Puerto Rico has dangled a carrot in front of the investment community in the form of a 77-page fiscal and economic
It remains to be seen whether the measures are enough to persuade investors to work with the government as it restructures about $72 billion of debt -- or whether they can garner the needed political support on the island.
The document, released Sept. 9, won plaudits for being "comprehensive" from Peter Hayes, the head of Blackrock's municipal bond group, and Moody's Investors Service vice president Ted Hampton. Advantage Business Consulting president Vicente Feliciano praised the plan for going beyond past proposals that had simply presented revenue and spending measures.
Sergio Marxuach, the public policy director at the Center for a New Economy, however, dismissed the document as, "more of a wish list than an actual plan," saying "In my opinion it is too broad, and I don't see enough connections between the items.
"I see this more as a negotiating document with the bondholders," Marxuach said. "It says we're willing to do all these things in exchange for some debt relief."
Unlike most government proposals, which are only in Spanish, the complete plan was released only in English, while only a summary was available in the island's main language. And the government presented the plan to the English-language press in the continental United States 14 to 15 hours before it released the plan to the island's press, Marxuach said.
The plan, before presenting its reform proposals, quotes from the so-called Krueger report, "Puerto Rico - A Way Forward":
"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."
Accordingly, some of the "Puerto Rico Fiscal and Economic Growth Plan" proposals are on economic growth and structural reform, some on fiscal stability, and still others on institutional reform and transparency.
To stimulate employment and labor force participation, the government will ask the U.S. Congress to give a 10-year waiver from future minimum wage increases for workers age 25 or younger during their first two years of employment. The plan suggests making workers eligible for overtime pay after they work more than 40 hours a week, rather than after they work more than eight hours a day.
It calls for the introduction of an earned income tax credit aimed at making work more attractive to those with children. Also to increase participation in the labor force, the plan urges the local officials take steps with the federal government to allow people to remain in public housing even as their incomes rise.
Proposed economic growth and structural reform measures include reducing nominal corporate tax rates while eliminating corporate tax loopholes and unnecessary complexity. The plan also calls for the centralization and streamlining of the business permitting process. It calls for the government to seek a waiver from the federal government of the Jones Act, which the plan says would reduce shipping costs to the island.
As a final component of its economic growth proposals, the plan calls for a total investment of $7.7 billion in infrastructure programs for roads, ports, healthcare, and other needs. Some of this money would come from the federal government and some from Puerto Rico operating funds.
For fiscal stability, the plan proses revenue enhancing and expense reduction measures. The chief revenue enhancer would be to maintain an increase in the consumer tax to 11.5% from 7%, which was introduced in July 2015. The plan estimates this will bring in from $976 million in fiscal year 2016 to $1.1 billion in fiscal year 2020.
The government's switch from a sales and use tax to a value added tax in April 2016 is expected to yield about $135 million this fiscal year and about $220 million per fiscal year in the following years.
The plan calls for an extension and then replacement of a tax on foreign corporations operating in Puerto Rico, projecting this change would bring in an additional $1 billion per fiscal year starting in fiscal 2019.
The plan proposes improved tax administration and enforcement, partly by introducing new technology and by improved training for tax officials.
For expense reduction measures, the plan calls for extending a freeze on new hires, salary increases, and collective bargaining agreements. This change would yield $321 million in fiscal 2018, an amount that would increase to $622 million in fiscal 2020. The plan also calls for the government to also take steps to reduce government employment by 2% per year, which would save it from $39 million in fiscal 2017 up to $150 million in fiscal 2020.
The plan directs that the central government reduce subsidies to municipalities starting in fiscal 2018. By fiscal 2020 this should save it $300 million a fiscal year. It says that the government should gradually cut its allocation of funds to the University of Puerto Rico, ultimately saving $200 million a year in fiscal 2020.
Enrollment in public schools has declined by 40% since 1980 and is expected to decline an additional 25% by 2020. In response, the plan argues that there should be continued closures of public schools. This would ultimately lead to a savings of $118 million per year in fiscal 2020.
Finally, the government proposes cutting expenditures by selling concessions to operate its toll roads, bus systems, and maritime transport. The plan does not estimate a financial impact of these sales.
Institutional reform and transparency measures include installing new government accounting and financial systems, particularly in the Treasury Department.
The plan calls for the establishment of an independent control board to monitor and control government actions. The board would consist of five individuals with expertise in management and government. The governor would nominate a majority of the board members from a list provided by an independent third party. Members would serve staggered four-year terms.
The board would have the right to reject proposed budgets and would review budget compliance and compliance with other "Puerto Rico Fiscal and Economic Growth Plan" proposals over the year. If there were deviations, the board could prohibit the government from entering into new contracts and/or authorize hiring freezes or expense cuts.
Finally, the plan makes several requests to the U.S. federal government. It calls for Washington to increase funding for Medicaid and Medicare, allow the government to maintain the Act 154 tax on foreign corporations, pass a tax credit to promote U.S. corporate investment in Puerto Rico, revoke the Jones Act for Puerto Rico, allow Chapter 9 for Puerto Rico, and several other measures.
Marxuach said he thought the plan had some good suggestions - establishing an earned income tax, reducing the nominal corporate tax rates while simplifying the taxes, and reducing the income and wealth limits for receiving public housing and supplemental nutritional assistance program benefits. However, the plan lacks details on implementation, he said.
Marxuach said he was concerned by the number and nature of the plan's requests to Washington. Many of these requests will be hard to get passed, he said. The same will be true of some of the plan's other proposals, like its call for minimum wage exemption and reduced spending for the University of Puerto Rico.
Opposition is already mobilizing Marxuach said, noting plans for a demonstration against the plan scheduled for Friday afternoon.
The plan was probably mainly aimed at bondholders and the U.S. Congress, and may have limited political viability on the island, Marxuach said.
Puerto Rico Senate President Eduardo Bhatia Gautier and Puerto Rico House of Representatives President Jaime Perell- Borás both declined to be members of the working group that created the plan, Marxuach said. When they declined they said they did not want to shift from their legislative function to an executive one. Marxuach said the real reason was probably that Bhatia Gautier and Perell- Borás knew the plan would have politically unpopular items in it and did not want to be associated with it. Since these two leaders are in the same party as Gov. Alejandro García Padilla, their disinterest in helping draft the plan shows the difficulty it will face getting through the legislature, Marxuach said.
