Gov. Alejandro García Padilla’s proposal for a local Puerto Rico fiscal oversight and economic recovery board came under fire from financial industry analysts, who said a federally appointed board would have more credibility.
The governor, who is seeking cooperation from investors as he seeks to restructure the island’s $71 billion of debt and stabilize the economy, said Thursday evening that he had submitted legislation to create the board to the commonwealth’s legislature.
“We've always believed that a local financial control board would be a pointless election year political exercise,” said New Oak managing director Triet Nguyen.
“Given the lack of authority on so-called non-covered entities, due to constitutional constraints, the board will have little enforcement power and thus little credibility with the financial markets.”
According to the government’s English language press release on the legislation: “The board will facilitate a return to long-term fiscal sustainability and economic growth and provide Puerto Rico’s creditors with assurance that conditions agreed to as part of any comprehensive debt restructuring agreement, as well as compliance with the Working Group [for the Fiscal and Economic Recovery of Puerto Rico]’s Fiscal and Economic Growth Plan, will be monitored by an independent, non-political body.”
Under the proposed legislation, the governor would nominate the board’s five members. The Puerto Rico Senate would have the right of approving or rejecting the nominees. Membership would be restricted to those who have not been employed by the government for at least five years, according to the government’s Spanish press release.
Members would have to have at least 10 years of experience in finance, management, law, economics or the organization or operation of business or governmental entities. They could not own municipal bonds.
Each Puerto Rico government entity would have to submit a proposed annual budget to the board no later than March 1. Puerto Rico’s fiscal year starts on July 1. Proposals would have to be accompanied by a report from the Office of Management and Budget identifying revenue increases and spending cuts and showing how they conform to the government’s Fiscal and Economic Growth Plan.
The board would “approve annual budgets and monitor their compliance,” according to the English press release.
A government spokeswoman didn’t respond to a request for information on whether the board would have the power to block budgets and or make line-item vetoes.
The bill would require the government’s Working Group to submit a five-year fiscal and economic growth plan to the board around June 2016. The board would determine if the plan would implement reforms aimed at restoring economic growth, eliminate “over time” government entities’ financing gaps and reduce the government’s debt, and improve credibility through improved budget formulation and execution and better data transparency.
In addition, the bill would deal with potential developing budget gaps by imposing automatic expense control mechanisms and other measures.
The bill would require that board appointed independent experts certify government revenue estimates used in Puerto Rico’s budget. Further the bill would specify the government set aside 2.5% of revenue as “sequestered appropriations,” apparently as a buffer or rainy day fund.
The board would oversee all commonwealth government entities including public corporations and authorities except: the Puerto Rico Electric Power Authority, the Puerto Rico Aqueduct and Sewer Authority, the judicial branch, the legislative branch, the Office of the Comptroller, the Government Ethics Office and the Office of the Special Independent Prosecutor.
A municipal bond analyst said the proposed control board would be just another layer of local leadership, and there is no reason it would lead to a different outcomes than we have seen so far.
There are two reasons a federal control board would be best for Puerto Rico, said the analyst, who spoke on condition of anonymity citing company policy. First, a federal body would be better positioned to ensure proper actions. Second, Puerto Rico is more likely to get federal help with a federal control board monitoring the situation.
The discussion around a control board is being increasingly affected by a gubernatorial campaign, with the governor and the legislature up for reelection in November 2016, the analyst said. The governor and legislators face constituents who oppose reductions in benefits or layoffs of government workers -- measures that are probably necessary for fiscal balance and to get federal help, he said.
“As is often the case, the [government’s fiscal oversight board press] release leaves so many questions unanswered,” said Joseph Rosenblum, director of municipal credit research at Alliance Bernstein, in an email. “But fundamentally, the key one or two to me are what meaningful powers will the board have to insure adherence to a balanced budget, and how will their powers and the process used be free of future pressures from a different governor or legislature?
“Perhaps a third is whether a local board can even pass legal muster in way that allows it to function as a true control board,” Rosenblum said.
Some Republicans in the United States Congress have talked about possibly imposing a federal control board over Puerto Rico. On Oct. 7 the El Vocero news web site quoted García Padilla as saying, a federally proposed fiscal control board “arises because previous governments promised to do things for the market and did not do them. Some [U.S.] representatives and senators say that this past experience means that there need to be guarantees and we must ensure that these broken promises do not happen again so that a federal fiscal control board will not be necessary.”
The Puerto Rico’s Working Group proposed a local control board in early September as part of the Fiscal and Economic Growth Plan.
“There are some measures outline in the FEGP that require legislation but many others that only involve executive action,” a member of the governor’s staff wrote in an email on Sept. 30. “The government will be both implementing measures via administrative actions and presenting the legislative measures, as outlined in the FEGP over the next weeks and months.”
Evercore director of municipal research Howard Cure said fiscal control board ordinarily would answer to a higher governing authority. “For example the state of Michigan setting up a control board for Detroit or New York state with New York City or Nassau County or the federal government with Washington, DC. These control boards need to have authority to supersede elected officials as well as renegotiate any union contracts to be effective while also maintaining access to the credit markets by separating certain revenues. Having Puerto Rico establish its own mechanism without a higher authority overseeing it may not be as effective.”
