Puerto Rico budget prioritizes pensions over debt

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Puerto Rico Gov. Ricardo Rosselló presented a fiscal year 2018 budget Wednesday that allots at least $2.04 billion for pensions and nothing for the payment of debt.

In his speech on the budget Wednesday, Rosselló said his budget's funding of pensions would protect the island's most vulnerable. He said little about the island’s debt, though he added: "The measures implemented in this budget are those that we had established in the fiscal plan."

In Rosselló's proposed budget, released after the speech, all General Fund payments for debt are zeroed out. The Puerto Rico Oversight Board-certified fiscal plan projected there would be $404 million available cash flow “post-measures” in fiscal year 2018. The board has indicated that the available cash flow “post-measures” is to be used for debt service.

In the summer of 2016 the U.S. Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act to deal with the island’s fiscal and economic crisis. This act set up the board to oversee the local government and create guidelines for potentially restructuring its $74 billion in public sector debt. In mid-March the board certified the 10 year commonwealth government fiscal plan that, among other things, indicated how much debt service should be paid each year.

The plan says total scheduled debt service by the entities covered by the fiscal plan in fiscal year 2018 is supposed to be $3.28 billion. If $404 million was paid of $3.28 billion due, 12.3% of debt due would be paid.

The commonwealth fiscal plan lists 12 issuers and an “other central government entities” category, owing a total of owing $51.9 billion. It is possible that some of the 12 entities have sources of payment outside of the General Fund to pay the debt.

Neither the board nor the Rosselló administration responded to an inquiry as to how much debt service the government anticipates paying in fiscal 2018 or from where the money would come.

The governor’s planned General Fund increase in pension funding is a reaction to the funds running out of money. All three government pension systems are expected to run out of liquid assets in fiscal year 2018. To address the matter, the governor has allotted at least $2.04 billion in his budget to cover pension funding. The line item to cover “pay-as-you-go” pension funding was absent from previous years’ budgets.

The three pension systems are the Employee Retirement System, the Teacher’s Retirement System, and the Judiciary Retirement System.

In mid-March the board approved a 10 year fiscal plan that would reduce pension system spending. However, the plan anticipated no reductions until fiscal year 2020. From then to fiscal year 2026 the plan anticipates savings ranging from $70 million to $83 million per year.

Rosselló is recommending a $9.56 billion General Fund budget for fiscal year 2018, which starts July 1. This would be an increase of 6.4% over the approved budget for the current fiscal year. Excluding the new $2 billion payment for pensions, the budget has 21.8% less for spending.

Compared with the approved fiscal 2017 budget, the biggest monetary shifts are $583 million more for “other operating expenses,” $555 million less for salaries and related costs, and $448 million less for “embedded assignments.”

The governor’s recommended fiscal year 2018 budget has $195 million as a reserve.

During the past month the Oversight Board has reviewed the governor’s proposed budget. At this point, the legislature will take it up, possibly modify it and approve a version of it. If the Oversight Board ultimately doesn’t accept the legislature version, PROMESA provides that the board can approve a budget on its own.

As part of PROMESA, a judge is considering Puerto Rico’s debt payments in the Title III bankruptcy process. While she could hypothetically shift the amounts of debt paid in the next fiscal year, there are at least two hurdles to this. First, several observers have predicted it will take more than a year for the judge to reach a debt decision. Second, Rosselló has said PROMESA section 106(e) prohibits the Title III judge from deviating from the board’s certified fiscal plan and budgets.

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