Puerto Rico Gov. Ricardo Rossell- took steps on his first day in office to cut government spending and revenues, signaling a new approach to the island's debt crisis.
Rossell- was sworn into office Tuesday and immediately signed six executive orders, among them one telling his department heads to cut 10% in spending from the current budget. This order also reduced the allotment to professional services by 10%, cut the number of positions of trust in the government by 20%, and prohibited the creation of new positions.
"We do not come to merely administer an archaic and ineffective scaffolding," Rossello said in his inauguration speech. "Ours will be a transformational government."
The moves came after Puerto Rico House of Representatives President Carlos Méndez Núñez told El Vocero over the weekend that the legislature would cut the sales and use tax rate and the oil tax rate, reversing steps by the prior governor and legislature during the last four years. Méndez Núñez and Rossell- are members of the New Progressive Party, which is taking control of both the House and Senate this month.
"The general consensus among municipal analysts is that there is plenty of fat in the budget and, to the extent that payroll levels can be reduced without severely jeopardizing services, cuts should be made," said Howard Cure, director of municipal bond research at Evercore Wealth Management.
"As far as tax cuts are concerned, I assume the goal is to somehow stimulate the economy," Cure said. "This could be dangerous from a budget perspective, as a decline in revenues from tax cuts may not be replaced by a stimulative increase in the economy, which would ultimately lead to an even greater operating deficit."
Former Gov. Alejandro García Padilla estimated in November that the government would be short $3 billion this year in payments for soon-to-be-due debt and for already unpaid debt and clawed-back revenues. This wouldn't include the $1.3 billion the government owes to its suppliers.
In his other executive orders, Rossell- directed his agency heads to implement zero-based budgeting, under which agency heads start with a $0 and only adds to it when they can provide a justification for particular programs.
Rossell- also created a Federal Opportunity Center attached to the governor's office. The center will provide technical and compliance assistance to the office to make programs eligible for federal funds.
On Wednesday, Susheel Kirpalani, a partner at Quinn Emanuel Urquhart & Sullivan and legal counsel to the COFINA Senior Bondholders Group said, "We look forward to working with Governor Ricardo Rossell- and his administration to help restore Puerto Rico's fiscal health during this pivotal moment in its history. Through his actions, Dr. Rossell- has demonstrated that he is committed to working with all stakeholders, leading to renewed energy and optimism amongst constructive creditor groups pursuing voluntary restructuring agreements under Title VI, rather than proceedings under Title III of PROMESA that former Governor García Padilla favored."
This summer the federal government passed the Puerto Rico Oversight, Management, and Economic Stability Act, which provided for restructuring of the island's debt and created a federally appointed Oversight Board.
In his press statement, Rossell- pledged to work with the Oversight Board in a "collaborative way."
On Tuesday afternoon the new governor travelled to Washington, D.C. for a few days to advocate for statehood for Puerto Rico.
On Saturday Rossell- appointed Manuel Laboy Rivera as executive director of the Puerto Rico Industrial Development Authority and Christian Sobrino Vega as president of the Government Development Bank for Puerto Rico. Laboy Rivera will also oversee the Puerto Rico Department of Economic Development and Commerce. Sobrino Vega will also be the governor's chief economic advisor.
