Puerto Rico’s federal oversight board voted unanimously on Monday to certify the government's fiscal turnaround plan, on the condition it be amended to eliminate Christmas bonuses, impose employee furloughs, and further reduce pension spending.
The plan, a cornerstone of the federal Puerto Rico rescue law known as PROMESA, will serve as the baseline for looming restructuring talks with holders of some $70 billion in debt that has pushed the U.S. territory to the brink of economic collapse.
The government can avoid some of the austerity measures, which have sparked protest among Puerto Ricans, if it presents alternative cost-saving measures by April 30, the board said.
PROMESA required Governor Ricardo Rossello to present a turnaround blueprint that would require sign-off by the board. The board rejected an initial draft last week, saying it relied on "overly optimistic" economic projections.
The latest version rolled back those numbers, boosting the island's 10-year projected funding gap to $67 billion from $56 billion, and contemplating $39.6 billion in new cash flows from spending cuts and revenue initiatives, up from $33.8 billion in the last plan.
The new version forecasts the island would have $800 million a year to service debt, down from $1.2 billion in the draft. "The new plan is modestly worse than the old plan for creditors, as it implies larger haircuts," Puerto Rico credit analyst Chas Tyson, of KBW Inc, said in a note on Monday.
Approval by the board came with conditions: the government must reduce pension spending by 10 percent beginning in 2020, cut Christmas bonuses and implement employee furloughs as soon as July 1 to stave off a short-term cash crunch.
AUSTERITY PUSH DRAWS PROTESTS
The austerity push drew protests outside the meeting in lower Manhattan on Monday, including from teachers who claimed the furloughs would shorten the public school year by the equivalent of two months a year.
The government can avoid the furloughs and bonus cuts if it presents the board with a plan by April 30 to shore up liquidity by $200 million. Rossello said he was confident the cuts would not be necessary.
"I’m very confident we’ll have $200 million in reserve cash, so that we can jump over that obstacle," Rossello said in an interview with Reuters after Monday's meeting.
The board said it will negotiate over the next 30 days with the government on how to cut pensions, a contentious issue on an island where retirement systems are already borderline insolvent thanks to decades of mismanagement by governments that routinely made overly generous promises to workers.
"All stakeholders have been forced to sacrifice, and no one is exempt from that," board member Andrew Biggs, a pension expert, told reporters after the meeting. He added the cuts will be orchestrated “in a way that would spare the lowest-income people from any reductions.”
Rossello said he will not pass public policy that would hurt the poorest pensioners. "I don’t see any way I can reduce pensions of people already having a hard time getting medications and things."
In another controversial move, the board said it supported government efforts to seek additional concessions from bondholders of Puerto Rico’s power utility, PREPA, which is more than $8 billion in debt.
The utility and its creditors have had a tentative restructuring in place for more than a year, but Rossello’s administration has said it would seek new terms, sparking concern and frustration among PREPA’s creditors.
A subcommittee of the U.S. House Committee on Natural Resources announced it will hold a hearing on March 22 on the status of the PREPA deal, the current version of which sees creditors taking 15-percent cuts.
(Reporting By Nick Brown; Editing by Daniel Bases and Diane Craft)