Although, in the next five years, Puerto Rico would receive an unprecedented monetary injection, the revised fiscal plan of the administration of Ricardo Rosselló Nevares contemplates that the government budget will continue with an accumulated deficit that will fluctuate between $ 2 and $ 3 billion, so there would be no money to pay bondholders.
The macroeconomic conditions faced by the Island after the passage of Hurricane Maria and the federal tax reform, as well as the government's obligations, seem to be so severe and large that, as anticipated by El Nuevo Día, the government of Rosselló Nevares does not foresee that the budget will be balanced until 2022. This will happen dispite enforcing dozens of reforms, reducing government spending on education and security, privatizing public services and reducing the monthly premium per member in My Health.
Likewise, changes would be promoted in the regulations that affect businesses and a new tax reform that would establish the Earned Income Tax Credit (EITC) back in Puerto Rico, eliminating the Sales and Use Tax (SUT) in commercial transactions, known as B2B and reducing from 11.5 to 7 percent the SUT that is paid in restaurants and fast food places.
Last night, hours before the Fiscal Agency and Financial Advisory Authority (FAFAA) submit the revised fiscal plan for the 2019-2022 period to the Board, Rosselló Nevares offered some details of the document that he believes will trace a new route for Puerto Rico. The document, said the Governor, would be submitted to the body that controls the finances last night at 11:59 p.m. In the past, the Board rejected a fiscal plan to former governor Alejandro García Padilla for presenting an unbalanced budget.
"The objective of PROMESA is not only fiscal, there is also an economic element," said Rosselló Nevares, noting that the revised plan is not focused on achieving cuts to comply with the fiscal issue but on "advancing economic development" after the reality left by the cyclone of the past September 20.
Rosselló, who assured that his plan will continue protecting the "most vulnerable", made his expressions accompanied by his representative in the Board, Christian Sobrino, and FAFAA executive director, Gerardo Portela Franco.
The revised fiscal plan is divided into six areas and is based on the premise that the economic and social problems that Puerto Rico faces are, to a large extent, the result of the inequality implied by the Island's territorial status. These are: the vision of the government; the reconstruction of Puerto Rico; the path to the structural balance; the transformation of the government and structural reforms.
The basis for the plan
The revised fiscal plan contemplates that during this fiscal year , the gross domestic product of the Island would fall by 11.2 percent in real terms and, from this fiscal year until 2022, population of the Island would shrink by 16 percent.
Meanwhile, the federal tax reform will involve the loss of some $ 1.7 billion in the collections of Law 154.
According to Rosselló Nevares, the scenario left by Hurricane María presents two opportunities: large investments to create a more resilient Puerto Rico and adopting structural reforms -including a welfare reform-, as well as to establish a new model of government that would overturn the economy of the Island.
The plan relies on FEMA
Regarding investment, Sobrino stressed that a new revitalization authority will be created to integrate infrastructure initiatives.
The new structure would have about $ 35.3 billion from the Community Disaster Loans Program of the Federal Emergency Management Agency (FEMA) as cushion. The figure is part of the needs analysis Rosselló Nevares presented in Congress in the Build Back Better report, when about $ 94 billion were requested.
Sobrino explained that the allocation was included because it is a fund legislated in Congress and that historically has never been devoid of funds.
Half of that monetary injection would go to public utilities; 24 percent to the improvement of buildings and equipment; 8 percent to the control of water facilities and a similar figure to the response to the emergency.
In order to receive such funds, the government considers that it would have to contribute about $ 1.4 billion as part of the matching program required by FEMA.
In addition to that figure, the revised fiscal plan contemplates that the economy of the island will receive another boost from the claims that insurers will pay to individuals and businesses.
That figure is estimated at $ 21.9 billion and is based, according to Portela, on a report prepared by Property Claims Services. 75 percent of these insurance claims would be spent between 2018 and 2022.
In total, from this year until the fiscal year 2022, Puerto Rico would receive a monetary injection of about $ 57.2 billion. If true, in five years, Puerto Rico would receive the equivalent of more than two consolidated government budgets.
According to preliminary figures, the federal injection and that of insurances would help the economy jump around 7.6 percent in real terms in the fiscal year 2019, and remain in positive territory for the five years of the fiscal plan.
But, according to Rossello, the monetary injection will be worth nothing if concrete steps are not taken on other fronts such as creating a digital government, designing a new governing apparatus "outsourcing" services to the private sector, and if changes are not made in the way that companies interact with the public sector.
"The problem of labor force participation is chronic and severe in Puerto Rico," Rosselló Nevares said, noting that the Island only compares with economies such as Botswana when it comes to the number of people who are part of the labor force.
In order to reverse the labor force participation rate, the Governor explained, several measures will be adopted.
The plan includes reviving the EITC, a proven program that promotes the insertion of workers in the formal economy and that, on the Island, was adopted under the administration of Luis Fortuño. The provision, which is based on the premise that workers can claim the credit on their income tax returns, would cost about $ 220 million after five years.
Another strategy, added Sobrino, focuses on making changes to social assistance programs, so that those who receive these aids are not penalized as they join the workforce. This proposal was contained in the fiscal plan submitted by former Governor García Padilla.
Other strategies on the list are already known, public-private partnerships (3P), the Destination Marketing Organization (DMO) and a new code of tax incentives that would only save about $ 65 million after five years.
Measures favorable to the economy would have a counterweight to the impact of reducing public spending as part of the fiscal implementation.
According to Rosselló Nevares, the main savings proposal would be given with the consolidation of agencies already launched.
Although in this fiscal year there would be no cuts, starting in the fiscal year 2019 the adjustments would begin and, by 2022, the new organizational chart of the government would have reduced its spendings by $ 1,264 million.
The second slice of savings would come from the health reform, which would save $ 795 million.
The revised fiscal plan also leaves out increases in labels, licenses and tax oversight, which would provide another $ 415 million in savings to the treasury.
Rosselló Nevares indicated that the cuts in subsidies to the University of Puerto Rico (UPR) and municipalities continue, but this time, they will not last two years but five fiscal periods.
In the case of the UPR, however, the reduction contemplated would be around $ 220 million, which would mean half of the cuts expected a year ago.
In total, after five years, the government would look for savings in its operational expenses in the order of $ 3,023 billion.
El Nuevo Día questioned how a plan that did not guarantee the fiscal balance, according to the federal Promesa Law could be submitted. Portela answered that by 2022, there might be a bet on a balanced budget.
No money for bondholders
However, in this budget framework there would be no surplus to pay the bondholders.
"The payment of the debt is established by Court ... until the fifth year, there is no surplus," indicated Sobrino when the press asked how much would be devoted to the creditors.
According to Portela Franco, just like the previous fiscal plan, the new road map integrates all the sources of collections and it will be the court that decides how it will be distributed, if there is anything left, to the bondholders.
"All revenues are being consolidated ... We do not take any position," said Portela Franco.
The road with the Board
To questions from this newspaper about whether the projections of the plan were endorsed by the Board, Rosselló Nevares indicated that there was agreement on "the guidelines of the plan", but not necessarily on the figures.
Rosselló Nevares stressed that the plans of the Puerto Rico Electric Power Authority (PREPA) and that of the Aqueducts and Sewers Authority (PRASA) will be submitted along with the government´s fiscal plan, but no details were offered.
Beyond the numbers, two things seemed true last night.
Rosselló Nevares would finish his term without having balanced the budget, while many of the change proposals he suggests would not be achieved in what is left of his four-year period, nor would happen under the current members of the Board’s period.
The second issue is that, at the end of 2016, the Board rejected the fiscal plan proposed by García Padilla, noting that the document submitted did not reduce the deficit nor did it present solutions for the payment of the public debt.