Last night, after telling Governor Ricardo Rosselló Nevares that the fiscal plans proposed do not comply with PROMESA, the Oversight Board has practically thrown the proposal for the tax reform overboard, as well as that for the consolidation of the Puerto Rico Energy Commission (PREC) into a new entity.
In three separate letters, the Board told Rosselló Nevares that his advisors will have to modify all the assumptions they used in the fiscal plans of the central government, the Electric Power Authority (PREPA) and the Aqueducts and Sewers Authority (PRASA). This is because the numerical premises and the proposed reforms in such documents lack details and are not clear enough for the Board to certify them, which in turn is a key step for the fiscal balance process required by the federal statute.
The Board also requested the Puerto Rican governor to make more changes to those he has already adopted with the labor reform; it questioned the federal funds projections in the fiscal plans; it asked to exactly define which infrastructure projects will be financed with the funds to be received and they even asked to eliminate the references to the political status of the island.
“The Board is a non-political entity, and therefore it cannot certify a fiscal plan that includes positions on the political status of Puerto Rico,” reads the letter sent last night by Board President José B. Carrión, regarding the central government fiscal plan.
The resolution of the Board was announced last night; minutes after Rosselló Nevares offered a televised speech to announce that he will promote an education system reform, adopting the model of charter schools.
However, the decision of the entity that controls the public finances of the Island would have occurred during the weekend. This, after last Friday, the federal body had a working session with Rosselló Nevares and his fiscal team in New York City.
It is the first time that the Board issues a notice of violation in the fiscal plans of the Rosselló Nevares administration, as permitted by Section 201 of PROMESA.
Rosselló Nevares has seven days, that is, until February 12, to answer to the violations identified by the Board and submit about a dozen plans and new estimates to meet the new requirements of the Board.
Immediately, the representative of Rosselló Nevares before the Board, Christian Sobrino, said that the documents submitted to the Board are "robust" and in harmony with the reality after the impact of hurricanes Irma and Maria.
"Last night, we received notices from the Board requesting revisions to the fiscal plans of the central government, PREPA and PRASA submitted to the Board on January 24, 2018," said Sobrino in written statements.
"The fiscal plans of the government and the respective public corporations are robust documents that trace a path of fiscal discipline, recovery and reconstruction after hurricanes Irma and María and the socioeconomic transformation of Puerto Rico in favor of long-term sustainability," said the also economic adviser to the governor.
According to Sobrino, the process of developing and certifying fiscal plans is "interactive," so the government will "carefully" review the comments of the Board and anticipated that they will comply "with any additional information request included in the letter."
What the Board requests
Our goals of achieving balance and renewing access to the debt markets are only possible if we fundamentally change the underlying economic trends that characterized Puerto Rico’s economy prior to the hurricane,” reads Carrión's letter to Rosselló Nevares.
In the case of the central government, the Board questioned four of the premises that the Financial Advisory and Fiscal Agency Authority (FAFAA) used in its economic and investment projections: the federal funds that the island would receive for the recovery; the collections of the General Fund and capital improvements contemplated to maintain government assets.
Similarly, although on this occasion, the Board did not request a reserve against possible budget overdrafts, which was harshly criticized by creditors last year, the entity has requested FAFAA to adopt "an emergency reserve" as has happened in other jurisdictions hit by disasters and asked to extend the plans until the fiscal year 2023.
The reserve for emergencies should total about $ 1.3 billion within five years, according to the Board.
Also, in its new demands, the Board seemed to combat the criticisms of creditors regarding the revised fiscal plan. This is because the document submitted by the government does not contemplate any payment to the bondholders.
In the letter, the entity that controls the public finances of the island asked FAFAA to “outline specific debt capacity year-on-year for the 30-year period” for the government, PREPA and PRASA.
Work according to the states
If changing the economic assumptions within seven days could be an uphill battle for FAFAA, complying with the structural reforms requested by the Board last night in its letter could be impossible for the government.
From the outset, according to Carrión's letter, the government “must outline specific initiatives” that will pursue to improve the
ranking of Puerto Rico in the World Bank Ease of Doing Business rankings
Each year, the World Bank publishes a report known as "Ease of Doing Business" and Puerto Rico is in the bottom when compared to other countries in matters such as tax and ease of starting a business, among other criteria.
The Board said it agreed with the reactivation of the Earned Income Tax Credit (EITC) in Puerto Rico, but then asked Rosselló Nevares to make more cuts in the benefits that workers receive, such as payed sick leave or vacationsand the Christmas Bonus.
Although the Board asked Rosselló Nevares not to mention the political status, the federal entity asked the governor to modify labor laws so that Puerto Rico has similar regalations to the states of the mainland.
“To the Board’s knowledge, no mainland state requires either severance pay or the payment of a Christmas bonus,” reads Carrión´s letter.
Taxes and energy
“Tax policy reforms included in the Proposed Plan must be at least revenue neutral (relative to the baseline) and exemptions and incentives should be phased out before reducing rates,” say the letter.
About two weeks ago, Rosselló Nevares and the secretary of Treasury told El Nuevo Día that pushing for a tax reform that would reduce the taxes paid by individuals and corporations is essential for recovery.
However, from the Board´s perspective, before cutting taxes, Puerto Rico will have to begin accounting for the credits and incentives it grants as part of its budget and clearly demonstrate the impact of a tax adjustment on the local economy.
On the other hand and in what could mean a setback to the plans of consolidation of Rosselló Nevares agencies, the Board warned that the new regulator of the energy sector should be separated from any other agency; have at least three commissioners and must be financed by establishing a charge in the electricity rate paid by citizens.
Attrition and pensions
“The Board believes that the Proposed Plan’s attrition-based model overstates the fiscal impact that such an approach
will achieve and does not ensure the permanency of fiscal impact,”
Carrión added, referring to the program through which the government says it will reduce the number of workers.
The Board's statements regarding the savings that would be achieved in operational expenses were also extended to municipalities and the government's plan to create a "counties system".
According to the letter, in addition to the cuts already made, subsidies to municipalities would have to be adjusted by 80 percent and FAFAA will have to provide a specific list of the central government services that would be transferred to the counties and detail their impact on the number of employees, the savings that would be achieved and a plan with specific dates for the consolidation of such services in the new government structure.
On the other hand, the Board´s letter revived the demands regarding a cut in pensions and the need for police and teachers to contribute to Social Security.
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