Fiscal board warns Legislature not to pass labor reform again

In a letter to legislative leaders, the oversight board said it wishes to avoid further disruption in the labor markets, as occurred when the Legislature and the governor disregarded the board’s concerns in enacting Act 41, which resulted in litigation and the nullification of the law six months after it took effect.

By The Star Staff

The Financial Oversight and Management Board has once again warned the Legislature against passing labor reform.

The House passed House Bill 1651, which would repeal certain portions of Act 4-2017, the Labor Transformation and Flexibility Act (LTFA), to reestablish many of the labor restrictions that existed prior to passage of the LTFA, as well as to create new labor restrictions. The bill is virtually identical to Act 41-2022, which was recently nullified under the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), the oversight board said in a letter to legislative leaders on Wednesday.

“We understand that the Bill is currently pending in the Senate and may be passed by the Legislative Assembly before the current session ends on November 14, 2023,” the oversight board said in the letter. “In addition, on November 1, 2023, the ‘Report on the Fiscal Effect of House Bill 1651’ was prepared by the Budget Office of the Legislative Assembly of Puerto Rico. It is also our understanding that the Governor and AAFAF [the Puerto Rico Fiscal Agency and Financial Advisory Authority] have commissioned an economic analysis of the Bill. As set forth below, the Oversight Board has significant concerns with respect to HB 1651. Notwithstanding those concerns, the Legislature seems determined to pass this legislation for a second time.”

In the letter dated Nov. 8, the oversight board said it wishes to avoid further disruption in the labor markets, as occurred when the Legislature and the governor disregarded the board’s concerns in enacting Act 41, which resulted in litigation and the nullification of the law six months after it took effect.

“To avoid similar disruption and uncertainty in the labor markets, the Oversight Board urges the Legislature to engage with the Oversight Board to analyze fully the impact of this Bill on the Commonwealth of Puerto Rico – before passing it,” the letter said.

Following an analysis, the Board determined that Act 41 would discourage new hiring and reduce labor market flexibility in direct contravention of the Fiscal Plan, which in turn would “(1) negatively impact Puerto Rico’s dismal labor force participation rate; (2) reduce economic growth and market competition; (3) deprive the Commonwealth of the revenues associated with such revenue growth (including by reducing the effectiveness of the Earned Income Tax Credit); and (4) increase the Commonwealth’s public assistance burden.”

“In summary, Act 41 would not only render Puerto Rico less attractive to new investors by increasing costs and litigation rather than allowing the free market to determine employee compensation, but also would hinder and diminish the economic growth PROMESA promotes, and the Government should want to encourage,” the letter added.

“Given that HB 1651 is substantively identical to Act 41, all these determinations apply to the Bill. At bottom, the Oversight Board believes that the proposed changes to the labor laws in Act 41/HB 1651 will undermine Puerto Rico’s competitiveness and its ability to achieve sustainable economic growth,” the oversight board said. “Under these circumstances, including that HB 1651 is directly inconsistent with the 2023 Fiscal Plan and in light of the Board’s prior determinations about Act 41 pursuant to PROMESA, adoption by the Legislature of the Bill would violate PROMESA.”

“Given this context, we urge you to take a different approach this time,” the board added. “Specifically, we encourage the Legislature to engage with the Oversight Board prior to passing the Bill and delivering it to the Governor to avoid violating PROMESA.”