Puerto Rico Board Recommends Immediate 'Emergency Actions' for Liquidity

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Saying that Puerto Rico's liquidity is critically low, the Puerto Rico Oversight Board recommended Wednesday that the island's government immediately adopt emergency spending cuts.

The board told Gov. Ricardo Rossell- in a letter that unless the government immediately adopts measures the government will lack money for essential services in a "matter of months."

The board recommended that the government immediately implement a program furloughing most executive branch employees for four days each month – a roughly 20% cut in work time. Teachers and most frontline personnel in 24-hour institutions would be furloughed two days a month. Frontline law enforcement personnel would be exempt from the work reduction measures.

The board also urged the government to introduce similar furlough measures in other government entities, like the public corporations, authorities, and legislative and judicial branches.

The board called for professional service contract expenditures to be cut by up to 50% and for significant cuts in other contract expenditures.

Next, the board told the government to reduce healthcare costs by negotiating drug pricing and rate reductions for health plans and providers.

Finally, the board called for the Fiscal Agency and Financial Advisory Administration to implement a new liquidity plan by immediately controlling all Puerto Rico government accounts and spending.

"While we appreciate your focus on addressing Puerto Rico's long-term fiscal and economic challenges, we think far more needs to be done immediately to reduce spending and avoid this critical cash shortfall," the board told Rossell-. "Given Puerto Rico's lack of normal capital market access and our need to focus on a sustainable restructuring of debt it is neither practical nor prudent to address this cash shortfall with new short-term borrowing."

With the letter the board delivered a report from the auditing firm Ernst & Young. The firm found that the government's actual expenditures this year should be expected to exceed budgeted expenditures by $360 million to $810 million.

Partly because of this, the government could face a cash deficit of about $190 million by the start of July 2017, the board said.

The board also warned that both the Employment Retirement System and the Teachers Retirement System funds will be depleted by the end of the calendar year. The government expects to begin segregating employee contributions to these funds. These developments will force the commonwealth to make operating budget payments for these funds equal to approximately $1.2 billion per fiscal year.

Also in the coming fiscal year, starting in January 2018 the government will lose $800 million in Affordable Care Act funding for the healthcare system, the board said.

Early on Wednesday afternoon (Puerto Rico time) Gov. Ricardo Rossell- released a statement saying he "appreciated" the board's input on liquidity.

The governor said that he had taken steps on Tuesday regarding taxes and spending and that the board may not have had the chance to review these. He said Tuesday's measures will allow the government to handle the liquidity situation without employee furloughs.

On Tuesday Puerto Rico's Fiscal Agency and Financial Advisory Authority, which operates under Rossell-, said that the government had frozen payments on $1.8 billion in multi-year expenses. The government put limits on the use of certain tax credits.

FAFAA said in a written statement that the steps should ultimately save the government $625 million. The government is setting up a group to evaluate the frozen funds and credit uses and approve their payment or use on a case-by-case basis.

In another Puerto Rico government development, on Tuesday Rossell-'s non-voting member on the Oversight Board, Elías Sánchez Sifonte, sent a letter to Board Chairman José Carri-n III to urge the board to extend a stay on debt lawsuits by eight months.

Under the Puerto Rico Oversight, Management, and Economic Stability Act the board had the power to extend the stay to May 1 from Feb. 15. It has already made this extension.

In the letter Sánchez Sifonte asks for the board to seek an extension on the stay from the U.S. Congress and President Trump. He said more time is needed to negotiate a bond restructuring.

The board Tuesday released a statement saying interim executive director Ram-n Ruiz Comas followed the law in his financial disclosures.

On Monday The Bond Buyer posted a story based on a document from the board, saying that Ruiz Comas owned at least $265,002 in Puerto Rico bonds and debt. The story and experts quoted in the story said that federal law seemed to indicate that Ruiz Comas' simultaneously holding this debt and his job may be an illegal conflict of interest.

One commentator objected to Ruiz Comas' background as leader of Triple S, Puerto Rico's largest health insurer, at a time when the board is considering massive healthcare cutbacks.

On Tuesday, the president of Puerto Rico's main opposition party said the article's financial disclosures may disqualify Ruiz Comas from holding his position. Héctor Ferrer, who leads the Popular Democratic Party, called for Ruiz Comas to respond to the article's issues.

The board released a statement that said Ruiz Comas had followed PROMESA's requirements for disclosing his Puerto Rico bond holdings and his current and former relations with Triple S.

The board said that its "internal governance guidelines" prohibited any member or staff from trading any Puerto Rico government security.

"Mr. Ruiz Comas' financial disclosure – just like that of every member and staff to whom the financial disclosure requirements apply – is subject to review in accordance with the procedures established by the board under its bylaws and code of conduct, including quarterly and annual updates," the board stated. "Any action recommended to be taken in connection with the financial holdings of any member or staff to whom the financial disclosure requirements apply as a result of such review will be promptly implemented."

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