The Puerto Rico Oversight Board went to court Monday to force the local government to comply with fiscal measures it says are needed to revive the island's economy.

The Board filed an adversary complaint Monday for declaratory and injunctive relief against Gov. Ricardo Rosselló and his government. The board is seeking a court order forcing Puerto Rico’s government to introduce a 10% furlough program for most of its employees to save money. It is also seeking an order forcing the government to comply with planned cuts to government pension benefits.

Natalie Jaresko, the executive director of the Oversight Board, said the measures are necessary to reduce spending. Bloomberg News

“Fiscal reform is a difficult but necessary process for Puerto Rico and the credibility of the plan lies in its enforcement,” said Oversight Board executive director Natalie Jaresko. “While our preference was to avoid this step, we believe it is a necessary measure to keep Puerto Rico on track with its commitments to reduce spending and build stable foundations for its economic future.

“On March 13 the board certified the commonwealth’s fiscal plan to achieve nearly $40 billion in long-term deficit reduction by increasing revenues and right-sizing the public sector, while beginning the hard work of restructuring the island’s unsustainable $74 billion debt owed to creditors,” Jaresko continued. “The plan included clear and specific milestones to be closely monitored by the board.”

Cumberland Advisors portfolio manager Shaun Burgess said the board faces a battle from the local authorities as it seeks to reduce spending.

“Layoffs and furloughs are politically unpopular so the chance the governor would accept them without a fight was very low," Burgess said. "I expect any austerity measures the [Oversight Board] suggests will be challenged by the governor.”

When the board certified its fiscal plan for Puerto Rico’s next 10 years in March, it included amendments. These included statements that the board would order furloughs if the government’s liquidity was too low at the end of June or if the government’s implementation measures for its cuts in fiscal year 2018 were inadequate.

At a board meeting in early August, Jaresko said that the implementation measures were not worked out well enough. The board voted to approve a two-day-a-month furlough for most government workers from Sept. 1 to the end of June 2018.

At that meeting Rosselló’s non-voting member of the board Christian Sobrino Vega said the board didn’t have the authority to order the furloughs and that the government wouldn’t comply with the board.

Rosselló said in a statement, “Section 205 of the PROMESA Act grants discretion to the Government of Puerto Rico on refusing to adopt inappropriate recommendations of the board imposed by the Congress of the United States.”

PROMESA is the acronym for the Puerto Rico Oversight, Management and Enforcement Act, which set up the board in response to the territory's debt crisis.

Concerning the filing, Judge Laura Taylor Swain won’t consider arguments on the issue of whether the furloughs are necessary, attorney John Mudd tweeted. She will only consider whether the furloughs and the board’s power to order them were part of the fiscal plan. Since this was the case, Swain will order Puerto Rico’s government to introduce the furloughs, he said.

The board’s fiscal plan anticipates cuts to some government workers’ pensions starting in fiscal year 2020.

In other board-related news, on Monday the board released a revised Puerto Rico Aqueduct and Sewer Authority fiscal plan through fiscal year 2026. The board approved the revision through unanimous written consent.

The new plan revises the version the board approved on April 28 with three amendments. One of these amendments required the authority to plan for multi-year permanent rate increases across all classes of its customers. The new version does this, assuming annual rate increases through fiscal year 2026 for residential customers of 2.5%, commercial customers of 2.8%, industrial customers of 3.5%, and government customers of 4.5%.

Under this scenario, the authority wouldn’t have enough for its debt service through fiscal year 2026. PRASA currently owes about $4.8 billion in debt.

The revised plan doesn’t calculate the portion of debt service through fiscal year 2026 that the authority will have the money to pay. However, it has an average cash flow available for debt service through fiscal 2026 of $249 million and it owes $324 million this fiscal year.

In a final board-related development on Monday, the board sent a letter to Rosselló, Puerto Rico Senate Pres. Thomas Schatz, and House President Carlos Muñoz urging them to change the law concerning the government’s replacement of public corporation board members. In order to preserve the independence of the public corporation from politics, the governor should only be allowed to replace these members “for cause.”

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