Puerto Rico oversight board gives details of proposed new fiscal plans

By Caroline Salls

Pittsburgh, April 19 – The Financial Oversight and Management Board for Puerto Rico created under the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) on Wednesday released the draft text of the proposed new fiscal plans for the Commonwealth of Puerto Rico, the Puerto Rico Electric Power Authority (Prepa) and the Puerto Rico Aqueduct and Sewer Authority (Prasa), according to a news release.

The board said it expected to certify the plans on April 19.

The proposed plans provide a detailed roadmap to achieve fiscal balance and sustainability, revitalize Puerto Rico’s economy after more than a decade of recession and enable an affordable solution to its debt crisis so that it can regain access to capital markets, the board said.

“Several years of economic decline, excessive borrowing and fiscal mismanagement drove thousands of people and businesses to leave the island,” oversight board chairman Jose Carrion said in the release.

“Then the historic hurricanes Irma and Maria forced even more to leave Puerto Rico as it struggled to recover from the storms’ catastrophic devastation.

“These plans offer a once-in-a-generation opportunity to do things right and turn these trends around.”

The board said the proposed new plans make clear that Puerto Rico’s problems are longstanding and structural and that the solutions that Puerto Rico needs are similarly long-term focused and structural, specifically calling for strategic reinvestment in the people of Puerto Rico and the robust implementation of pro-growth, structural reforms.

“We now urge the government to move decisively on implementation of these necessary reforms upon certification of the proposed new fiscal plans,” Carrion said in the release.

Commonwealth plan

The board said the proposed new commonwealth fiscal plan covers a period of six fiscal years from 2018 to 2023 and provides the framework for achieving lasting growth to enable the Government of Puerto Rico to provide services to its residents, invest in the wellbeing and future of its people and businesses, fund pensions payments and restructure Puerto Rico’s debt in a sustainable fashion.

The plan takes into account over $50 billion in federal assistance that is expected to be provided to Puerto Rico for recovery and rebuilding efforts following hurricanes Irma and Maria, which the board said will provide a critical temporary boost to the economy during which time the Government of Puerto Rico must tackle changing the underlying fundamentals of Puerto Rico’s economy.

Specifically, the board said the plan lays out that if labor reform is implemented, Puerto Rico can afford to reinvest more than $500 million over the next three years in healthcare and education, and that through additional right-sizing initiatives, the government can create and fund a significant endowment for needs-based scholarships.

The plan provides for more than $1.1 billion in reinvestments back into these key economic sectors, the release said.

If implemented, the board said structural reforms are projected to result in a sustained 1.8% real annual GNP growth by fiscal year 2023, amounting to $80 billion to $90 billion in increased revenues for the commonwealth over 30 years that would provide for the elimination of structural deficits.

Reforms

The proposed reforms include the following:

• Human capital and labor reform, including increasing labor force participation from today’s 40% level through flexible private sector labor regulations, creating greater incentives to work and providing comprehensive workforce development opportunities;

• Ease of doing business reform, including promoting economic activity and reducing the burden for starting and sustaining business in Puerto Rico by improving World Bank’s Ease of Doing Business index in critical factors;

• Power sector reform by providing more cost-effective and resilient energy at a target rate of less than $0.20 per kilowatt hour through the transformation of Prepa and independent energy regulator; and

• Infrastructure reform by enhancing and modernizing infrastructure and long-term capital planning efforts, as well as maximizing impact of federal disaster spending.

The board said the plan also proposes fiscal measures, which are projected to drive $12.3 billion in increased revenues and reduced expenditures through fiscal year 2023 and up to $142 billion in fiscal benefit over the 30-year period.

Fiscal measures

The proposed fiscal measures include:

• Enhancing tax compliance and additional tax initiatives by launching initiatives to increase tax compliance through better use of technology, best practices, addressing leakage, lowering corporate, individual and sales and use tax rates, while expanding the tax base through alternative minimum taxes and reducing incentives and subsidies;

• Governmental rightsizing through agency consolidations and rightsizing of government services;

• Healthcare reform, including bending the curve of healthcare cost inflation through a comprehensive new healthcare model that prioritizes quality relative to cost;

• Decreasing appropriations granted from the central government to municipalities and the University of Puerto Rico;

• Comprehensive pension reform through improving the financial stability of public employees’ retirement funds and protecting pensions for the most vulnerable; and

• Improving fiscal controls, budgeting, procurement practices and accountability at the Office of the Chief Financial Officer.

Prepa plan

Consistent with the Government of Puerto Rico’s announced priorities, the board said the proposed new fiscal plan for Prepa provides for its transformation and includes restructuring the power generation mix to leverage low-cost sources of power, rebuilding and modernizing the power grid, achieving an operational cost transformation, executing a large-scale capital investment program with billions of dollars in federal funds and private sector investments, restructuring the power industry by leveraging private operators, and establishing a new rate structure to allocate costs fairly and equitably across customers.

According to the release, the plan establishes a target rate of below $0.20 per kWh, as well as reliability and resiliency targets, and is premised on a transformation of the energy sector tied to a transaction timeline of at least 18 months.

Prasa path

Meanwhile, the board said the proposed new fiscal plan for Prasa outlines a path to fiscal sustainability so that it can achieve its mandate of providing high-quality and safe drinking water at affordable prices, as well as wastewater services, prudent environmental stewardship and making the right investments so that it is prepared for future natural or human-made disasters.

The Commonwealth of Puerto Rico announced its Title III petition filing on May 3, 2017. The case number is 17-03283.

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