On March 13, the federal oversight board of Puerto Rico unanimously agreed to a new economic plan that will restructure the $70 million debt faced by the country. The agreement outlines the new taxes that will be implemented on the island, such as excise tax on tobacco, higher traffic fines, tax on insurances, and an extension of a tax break for manufacturers. The plan is set to take effect over the next ten years and improve fiscal solvency on the island.
The plan, known as PROMESA, was submitted by Governor Ricardo Roselló in a preliminary version on March 9. It was rejected by the federal board for being “overly optimistic” in regards to the economic sanctions, according to Business Insider.
Consequently, it led to a weekend long dialogue between the governor and the federal board. After some modifications and revisions, the plan was ultimately adopted. Reuters reports, “Approval by the board came with conditions: the government must reduce pension spending by 10 percent beginning in 2020, cut Christmas bonuses and implement employee furloughs as soon as July 1 to stave off a short-term cash crunch.”
However, pensions in Puerto Rico are an issue because retirement systems are nearly bankrupt due to the many years of mishandling by the governing bodies that promise rather generous pensions to workers. Therefore, over the next 30 days, the board will be negotiating with the government on how to cut pensions.
A modification made by the board on the original plan lowered the numbers, thereby improving the island’s 10-year projected funding gap to $67 billion from $56 billion. As a result, there will be $39.6 billion in new cash flows from spending cuts and revenue initiatives, a significant raise in finances from $33.8 billion in the original plan.
Another revision set by the board are certain “milestones” the island government must meet. Governor Roselló “had to find ways to come up with $160 million more in government revenue than he had in a previous version of the plan” according to The New York Times.
The governor has emphasized, however, that he will remain unchanged in his views on the following: how much to cut pensions for retired government workers, whether to constrain the current workforce to two and four day workweeks in order to save money, and whether to stop paying all public workers a Christmas bonus, while bondholders are not being paid.
David Skeel, a board member, said, “Puerto Rico is about to capsize… The island is overwhelmed by debt. Puerto Rico is in real danger of running out of money for even the most basic essential services” as reported by ABC News.
The governor told The Associated Press that he was pleased with the plan and is confident his administration will find ways to head off the furloughs and the elimination of Christmas bonuses. “That’s my goal,” he said by phone. “We’re taking bold steps to making sure the economy gets jump started. We’re very much well on our way.”
The governor’s representative to the board, Elias Sanchez, told The Associated Press that the territory’s government hopes to avoid at least the first round of furloughs by proving it will have $200 million in cash reserves by June 30.
Although PROMESA will be revitalizing the debt crisis in Puerto Rico, Governor Rosselló said he will not pass public policy that would harm the poorest pensioners. “I don’t see any way I can reduce pensions of people already having a hard time getting medications and things,” according to Reuters.
In regards to another reform in the economic status in Puerto Rico, the board supported government efforts to seek additional businesses from bondholders of Puerto Rico’s main power utility company, PREPA, which is more than $8 billion in debt. Later on, a subcommittee of the U.S. House Committee on Natural Resources announced it will hold a hearing on 22 March on the state of the PREPA and bondholders question.
According to Bloomberg, the plan “lays out a path for closing the territory’s chronic budget deficits. The blueprint leaves an average of less than $800 million annually for debt service over the next decade, a fraction of the more than $3 billion owed each year from 2018 through 2027.” The plan addresses the deeper concessions that the island will be collecting from its investors.
The seven member federal board of Puerto Rico was established by Congress to guide Puerto Rico through its $70 million debt last year. Puerto Rico, however, gained a significant amount of debt because it kept on borrowing money over the years to show the federal government that its budget is balanced and organized. With the ten year plan to stimulate the economy and reform its economic crisis, Puerto Rico will hold its sovereignty over the plan and bring its budget back into balance and a smaller debt pool.