In the short term, the first threat municipalities face due to the disarray in the Government Development Bank (GDB) is the possible halt on projects financed by loans from this government institution.
In the medium term, the situation could lead many local governments to budgetary deficiencies or enormous capital losses, which would add to the crisis many municipalities are already facing.
Reinaldo Paniagua, executive director of the Puerto Rico Mayors Federation, stated that municipalities have much more than $300 million in deposits at the GDB. These funds are at risk considering the Bank’s reduced cash availability.
In fact, according to the GDB’s own data, the total amount of money deposited by municipalities by February would add up to $785 million. Nevertheless, this number decreased after many municipal governments decided to transfer their public funds away from the institution, in light of the looming fiscal threats. These threats initially materialized with the moratorium imposed on the GDB, which limited the institution’s disbursements.
It is estimated that, by September, the governmental agency only had $160 million available to fulfill its commitments. This led Secretary of Hacienda (Treasury) Juan Zaragoza to issue a mandate to all public corporations, agencies, and municipalities, stating that they must take steps and register the possible loss of GDB deposits in their books.
“It would be serious. There are municipal deposits in the GDB, as well as loans for projects already underway, whose futures are now unclear. The impact would be dramatic. The GDB is the vehicle municipalities use for projects,” explained Paniagua.
This issue has been mitigated by the steps taken by a few mayors who foresaw the disaster. For example, Carlos Delgado Altieri, mayor of Isabela, pointed out that he began withdrawing money from the GDB a year ago to protect it from a scenario of insolvency.
Ramón Luis Rivera Cruz, mayor of Bayamón, employed a similar measure: he transferred the municipal deposits to private entities, paid off lines of credit, and limited the loans requested to the GDB.
Rolando Ortiz, mayor of Cayey and president of the Mayors Federation, claimed that most mayors have taken steps to reduce the impact from the GDB’s insolvency.
“In most cases, I believe this will mean administrative paperwork with changes in the municipalities’ financial statements. Now we have to make a note for the record that the funds in these accounts are not liquid but can be recovered. The issue is how long it will take before we can collect,” he remarked.
The municipalities’ debts with the public employee retirement systems will also have to be registered in their accounting books, which will add more stress on the municipal governments, according to Rivera Cruz.
The mayor of Bayamón explained that, for the time being, most problems would probably arise in projects currently under construction.
The GDB usually approves municipal loans and begins disbursing the funds as projects are constructed. If the Bank runs out of money and a project is left unfinished, the initiative could be abandoned halfway due to a failure to pay contractors.
“In all of this, we do not know if they will be able to pay the contractors. I have two projects. I have one project in Jobos beach and another one in a baseball park that is being remodeled. I don’t know what will happen with that. Nothing has been said yet,” said Delgado Altieri.
Paniagua confirmed that this situation with the municipal projects would have been fixed with a bill seeking to set aside a portion of the Special Additional Tax for disbursements related to municipal loans. This initiative was vetoed because it included amendments associated with another issue Fortaleza had rejected, claimed Paniagua.