For the first time since the Commonwealth was established in 1952, a federal entity has directly intervened to establish the contours of Puerto Rico’s internal fiscal and budgetary matters. As stipulated under the federal PROMESA law approved last year, the Fiscal Oversight and Management Board (FOB) now has the last word over Puerto Rico’s fiscal affairs, and it has approved a 10-year fiscal plan for the Island. The plan, which was subject to public pushback from Governor Ricardo Rosselló’s Administration, in essence contains most of the FOB’s original demands. After initially balking at many of the FOB’s stated requirements, Rosselló amended his plan to comply with the 7-member federal body’s requests, including balancing the budget in two fiscal years and making $450 million in cuts and revenue raisers for the University of Puerto Rico (UPR). The spending shift constitutes half of UPR’s budget and is $150 million over the FOB’s original request.
Rosselló is using the FOB’s economic projections as a benchmark, after the Board rejected the Government’s assumptions calling them overly optimistic in regards to economic growth and revenue collection estimates. In a further compromise, the Government will now have to achieve $200 million in additional savings prior to the start of the next fiscal year (July 2017) in order to avoid eliminating public employee’s Christmas bonuses and a 20% reduction in the working hours of public servants. Regarding the debt, the certified plan mandates an 88% cut in debt service payments starting next year.
The FOB also agreed to the Governor’s plan to prevent massive lay-offs of public employees, and to his idea of limiting 10% pension cuts to retirees receiving $2,000 or more. Social Security will also now apply to teachers and security officials. Overall, government retirement systems will now operate as a “paygo” defined contribution systems.
The Governor used a celebratory tone to announce approval of the plan. In a live televised speech, Rosselló said he was pleased that the Board had validated his fiscal approach. He also celebrated the prevention of the most painful austerity measures proposed by the Board, laying-off thousands of workers and leaving 700,000 Puerto Ricans without health insurance.
Resident Commissioner rejects extension of stay, urges FOB to lobby Congress for Medicaid funding
Puerto Rico’s Resident Commissioner in Congress, Jenniffer González, said that there would be no time to amend PROMESA in order to extend the stay on debt collection litigation past May 1. González also reiterated her call for the FOB to exert pressure on Congress to act and avoid the impending Medicaid “fiscal cliff” that will leave Puerto Rico without $1.2 billion a year in Medicaid funding approved under the Affordable Care Act (ACA or Obamacare). Puerto Rico’s additional Medicaid funding under the ACA will run out at the end of this year, prior to the original 2019 estimate.
Congressional hearing to focus on PREPA deal
The House Natural Resources Subcommittee on Native American and Insular Affairs will hold a hearing on March 22 on the status of the Electric Power Authority (PREPA) debt agreement. The hearing was initially expected to focus on the overall status of the implementation of PROMESA and the role of the FOB in Puerto Rico. However, committee leaders decided to narrow the focus to the utility company’s debt deal.
PREPA had reached an agreement with its creditors for a 15% haircut in principal debt payments that also included a securitization process for repayment of the remainder of its $9 billion debt. The agreement, which included a forbearance on debt service payments for the past two years, has not been finalized and some of the players in this deal are worried that the Government and the Board might be looking to scrap it entirely in order to include PREPA in the debt restructuring provisions of PROMESA.