Natalie Jaresko Executive Director

Transcription

1 José B. Carrión III Chair FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO Members Andrew G. Biggs Carlos M. García Arthur J. González José R. González Ana J. Matosantos David A. Skeel, Jr. Natalie Jaresko Executive Director BY ELECTRONIC MAIL The Honorable Thomas Rivera Schatz President of the Senate of Puerto Rico The Honorable Carlos J. Méndez Núñez Speaker of the House of Representatives of Puerto Rico Dear Senator Rivera Schatz and Representative Méndez Núñez: The proposed budget for Fiscal Year 2018 (the Proposed Budget ) is the first constructed under PROMESA and intended to conform with the Government s Fiscal Plan dated March 13, 2017 (as amended and certified by the Board, the Fiscal Plan ). As you are aware, and consistent with previous communications, the Proposed Budget must be realistic, implementable, and consistent with the Fiscal Plan in both form and spirit. The Proposed Budget was intended to be consistent with the Fiscal Plan s baseline and to begin the process of reducing the size of spending in the government and legislature. It was designed to include a more realistic assessment of revenues, spending, the continuation of critical services, and efforts to improve financial reporting. The Proposed Budget takes several important steps to meet those objectives. A majority of appropriations are dedicated to education, public safety, healthcare and welfare needs. Pensions convert to a pay-as-you-go basis. Additional funds are budgeted toward the healthcare system to offset the loss of Federal funds. To protect against liquidity shortfalls, budget reserves are restricted and can only be used after obtaining approval from the Board. After adjusting for the need to maintain pension payments to current retirees, the Proposed Budget reflects a reduction in spending from FY2017 of $804 million, or more than 9 percent. This reflects significant progress in closing Puerto Rico s historical structural budget deficit. Consequently, most of the Proposed Budget can be deemed compliant with the certified Fiscal Plan and reflects great advancement towards achieving fiscal responsibility.

2 Page 2 The Proposed Budget, however, also includes spending in a few areas that are inconsistent with the Fiscal Plan and are not compliant with Board guidance. Given the gravity of Puerto Rico s fiscal and liquidity situation, further adjustments to the Proposed Budget are needed. This conclusion is based on the enclosed budget resolutions (R. C. de la C. 186, 187, 188, and 189) submitted to the Board for its review on June 26, 2017 (collectively the Budget Resolutions ). Pursuant to PROMESA 202(d)(1)(B), this letter constitutes a notice of violation and describes below the necessary corrective action that must be taken by the Legislature and the Governor to correct such violations. Necessary Corrective Action The Proposed Budget includes overspending and ineligible expenditures in three categories that total approximately $119 million. Inability to reduce spending in these areas would, regrettably, increase the size of alternative corrective actions that would need to be considered to offset the additional expenditures. 1) Additional legislative expenditures. The Proposed Budget increases appropriations for the legislative branch significantly beyond the level in the government s original budget submission. Legislative spending increased from $131 million to $147 million between the initial submission and the final Proposed Budget. The additional $16 million in legislative expenditures were added to the Proposed Budget without the same rigor or review as other components of the Proposed Budget, and, in some cases, appear duplicative of other expenses already allocated to the legislative branch. The aggregate appropriations to the legislative branch should be reduced to $131 million. 2) Additional non legislative expenditures. Additional spending of $78 million in non-legislative expenditures were also added to the Proposed Budget. This includes, among other appropriations, additional spending on payroll, operating expenses, subsidies to municipalities, sports activity spending, and appropriations for entities previously funded by other sources. Spending in these areas is a violation as it depends on inappropriate sources of savings, including the elimination of the mandatory 1% required budgetary reserve, to fund these incremental appropriations. This additional spending should be eliminated in its entirety. 3) Savings on earmarks and special expenditures. Previous Board guidance to the Governor and Legislature conveyed that spending on certain earmarks and special expenditure appropriations be reviewed and reduced by at least 33 percent, for a targeted reduction of $30 million. These included reductions in appropriations to subsidize various industries, associations, museums, foundations, choirs, ballets, operas, marathons, festivals, municipalities,

3 Page 3 scholarships, and professional athletes, among others, that are otherwise not subject to the rightsizing adjustments imposed on other agencies. The objective for this request was to ensure consistency and equal treatment amongst all appropriations in the Proposed Budget. While many smaller earmarks and special expenditures were reduced or eliminated during the budget review process, the final savings from this category of spending totaled less than $5 million. Additional reductions totaling $25 million are warranted on these earmarks and special expenditures. The Proposed Budget does not adequately provide for at least $200 million in specific reforms required to implement the rightsizing requirement in the certified Fiscal Plan. 4) Insufficient rightsizing measures. Consistent with the Fiscal Plan, the Proposed Budget included savings of $440 million generated from personnel and non-personnel government rightsizing targets. Of that amount, however, at least $200 million of potential savings lacked specific implementation plans that demonstrate the types of agency level operational and structural reforms needed to reduce the size of the government and eliminate non-critical services. Specific implementation plans must be submitted to give the Board confidence those savings will be achieved. Without the identification of specific sources of savings and adequate implementation plans to achieve such savings, alternative corrective actions will be needed to improve confidence that the appropriate level of rightsizing savings will be met. Finally the Proposed Budget must correct what appears to be a technical error in the release of the Judiciary Branch s appropriations. 5) Technical oversight. Due to a technical error, when the appropriation for the Judicial Branch was transferred from the Special Appropriation Bill (R. C. de la C. 187) to the Joint Resolution Bill (R. C. de la C. 186), the conforming spending authorization for the Judicial Branch was not incorporated into the Joint Resolution Bill. Consequently, Section 2 of the Joint Resolution Bill should be amended to approve the disbursement of Judicial Branch appropriations. As a point of reference, Section 2 currently reads: The Department of Treasury will remit to the Legislative Branch and its components, on a monthly basis and in advance, the budget installments corresponding to one twelfth of the annual allocation contemplated in this Joint Resolution for each of these. By comparison, the Special Appropriation Bill (R.C. de la C. 187), where much of the Judicial Branch s spending has historically been appropriated includes spending authorization that reads as follows: Section 6: The Secretary of Treasury will remit to the Legislative Branch and its components, to the Judicial

4 Page 4 Branch, to the University of Puerto Rico and to the nonprofit entities which receive funds from this resolution, monthly and in advance, the budget installments corresponding to one twelfth of the annual allocation in this Joint Resolution for each of these. Corrective Action Alternatives The Proposed Budget reflects difficult public policy choices determined by the government and represents a positive step forward towards Puerto Rico s recovery. As described above though, the Proposed Budget includes several violations and requires $319 million in corrective actions. There are several alternatives to correct this deficiency. The first, and preferred, alternative is for the government to reduce spending in accordance with the guidelines provided in this notice of violation. This must be supplemented with specific agency level operational and structural rightsizing reforms to reduce the size of government and eliminate non-critical services. Should the shortfall not be addressed appropriately, additional measures, such as furloughs and the reduction or elimination of the Christmas bonus, as well as commensurate savings from the Legislature s appropriations, will need to be considered prior to the Board s certification of the Proposed Budget. Getting to fiscal balance is essential to stabilizing Puerto Rico s outlook. Conclusion The Board appreciates the hard work and sacrifice that went into the development of the Proposed Budget. This notice of violation serves as an opportunity to take the necessary corrective action. Please correct the Proposed Budget accordingly and submit a revised adopted version on or before Thursday, June 29, 2017, at 5:00 PM. Failure to comply may, consistent with PROMESA 202(e)(3), result in the Board submitting a Budget to the Governor and the Legislature (including any revision to the Budget made by the Board pursuant to subsection 202(d)(2)) no later than June 30 th. Such a Budget would be deemed to be approved by the Governor and the Legislature, be the subject of a compliance certification issued by the Board to the Governor and the Legislature, and be in full force and effect beginning on the first day of the applicable fiscal year. The Board also reserves its right to review progress of the rightsizing measures to determine which measures still have not been validated and determine adjustments to the Proposed Budget from additional measures, such as furloughs and Christmas bonus reductions or eliminations, which may be required to make the Proposed Budget compliant with the Fiscal Plan.

5 Page 5 Sincerely, José B. Carrión Chair Andrew G. Biggs Carlos M. García Arthur J. González José R. González Ana J. Matosantos David A. Skeel, Jr. CC: The Honorable Governor Rosselló Nevares Elías F. Sánchez-Sifontes Natalie Jaresko