The Puerto Rico Oversight Board ordered government furloughs to start on Sept. 1, setting up a conflict with the island's leaders.
Board members unanimously approved the furloughs at a meeting Friday in Fajardo, P.R., part of its effort to cut government spending, help stabilize the economy and restructure the island's debt.
Puerto Rico government non-voting board member Christian Sobrino Vega told the board that it lacked the authority to impose the measure. “There will be no furloughs. You can take that to the bank,” Sobrino Vega told board members sitting next to him before the vote.
The furloughs would be for two days per month for all government employees except front-line police, board executive director Natalie Jaresko said. The board had approved a fiscal plan that assumed that many employees might see furloughs of four days per month.
“The initial board plan called for 48 days of furlough [a year]," said Howard Cure, director of municipal research at Evercore Wealth Management. "At 20 days, this is obviously less, but it will be interesting how the employees accept this news and if it could lead to any work slowdowns or strikes.”
The board and the local government also moved closer to conflict on cuts to pension spending. Board member Andrew Biggs said that the fiscal plan called for 10% cuts to pension spending in future fiscal years, while Sobrino Vega said Gov. Ricardo Rosselló has promised to pay the pensions at 100%.
Jaresko said that the 10% cut was part of the fiscal plan that the governor had promised to observe. “Today you said you will not comply with the fiscal plan,” Jaresko said to Sobrino Vega,
Jaresko said the fiscal plan assumed that the government would cut $880 million in spending in the current fiscal year. After analyzing the government’s implementation plans, the board was comfortable that the cuts would save $662 million. The board ordered the furloughs to make up the remaining $218 million, she said.
Board member Carlos García said that the board in March presented the 10 year fiscal plan guiding government actions with certain conditions. The governor agreed to them, he said. The board approved the plan with the conditions.
The conditions were that the government achieve a certain level of liquidity by the end of June and submit valid implementation plans for spending cuts. The government had $1.8 billion in liquidity at the end of June, instead of the $291 million that had been projected.
Board member Ana Matosantos said the $1.8 billion was just a single data point and shouldn’t have too much made of it.
Jaresko said that this year’s government cuts were just the beginning. She said the fiscal plan calls for the cuts to expand from $880 million in this year, to $1.7 billion in fiscal year 2019, to $2.1 billion in fiscal year 2020.
Sobrino Vega complained that the agenda for the meeting showed there would be discussion about the furloughs. Yet he said anonymous sources had told the press that the board had already decided in favor of the furloughs. No government representative was allowed to make a presentation to the board on the topic before Jaresko announced that there would be furloughs. This showed that there was no real discussion of the topic at Friday’s meeting, he said.
Sobrino Vega said there was only one government of Puerto Rico and that was Rosselló’s. He said section 205 of the Puerto Rico Oversight, Management, and Economic Stability Act said the board only had the powers to recommend on things like furloughs. “We can’t take lightly the impact of the furloughs on the economy,” he said.
The government will meet its fiscal goals, but it will do it according its own choices, Sobrino Vega said. The government will cooperate with the board on other matters besides furloughs, he said later.
At the board’s meeting in late June, board chairman José Carrión III said that if the government didn’t follow a board order for furloughs, the board would bring the matter to a court of law.
Also at Friday’s meeting Jaresko announced that the board wasn’t ordering an end to the government employee Christmas bonus. She said that the board would consider the topic in September or October.
“Just from an optics perspective, it seems increasing hard to justify the bonus distribution when the commonwealth is struggling to balance its budget along with the expectation of significant haircuts to bond holders,” Cure said.
Also at Friday’s meeting, Puerto Rico Fiscal Agency and Financial Advisory Authority Gerardo Portelo Franco said his agency’s tests of the fiscal soundness of the Public Corporation for the Supervision and Deposit Insurance of Puerto Rico Cooperatives (known by its Spanish acronym COSSEC) had shown it to be able to weather moderately stressful scenarios. COSSEC oversees and insures the island’s non-federally insured credit unions.
The credit unions hold as much as $1.5 billion of Puerto Rico bonds and some economists have been concerned that they may not have the capital to absorb losses if auditors decide the securities have to be marked down.
The board approved FAFAA’s recommended fiscal plan for COSSEC with several amendments.
Finally, on Friday the board told Jaresko to suggest measures within 15 days to gain greater knowledge of the liquidity situation across all of Puerto Rico’s government entities. The board also said that Jaresko should look into the appointment of a leader to oversee liquidity and its reporting to the board.
