The Financial Oversight and Management Board for Puerto Rico is reviewing the government’s proposed Fiscal and Economic Growth Plan — which on Friday was met with criticism by a cross-section of the island’s business community — and should be finished by Jan. 31.
The opinions came from representatives of the island’s education, health and third sectors, professional and trade associations, local and stateside economists and local bondholders who offered the Oversight Board their comments regarding the blueprint Puerto Rico Gov. Alejandro García-Padilla presented to the Board on Oct. 14.
Most of the stakeholders who responded were in consensus on the shortcomings of the proposed Fiscal Plan.
The majority believed that the Plan did not meet the requirements of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), needed a more balanced approach between structural reforms, fiscal consolidation and debt restructuring and required more structural reforms and better financial controls.
“Puerto Rico faces a massive budget and cash cliff and significant reforms are needed even without bond payments,” said Board Chairman José B. Carrión.
“There are no quick fixes or near term promises of substantial, additional federal help. The consensus among stakeholders is consistent with the Board’s assessment: more needs to be done to restore growth and opportunity,” he said.
“The Board is committed to work with the government of Puerto Rico to restore opportunity for its people. Tough choices and hard work ahead can pave the way to a stronger Puerto Rico,” said Carrión.
PRMA, Chamber, CPAs testify
During his testimony, Puerto Rico Manufacturers Association President Rodrigo Masses said the trade group believes the fiscal Plan “must be redefined now that certain assumptions of the relationship between Puerto Rico and the White House are definitely going to change,” in the wake of the recent elections in which Republican Donald Trump won the presidency.
“We also believe that the Commonwealth government has taken appropriate steps to control its expenditures, improve budgetary controls and financial transparency, improving labor force participation and promoting energy reform,” he said.
“However, there are still many things to be done to ensure the economic stability of Puerto Rico,” he said.
He said the Fiscal Plan assumes that $1.5 billion will be assigned for Medicaid parity — something that must be ascertained before considering approval of the plan.
Further, 21 percent of the Commonwealth’s revenues are dependent on taxes paid by a small group of companies through Act 154’s excise tax.
“The Fiscal Plan assumes continued collections with an extension of this tax for a number of years, even under a new Tax Incentives Act. A reform of tax policy is urgent and we have stressed that careful consideration must be given to any modification of what is today Puerto Rico’s industrial incentive model for both local and multinational manufacturers in the island,” Masses said.
Meanwhile, Puerto Rico Chamber of Commerce President-Elect Alicia Lamboy told Board members that upon reviewing the Fiscal Plan, the trade group believes the sources for obtaining the necessary funds for its implementation were omitted. If these funds are unavailable, it might jeopardize essential services and certain obligations. The Chamber recommended that:
- 40 percent of the government actions that could be taken by the Plan should be allocated to structural reform for improving the long-term growth potential of the Puerto Rican economy;
- 40 percent of the government actions that could be taken by the Plan should be allocated to fiscal adjustment for promoting more sustainable government budgets; and,
- 20 percent of the actions that could be taken by the Plan should be allocated to debt restructuring.
Regarding the strengths and weaknesses of the Plan, the Chamber believes its strong points are that it does not consider an increase in corporate taxes, it tries to protect weak economic sectors, and relies on public-private partnership initiatives. However, the Plan falls short because it does not prioritize government expenditures and obligations, it is not very specific on the sources to replace the 154 excise elimination and includes a “very vague” labor law reform.
“One of the most relevant items found was that the economic assumptions presented by the government are incorrect,” Lamboy said.
“In addition, the Chamber is of the opinion that the Plan will not be sufficient to attaining the objectives to stabilize the current economic, demographic, and financial situation, as well as other matters necessary to restore opportunity for the people of Puerto Rico,” she said.
During Friday’s lengthy third meeting, the Oversight Board also received a presentation from Commonwealth consultants Conway MacKenzie on the present state of the Government’s cash flow position.
The presentation showed that even without any bond payments there is a budgetary and fiscal cliff coming at the beginning of the year, which will make government operations tough, participants said.
“Puerto Rico’s fiscal problem require the implementation of immediate measures to reduce the cost of operating the government, allow for the collection of all income that the government is entitled to and maximize the current limited resources,” said Edna Jiménez, executive director of the Puerto Rico CPA Society.
“It is evident that the quality of the work and job performance in the government must be raised and that effective controls…must be imposed,” she said.
The CPAs said although some of the recommendations they presented would require major reforms, the vast majority of them just need the establishment of a clear public policy, followed by the implementation of controls, guidelines, and parameters of execution for which there must be accountability subject to reasonable and adequate consequences for noncompliance or failure to execute.
“The absence of adequate controls and impunity in the mismanagement of public administration has no room in a Puerto Rico of progress,” she said.
Board set to announce outside consultants
At the meeting, Carrión announced that the Board had received final recommendations from its selection committees regarding the selection of the strategic consultant and outside legal counsel, including local (Puerto Rico) legal counsel.
Carrión confirmed that the Board is finalizing the engagement of the selected firms and will make a public announcement shortly. Both engagements were the subject of Requests for Proposals issued by the Board on Oct. 20, 2016.