services, such as garbage collection, performed separately by different municipalities, has been “a magic solution to municipalities’ problems.” However, he said municipalities have done this type of consolidation through the consortium model, but savings have not been substantial.
“I could enter into a collaborative agreement with other municipalities. Instead of each town doing their own bids to buy asphalt, we all can do one bid to buy for all of us and we can get a better price,” he said. “But how much can that represent in savings? One percent, two percent? Is that a solution?”
He added: “[T]his is done more of convenience, not necessarily to reduce costs, because the population is the same. It is like the theory that says that if a municipality cannot subsist it should close, but if the municipality is closed people will continue living and producing garbage. Who is going to address these needs? Many people doing these analysis are not in the know about what really is going on here.”