The Puerto Rico Oversight Board plans to discuss and may institute mandatory government furloughs at its meeting Friday.

The board has said that the furloughs and an elimination of the Christmas bonus might be necessary to address an expected government cash shortfall this autumn.

Gov. Ricardo Rosselló said in late July that he would go to court to block any efforts by the board to force furloughs. He said the furlough plan would cause the island’s economy to contract by $500 million.

Evercore director of municipal research Howard Cure said furloughs and layoffs should be introduced at the same time as an earned income tax credit.

At the end of June board chairman José Carrión III said if the board ordered the furloughs and the governor refused, the board was willing to take the matter to court.

Under the board’s plan government workers would be furloughed four days a month, unless they were in excepted classes of workers. Teachers and frontline personnel who worked for 24-hour staffed institutions would be furloughed two days a month. Law enforcement personnel wouldn’t be furloughed.

In March the board expected the furlough program to save the government $35 million to $40 million per month. In 2015 the bonus cost the government $120 million.

“Since such a disproportionate share of the workforce is employed by government, additional furloughs or even layoffs will undoubtedly cause problems with economic growth,” Howard Cure, director of municipal research at Evercore Wealth Management, said in an interview. Cure said it would be better to have the federal government introduce the earned income tax credit requested by the board for Puerto Rico at the same time as furloughs and layoffs. This would reduce the economic impact.

Municipal Market Advisors managing partner Matt Fabian agreed that “inevitable” furloughs and layoffs would hurt the economy in the medium term. “To the extent employee reductions create a protest environment on the island, it may make the board’s work more difficult going forward, but this is the challenge of downsizing an over-large, mismanaged government.”

Joseph Rosenblum, director of municipal credit research at AllianceBernstein, wasn’t ready to endorse furloughs. “It would be easier to comment about the situation in Puerto Rico if potential investors had more details on their cash position on a regular basis,” he said. “And it would also be helpful if the Oversight Board was more transparent about how it arrived at its spending estimates in the fiscal plan.”

Also at Friday’s meeting the board plans to discuss pension reform. Its approved fiscal plan indicates there will be cuts in pension spending plans starting in fiscal year 2018.

The board also plan to consider a proposed fiscal plan for the Public Corporation for the Supervision and Deposit Insurance of Puerto Rico Cooperatives (known by its Spanish acronym COSSEC), which oversees and insures the islands’ non-federally insured credit unions.

The credit unions hold as much as $1.5 billion of Puerto Rico bonds and some have been concerned that they may not have the capital to absorb losses if auditors decide the securities have to be marked down. Credit unions in Puerto Rico have a greater role in personal banking than they do in the 50 states, as 1.2 million of the island’s 3.5 million residents are either members or depositors.

The Oversight Board will hold its meeting at the El Conquistador Business Meeting Facilities in Fajardo, Puerto Rico at 8:30 a.m., EST. Those who want to attend my register by noon on Thursday. The meeting will be broadcast on its website,

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.