SAN JUAN, Puerto Rico (AP) — A federal control board that oversees Puerto Rico’s finances approved a revised fiscal plan on Wednesday that temporarily suspends all budget cuts and anticipates the island’s projected surplus could plunge by 65% as it warned the government is unable to pay current debt obligations.
The plan will serve as a blueprint for a U.S. territory crippled by hurricanes, earthquakes and the coronavirus pandemic as it continues to restructure a portion of its more than $70 billion public debt load.
Natalie Jaresko, the board’s executive director, said the island’s economy will shrink over the next five years and that the anticipated surplus in upcoming years will drop from $23 billion to $8 billion from fiscal years 2020 to 2032.
The projected surplus would come from the government implementing measures outlined in the fiscal plan, which does not include debt payments in estimated figures. She declined to say how this drop would affect the repayment of Puerto Rico’s debt, saying only that the island cannot afford existing contractual obligations and that the board will meet with mediators and creditors to talk about the next steps.
“The shock of the COVID-19 pandemic in Puerto Rico is severe,” she said, noting that the revised economic projections are similar to those issued after Hurricane Maria hit in September 2017.
The board rejected a different version of the fiscal plan filed by Puerto Rico officials, saying it eliminated certain cuts, offered different macroeconomic projections and did not contain strong enough measures to make the government more efficient, among other things.
Board chairman José Carrión said that the suspension of budget cuts for one year will allow the government to improve how it operates and implement reforms needed in the labor sector and other areas.
“This plan is a wake-up call for this government,” he said. “For decades, the people of Puerto Rico have been waiting for real transformation.”
Omar Marrero, executive director of Puerto Rico’s Fiscal Agency and Financial Advisory Authority, said it’s unclear when the reforms sought by the board could be implemented because of the ongoing economic uncertainty. In addition, Marrero, who is also the government’s representative to the board, raised concerns about pending debt obligations.
“The debt repayment solution cannot rest solely on austerity,” he said. “It would offer no hope for Puerto Rico.”
The modified fiscal plan comes less than a week after Rep. Raúl Grijalva submitted amendments to a law that created the board as part of a financial package for Puerto Rico.
The bill calls for an audit of Puerto Rico’s debt and declares public health, education, safety and pensions as essential public services, which could protect them from funding cuts. In addition, the bill would guarantee funding for the University of Puerto Rico and allow the local government to shed certain debt. The bill was submitted amid criticism that the board is not protecting Puerto Ricans and has not done enough to improve the island’s situation.
“The crushing fiscal austerity imposed by the original … law has failed to improve economic development or fix chronic poverty in Puerto Rico, so it’s time for a more people-focused approach,” Grijalva said in a statement late last week.
Hurricanes Irma and Maria, coupled with recent strong earthquakes, have caused billions of dollars in damage amid an extended economic crisis. Then the pandemic hit, with experts warning the island of 3.2 million people with a more than 40% poverty rate — higher than any U.S. state — could also see a 40% unemployment rate. Some economists estimate that the COVID-19 crisis will cause economic losses ranging from $6 billion to $12 billion.
Echoing some of the priorities outlined in the federal bill, Jaresko said the board wants to see an improvement in government services and called for things including implementing a back-to-school plan, developing a telehealth system and moving police officers from administrative positions to the field.
“We need to work twice as hard because the people of Puerto Rico have twice the need right now,” she said during a meeting Tuesday with reporters.
Shortly after Jaresko spoke, New York-based Ambac Financial Group, a large insurer of Puerto Rico debt, announced that it filed a lawsuit against the board, alleging the law that created it and allowed the island to restructure its debt is unconstitutional and unenforceable.
The board said in a statement to The Associated Press that it is reviewing the lawsuit and will respond in upcoming weeks.