Puerto Rico Oversight Board, Rosselló tussle over Christmas bonus

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Puerto Rico's Christmas bonus is again under the spotlight as the Oversight Board pressures Gov. Ricardo Rosselló to identify spending reductions to offset the cost of his plan to pay the annual benefit.

The clash between the board and Rosselló comes more than two years after Puerto Rico stopped paying its general obligation debt. Since July 2016 Puerto Rico has defaulted on most of its other bonds. The continuation of the Christmas bonus has been a sore point for some bondholders.

On Thursday Oversight Board Executive Director Natalie Jaresko sent a letter to the governor telling him that if he pays the bonus he would have to find equal amounts of savings in payroll or other operating spending. The bonus amounted to $120 million in 2015. The territory's general fund budget is $8.76 billion.

She said that while officials under Rosselló have said that the government has already identified the money to be saved, the board hasn’t seen the savings to achieve the approved budget level of spending, even assuming the bonus isn’t paid.

On Friday Fiscal Agency and Financial Advisory Authority Executive Director Christian Sobrino Vega released a statement saying, “As previously stated, the Christmas Bonus will be paid according to the law. The Christmas Bonus has been a statutory part of the ordinary salary of public servants and employees of the government of Puerto Rico since the 1970’s.

“Gov. Ricardo Rosselló’s administration has achieved the necessary fiscal adjustments to comply with the Christmas Bonus payment,” Sobrino Vega continued.

Puerto Rico’s government must live within its budget regardless of its cash balances, Jaresko said in her letter. A failure to cut the bonus, other payroll, or other operating spending sufficiently before the end of the current fiscal year may “imperil… the commonwealth’s ability to make payroll for its employees.”

Cumberland Advisors Portfolio Manager Shaun Burgess said, “It doesn’t surprise me that the commonwealth is moving ahead with paying the bonuses. I suspect the commonwealth’s elected officials would have done whatever is necessary to pay them since not doing so would have been a deeply unpopular move.” Cumberland owns insured Puerto Rico bonds.

The Puerto Rico Oversight, Management, and Economic Stability Act, which governs the board’s capabilities, says that the board is to review the compliance of the local government’s actual spending with the board’s approved budget. If the board finds that it is inconsistent, the act says the board is to inquire with the government for more information about the spending and future spending.

If the board were then to find the government spending is inconsistent with the approved budget, the board should then report the inconsistency to the U.S. president, House of Representatives, Senate, and local government leaders.

According to PROMESA Title II, section 203 (d), the board then “shall … make appropriate reductions in non-debt expenditures to ensure that the actual quarterly revenues and expenditures for the territorial government are in compliance with the applicable certified territory budget.”

A source familiar with the board’s thinking said that the board is trying to not have to get to the point that it uses Title II, section 203(d).

The board is keeping a careful eye on government-reported levels of spending and expenditures each month and how they compare to the budget, the source said. The board is particularly interested in how December turns out – something it will learn about in early January.

If there is a significant discrepancy through the end of December between the budget and actual spending, the board would consider its options, the source said.

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