How many times can someone say the word “plan” in 30 seconds? At least eight.
“I know that ‘the plan’ has been used as a joke by some. (Audience laughter.) And apparently I repeat the word ‘plan’ a lot. (Laughs.) But I want to talk to you about the importance then of having that plan. … Plan, plan, plan, plan,” said Puerto Rico Gov. Ricardo Rosselló Nevares, laughing at himself, to a room crowded with businesspeople who attended the “Caucus with the Government,” an event held Feb. 9, 2017, by the local Manufacturers Association.
During his keynote speech, the new governor spoke about some of the fiscal control and economic growth measures that he had enacted after only one month in office. They would all be part of what his administration presented 12 days later in its first fiscal plan – a roadmap that would “change the direction Puerto Rico was taking,” in line with PROMESA (Puerto Rico Oversight, Management & Economic Stability Act), the governor vowed.
The reiteration made at the time by Rosselló Nevares coincides with the number of fiscal and economic growth plans that the island has seen in the past two and a half years: at least eight versions, under two administrations of opposing political parties. On or before March 30, the commonwealth would see a ninth version of the document, upon the new deadline imposed by the Fiscal Control Board to recertify a fiscal plan for the government of Puerto Rico.
There are plenty of similarities between all the plans unveiled to date. More than half of the proposals included in the most recent fiscal plan released by the Rosselló Nevares administration were already part of the first plans prepared by former Gov. Alejandro García Padilla, who served from 2012 to 2016, according to an analysis conducted by the Center for Investigative Journalism.
The FCB has rejected all the plans received from the commonwealth government, except for the one delivered on March 13, 2017 by Rosselló Nevares. The latter fiscal plan was certified by the FCB, but not before including amendments of its own.
From the outset, each one warns that the government and its instrumentalities, agencies, officers, directors, employees, agents, lawyers, consultants, members, partners and affiliates “do not owe or accept any duty or responsibility to any reader” for the information in the plans. Estimates, assumptions and projections are all constantly and dramatically changing.
What remains across versions are the types of proposals to pull Puerto Rico out of its fiscal quagmire. The commonwealth government claims it isn’t about austerity, but rather a balancing act to bring back economic development while putting the fiscal house in order.
The recipe always includes cuts to government spending, including payroll, services, pensions and health care. The plans emphasize on the use of public-private partnerships, or P3s, and propose labor reforms that favor employers as the key to increase the anemic labor participation rate (currently at roughly 40 percent), while making it easier to do business on the island. They also claim that, in the immediate future, Puerto Rico is unable to meet its debt obligations, although the plans vary in the availability of funds for debt service. In the case of public corporations such as the Electric Power Authority, the Aqueduct and Sewer Authority and the Highway Authority, all push forward a route toward the privatization of a large part of its services and assets, sometimes with increases in what they charge their clients, to address their immediate fiscal deficiencies.
“Puerto Rico: A Way Forward” (or the “Krueger Report”), a study of the island’s economy and finances carried out in the summer of 2015 by economists and former employees of the International Monetary Fund Anne Krueger, Ranjit Teja and Andrew Wolfe, serves as the building block for all fiscal and economic growth plans that have been developed ever since.
“The situation is acute in the face of faltering economic activity, faltering fiscal and debt sustainability, and faltering policy credibility. A comprehensive program that tackles all three has a better chance of success than a partial approach, and the advantage of sharing the costs and benefits of reform across government, workers, businesses, and creditors,” the report anticipated.
García Padilla: The Krueger Report, three plans and a financial control board
Following the famous Krueger Report, the García Padilla administration unveiled in September 2015 the “Economic & Fiscal Growth Plan,” (or “PCEF” by its Spanish initials). The federal PROMESA law, which requires the delivery of a fiscal plan, had not been approved and the government was preparing to push its argument that the commonwealth’s public debt – $70-billion-plus in bonds and roughly $40 billion in unfunded pension liabilities – was unpayable.
There are many familiar faces working nowadays with the government’s fiscal and economic plans. DevTech, a consulting firm, and its president & CEO, Rafael Romeu, were part of García Padilla’s team of financial consultants. Romeu, an economist who worked in the IMF and “held positions” in the governing boards of the Central Bank of Venezuela and the Federal Reserve, is now the lead economist for the Rosselló Nevares administration. Wolfe, one of the authors of the Krueger Report commissioned by García Padilla, is Romeu’s counterpart at the FCB.
The same happens with Conway MacKenzie – tasked since January 2015 with analyzing and projecting how much money the government’s coffers will have – and other local consultancy firms, such as V2A, that have been around since García Padilla’s time.
The PCEF, which covered a five-year period, concluded that Puerto Rico would accumulate a deficit of up to $27.8 billion absent “measures of economic development and structural, fiscal and institutional reform.” It warned, moreover, that the commonwealth’s public debt was “unpayable” and that the government was at imminent risk of running out of money. The PCEF proposed the creation of a local “control board,” an entity that was created under Act 208 of 2015, but whose members were never appointed. The plan also emphasized the need for changes in the treatment that Puerto Rico receives from the federal government, particularly in Medicaid and tax matters.
Some of the initiatives of the PCEF included: cutdown to subsidies granted by the government to municipalities and the University of Puerto Rico; reduce operational expenses; enact labor reforms in favor of the employer; shut down schools; reduce the cost of the public health plan; significantly reduce the number of agencies; reduce tax rates for individuals and corporations; centralize the granting of permits; “ease” doing business on the island; establish an earned-income tax credit; improve tax collection rates; modernize the technological and energy infrastructure; and “stabilize” the cost of energy on the island. All these measures are also part of the most recent fiscal plan of the Rosselló Nevares administration.
The PCEF was amended twice: in January 2016 and in October of that year. Its latest revision corresponds to the first and only “fiscal plan” that the García Padilla administration delivered to the FCB, which had began operating just over a month earlier. The fiscal plan of García Padilla was rejected by the entity. It called for such changes as eliminating any assumption of federal funding if it had not yet been approved in Congress, as well as greater cuts to government spending – the same changes that the board has requested recently to the Rosselló administration. Before leaving La Fortaleza, García Padilla decided not to revise the document, leaving the delivery of a new fiscal plan to the newly elected government.
Rosselló Nevares: A change of vision?
What followed is a chain of delays, deadline extensions and revisions. Once in office and with a deadline of mid-January 2017, Rosselló Nevares asked the FCB for an extension to the delivery deadline of the fiscal amid revisions of the numbers left by his predecessor. The FCB granted the request and proposed late February 2017 as the new deadline. Yet, it called for significant cuts in government spending, particularly in the areas of payroll, pensions and health care.
On Feb. 21, 2017, Rosselló Nevares delivered to the FCB his first draft of the fiscal plan, but it was never made public, after labeling it a “working document.” On Feb. 28 and after further changes, the administration released a second fiscal plan, which fell short by roughly $700 million in closing the fiscal gap identified by the FCB at that time. A week later, the board once again rejected a plan delivered by the commonwealth government. It also urged for stronger fiscal measures such as furloughing working days of public employees and greater cuts to pension benefits.
The board gave the Rosselló Nevares administration until March 11 to make new changes to the document, two days before a scheduled public meeting to certify a fiscal plan for Puerto Rico. On March 13, after last-minute negotiations and yet another revision to the plan, both sides reached consensus over the certification of Rosselló Nevares’ fiscal plan. The document included amendments required by the FCB, including a furlough program, the elimination or reduction of the Christmas bonus for that year and greater pension cuts.
Following the board’s meeting, the governor addressed the public in a televised message, from the inner courtyard of La Fortaleza (the governor’s mansion), flanked by lawmakers and officials of his party, to celebrate that “reason prevailed, good sense prevailed, our fiscal plan prevailed, Puerto Rico prevailed.”
Five months after that message, the FCB called for the implementation of the furlough program and pension reductions. Rosselló Nevares opposed and the FCB took the matter to the federal court. After hurricanes Irma and María in September, the board decided to withdraw the legal action. Judge Laura Taylor Swain, who presides over Puerto Rico’s bankruptcy case, never ruled on the dispute.
After Irma and María, the certified fiscal plan was on pins and needles and the FCB asked the government for a new draft to be delivered by Dec. 22, 2017, that took into account the new panorama in Puerto Rico after the devastation left by both hurricanes. The government failed to comply with the December deadline and requested an extension to the FCB, which granted the petition and pushed the deadline to Jan. 10. The board’s expectation was to certify a new fiscal plan by Feb. 23.
On the afternoon of Jan. 10, some dozen journalists arrived at La Fortaleza for a roundtable where the new document would be discussed. After all, it was the first fiscal plan to be unveiled following the onslaught of María. Minutes before the meeting, however, the governor’s press secretary, Yenniffer Álvarez Jaimes, told journalists from a cellphone on speaker that the roundtable had to be cancelled. She didn’t know at the time if the plan would be made public that day, citing last-minute changes.
The Rosselló Nevares administration failed to have a draft of the fiscal plan ready for its power utility, PREPA, also due Jan. 10, and requested an extension for its delivery. The FCB granted the commonwealth’s petition and pushed back the deadline to Jan. 24, but also demanded that the government handed over both plans together. On Jan. 24, the commonwealth delivered its draft fiscal plans for the central government, PREPA and the water utility PRASA.
On Feb. 5, the FCB rejected the documents, stating they failed to comply with PROMESA. The board required, once again, greater cuts to government spending, including payroll and pensions, as well as more details about the reforms proposed by the Rosselló Nevares administration.
The FCB, moreover, recently announced an extension to the target date for the new fiscal plan’s certification, from Feb. 23 to March 30.
Whose fiscal plan?
Will the FCB approve Gov. Rosselló Nevares’ version or impose its own fiscal plan? The decision, at the end of the day, could reside in a technicality within the PROMESA law.
For John Mudd, a lawyer who represents some creditors in Puerto Rico’s bankruptcy process under Title III, the certification of a new fiscal plan would cause yet another “clash” between the government and the board. This time, unlike the plan’s certification process in March 2017, the FCB would impose its own version, he anticipated.
“To avoid problems with the judge and be able to control – and that’s what the board wants to do – the board can do that (certify its version of the fiscal plan). If the board imposes its own plan, I think that this time the government would lose. The board is not going to make the same mistake,” said Mudd, referring to the fiscal plan that was certified before the hurricanes and ended with the FCB suing the government in federal court.
If the board were to approve its plan, the commonwealth government would be left with few legal defenses to oppose the implementation of cost-cutting measures sought by the FCB that the Rosselló Nevares administration.
“From her decisions, it seems that Judge (Swain) acts according to what the (PROMESA) law specifically says. She is not going to make it up. Specifically, PROMESA says that the board either certifies the government’s (plan) or its own plan,” Mudd explained.
Nevertheless, regardless of the version that the FCB finally certifies come March 30, it will be the federal court and the commonwealth’s Title III bankruptcy process which will determine the future of the government’s fiscal plan, as recently published by the CIJ. The “plan of adjustment” of the third chapter of PROMESA will establish how much debt will be paid, when, to whom and the order of preference among the different creditor groups.
Any decision on what resources will be available to the commonwealth and which are restricted – as the plan of adjustment would have it – will significantly change the assumptions of any fiscal plan that is certified prior to this process. Under PROMESA, the FCB has the exclusive power to present the plan of adjustment, but the court has the final say on the approval of the document, which also involves a voting process by different creditor classes.
The most recent version of the central government’s fiscal plan features economic projections inconsistent with the historical experience of places that have been impacted by hurricanes, as well as with the economic trajectory of Puerto Rico, which according to experts, has not had annual growth in decades as that estimated for fiscal year 2019.
This research was made possible in part by the support of the Ravitch Fiscal Reporting Program of the Graduate School of Journalism at the City University of New York.