Tired of waiting for the repeal of Law 80 and anticipating that the budget the Legislature approved yesterday will not comply with the fiscal plan either, the Oversight Board terminated the agreement it reached with Governor Ricardo Rosselló Nevares.
The decision would be confirmed today, once the federal entity, through PROMESA provisions, discloses its version of the government budget that should come into effect tomorrow and that from the outset represents a 3 percent reduction to the budget announced by Rosselló Nevares on May 21.
"It was not possible due to lack of dialogue," said the Board’s President José B. Carrión, who suggested that budget for the next fiscal year contemplates reactivating the cuts and rate increases initially proposed under the fiscal plan certified last April.
Yesterday, while the Legislature continued with its actions to approve the budget, Carrión, flanked by the Board’s Executive Director, Natalie Jaresko, and Board members Ana Matosantos and David Skeel, said that the federal entity did everything possible to comply with the agreement reached with Rossello Nevares last May, which mitigated the cuts required by the Board.
Answering to El Nuevo Día questions, Carrión made it clear that the Board would be willing to honor its part of the agreement as soon as the Legislature repeals Law 80.
But yesterday he admitted that this was not likely, and that therefore, the Board would offload its responsibility, including going to court if necessary.
"PROMESA is quite clear regarding the things we can and cannot do," said Carrión, posing -with some resignation- that "we cannot force" the Legislature or the government to take a specific course of action.
"Although we are disappointed that the agreement was not approved, we recall that this fact does not change our mandate or the reality of Puerto Rico," said Matosantos, who argued that given the refusal of the Legislature, "there will be more cuts” in public spending.
"Changing the course of more than a decade of economic and population decline is very hard work, but it is a necessary work," continued the former Director of Finance in California and who said that, through PROMESA, Congress gave the island an "extraordinary" tool to modify its debt with bondholders and pensioners, but in exchange for putting the Treasury on the straight path.
Why Law 80?
During the past few weeks, the Board, the Executive Branch and the Legislature have been engaged in a power struggle and negotiations with the expectation that Puerto Rico would become a jurisdiction that adopts the doctrine of at-will employment, which requires repealing the statute that protects workers in case of unjust dismissal.
For the Board, explained Carrión, the repeal of Law 80 is not a matter of bringing more money to the Treasury. It is rather one of several measures aimed at changing the conditions and business climate in Puerto Rico, under the premise that facilitating business management will attract investment from abroad.
However, according to Matosantos, when the reforms that would make the economy grow are not implemented, the only path left is to implement more cuts and controls.
Given the refusal to repeal Law 80, the Board is forced to revise its macroeconomic projections and this, in turn, affects the projections for the Treasury.
Breaking the agreement related to Law 80 constitutes another setback for the Board in its attempt to restore the fiscal balance of the island, and this occurs just two years after Congress approved PROMESA and invoked Title III of that statute.
Impact on people
Matosantos explained that considering that, the fiscal plan certified yesterday -as well as the budget that would be certified today- allocates less funds for municipalities, eliminates the Christmas bonus for public employees and applies deeper cuts to the projected spending in the Judicial Branch.
The agreement between the Board and Rosselló Nevares also contemplated that the Legislature budget remained intact.
But, given the fact that Law 80 was not repealed, the fiscal plan also included austerity measures for the Legislature that before were to only be applied for the Executive and Judicial Branch and municipalities.
Minutes before Carrión told the press that they would implement their own budget, Rosselló Nevares advocated for the Legislature to change its position regarding Law 80.
"I know that the (previously agreed) conditions have been broken, but I appeal to the Board and the Legislature to try to find a solution instead of creating an obstacle that lacerates workers, to find a way and comply with the agreement," said the Governor.
According to Rosselló Nevares, once the agreement was derailed, several of his proposals to redirect the economy were also distorted.
The Governor explained, for example, that the scope of the Earned Income Tax Credit (EITC) will be reduced and that the tax reform is also at risk. Regarding this, Rosselló Nevares warned that changes to the Internal Revenue Code included eliminating the so-called B2B and putting about $ 850 million back in the hands of taxpayers.
"The pockets of working families are the ones lacerated," pointed out the governor.
Rosselló Nevares explained that his representative before the Board, Christian Sobrino, has been in communication with members of the fiscal entity.
"This was not just repealing Law 80. There were future implications. It puts at risk the negotiation on pensions and debt negotiations,"he said, insisting that there will be "significant expenses in litigation."
Impact on bondholders
In addition to the reduction in the budget, the most detrimental sequel to the failure of negotiations is its rebound in the process of debt renegotiation.
According to Jaresko, the controversy over Law 80 will not invalidate the Board´s schedule to complete the debt restructuring process.
However, once federal funds associated with Hurricane Maria are exhausted, economic activity would fall and, therefore, also Treasury collections.
As a result and according to the new figures of the revised fiscal plan, Jaresko warned that the primary surplus -which is the amount intended to pay the debt- would fall from almost $ 40 billion to only $ 14 billion after 30 years.
In answering to El Nuevo Día questions regarding what would be at stake if -two years after the approval of PROMESA- Puerto Rico does not start implementing a fiscal plan, Matosantos said that the island might lose the opportunity to use "the tools" provided in PROMESA "to restructure obligations" with creditors and pensioners, balance the budget and restore its economy.
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