PREPA Privatization Hits a Snag

Senate Special Committee on Energy Chairman Larry Seilhamer (NPP) said that the bill to privatize the Electric Power Authority (PREPA) would undergo changes. Seilhamer stated that the legislation will leave out the sale of PREPA assets (to be addressed in a future bill), and that the current bill will focus solely on a public private partnership (PPP) for the distribution and transmission of energy. In addition, the bill will require the PPP Authority to acquire a majority vote from 4 of their 5 board members in order for transactions to move forward. Last week Senate President Thomas Rivera Schatz hinted at the possibility of giving the Legislature an up-or-down vote on any privatization contract. Though Seilhamer said that the new strategy would not alter the 18-month timeline set out by Governor Ricardo Rosselló, observers noted that the new approach could delay the process even further.

Seilhamer also said that the lack of an energy policy or regulatory framework was a deciding factor in crafting an alternate approach to the privatization process. In the privatization bill originally introduced by the Governor, the Energy Commission would not have a role in selecting the private companies bidding for PPPs, nor would they have a role in setting financial or other regulatory parameters for the transaction. The Fiscal Oversight Board (FOB), Members of Congress from both parties, and other independent observers have urged the Legislators to ensure the independence of the Commission in any efforts to merge government agencies or privatize the energy distribution process.

Governor Introduces Tax Reform Bill

Governor Ricardo Rosselló announced that he will introduce a tax overhaul bill this week. The proposal would include: a reduction in tax rates for individuals and corporations, a reduction of the Sales and Use Tax (SUT), the elimination of the Business to Business (B2B) tax, and the creation of a Work Credit. The Governor estimates that taxpayer savings would amount to $451 million by 2019, increasing to $849 million by the year 2023.

“This New Tax Model will be financed with certain sources so that it has a neutral effect on the budget,” said Rosselló, though he did not explain how the model would compensate for lost revenue. Under the proposal, corporations and Small and Medium Enterprises (SMEs) would pay a reduced rate (between 5% and 20%). The Business to Business (B2B) tax would be reduced from 4% to 3% in 2019, and would be completely eliminated by 2020. The Sales and Use Tax (SUT) for prepared foods would fall from 11.5% to 7%. A Work Tax Credit, from $300 to $ 2,000, would be created for each worker, which would result in savings of $ 200 million per year.

The Governor’s proposal requires substantial amendments to the Internal Revenue Code, and the creation of a new “Incentives Code.” The governor has already introduced changes to the Internal Revenue Code, with a bill for the newly proposed “Incentives Code” to be released later this week.

FOB Continues Push for Pension Cuts

The Fiscal Oversight Board (FOB)’s fiscal plans, which will be revealed and certified this week, will retain an average pension cut of 10%. The FOB is also studying Governor Ricardo Rosselló’s proposed labor reform which, among other things, would reduce sick leave and vacation days from 15 to 7 days a year, and eliminate Christmas bonuses and mandatory severance pay for unjustified firings in the private sector. The FOB and Governor also disagree on the total amount of cuts; the Governor seeks a total of $1.45 billion in budget cuts over five years, while the FOB has asked for that amount to total $1.58 billion by June 2023.

The Governor has rejected the FOB’s insistence on what he views as public policy issues, such as labor and pension reform. In the previous fiscal plan, the Governor agreed to a 6% average pension cut, but he has since backed away from that position. The Governor had previously proposed labor reform coupled with an increase in the minimum wage, but the board rejected that proposal (which would have increased the minimum wage to $8.25 per hour) and insisted on the immediate implementation of labor reform without an increase in the minimum wage.

On Thursday, the FOB plans to certify fiscal plans for the Commonwealth and Electric Power Authority (PREPA). On Friday, the FOB plans to certify fiscal plans for the following public corporations: the Aqueduct and Sewer Authority (PRASA), the Highways and Transportation Authority (HTA), the Government Development Bank (GDB), the UPR, and the Credit Union Oversight and Insurance Corporation (COSSEC in Spanish).

Experts Warn Against Using Hurricane Relief to Pay Creditors

Three experts with intimate knowledge of the PROMESA law and Puerto Rico’s complex financial crisis warned that the FOB should adopt a more realistic vision of Puerto Rico’s economic future than that proposed by the government, and prevent federal disaster relief money from becoming a “bailout” for creditors.

In an opinion article on Bloomberg, Antonio Weiss, former Senior Counselor to former U.S. Treasury Secretary Jacob Lew, and economists Desmond Lachman and Brad Setser, called attention to the economic recovery forecasts made by the Commonwealth, after confirming the allocation of tens of billions of dollars in federal disaster funds. The three scholars questioned the government’s most recent projections that it will be able to pay up to 40 cents on the dollar for its debt. They warned that, if the economic projections fail, a second round of debt restructuring may be necessary.