What Do Today’s Fiscal Storms Augur for Puerto Rico and New Jersey’s Fiscal Futures?

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eBlog, 03/13/17

Good Morning! In this a.m.’s eBlog, we consider the frigid challenges awaiting Puerto Rico in New York City’s Alexander Hamilton Building today, where even as a fierce winter storm promises heavy snow, the U.S. Territory of Puerto Rico will likely confront its own harsh challenge by the PROMESA Board to its efforts to reassert ownership and control of Puerto Rico’s fiscal future. Then we turn south to New Jersey, where there are fiscal and weather storm warnings, with the former focused on a legacy of public pension debt that Governor Chris Christie will bequeath to his successors.

Is There Promise or UnPromise in PROMESA? In the wake of changes made by Puerto Rico Governor Ricardo Rosselló Nevares to update its economic growth projections to address a concern expressed by the PROMESA Oversight Board, it remains unclear whether that will be certified by today—when the Board will convene in New York City in the Alexander Hamilton building to act on measures intended to guide the fiscal future of the U.S. territory over the next decade. The update was made in an effort to close a new gap between Puerto Rico’s projected revenue and expenditure projections, since the new economic projections altered all the Government’s revenue estimates. Gov. Rosselló, in an interview with El Nuevo Día, explained his administration had ordered four new measures to correct the insufficiency, which had been estimated at $262 million: the first measure would be an increase in the tax on tobacco products, an increase projected to add around $161 million in public funds, nearly doubling the current rate. The Governor proposed eliminating Christmas bonuses from the highest salaries in the government and public corporations, albeit without providing details with regard to the distinction between an executive salary and a non-executive salary, stating the changes would generate savings of between $10 million and $20 million. He also said the revised, updated plan would reflect an additional $78 million by means of the reconfiguration of the property tax through an appraisal process, as well as modifications to achieve $35 million in savings by means of changing the amount of sick and vacation days which public servants accrue, noting: “We were able to evaluate some of the economic development projections, and, even though our economists don’t agree with the Oversight Board’s s economists, we’ve used the Board’s economic projections within our model for the sake of getting the fiscal plan certified…(Due to the changes) we’ve prepared, some initiatives to have additional savings of up to $262 million. We had already assuaged some of the Board’s concerns within the same proposal we had made, and those were clarified.”

The Governor indicated that the decision taken yesterday does not imply that he will support other proposals made by the Board, noting that he especially opposed the suggestions to reduce the working hours of public employees by almost 20% and cutting professional services in the government by 50%, in order to reduce costs immediately in an effort to ensure the government does not run out of cash by the first two quarters of the next fiscal year, admitting that current projections suggest they are short by around $190 million, and warning: “This (the Board’s proposals) has a toxic effect on workers and on the economy.”

In response to the PROMESA Board’s apprehensions about the double counting of revenues in its submitted plan, the Governor noted: “We’ve established that our public policy is to renegotiate the debt. The idea is to keep everything in one place so we can work with it. The debt service will be affected depending on economic development projections, but we haven’t touched that part of the fiscal plan. We’re focusing on preparing the collection areas, because we’re aware that (government revenues) have been overestimated in the past. We’ve answered questions about healthcare, revenue, government size, and we’ve worked on the pension category within our administration’s public policy about protecting the most vulnerable as much as possible.”

As for today’s session in New York, noting that he believes the government has succeeded in answering the Board’s questions and concerns, and, using the Board’s economic growth numbers, the Governor believes the updated plan will address the revenue gap without major cuts, noting: “That’s no small thing. We’ve been able to dilute it and make the impact progressive, in the sense that those who have more have to contribute more, and keep the most vulnerable from losing access. We’ve established a plan of cost reduction. Now, the plan guarantees structural changes in the government so it operates better, as well as changes to the healthcare model and the educational model. It defends the most vulnerable, it doesn’t reduce the payroll by 30% or 20%, and it doesn’t reduce working hours like they’ve asked, and we reduced tax measures.” Nevertheless, Gov. Rosselló noted that the Board’s proposed service delivery cuts of as much as 50% affect health care and education—defining those two vital government services as ones in which such deep proposed cuts could trigger a drop in the economy by 8% or 9%, noting: “I’m very aware that the ones that are in the middle of all this are the people of Puerto Rico.” Indeed, the plan considers cuts to retiree pensions, lapses in the basic coverage of the Mi Salud healthcare program, a freeze in tax incentives, agency mergers, privatizations, and reductions in transfers to the University of Puerto Rico and to municipalities. On the revenue side, the Governor’s proposal seeks to increase the collection of the Puerto Rico Sales and Use Tax, the property tax, and corporate taxes. In addition, it boosts the cost of insurance, penalties, and licenses granted by the Government.

With or without the endorsement of Governor Rosselló’s administration, when the PROMESA Board meets today in the Alexander Hamilton US Custom House, the agenda includes certifying a plan that some argue goes far beyond not only considering the Governor’s proposed fiscal recommendations, but to some marks a transition under which the PROMESA Board members will “will become both the Legislative and Executive powers in Puerto Rico.” That is to note that this and ensuing fiscal budgets, or at least until the government of Puerto Rico is able to balance four consecutive budgets and achieve medium- and long-term access to financial markets—will first be overseen and subject to approval by the Oversight Board, as well every piece of legislation which has a fiscal impact.

Balancing. The undelicate federalism balance of power will be subject to review next week, when the House Committee on Natural Resources’ Subcommittee on Insular Affairs has a scheduled PROMESA oversight hearing.

The Stakes & States of Yieldy—or Kicking the Pension Can Down the Road.  Alan Schankel, Janney Capital Markets’ fine analyst has now warned that the Garden State’s lack of a significant plan to address New Jersey’s deteriorating fiscal conditions will lead to more credit rating downgrades and wider credit spreads, writing that New Jersey is unique among what he deemed the nation’s “yieldy states,” because the bulk of its tax-supported debt is not full faith and credit, lacks a credit pledge, and some 90% of the debt payments are subject to annual appropriation. If that were not enough, Mr. Schankel wrote that the state is burdened by another fiscal whammy: it sports among the lowest pension funding levels of any state combined with a high debt load and other OPEB liabilities. Mr. Schankel warned the fiscal road ahead could aggravate the dire fiscal outlook, noting that the recent sales tax reduction from 7% to 6.625%, combined with phasing out the estate tax under last year’s $16 billion Transportation Trust Fund renewal, will reduce the state’s annual revenue by $1.4 billion by 2021—long after Gov. Christie has left office, noting that the state’s unfunded pension liabilities worsened when in the wake of FY2014—16 revenue shortfalls, New Jersey reduced pension funding to a level below the scheduled-ramp up Gov. Chris Christie had agreed to his as part of New Jersey’s 2011 pension reform legislation, emphasizing that public pension underfunding has been “aggravated by current leadership,” albeit noting that such underfunding is neither new, nor partisan: “This long history of kicking the can down the road seems poised to continue, and although New Jersey appropriation backed debt offers some of the highest yields among all states, we advise caution…Given the persistent lack of political willingness to aggressively address the state’s financial morass, we believe the future holds more likelihood of rating downgrades than upgrades.”

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