With 2019 finally over, Chief Financial Officer Omar Marrero looks back at the achievements and challenges experienced since the beginning of his tenure at the Fiscal Agency and Financial Advisory Authority (Afaaf by its Spanish acronym), as well as his vision for the new year.
Marrero, who started working as Puerto Rico’s CFO in August, affirmed that some of the most climactic events that Afaaf has documented since then have been maintaining stability during and after an administrative transition, following through with multiple restructuring agreements for various public corporations, and incentivizing investment.
Last summer, Puerto Rico garnered international attention due to the arrests of former high-ranking government officials and the historic protests against then-Gov. Ricardo Rosselló after a leaked Telegram chat led to widespread controversy.
Following Rosselló’s resignation in late July, then-Secretary of Justice Wanda Vázquez became the island’s new governor and, with that change, came a dire need to assure residents, investors and the federal government that Puerto Rico’s public sector remained stable and functional.
“I believe that if we were to summarize everything, the most important thing has been how we have been able to maintain stability in the government’s financial spheres, particularly with our most important stakeholders, which are the federal government and the Financial Oversight and Management Board (FOMB), as well as state and municipal agencies. For me, I think that is the most important part. If I were to highlight something, it is the fact that the government continued to function,” he told THE WEEKLY JOURNAL.
He and a delegation of public officials—including Vázquez—had their first visit to Washington, D.C. for Congressional meetings, which Marrero described as “highly significant,” meant to provide an update on the local government’s status after the transition and its ongoing agenda to bolster economic development.
Marrero and the delegation also met with the Federal Emergency Management Agency (FEMA) and the U.S. Department of Housing and Urban Planning (HUD)—the agencies that allocate disaster relief funds as recovery means from Hurricane Maria—as well as the U.S. Departments of Energy and Treasury. According to Marrero, these federal entities did not express concerns over Puerto Rico’s management but were assured of its continuity regardless.
During that visit to the U.S. capital, Marrero also held talks with the Treasury concerning Act 154-2010, which establishes a 4 percent excise tax on foreign corporate subsidiaries based on the island. As reported, this excise tax contributes approximately $2 billion to Puerto Rico’s public funds and accounts for roughly 20 percent of the General Fund’s revenue.
U.S. Treasury Secretary Steve Mnuchin stated that the local government needed to take the steps necessary to end this provision and Marrero replied that the U.S. Treasury had not demanded a plan per se, or established a due date for the government to present alternatives. As such, the conversation is currently ongoing.
Progress in Restructuring Agreements, With Criticism
The CFO recalled a series of restructuring agreements for multiple government instrumentalities, such as the Puerto Rico Industrial Development Company (Pridco), the Aqueduct and Sewer Authority (Prasa), the Electric Power Authority (Prepa), and the Sales Tax Financing Corporation (Cofina by its Spanish acronym).
“In terms of restructuring, which was one of my priorities, we were able to retake Pridco’s restructuring agreement, starting with the request-for-qualification (RFQ) process of a professional operator for Pridco’s properties; that is, a real estate manager. As part of Pridco’s restructure and reorganization, there needed to be a private operator that could manage Pridco’s real estate portfolio in a much more professional and efficient manner,” Marrero said.
The official said that the RFQ, which began last August, could result in economic development.
Likewise, Prasa’s restructuring agreement was completed, allowing the entity to restructure roughly $1 billion and “get up to date with two federal programs from the Environmental Protection Agency and the U.S. Department of Agriculture,” Marrero stated.
Moreover, another issue he saw through in September was amending Prepa’s restructuring support agreement to include additional insurers. According to Marrero, “with that, we already have more than 90 percent of bondholders represented in that agreement.”
However, this RSA has been laden with criticism, particularly from nonprofits who noted that the agreement entails electricity rate hikes during the next five years, with economist Daniel Santamaría Ots calling it a “regressive tax that affects low-income families and local businesses.”
Marrero acknowledged that it will be a challenge to convince all affected parties to support the RSA, but claimed that dismissing it would lead to an “apocalyptic” scenario.
Meanwhile, after Cofina reached its own restructuring agreement last October, the government was able to complete the agency’s debt payment for the 2019-20 fiscal year with $436 million, leaving a surplus of $17.3 million that was transferred to the General Fund. This payment marked the government’s first compliance with Cofina’s adjustment plan.
“This speaks to the government’s credibility, that we are back on the market in Cofina’s case, so that was also positive,” the CFO commented.
Last July, the government started redistributing 5.5 percent of the revenue from the Sales and Use Tax (IVU by its Spanish acronym) to Cofina’s repayment fund, while the local Treasury Department distributed the remaining 6 percent of IVU revenue between municipalities, the treasury and the Film Industry Fund.
“Every time something is purchased with the IVU, 5.5 percent goes to Cofina’s pot. Once you fill it, the payment is processed. Then, everything collected by the IVU proceeds to the government of Puerto Rico because [the debt payment] was already issued,” he added.
Nearly $50 Million in Accumulated Interest
Shortly after becoming CFO, Marrero asked the Department of the Treasury to consider the possibility of analyzing the market to assess whether the central government could achieve greater financial performance by redistributing its funds in different banks that would provide greater interest. Originally, “a great sum of money” was stored at Banco Popular, but now there is an allegedly less disproportionate distribution.
“Now I can say that we have had a highly positive performance and we have been able to generate… roughly $49 million, and we hope to be able to generate a greater sum as the process continues. As long as we are in bankruptcy, the account will keep growing because we are not paying the debt. If we aren’t paying the debt, then the most responsible thing for Puerto Rico’s money is to generate interest,” he stated.
Delayed Advancement in Opportunity Zones
Marrero also highlighted that last August the Opportunity Zones Priority Projects Committee, in which he serves as president, published a list of eligible commercial activities under the federal Opportunity Zones (OZ) program that was incorporated in the Puerto Rico Incentives Code last summer.
The list will eventually be updated and include further incentives based on geography, as the Committee is waiting for mayors to provide a list of the types of activities and sectors that they want to prioritize in their respective municipalities, which will then be awarded additional municipal patent exemptions of up to 25 percent.
Secretary of Economic Development and Commerce Manuel A. Laboy informed THE WEEKLY JOURNAL in late August that the updated version of that list would be available within four to six weeks, but the Committee has yet to receive detailed strategic plans from all municipalities. Some, like Bayamón, already know what type of economic activity they want to incentivize, but there is no set date for the Committee to publish the update, which could, in turn, delay economic and community development.
In addition to this setback, the original list of eligible activities has been criticized because only one of four items focuses on the development of low-income housing projects. Critics have thus denounced the OZ program as either a tool to displace marginalized communities or as oblivious to the housing needs of the population.
Prompted by THE WEEKLY JOURNAL to comment on this issue, Marrero explained that the reason why there is only one item that focuses on low-income housing on this particular program is because there already are multiple other programs and funds that directly target this segment, such as funds provided by the Community Development Block Grant for Disaster Relief (CDBG-DR).
“If you look at the 26 programs included in the HUD’s action plan for those $1.5 billion [in funds], I’d say that 90 percent are for housing. Therefore, the rationale behind it… was that it will basically be addressed with federal funds,” he said. As such, the Committee decided that the principal direction with the OZ program would be geared toward addressing commercial and industrial development, as well as “assets recycling,” in which developers revitalize damaged properties.
With the latter in mind, the CFO also highlighted that he reorganized the Real Estate Evaluation and Disposal Committee (CEDBI by its Spanish acronym) and assigned more human resources so that the entity would be able to consolidate its rulings and update the public asset inventory, which should be updated in the first quarter of 2020 and incorporated into Afaaf’s homepage.
Working with the Oversight Board
Marrero pointed to the FOMB’s Plan of Adjustment as a first step toward improved relations between the government and the fiscal entity appointed by the U.S. Congress, under the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) of 2016, to oversee the island’s finances.
“That improvement doesn’t mean that [the FOMB] is aligned with our principles and punctual beliefs. Alas, we were able to attain a better relationship where, acknowledging its power under Promesa, but also acknowledging our power under the Constitution of Puerto Rico and the power of democracy, we were able to collaborate respectfully,” the official said, adding that he is personally opposed to the existence of the Board—labeling it “undemocratic”—but accepts its legality as a federally-established organism.
“We have to work. The most responsible way to work, and ensure that the Board leaves as soon as possible, is by complying with the law and complying with the rules… In that sense, both the governor and yours truly began to develop a work agenda where the priority was to exit bankruptcy,” he added.
Moreover, he observed that the adjustment plan will be amended, while the government enacts other initiatives to counter the fiscal plan’s impact on certain sectors, such as the University of Puerto Rico (UPR) and the retirement funds.
In that regard, Marrero noted that the government unveiled a new UPR scholarship fund. Because the FOMB required the UPR to increase its cost per credit, students who benefit from scholarships will have less money to buy necessities or academic materials because a higher amount will be spent on tuition. Thus, the new fund—to be made available this year—is intended to assist low-income recipients of other scholarships.
As for the FOMB’s proposed cuts to pensions, Marrero affirmed: “we will mitigate any measure implemented by the Board.” Furthermore, he claimed that one of the amendments for the Plan of Adjustment is to include language that will allow the government to restore eliminated benefits—applicable to all impacted sectors—if it has a surplus, as is the current case.
As for retirees themselves, the official said that he and Puerto Rico Government Employees Retirement System Administrator Luis Collazo have taken the first steps to allow employees in the public sector to access their retirement plans online or through a 24/7 call center service.
“Employees are receiving their passwords, they are receiving training and, for the first time in history, they will be able to see how much money they have in their retirement plans,” he said.
With this new service, employees will be able to see their balance, perform money transfers and selects investments, among other benefits. Marrero likened it to the 401(k) plan offered by employers in the private sector.
Asked about what he visualizes for the new year, Marrero said that Prepa’s debt restructuring process remains a top priority, as well as providing structure to Afaaf, and reinstating an internship program akin to the initiative in the now-defunct Government Development Bank.
Apart from Prepa and Pridco, he noted that other agencies need restructuring as well, as is the case of the UPR and the Department of Public Works and Transportation—specifically, the Highway Authority.
On a personal note, he said that he intends to return to the private sector after performing his duties as CFO.
“My goal is to comply with my commitment to Puerto Rico. That is the most important thing to me… My intention is to return to the private sector, but I made a four-year commitment and I intend to see it through. I won’t go back on the commitment that I made,” he affirmed.