Puerto Rico Board Rejects Governor's Plan to End Debt Crisis

  • Board says projections ‘unrealistic,’ spending not cut enough
  • Rossello given until March 11 to submit a revised plan

A U.S. oversight board rejected Puerto Rico Governor Ricardo Rossello’s initial plan for pulling the island out of its debt crisis, saying the proposal relies on overly optimistic projections and fails to cut spending deeply enough to erase the government’s chronic budget deficits.

The panel’s comments, made in a letter to the governor Thursday, raise the specter of a clash between the elected leader and the federal appointees who were given vast power over the U.S. territory’s finances after a record-setting series of bond defaults. The blueprint released by Rossello bucked the deep austerity initially suggested by the board, relying instead largely on tax and cost-saving measures that wouldn’t deal as big a blow to the already shrinking economy.

"The Proposed Plan is based on unrealistic projections of economic growth, substantially underestimates spending, and reflects overly optimistic revenue projections," the board said in its letter to the governor. "The Proposed Plan does not provide a path to restructuring debt and pension obligations to reach a sustainable level, and ensuring funding of essential services for the people of Puerto Rico."

The letter comes days before the panel is set to meet to review the governor’s plan, which would have been used to guide negotiations with bondholders aimed at cutting Puerto Rico’s $70 billion debt. The panel, which was created last year through emergency legislation enacted by Congress, can impose its own steps if it finds the governor’s fail to take adequate action to stabilize the government’s finances.

The debt crisis erupted after years of borrowing to cover expenses as the island’s economy contracted and residents left for the mainland U.S. for work. Former Governor Alejandro Garcia Padilla in 2015 began defaulting on Puerto Rico’s debts, saying they were too onerous to pay. The economy isn’t expected to turn around anytime soon, with the board forecasting that the recession will continue until 2022.

Since taking office in January, Rossello has struck an increasingly populist tone, vowing to resist deep cutbacks to government programs that would hurt residents of an island where nearly half live below the poverty line. He also faced widespread protests on college campuses after the U.S. panel proposed cuts to the university system’s budget.

His initial plan reflected this view, limiting the impacts on Puerto Rico’s education, pension and health-care system. His plan also skirted employee layoffs.

The federal board said Puerto Rico is already underestimating its spending for the current fiscal year by as much as $585 million, and it cast doubt on what it said were “aggressive” estimates for how much can be raised over the next few years by cracking down on tax evasion and altering corporate taxes. The letter said the government also needs to reduce payroll costs by $1.3 billion by 2021 and implement bigger cutbacks for health care, universities and pensions.

A Rossello administration official disputed some of the board’s assertions, but said officials are still evaluating the letter.

"The letter sent by the board is plagued by information that is incorrect," said Elias Sanchez, the governor’s representative to the board. "They are saying that we are understating expenses by $585 million. That is preposterous."

Rossello’s approach was also questioned by former Treasury Department official Antonio Weiss, who worked with Congress as it pushed through the emergency legislation last year. In an editorial for Bloomberg View, Weiss said the governor’s rosy economic growth projections will only set the stage for another crisis later by failing to force the island to reduce its debts sufficiently.

The board asked Rossello’s administration to submit a revised proposal by March 11. The letter was first reported Thursday by local newspaper El Nuevo Dia.

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