Mon 11/16/2020 17:25 PM
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Relevant Documents:
AAFAF Testimony (in Spanish)
Treasury Department Testimony (in Spanish)
OMB Testimony (in Spanish)

Request a trial to access the above documents as well as reporting and analysis of hundreds of other stressed, distressed and performing credits and continue reading for the Americas Core Credit's analysis of the Puerto Rico fiscal issues.

Puerto Rico’s top fiscal officials outlined progress over the current four-year political term on a range of fronts including debt restructuring, fiscal plan implementation, federal funding, financial reporting, taxes and budgeting as commonwealth government transition hearings started in San Juan this morning. Testifying in the initial hearing were the heads of the Puerto Rico Fiscal Agency and Financial Advisory Authority, or AAFAF, Treasury Department and Office of Management and Budget, or OMB.

Gov.-elect Pedro Pierluisi kicked off the public hearings outlining his key areas of focus including Covid-19 response, infrastructure works and getting Puerto Rico out of Title III bankruptcy “as quickly as possible.” He reiterated plans to meet with members of the oversight board in the coming days and signaled he would not delegate the governor’s nonvoting seat once he takes office. He said communications between the oversight board and the incoming government should be part of the transition process.

AAFAF Executive Director Omar Marrero’s lengthy prepared testimony covered the status of debt restructurings, Covid-19 response efforts, fiscal plan implementation, public-private partnerships and a range of reforms including structural, pension, financial reporting and organizational.

Marrero acknowledged that the government’s relationship with the oversight board has been “awkward” over the past four years due to a learning curve around PROMESA’s reach and anticipated clashes over public policy issues. He pointed to areas of collaboration, however, including the transformation of Puerto Rico’s energy system, vastly improved financial transparency and budget discipline, among others. The AAFAF chief reiterated the government opposition to pension reductions as part of any plan of adjustment.

The AAFAF chief reiterated that the Covid-19 pandemic remains a “cloud of uncertainty” over Puerto Rico macroeconomic prospects as he renewed a call for the PROMESA oversight board to factor that fact into both future commonwealth fiscal plans and proposed plans of adjustment. Marrero signaled that the incoming Pierluisi administration could be tasked with drafting and submitting a revised proposed commonwealth fiscal plan to the oversight board ahead of a Feb. 10, 2021, deadline set by Title III Judge Laura Taylor Swain for the oversight board to present a revised commonwealth plan of adjustment or term sheet. He said an “itinerary” regarding the certification of a new fiscal plan would be taking shape in the coming days. Marrero acknowledged ongoing challenges to the government’s efforts to avoid “draconian austerity measures” including public sector layoffs, signaling those could be reflected in a new fiscal plan and the fiscal 2022 budget process set to start early next year.

Marrero added that a plan of adjustment for $35 billion in commonwealth general obligation, Public Buildings Authority, Employee Retirement System and Convention Center District Authority bonds under Title III would necessarily be a “priority” for the incoming government given the Feb. 10 deadline. Marrero outlined the evolution of the plan of adjustment, and while he acknowledged that the oversight board failed to vote on authorizing negotiations regarding the latest proposed plan during its most recent public meeting, he said the proposal provides “perspective on where the oversight board is going with creditors.”

Marrero expressed confidence that restructuring deals can be executed at the Puerto Rico Electric Power Authority, or PREPA, and the Puerto Rico Industrial Development Co., or PRIDCO. He noted that the restructuring support agreement at PREPA, which he said has been the target of “much unjustified criticism,” remains on hold as the macroeconomic impact of Covid-19 continues to be weighed. A status report on the process is due to be filed with the Title III court on Dec. 6. A PRIDCO restructuring continues to be subject to certain viability studies and is important to efforts to lure more pharmaceutical manufacturing to the island, he said, adding that the two restructurings plus a reworking of the University of Puerto Rico’s debt would be key steps toward exiting Title III.

Touching on public-private partnership as one of the “few tools in the toolbox” given the commonwealth’s fiscal ills and the pendency of Title III bankruptcy proceedings, Marrero lauded the deal with LUMA Energy to run PREPA’s transmission and distribution system and said a separate request for qualifications to run PREPA’s legacy generation assets had drawn more than 15 responses from world-class entities. He said preferred proponents to run the island’s regional airports, cruise ship terminals and PRASA’s water meters have been selected and negotiations are ongoing.

Marrero touted the nearly $13 million settlement with the Federal Emergency Management Agency for post-hurricane permanent works at the Puerto Rico Electric Power Authority and public school system and said “good news is coming soon for other sectors.” Commonwealth and federal officials have previously said that a FEMA settlement for Puerto Rico Aqueduct and Sewer Authority works could be announced by the end of the 2020 calendar year.

Presenting his prepared testimony after a lunch break, Francisco Parés said that during the four-year political term the Treasury Department’s revenue collections beat the oversight board’s original projections by $2.178 billion and revised projections by $1.165 billion. He said the Treasury Single Account currently tops $9.1 billion, while bank account balances across the commonwealth have swelled to more than $20 billion.

The Treasury secretary touched on ongoing efforts to get additional clarity for the U.S. Internal Revenue Service regarding the reach of proposed regulations that could threaten Puerto Rico’s Act 154 levy on manufacturers, which currently accounts for roughly 20% of annual general fund revenue. He acknowledged the need for local legislation to set the legal framework for a replacement of Act 154 and sees a three-year transition to any new levy that would include direct negotiations with manufacturers regarding their tax treatment. Parés also said Treasury is sharing information with the Internal Revenue Service regarding Puerto Rico’s Act 20/22 tax lures given a recent IRS report to Congress that seized on the issue.

Parés also pointed to the growing importance of collecting sales-and-use taxes, or SUT, on internet-based transactions, noting that online sales have seen a “radical” surge as brick-and-mortar operations have been curbed during the Covid-19 pandemic. He said that “historic accords” reached with remote retailers to collect and remit the SUT during this political term have brought in $68.4 million to the commonwealth and $6.24 million to municipal governments.

Additional hearings with other agency heads are scheduled for each day this week including the Central Office for Recovery, Reconstruction and Resilience, or COR3, which was created to manage the receipt of federal disaster funding after Hurricane Maria, and the departments of Housing, Health, Education, Labor and Public Safety.
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