The latest fiscal turnaround plan for Puerto Rico could be headed for a court showdown after Gov. Ricardo Rossello vowed he won’t implement key parts of the proposed austerity measures.
The Financial Oversight and Management Board for Puerto Rico approved the plan by a 6-1 vote Thursday after negotiations with the commonwealth’s government failed.
“The Oversight Board expects the Governor to fully implement the certified fiscal plans," Jaime El Khoury, the Board’s general counsel, said in an email. "Should the Oversight Board have to resort to litigation to carry out its mandate under [the Puerto Rico Oversight, Management, and Economic Stability Act], the matter would be before Judge [Laura] Swain in the Title III court."
The controversy centers over whether the oversight board overreached the authority given to it by Congress for addressing the commonwealth’s debt problems.
The board said Thursday that the commonwealth has more than $70 billion in outstanding debt and over $50 billion in pension liabilities.
The new fiscal plan would produce an estimated $6.7 billion in surpluses over six years before any debt service is paid if its austerity measures are fully implemented.
The proposed measures include reducing mandated vacation and sick leave as well as ending Christmas bonuses for government and private sector workers. They would have to be approved by the commonwealth’s Legislative Assembly.
Rossello said Thursday he won’t submit the proposals because they don’t have support from lawmakers or him.
Rossello also opposes a proposed reduction in pension benefits for former government workers.
“The board sees it as if the pensioner were a non-secured credit,” Rossello said. “We do not see it that way; neither the local nor the federal law sees it that way. Therefore, we understand that, from the perspective of public policy as well as from a legal perspective, we are on the right side of this argument."
Rossello tweeted Thursday that the oversight board is insisting on “dictating public policy when they don’t have the power to do so.”
The governor has suggested adding a work requirement for people receiving food stamps to the plan and wants to take action to make residents of the island eligible for the Earned Income Tax Credit.
Commonwealth officials lobbied unsuccessfully for EITC eligibility to be included in the tax reform legislation enacted in December.
Rossello also tweeted that his fiscal plan “would reduce discretionary spending by 22% within the next 5 years” in additional to the 17% reduction implemented last year.
The new fiscal plan represents a $400 million increase in surpluses that would be available for debt service compared with previous estimates outlined by Rossello.
That would represent about 33% of $20.5 billion in debt service due over the six-year period covered in the plan, according to a credit analyst who asked to not be identified because of company policy.
A previous proposal Rossello presented to the fiscal oversight board in February suggested that the island’s government could pay from 8.1% to 14.1% of debt due through the 2023 fiscal year. A January plan pitched by the governor had called for no debt service payments through 2022.
Roman Catholic Archbishop Roberto Gonzalez Nieves of San Juan on Thursday called for a multiyear moratorium on bond payments that would give the commonwealth time to rebuild its economy.
The archbishop and other religious leaders, including Catholic Charities head Reverend Enrique Camacho and Eric LeCompte, as well as executive director of Jubilee USA, joined Friday in calling not only for a five-year moratorium on debt payments, but also the accrual of no additional interest over that period.
“Beyond this five year debt moratorium period, no debt should be paid until Puerto Rico sees positive economic growth, a reduction in child poverty and the island has rebuilt from the hurricanes,” they said in a joint statement.
In addition to the new fiscal turnaround plan for the commonwealth, the fiscal oversight board approved five other plans on Thursday and Friday.
They include plans for the Puerto Rico Electric Power Authority, the Puerto Rico Aqueducts and Sewer Authority, the University of Puerto Rico, the Government Development Bank for Puerto Rico and the Puerto Rico Public Highways and Transportation Authority. The Oversight Board postponed a vote on the plan for the Public Corporation for the Supervision and Insurance of Cooperatives.
Rick Donner, Moody’s Investors Service vice president and lead analyst for PREPA, said in a statement Friday afternoon that the certification of the PREPA’s financial plan is an important step for bondholders.
“Earlier versions had been sent back to PREPA by the board with instructions seeking additional information and requirements,” said Donner. “The fact that the latest version of the fiscal plan has been approved suggests this is a positive development for PREPA bondholders as it presents a plan that is acceptable to the PROMESA Board and can provide a roadmap for PREPA’s fiscal future.”