In order to avoid a dispute with the Government, the Oversight Board accepted the offer made by Governor Ricardo Rosselló Nevares to repeal the unjust dismissal legislation (Act 80 of 1976), although this action will result in increasing the budget of the Executive Branch, providing more resources to municipalities and avoiding changes in the Puerto Rican Legislative budget in the next fiscal year.
The Executive Director of the Board, Natalie Jaresko, acknowledged that yesterday and insisted that, in order to renegotiate the debt under PROMESA Title III, it is better to direct a structural reforms program to reactivate the Island's economy than to continue delaying the implementation of the fiscal plan, disputed in court with the Government.
Yesterday, at a press conference in the headquarters of the federal entity in Hato Rey, Jaresko explained that this week the members of the Board will amend the certified fiscal plan to reflect the resolutions they agreed with the Governor last Sunday afternoon and of which the legislative leadership was aware, according to Jaresko.
That exercise will be the backdrop of Rosselló Nevares budget message to the Legislature today and that, so far, aims for both the budget charged to the General Fund and the consolidated budget for the next fiscal year to be higher than what the government spent during 2017 fiscal year.
However, Jaresko warned yesterday that if the Legislature and the Governor do not approve the law that will change forever labor-management relations in Puerto Rico on or before June 27, the Board will revoke the "arrangement" agreed with Rosselló Nevares during the weekend.
"The agreement seeks to strengthen these reforms and considerably reducing implementation risks while, I admit it, avoiding costly litigation," said the Executive Director explaining the reasons for the Board to agree with Rosselló Nevares’ proposal.
"We are hopeful, we understand that this is a difficult and painful issue, but we have a general agreement with the Legislature and the Governor on this matter," assured Jaresko.
Before the possibility that the Senate does not pass the repeal of Act 80, as its president, Thomas Rivera Schatz suggested yesterday, Jaresko said that according to the Governor “the Legislature agreed."
Jaresko recalled that the labor reform established in the fiscal plan contained about five components. With this agreement, three of those -except the reduction of vacation and sick leave and the Christmas bonus- will be implemented: employment-at-will with the repeal of Act 80, the Earned Income Tax Credit (EITC) and work requirements for participants of the Nutrition Assistance Program (NAP).
The increase in the minimum wage that Rosselló Nevares initially proposed and that was conditioned in the fiscal plan will not be implemented, reiterated Jaresko.
"If all the reforms are implemented in time, we will note a change in the economy in the medium and long term, we will return to growth instead of contraction," said Jaresko.
“The Board is happy with the fact that we were able to achieve this agreement, limit that risk and move forward," added the Executive Director.
Last Sunday night, acknowledging that the agreement has its "defects and virtues," Rosselló Nevares informed that he had managed to convince the Board.
"With its defects and virtues, this agreement makes it easier for us to move forward," said Rossello Nevares last Sunday night.
Among other things, the agreement between the Puerto Rican Governor and the Board would eliminate Act 80 as of January 1, 2019; transfer some $ 25 million to the University of Puerto Rico scholarship fund instead of creating an independent fund, as suggested in the fiscal plan; and allow the tax reform to be implemented.
In the case of the tax reform, the Board revoked the restrictions to revert tax changes if these resulted in a reduction on Treasury collections.
With the agreement, there would be no reduction in vacation and sick leave and the Christmas bonus would not be eliminated for private sector employees during the fiscal plan's validity.
In the case of the Christmas bonus for the private sector, a statute that companies increasingly fail to comply would remain in effect. Last year, according to the Department of Labor and Human Resources, over 1,000 companies did not pay the benefit invoking financial challenges.
Apparently, the Christmas bonus will remain in effect for public sector employees, provided that the Government is meeting savings goals.
The agreement, which Jaresko confirmed yesterday, was the result of almost a week of negotiations -at times, quite heated, as this newspaper found out- among the officials and advisors of the Board and the Fiscal Agency and Financial Advisory Authority (FAFAA).
Conversations started after the meeting that Rosselló Nevares held a week ago with the president of the Board, José B. Carrión, Rivera Schatz and the Puerto Rico House Speaker, Carlos "Johnny" Méndez.
Sources assure that during that meeting, held at La Fortaleza, Carrión stated the willingness of the Board to make changes to the fiscal plan and the budget if the Government was committed to repeal Act 80.
According to the economic models that underpin the fiscal plan, the labor reform, along with other measures -such as facilitating those processes to set and run a business in Puerto Rico-, would help to reactivate the economy of the Island that has been in recession for 12 years.
That initial meeting would have laid the ground for Rosselló Nevares to instruct FAFAA and his legal advisors to prepare a proposal to repeal Act 80, provided that the budget of the Legislature was preserved, $ 100 million were granted to municipalities and the budgets of the Resident Commissioner’s Office and the Governor’s Office were increased.
The agreement’s budget
Yesterday, Jaresko confirmed to El Nuevo Día that the Board received the offer revealed by this newspaper last Saturday, before the meeting between Rosselló Nevares and the Board’s members.
"I do not think that is relevant in this moment, the important thing is that an agreement was reached," said Jaresko, declining to answer how the Board’s leadership voted on the Governor's proposal.
Jaresko explained that she was focused on achieving the certification of the changes to the fiscal plan in order to begin the evaluation of the budget -that Rosselló Nevares will submit today- as soon as possible.
The objective of the Board is to evaluate the revised budget document and send it to the Legislature next Friday, according to the work schedule established for that purpose.
By doing so, and although the figures could change today, it seems that in the first year to adjust the Island´s public finances after a revised fiscal plan due to Hurricane Maria, Puerto Rico will have a spending program that, although smaller than the current budget, would continue to be higher than the Government's expenses for 2017 fiscal year.
According to the corrections to the revised budget that FAFAA sent last Friday to the Board, 70 of 107 agencies or programs paid from the General Fund would see budget increases.
Part of that increase is due to the payment of pensions, pointed out Rosselló Nevares.
"The agreement allows us to allocate 100 percent of the pensions in our next budget and ensuring that its full payment will continue to be our public policy. In little more than a year, we have reduced about 22 percent of the Government's operational expenses in order to assume this and other responsibilities," said Rosselló Nevares.
The next fiscal year, Puerto Rico would also devote more resources to permanent works.
But in other cases, such as the Governor’s Office, the budget would go from $ 13.7 million to $ 41.8 million, including about $ 14.5 million for "programming commitments."
On the side of the cuts, FAFAA would go through a budgetary adjustment of about 5 percent, contributions to municipalities will decrease by 25 percent and the allocation by formula to the UPR would decrease by 6.8 percent.
The fiscal plan -that the Board will now amend- included reducing some $ 23.6 million of the Legislature budget starting next July. That money, along with the cuts in FAFAA, the Judicial Branch and the Board would go to the reinvestment program.
If that were the case, based on Government documents, the Legislature budget for the next fiscal year would have been about $ 111 million.
However, through the agreement between the Board and Rosselló Nevares, the Legislature budget would remain intact.
Blow to bondholders
Although the Board and Rosselló Nevares will not go to court regarding the budget, the agreement between both parties would not release Puerto Rico from another litigation, acknowledged Jaresko.
However, as part of the agreement between the Board and the Governor the controversy over pensions cut requested by the Board was never discussed.
In that sense, Jaresko recalled that from Title III perspective, pensioners are considered an "unsecured" creditor and the controversy would be addressed from that point of view.
But, on the other hand, Jaresko admitted that the agreement with Rosselló Nevares implies that the primary surplus, which is the item that will be used to pay bondholders, will be lower.
After five years, the primary surplus would be around $ 6.048 billion. The figure would be about $ 650 million less than what was allocated in the fiscal plan certified last April.
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