During its 32nd public meeting this morning, the PROMESA oversight board certified the 2022 Fiscal Plan for Puerto Rico, which revises the commonwealth certified fiscal plan by incorporating the terms of the commonwealth plan of adjustment along with updated federal funding, demographic, and economic and financial projections.

Prior to certification, oversight board members discussed the “historic” importance of what they called Puerto Rico’s “first post-bankruptcy bankruptcy plan” because it incorporates debt service for the first time in five years.

Chairman David Skeel said the commonwealth and related restructurings “leave behind sustainable levels of debt that allow the government to plan, to spend on priorities and hopefully to regain access to the credit markets in the not too distant future. This fiscal plan is another step towards Puerto Rico’s recovery,” Skeel said.

Presenting a fiscal plan Executive Director Natalie Jaresko characterized as an “actionable blueprint” to achieve financial responsibility and sustainable economic growth, she stressed the predictability of debt service and pension security following confirmation of the commonwealth plan of adjustment. Jaresko pointed to a 12-point financial management agenda in the fiscal plan that will guide the oversight board’s work with the government to ensure fiscal responsibility.

Gov. Pedro Pierluisi said the approval of the commonwealth plan of adjustment represents a “new day for Puerto Rico” and creates a “platform for renewed growth and prosperity.” The governor pledged to take the steps needed to take the plan effective by a March 15 deadline. Pierluisi said the revised fiscal plan incorporates many administration initiatives, including improved pension benefits and improved pay for commonwealth workers, but noted differences with the oversight board regarding the structure of proposed teacher salary hikes and University of Puerto Rico funding. Pierluisi said his administration will continue to collaborate with the oversight board despite these differences.

Board member John Nixon called the certification of the commonwealth plan of adjustment a “historic” development, but noted that the commonwealth was a “broken” government with “out-of-control” spending that jeopardized public employee pensions and sparked “billions of dollars” in bondholder losses. Nixon said the oversight board still needs to ensure that PROMESA’s fiscal controls are put in place to avoid such “fiscal turmoil” in the future and to leave Puerto Rico in a “stronger and better place.”

Calling the commonwealth restructuring a “great deal” for Puerto Rico, board member Justin Peterson reiterated his call to complete a debt restructuring for the Puerto Rico Electric Power Authority, or PREPA, this year and said the oversight board needs to expedite its exit. Peterson insisted that the oversight board “cannot be here forever and was not designed to be here forever,” adding that the oversight board needs to allow Puerto Rico’s elected leaders “to take it from here.”

Board member Antonio Medina said Puerto Rico’s imminent exit from bankruptcy is a “moment to celebrate” and a great opportunity to make progress on the island.

Fiscal Plan Highlights

The fiscal plan is bolstered by a “surge” in available resources to the commonwealth largely attributable to two developments:

First, $11.61 billion in increased federal healthcare funding from fiscal 2022 through fiscal 2031 resulting from the determination by the Centers for Medicare & Medicaid Services, or CMS, of the U.S. Department of Health and Human Services, or HHS, lifted Puerto Rico’s Medicaid cap to $2.9 billion annually and increased prescription drug rebate revenue due to the commonwealth’s joining the federal Medicaid Drug Rebate Program; and

Second, $6.48 billion in increased commonwealth revenue resulting from “higher-than-expected” U.S. economic growth and increased local consumption and economic activity stemming from enhanced federal funding programs, including a $460 million increase in annual federal funding for the Nutrition Assistance Program. The government will also seek a “sustained” revenue increase from a change in the tax treatment of partnership entities, according to the fiscal plan.

As previously discussed, the 2022 fiscal plan incorporates costs related to the plan of adjustment by factoring in $1.15 billion in annual debt service and costs related to Act 53-2021, which include additional funding for the University of Puerto Rico and municipalities, removing previously planned pension benefit reductions and the establishment of a pension reserve trust. The other additional costs in the revised plan relate to PREPA employees transferring to the commonwealth and additional investments in the commonwealth government, including salary increases.

Major changes in expenditures in the 2022 fiscal plan from fiscal 2022 through fiscal 2031 include:

– $10.32 billion pension reserve trust contributions;

– $9.26 billion debt service and projected contingent value instrument, or CVI, payments;

– $5.4 billion in other expenditures including the transfer of PREPA employees to the commonwealth; and

– $4.32 billion investment in a uniform classification and remuneration system, salary and pension benefit hikes for certain essential workers; and improving the commonwealth’s operational capacity and financial management.

The 2022 fiscal plan forecasts higher tax collections than the current plan given new data reflecting a “strong economic recovery” related to the resumption of economic activity enabled by Covid-19 vaccinations and federal stimulus funding disbursed throughout the pandemic. General fund revenue is expected to be 7% higher this fiscal year and 6% higher in fiscal 2023.

The 2022 fiscal plan projects unrestricted surplus after debt service to average $1 billion annually from fiscal years 2022 to 2031.The plan projects sustained deficits in unrestricted surplus after debt service and pension trust contributions/withdrawals beginning in fiscal 2049 onward. The previous fiscal plan had projected a return to deficit spending in 2036.

“The Government will be required at some point to take additional measures that go beyond the FY2022-26 framework of this 2022 Fiscal Plan as the Puerto Rico Constitution requires the Government to operate within a framework of fiscal balance,” the 2022 fiscal plan states.

The 2022 fiscal plan includes a financial management agenda, or FMA, that outlines 12 initiatives to achieve “critical” milestones aimed at restoring “fiscal responsibility” in the commonwealth government and ensuring its financial stability. The fiscal plan says a “collective commitment” from commonwealth political leaders is “critical” to the “institutionalization and roll out” of the FMA.

The FMA requires “a properly structured and empowered” Office of the Chief Financial Officer, or OCFO, to ensure “timely financial audits, transparent and useful financial reporting, resource management, and implementation of long-term planning objectives” as well as the establishment of a civil service reform.

Several initiatives are key to meeting the conditions for terminating the oversight board: delivering timely audited financial statements, establishing a debt management policy and best budgeting practices, and establishing a central federal funds management. Other initiatives focus on financial management improvement, including procurement reform and cash and bank account management.

Fuente: Reorg

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