A federal control board overseeing Puerto Rico's finances rejected the U.S. territory's proposed budget on Tuesday because it said it lacks at least $200 million in specific cost-saving measures and contains nearly $120 million in overspending and ineligible expenditures.
It is the first time the U.S. territory has to submit a budget approved by legislators to a federal control board as Puerto Rico struggles to emerge from a 10-year recession and restructure a portion of its $73 billion public debt load. The board warned that if the budget is not corrected, furloughs and the reduction or elimination of a Christmas bonus will be considered, measures that Gov. Ricardo Rossello has shunned.
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"This notice of violation serves as an opportunity to take the necessary corrective action," the board said in its letter. "Given the gravity of Puerto Rico's fiscal and liquidity situation, further adjustments to the proposed budget are needed."
Rossello said his administration will be taking action to achieve a budget "that answers to the people of Puerto Rico" and complies with fiscal requirements.
He also stressed that the board cannot unilaterally impose furloughs, eliminate the Christmas bonus and cut by 11 percent an underfunded pension system that faces $45 billion in liabilities.
"Not only would 150,000 Puerto Rican families be affected by the (board's) proposals, the reduction of 20 percent of the salary of public workers could have a potential reduction of $600 to $700 million in the economy of Puerto Rico, which would also have a devastating effect," he said late Thursday.
The board said Rossello's administration has until Thursday to submit a revised budget. Board members are scheduled to meet Friday in Puerto Rico to approve the final budget, among other things.
The budget that Puerto Rico legislators approved over the weekend contains an increase from $131 million to $147 million in legislative spending that was not included in the original budget submitted by the governor. The additional expenditure will not be approved, according to the board. In addition, the board rejected $78 million set aside in non-legislative expenditures for subsidies to municipalities and sports activities, among other things. It also said an additional $25 million in reductions are needed including cuts in subsidies to museums, scholarships, professional athletes, choirs, marathons and other things.
The board also noted that the government did not specify how it plans to save at least $200 million through reforms needed to reduce the size of government and eliminate non-critical services.
Puerto Rico Representative Luis Vega Ramos rejected the board's demands.
"This is abusive and unreasonable," he said. "The $319 million that the board is demanding in cuts and budget adjustments are devastating...More than 90 percent of them are for essential services, nonprofit organizations, municipalities, scholarships, support for the agricultural industry and other entities."
In its letter, the board praised the government for things including restricting budget reserves, converting a pension system to a pay-as-you-go basis and reducing expenditures by more than $800 million, a nearly 10 percent cut from the previous year.
The board also announced late Tuesday that it rejected a proposed restructuring deal for Puerto Rico's power company following an executive session. The deal was recently revised and had taken nearly three years to complete as the Puerto Rico Electric Power Authority sought to restructure roughly $9 billion of debt. The deal with bondholders was the only one reached by any of Puerto Rico's government agencies, but the board said it would not support the reforms needed to generate more revenue to transform the agency.
The board said the power company's debt would likely now be resolved in court through a bankruptcy-like process along with other debts the U.S. territory is seeking to restructure.