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  • Writer's pictureThe San Juan Daily Star

Oversight board: Government’s proposed fiscal plan violates PROMESA

Robert Mujica, executive director of the Financial Oversight and Management Board

By The Star Staff

The Financial Oversight and Management Board says the proposed fiscal plan submitted by Gov. Pedro Pierluisi Urrutia is in violation of the Puerto Rico Oversight, Management and Economic Stability Act, commonly known as PROMESA, and that the plan it intends to certify will be the first in a post-restructuring environment, establishing conditions for economic prosperity and fiscal management.

In a letter sent late last week and signed by the oversight board’s executive director, Robert Mujica, the board told the government that the plan must entrench a legacy of strong fiscal management to prevent a recurrence of past mistakes, establish conditions for economic prosperity and instill a culture of public-sector excellence, including civil sector reform.

“This effort includes making prudent spending and investment decisions to meet current needs and reach future goals, while also prioritizing resources needed to fulfill commitments made to provide retirement benefits to public sector workers,” the oversight board said.

The board required the government to make the following revisions: forecast the Fiscal Plan for 30 years to increase fiscal transparency, update projections to accurately reflect current law, and provide context for the revenues forecast.

The oversight board requested 10 years of revenue collections for corporations operating currently under Act 154 and their transition to Act 52 legislation that was enacted on June 30, 2022.

“To date, 21 firms elected to migrate from an Act 154 regime to an Act 52 regime. The Government’s estimates for Act 52 collections differ from the Oversight Board’s estimates,” the board said. “The proposed Plan does not clearly outline the projected revenue collections attributable to the transition from Act 154 to Act 52.”

The plan increases support to the municipalities through several mechanisms, including creating an essential services fund and eliminating the municipalities’ Medicaid contribution.

The essential services fund is proposed to have a cap of $150 million; however, the government’s projections reflect amounts higher than the cap beginning in fiscal year (FY) 2025. The oversight board asked the government to remove from the plan a provision that would eliminate the municipality contribution to Medicaid, resulting in $4.5 billion in incremental expenditures for the commonwealth over 30 years.

The document increases the cost of implementing civil service reform, which is partially offset by incremental time and attendance savings. It also assumes that the General Fund absorbs the cost of salary increases currently supported by federal funds, including those of the Department of Education, the board noted.

The oversight board sought more details on incremental funding to support the Molecular Sciences Research Center ($2 million), University of Puerto Rico (UPR) Aguadilla Institute of Aeronautics ($1 million), and UPR Mayagüez Food Science and Technology Institute ($1 million). It also sought more information on a plan to merge the Puerto Rico Medical Services Administration’s Oncology Department into the UPR Comprehensive Cancer Center.

It also sought information for an increase in the cap on tax credits issued to the film industry under Act 60-2019 from $38 million to $100 million per year.

The oversight board objected to proposed cost of living adjustments in response to the current inflationary environment.

“These adjustments would reduce revenues by adjusting current tax scales and increase the maximum limit on certain existing deductions and exemptions,” the board said. “Indexing the income tax brackets for inflation as planned would significantly reduce income tax revenues.”

The total fiscal impact is estimated in the plan to be $73.6 million in FY 2023, reflecting a one-time rebate, and $192.5 million in FY 2024, growing each year. Total reduction in general fund revenue from FY 2023 to FY 2027 is $1.2 billion, and from FY 2023 to FY 2052 is $31.8 billion.

“Please provide the assumptions and methodology utilized to estimate the impact to revenues,” the board said.

Regarding transportation, the plan does not mention the letter agreement signed on Aug. 12, 2022, between and among the oversight board and the Puerto Rico Fiscal Agency and Financial Advisory Authority on behalf of the Puerto Rico Highways and Transportation Authority (HTA) and the government, as part of the HTA plan of adjustment that calls for the operational and financial segregation of transportation assets across three classes: toll roads, non-toll roads and an integrated transit system, the oversight board pointed out.

The board also said the plan must include a discussion on the roles of the Puerto Rico Energy Bureau (PREB) and the Public-Private Partnership Authority’s and efforts to ensure the PREB’s independence, which is essential for it to carry out its duties.

“Additionally, given the approval of the public-private partnership (P3) transaction for the [Puerto Rico Electric Power Authority’s] legacy thermal generation assets, the Proposed Plan should include a discussion on: the roles and responsibilities of the new generation operator and all the stakeholders in the reorganized Puerto Rico energy sector and the Commonwealth’s plan for any potential PREPA mobility employees it may receive as a product of the P3 transition,” the oversight board said in the letter.

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