The Puerto Rico Oversight Board asked Gov. Ricardo Rosselló to change three fiscal plans, though some observers said the board is probably already set to adopt its own.
Rosselló’s government submitted fiscal plans for the central government, Puerto Rico Electric Power Authority, and Puerto Rico Aqueduct and Sewer Authority on Jan. 24. On Monday the board sent three letters to the governor asking for extensive changes for each entity.
In the Puerto Rico government's plans, the central government and PRASA indicated debt payment of $0 for the former and 17% to 47% of debt due for the latter, both through fiscal year 2022. The PREPA plan didn’t address debt payment.
The board has given the Rosselló government one week to submit revised plans with the board’s extensive changes and expansions.
Heidi Calero, president of Puerto Rico economic consulting firm H. Calero Consulting Group, said she thought the board already has its own plans.
The board is asking for changes to the plan to create county governments, regionalize services, take a completely different approach to tax reform, add additional programs for the educational system, and create a new model for government, among other things. It would take the government real time to respond to these requests and a week isn’t enough, Calero said.
“Doesn’t everything point to the junta implementing their own fiscal plan anyway?” tweeted Puerto Rico observer Gil Hall on Monday in response to the board letters. “Don’t see any way government can produce details junta wants in [the time provided]. (Which, then, suggests to me board is just checking legal boxes with the letter to Rosselló.)”
The letters explicitly say they are consistent with Section 201 (c) (3)(B)(i) of the Puerto Rico Oversight, Management, and Economic Stability Act, which directs the board to tell the local government when the proposed fiscal plan is unacceptable and to specify required changes to submitted plans.
“Meeting the board’s requests for substantial revisions and additional information by the February 12 deadline is aggressive," said Ted Hampton, Moody's Investors Service senior credit officer and lead Puerto Rico analyst. "The changes sought are very wide-ranging, incorporating the proposed fiscal plan’s statements on debt sustainability, pension and healthcare funding, financial support for local governments, economic development, and capital needs.”
“The process for drafting and certifying fiscal plans contemplated under PROMESA is an interactive one,” said Christian Sobrino, Rosselló’s non-voting member of the board. “Therefore, we will carefully review the comments of the [Oversight Board], as well as meet any additional request for information, included in the letters.”
The Rosselló version of the central government plan included an estimated debt capacity, based on what residents of the 50 states were paying for state debt. The board asked for more information on the assumptions underlying the macroeconomic projections and the projected costs of pension liabilities. It asked for specific debt capacity amounts for each year in the next 30 years.
The board wants all three fiscal plans to be extended to fiscal year 2023, one year beyond the current plans’ coverage.
For the central government plan, the board says it should include capital spending each year, which it currently doesn’t mention. The original approved fiscal plan set aside $400 million per year for this purpose.
The new plan should also plan to set $650 million aside in the next five fiscal years for an emergency reserve, the board says.
Whereas the Rosselló's proposed budget would cut tax rates, the board in its letter said, “Tax policy reforms included in the proposed plan must be at least revenue neutral … and exemptions and incentives should be phased out before reducing taxes.”
The board plan calls for extensive labor market and welfare reforms including Puerto Rico becoming an “at-will employment” jurisdiction and making severance pay and Christmas bonuses optional. There should be a work requirement for the food stamp program, the board says.
Whereas Rosselló’s plan wouldn’t cut pensions at all, the board says that payments over $1000 per month should have the portion over $1000 per month cut by 25%. Police, teachers, and judges under age 40 should be enrolled in Social Security with the amount going to Social Security deducted from anything going to Puerto Rico pension accounts.
Where Rosselló said that government personnel expense reduction can be done simply through attrition, the board indicates that layoffs may be necessary.
Finally, the board is seeking a plan that would make it easier in Puerto Rico to get construction permits, register property, pay taxes, and get electricity.
For the PRASA plan, the board has directed the removal of hundreds of millions of dollars from a Community Disaster Loan, state revolving funds and rural development funds. It calls for the capital improvement plan to maximize the use of federal funding and otherwise be revised.
The board calls for PRASA to find further ways to reduce costs and to replace its range of possible debt payments with specific 30-year debt-capacity projections.
For the PREPA plan, the board calls for realistic estimate of federal funding. It also calls for the inclusion of general financial projections for the entire fiscal plan period.