Oversight Board raises more questions about Puerto Rico’s finances

Puerto Rico is no closer to exiting external oversight after the release of its most recent audited financials.

That’s according to a letter the Puerto Rico Oversight Board sent to the commonwealth’s treasury earlier this month following the April release of Puerto Rico’s annual comprehensive financial report for fiscal 2022.

Four consecutive years of balanced budgets are needed under the Puerto Rico Oversight, Management, and Economic Stability Act for the Oversight Board to disappear, and the territory is at zero as of the fiscal 2022 ACFR, board Executive Director Robert Mujica Jr. wrote in a letter dated June 6 to Interim Secretary of the Treasury Nelson Pérez Méndez.

The latest audit showed an unbalanced budget, raised serious doubts about University of Puerto Rico’s ability to continue operating, and revealed the government was providing insufficient information about parts of its operations, Mujica’s letter said. 

“I don’t foresee the government taking the fiscal imbalance with the level of urgency it needs to be addressed,” said Interamerican University finance professor Antonio Fernós Sagebian. “The fiscal board is here to stay.”

Mujica said the fiscal year general fund budget on a modified accrual basis (Generally Accepted Accounting Principles) had a $3.3 billion deficit and so can’t be counted towards the four consecutive years of balanced budgets needed under PROMESA, the 2016 law that created the Oversight Board, for the board to disappear.

Most of the deficit was related to the debt restructuring in fiscal year 2022 after the bankruptcy plan of adjustment was approved. There were $8.384 billion in transfers out of the Puerto Rico general fund in that fiscal year. Of this, $7.395 billion was transferred either to the debt service fund for paying general obligation bondholders or to the Public Building Authority for payments to PBA bondholders. 

The transfers were the main reason there was a $3.283 billion net reduction in Puerto Rico’s general fund balance from the start of fiscal 2022 to the end of it.

In his letter Mujica did not state that this was the primary cause of the modified accrual deficit. 

Earlier this month Mujica said the board’s interpretation of this passage of PROMESA, which also requires Puerto Rico to be able to access the capital markets at reasonable rates, is that the local legislature and governor must approve the budgets that are later found to be balanced. As the board approved the fiscal 2023 budget without the territorial government’s support, of the years so far under the board’s oversight, only the current fiscal year 2024 might qualify towards the PROMESA requirement. 

In the board’s March mid-year financial report on Puerto Rico it warned about recent territorial government legislation impacting spending or revenues. “In the second quarter, the [territory’s] legislature continued its trend for passing or enacting at least eight pieces of legislation amounting to a total estimated unfunded annual cost of between $10 million and $26 million,” the report said.

This spring the Puerto Rico Office of Management and Budget failed to propose a balanced budget, Fernós Sagebian said. “The political class has failed us yet again,” he said.

“Neither politicians nor the government of Puerto Rico understand what fiscal responsibility is,” said John Mudd, a Puerto Rico attorney and frequent commenter on the territory’s government and finances.

“I don’t know what it will take for the government to take seriously the need for fiscal discipline in order to achieve long term stability and prosperity of Puerto Rico,” said Jorge Irizarry, who was the executive director of the former local bondholder group Bonistas del Patio.

“My general sense is that Mujica is doing everything possible to extend his stay as long as possible,” said Cate Long, principal of the Puerto Rico Clearinghouse, a consultancy for Puerto Rico bondholders and stakeholders. “He spoke at the last board meeting of having to create ‘capital plans’ for every government entity stretching over 30 years. That is certainly not something that Congress mandated in PROMESA but would allow him to continue collecting his $650,000 year salary in addition to all his outside consulting work.”

“Fiscal responsibility is more than completing the debt restructuring and stabilizing Puerto Rico’s finances. To complete our mandate, sound fiscal management practices must be accepted and implemented over the long term. Robert Mujica’s work is tightly focused on this mandate of fiscal responsibility and to fulfill PROMESA’s statutory requirements for the Oversight Board’s termination,” the Oversight Board said in a statement.

“The Fiscal Oversight Board Report alleges a deficit of $3.3 billion using as a basis revenues allocated to the general fund that were never intended to reach the general fund, and were not part of it,” said Puerto Rico Rep. Jesús Santa Rodriguez, president of the House Treasury and Budget Committee. “Therefore, this deficit indicated in the report does not exist.”

Congress should define PROMESA’s requirement of a balanced budget more clearly to avoid the “arbitrary” determination of the board, which “apparently seeks” to stay “indefinitely,” Santa Rodriguez said.

The fiscal 2022 audited $3.3 billion general fund deficit followed an audited $3.8 billion surplus in the fiscal 2021, both on a GAAP basis.

On a budgetary basis, which looks at money coming in and going out over the 12 months of fiscal 2022, Puerto Rico’s central government had a $10.1 billion deficit, due to expenses associated with the execution of the central government’s plan of adjustment. 

General fund net revenues in fiscal 2024 from July 1, 2023, to March 31, 2024, have come in 12.7% ahead of projections, according to unaudited figures from the Puerto Rico Treasury. Of the nine months, March was the only one that came in behind projections, lagging by 7%. 

Mujica points out the fiscal 2022 ACFR was released 645 days after the end of the fiscal year, compared to the recommendation of the Government Finance Officers of America that ACFRs be released within 180 days. Mujica acknowledges Puerto Rico’s government has made progress with each of the last five ACFRs being released more quickly than the last. But the starting point was a 1,158 day delay with the fiscal 2017 ACFR.

“Delayed issuance of audited financial statements negatively impacts the reliability of financial information used to forecast revenues and expenditures and ensure balanced budgets,” Mujica told Pérez Méndez in the letter.

Puerto Rico politicians and government professionals do not “understand the need to have the audited financials on time,” Mudd said. 

Long said, “Late and false audited financials were what led in part to the bankruptcy. Now the fault lies with the oversight board not focusing the resources to get the audits done earlier. Congress wanted them brought up to date before the Title III [bankruptcy] petitions were filed. That obviously didn’t happen.”

The auditors of the most recent Government Development Bank, Puerto Rico Electric Power Authority, and University of Puerto Rico ACFRs provided “going concern” warnings, Mujica said in the Oversight Board letter. The board and Puerto Rico’s government expect the GDB to go out of existence. PREPA remains in bankruptcy and the resolution should, hypothetically, address its financial problems. 

However, the University of Puerto Rico remains a concern for Puerto Rico’s society and for bondholders, who as of June 2023 were owed $316 million for UPR bonds. 

EY’s auditor’s report on UPR’s ACFR for fiscal 2023 released this March cited high dependence on commonwealth appropriations, a net capital deficit and the legal standstill agreement on the debt.

“The university may not be able to avoid future defaults on its obligations,” said EY. “Management has plans to address the university’s liquidity situation and continue providing services,” the auditor said. 

“The UPR going concern language is included due to the current standstill agreement between UPR and bondholders, which is driven by a technical compliance matter related to the flow of funds,” said Puerto Rico Fiscal Agency and Financial Advisory Authority Executive Director Omar Marrero, who noted that the audited financials have contained the language for more than six years. “It is important to note that UPR is in full compliance with its debt service and is expected to continue doing such. The standstill has been extended 21 times and we are not concerned about any non-compliance or default in the future.”

The Puerto Rico Oversight Board “has given advice to consolidate the eleven campuses and to advertise in the United States but so far the administration continues to ignore it,” Mudd said.

UPR could go into PROMESA’s bankruptcy process but “I doubt it. And the government does not care about UPR,” he said.

“The Oversight Board is nowhere hated more than at the UPR,” said UPR political science professor José Garriga Picó, a former commonwealth senator. “Its efforts to have the university system reduce expenditures by closing outdated academic programs and the downsizing of its teaching and non-teaching staff generate a very educated vocal opposition to all the Oversight Board policies …. Administrators, professors, and students continually plan how to outwit the Oversight Board until PROMESA is repealed ahead of schedule.”

In his letter to Pérez Méndez, Mujica also said the board was concerned the auditor said they hadn’t been given enough information about the commonwealth government’s business type activities and unemployment insurance fund for the auditor to render a decision. 

Finally, Mujica said the board “continues to be concerned” about the continued existence of deficiencies in internal controls.

“The Oversight Board has every right to be concerned [about these deficiencies],” Garriga Picó said. “Most politicians and government bureaucrats are just waiting for the day when they do not have an Oversight Board to deal with and can return to the old ways. Then you will know what disaster is.” 

Spokespeople for Puerto Rico’s Treasury Department and governor did not respond to requests for a comment. FAFAA did not respond to requests for comments on Mujica’s concerns about the imbalanced fiscal 2022 audit results and delayed audit report.