After four years of PROMESA, the Financial Oversight and Management Board for Puerto Rico (hereon Oversight Board) recently presented to White House officials a blueprint of the progress towards achieving the expected goals, especially in savings and restructuring among the various types of Puerto Rico’s debt.
As set forth in PROMESA’s Section 209, the Oversight Board will terminate its functions in Puerto Rico when it certifies that: “(1) the territorial government has adequate access to short- and long- term credit markets at reasonable rates to meet its borrowing needs; and (2) for at least four consecutive years, the government has developed its budgets using modified accrual accounting standards and has reached balanced budgets.” (with the restructured debt servicing requirements included)
After these first four years, clear signs of moving with a definitive path on the debt adjustments front are seen based on the following consummated actions and others in progress:
- COFINA debt restructured under Title III.
- GDB debt restructured under Title VI.
- PRASA debt restructured out of court (and was even able to go to the market recently).
- The Central Government’s debt adjustment plan (PDA by its Spanish acronym) to be presented to Judge Laura Taylor Swain in about a month or so.
- In the case of the PDA, the negotiations include those public corporations’ bonds that were subject to the “clawback provisions” (including their clawback insurance creditors), such as those of the Convention Center District Authority, Infrastructure Financing Authority and Metropolitan Bus Authority; the Pension Obligation Bonds; the pension debt to the government’s retirees; as well as other more traditional debt like those with the government’s contractors and suppliers.
- For the Highways and Transportation Authority (HTA), a plan of adjustment is intended to be filed by Jan. 31, 2022.
- Puerto Rico Electric Power Authority (PREPA), awaiting its turn.
The “four consecutive years of balanced budget” is certainly a target goal where one can see all eyes on with tremendous priority and focus, as the fiscal plans are constantly monitored, reviewed, revised, reshaped and updated with the advent of new unanticipated events like hurricanes, earthquakes and most recently, the pandemic.
In the coming weeks, the Oversight Board will pass judgment on the most recent fiscal plan submitted by the new administration under Hon. Gov. Pedro Pierluisi. Back-and-forth discussions, revisions and questionings between the government and the Oversight Board are certainly expected. This constant monitoring over the fiscal plans shows the importance, focus and priority this ultimate goal of PROMESA is being given by all stakeholders.
On the other hand, with respect to the timely issuance of the audited financial statements of the government (a key action that would facilitate attaining access to the market), there seems to be a constant race towards just catching up. Despite legitimate efforts placed by those involved in the process, hurricanes Irma and Maria, and now the pandemic, have had unquestionable impact on the readiness of the financial statements. But such extraordinary events are not the sole culprit.
As of the date of this article, the June 30, 2018 government financial statements are still pending, but apparently in its final stretch of the 2018 race.
When such financial statements are finally issued and left behind, the brief sense of achievement will be replaced soon enough with another race towards the 2019 and 2020 financial statements; thereon a new countdown for the 2021 financial statements will begin next July 1, 2021. In that race, one hopes that 2021 can stay still for a while, just to allow the government and its auditors, at the central level and down to its subdivisions and components, to finally catch up on the race.
But unfortunately, time goes on, and all the variants and players involved in getting the financial statements of the government up to date and its audits done, must continue its pursuit and find ways to pick up the pace at speed that exceeds the normal passage of time.
When Treasury Secretary Francisco Parés was appointed CFO of the Commonwealth by Gov. Pierluisi, both immediately stressed the urgency of completing the government’s overdue audited financial statements; which is one of the responsibilities of the CFO. Observers and stakeholders of the government, especially the bond market, look ahead to see that the secretary successfully fulfills this assignment.
For the past decade and under different administrations, efforts and resources have been invested in the establishment of a new comprehensive unified financial system, also known as Enterprise Resource Planning (ERP) project, to manage the government’s finances in all its ramifications.
One of the various other objectives in the implementation of such system is to consolidate the communication of the financial accounting and reporting systems within the government agencies to achieve agility and efficiency towards the prompt closing of the accounting records by the end of fiscal years.
This would be a great progress in turning things around, but it is only one piece of the complex and overwhelming process that goes into the preparation of the financial statements of the government, let alone the fact that it would take time; but in the meantime, the financial statement preparation and audit process must go on. There are multiple other pieces of the puzzle equally important that require attention and maybe higher priority and focus.
The questions to be addressed are: What are those pieces still needing attention? Has the government taken a step back to identify what are exactly the reasons, situations or conditions that are causing the delays in the confection and eventual issuance of the audited financial statements of the government? Have these reasons been identified? If so, have they been addressed and/or resolved? If not, why not?
The responses to most of these queries are probably already known; but maybe the ways to execute the solutions and the response time to those solutions might prove a little trickier. To make things more challenging, the road ahead in terms of government accounting guidance and rules will not be getting any easier or simpler.
By the mid-2000s, the official standard setter of the accounting rules for governments, the Government Accounting Standard Board (GASB), totally reformed the financial reporting model for governments with the approval of GASB No. 34, which became an overwhelming task to implement at that time.
Matters can get complicated when a new reporting model, expected to become effective by July 1, 2024, and not less complex projects, like the new Lease Accounting Model for governments, will need to be implemented. Additionally, other accounting guidance like recent ones adopted for private businesses, such as Revenue Recognition, are coming up within the next couple of years in its government version; therefore, time is of the essence to begin preparing for those future pronouncements right away.
There are solutions and approaches to address all the different pieces of the puzzle that are creating these delays. Some should be developed carefully addressing the root of the causes, to create a solution for the long-term, and others must be addressed rather quickly. They must be dealt with creatively, with investment where resources are needed, enforcing execution of responsibilities and duties of those involved and certainly trying new drastic and creative ways!
There are successful examples out there within the government. Be reminded of how PRASA was able to go into the market recently. This example could be a subject for a future in depth discussion about how a few solutions and approaches could be copied government-wide.
It can be done! We all would like to see the government succeed because everybody wins if the government achieves its financial reporting goals. The immense flow of federal funds coming in from the several programs addressing different natural disasters and the pandemic will not last forever. Access to the market should be ready and going before these federal funds end, in order to continue a path of reconstruction and prudent investment in what our island needs. The rest of the economy and its sectors should be jumpstarted as a result.
Let’s collaborate with the government by creating a think tank forum or similar focus group to provide ideas, suggestions and solutions to help it finalize the financial statements catch-up race.