A Valentine’s Day Message?

St. Valentine’s Day, 2018

Good Morning! In today’s Blog, we consider the continued scrutiny by the PROMESA Board and Puerto Rico’s progress in not just recovering from Hurricane Maria—but also from its quasi chapter 9 municipal bankruptcy. That progress has been achieved through federal assistance, the Board’s vigorous oversight, and, as we note, tax and spending changes undertaken by the government of Puerto Rico.  

Fiscal Imbalances.  While states, cities, and counties operate in regular order, the federal shutdown, far into the federal fiscal year, illustrated the challenge to state and local governments of the unpredictability of federal funding that state and local governments would otherwise count upon. Now, in the wake of Congress’ vote to suspend the national debt ceiling, the package included nearly $100 billion in disaster aid, as well as extend a number of expired tax provisions, including a Jan. 1, 2022 extension of the rum cover-over for Puerto Rico and the U.S. Virgin Islands—an extension projected to generate an estimated $900 million for the two U.S. territories, as well as a related tax provision which would, at long last, allow low-income Puerto Rican muncipios to be treated as qualified opportunity zones: that disaster aid includes $4.9 billion to provide 100% federal funding for Medicaid health services for low-income residents of Puerto Rico and U.S. Virgin Islands for two years and $11 billion of Community Development Block Grants for the two territories, including $2 billion of CDBG money to rebuild Puerto Rico’s electrical grid. Puerto Rico anticipates it will be the recipient of as much as $18 billion—with an option to access a line of credit of as much as $4 billion—albeit, to the extent the territory can continue to demonstrate its lack of liquidity. Those amounts, including $4.8 billion in Medicaid, and $11 billion from HUD, however, are subject to conditions of both the federal government and the PROMESA Board. HUD Deputy Secretary Pamela Hughes Patenaude last week stated HUD would award $1.5 billion to assist in the repair of damaged homes and business structure, while FEMA has already awarded $300 million, half of which is via a loan. In addition, the aid includes $14 million in the Women, Infants & Children (WIC) program assistance. The package provides some $14 million for the Army Corps of Engineers to award contracts to U.S. electric companies to repair the power grid. Importantly, the FEMA funding will provide not just for improvements in the island’s public power system, but also for repairs: Puerto Rico has guestimated it will require $ 94.4 billion to rebuild the island’s public infrastructure.

Puerto Rico’s non-voting Representative in Congress, Jenniffer González, noted the next disaster relief resolution may be discussed in Congress later this Spring—at which point she anticipates the critical focus Will be on Puerto Rico and the U.S. Virgin Islands. She noted: “Speaker Paul Ryan told me that there is going to be a fourth bill on supplementary allocations for Puerto Rico with specific projects for transportation and electric power.” U.S. Senator Marco Rubio (R-Fla.) noted that claims of states such as Florida and Texas were very helpful in recent efforts in favor of funds for Puerto Rico; however, he warned that Congress needs to allocate additional funds for disasters regularly: “There are other places that, by then, will have needs.”

Negocios. Meanwhile, with regard to the fiscal storm, the fiscal amendments Governor Ricardo Rosselló presented to the PROMESA this week presented a more positive outlook for creditors to reach an accumulated surplus of $3,400 million, even as his offer retained virtually unchanged the terms of fiscal measures and severe cuts in government revenues over the next 5 fiscal years. The plan the Governor presented, moreover, did not comply with the requirements to reduce the pensions of government retirees, nor to eliminate additional labor protections for private sector workers, after the notification of violation of the federal PROMESA law—demands calling for a series of amendments, including a 25% reduction in pensions exceeding $1,000 per month (in combination with social insurance), in addition to the elimination of a series of protections for private sector employees. Indeed, in an interview with El Vocero, Gov. Rosselló replied that his administration is neither contemplating reductions to pensions nor including legislation to eliminate the employer’s obligation to pay the Christmas bonus and compensation for unjustified dismissal or to reduce the requirements for vacation leave and sick leave, stating: “We are not contemplating reductions in pensions.” As for eliminating labor protections, the Governor made clear: “We have not included that in the reform of human capital… certainly, it is an area that is important for us to work: how do we raise labor participation in Puerto Rico? How do we encourage them to transition to work? “

The most dramatic modification of the tax plan proposed by Gov. Rossello is the elimination of the aggregate deficit of $3,400 million for the FY2022 budget, since the previous version of its fiscal plan was in default with the objective of eliminating structural deficits: as early as FY2019, he projects the government will achieve a surplus of $750 million, thanks in large part, according to the Governor, to the federal assistance provided by Congress. Even though it had been estimated that the aid to date has reached $16.5 million, Puerto Rican authorities assert only $12,800 million has been incorporated as a result of supplementary allocations in the fiscal plan—allocations related to the FEMA $ 35.3 billion in the public assistance program and $21 billion in private insurance. The Governor noted his administration plans to spend $13 million of disaster recovery funds for Hurricane Maria, enabling, he added, a GDP growth projection of 8.4%. He also noted he expects a reduction in the rate of emigration from Puerto Rico down to 2.4%.

Unsurprisingly, he warned, the most difficult challenge will be what he termed the FY2020 Medicaid fiscal cliff –the year when the current Congressional appropriated funds will be exhausted. To address that abyss, he said the government has intensified cuts to government programs, as well as adopted measures to increase revenues, resulting, he asserted, in a positive or surplus balance of $800 million for FY 2023, noting: “Stabilization (the surplus) continues with other structural measures and impacts that have: the reduction in expenditures by government items and the rightsizing (shrinking) that is being done.” It appears that the $800 million projected surplus was included in the analysis of the sustainability of the public debt, an element which will be considered by the PROMESA quasi-bankruptcy court for the payment arrangement to the creditors—or, as he put it: “The discussion with the creditors will go by Title III, in everything that has not been agreed by Title VI. It is a numerical exercise, without differentiating creditors, about the numbers that reflect the fiscal plan, and that will certainly be part of the elements of judgment…that the judge would use in her determinations.”

The Governor noted that cuts to agencies such as Education, Corrections, Health, as well as across the board via shrinking services and utilizing tighter payroll control have succeeded in increasing revenues by $29 million; nevertheless, he added, because the new revenues failed to meet the anticipated goals, the agency, Mi Salud, will continue to be required to face an FY2022 reduction of some $795.


Fiscal & Physical Imbalances

Lincoln’s Birthday, February 12, 2018

Good Morning! In today’s Blog, we consider the outcome of last week’s actions to avoid another federal government shutdown, we consider the ongoing fiscal and physical plights of Puerto Rico.

Fiscal & Physical Imbalances.  Puerto Rico’s non-voting Member of Congress, Jenniffer Gonzalez, and Gov. Ricardo Rosselló have met with a group of New Progressive Mayors to describe the terms of the new federal assistance under the just passed $16 billion recovery assistance approved by Congress—funds ranging from what Secretary of Public Affairs Ramón Rosario Cortés noted would “range from construction to agriculture programs that will allow each municipality to develop its economy and create jobs.” The Secretary anticipates there will be a second meeting with associate mayors. Naguabo Mayor Noé Marcano said that the allocation of these funds represents “a unique opportunity” to repair and/or build infrastructure projects (including roads and bridges) and housing: “Part of the projects that we-at a given moment-had planned as improvements to the municipalities, we understand that this is the best opportunity.”

That could mean a new fiscal chance for this small muncipio of just over 23,000, one founded on July 15, 1821 near the mouth of the Daguao River—founded with the intent of providing a defense for the region from the Caribe Indians, based upon, 27 years earlier, the request of several influential neighbors of the Spanish Crown: on January 9, 1798, the erection of the Naguabo parish was authorized—but construction did not commence on its church until 1841. The muncipio’s name originated from the cacique and chieftainship named Daguao—as the territory was originally populated by Taíno Indians. Naguabo is also known as Cuna de Grandes Artistas (the birthplace of Great Artists) and Los Enchumbaos, “the Soaked Ones.”

For his part, Mayor William Aliceo of Aibonito, the City of Flowers, with the city’s appellation derived from the Taíno word “Jatibonicu,” the name of a Cacique leader of the region; a name also used to refer to a river in the area—and, in addition, a name used by the tribe of Orocobix. At the same time, there is a legend that tells of a Spanish soldier, Diego Alvarez, who, on May 17, 1615, reached one of the highest peaks in the area: upon taking in the view, he exclaimed: “Ay, que bonito!” The exclamation eventually led to the name of the region. Nearly two centuries later, Pedro Zorascoechea, in 1630, was one of the early Spaniards to settle on the island—apparently establishing one of the first fincas or ranches in the region; however, it was not until 1822, when Don Manuel Veléz presented himself before the government, representing the inhabitants of the area, to request that Aibonito be officially declared a town—a request which then Governor Miguel de la Torre granted on March 13, 1824.

Hurricane Maria’s eye tore through the region’s hills on September 20th: it was especially fierce along the exposed ridgelines, whipping in at a hundred and fifty-five miles an hour: it tore apart wooden houses; along the road leading up to Aibonito from San Juan, normally a two-hour drive, Maria tore a panorama of ruined houses and businesses, toppled and twisted trees, and downed utility poles. Mayor Aliceo said he would like to use part of the recovery funds for agriculture, roads, and electrical infrastructure: “In Aibonito, we have a project submitted to the U.S. Army Corps of Engineers for the canalization of the Aibonito River. And with poultry farming, which was well affected by Hurricane Maria, I’m interested (the funds) will find a way to help Aibonito’s poultry farmers, given the million-dollar losses they’ve had.”

The federal allocation came just prior to Puerto Rico’s resubmission of its revised fiscal plans to the PROMESA oversight Board—plans due today, with Puerto Rico’s representative, Christian Sobrino, simply advising the board that the plans comply with the public policy of the government, noting: “[W]e will comply with the stipulated date for the delivery of the fiscal plans. It has been an intense job, but the government will comply with the appointed time. The plans will continue in accordance with the Governor’s public policy of protecting the most vulnerable and that this document serves as a tool of fiscal responsibility and at the same time a path of long-term socio-economic development for the island.”

Nevertheless, uncertainty reigns, especially in the wake of the federal government shutdown. With last week’s Congressional approval of a package to keeps federal agencies running through March 23rd, the date of certainty has now been pushed off while House and Senate appropriators in Washington, D.C. work on final 2018 spending bills. The package suspends the debt ceiling through March 1, 2019, provides $89.3 billion in disaster aid, and extends a number of expired tax provisions, including a Jan. 1, 2022 extension of the rum cover-over for Puerto Rico and the U.S. Virgin Islands, which is projected to generate an estimated $900 million for the two U.S. territories. In addition, a related tax provision calls for all low-income communities in Puerto Rico to be treated as qualified opportunity zones. The disaster aid includes $4.9 billion to provide 100% federal funding for Medicaid health services for low-income residents of Puerto Rico and  the U.S. Virgin Islands for two years, $11 billion in CDBG block grants for the two territories, including $2 billion of CDBG money to rebuild Puerto Rico’s electrical grid—with Resident Commissioner Gonzalez reporting that, in total, $16.55 billion of the disaster aid is earmarked for Puerto Rico.

With the new allocations to mitigate last year’s natural disasters, the federal government has already authorized just over $140.7 billion within the past six months to be distributed mainly between Texas, Florida, California, Puerto Rico, and the US Virgin Islands—with Puerto Rico’s government projecting its share will be approximately $18 billion, plus access to a credit line of $4 billion—albeit, to access that line, the U.S. territory would be mandated to prove lack of liquidity. Of the total, almost $16 billion will surely go to the island from the funds allocated in the budget bill and to mitigate disasters—provided the territory complies with the conditions of both the federal government and the PROMESA Oversight Board. The projected package includes $4.8 billion for Medicaid and $11 billion for CDBG: last week, HUD Deputy Secretary Pamela Hughes Patenaude announced, during a visit to San Juan, that HUD will award $1.5 billion to help repair damaged houses and businesses. In addition, another $ 300 million, half of which would be allocated as a loan, has been allocated to match the FEMA project’s cost. The package includes $6 billion, funds under the U.S. Army Corps of Engineers, provided to U.S. electric companies to repair the power grid. FEMA has stated, moreover, its intent to grant an additional $13 billion to the island.

Puerto Rico’s Federal Affairs Executive Director, Carlos Mercador, notes that an official damage estimate from federal agencies is still pending; Commissioner González notes that Congress’ next disasters relief resolution may be discussed in Congress between April and May, noting: “Speaker Paul Ryan told me that there is going to be a fourth bill on supplementary allocations for Puerto Rico, with specific projects for transportation and electric power.”