Puerto Rico governor rejects federal control board orders

SAN JUAN, Puerto Rico — Puerto Rico's new governor on Friday rejected orders from a federal control board in the first clash over how best to tackle the government's deep financial crisis after a decade-long economic slump in the U.S. territory.

Gov. Ricardo Rossello called the board's demands unacceptable and said they differ greatly from his vision to promote economic growth.

"Any fiscal plan premised exclusively on a reduction in the health, well-being, and living standards of the people of Puerto Rico through health care delivery cutbacks, current retiree pension reductions ... and layoffs is by its nature unacceptable," he said in a letter to the board, adding that he is willing to work with the board to reach "acceptable balance."

Rossello's reply comes as his administration faces pressure to submit a revised fiscal plan this month and next month's expiration of a stay on lawsuits filed by creditors. The governor has asked for an extension on both deadlines, and the board said earlier this week that it was inclined to grant them.

The board also ordered Rossello's administration to present a plan that would generate $4.5 billion a year in revenue or savings through 2019. Board members said Puerto Rico should reform its tax system and reduce health care and higher education spending as well as minimize the size of government in part by reducing payroll costs by 30 percent, among other things.

"Puerto Rico faces a daunting fiscal challenge," the board said. "Unless significant fiscal and structural measures are implemented, the government will have an annual average fiscal gap of $7.0 billion from fiscal year 2019 to fiscal year 2026."

This is in addition to a nearly $70 billion public debt load that Puerto Rico is seeking to restructure. The board has said the government should set aside $800 million in annual debt service, which would represent a nearly 80 percent shortfall on payments due, but Rossello has said the administration will pay based upon resources available at the time. He has said he is willing to keep negotiating with creditors, many of whom have filed lawsuits following multimillion-dollar defaults by the previous administration.

Rossello and others have criticized board members for their demands, saying they are putting too much pressure on a wobbly economy that has prompted more than 200,000 Puerto Ricans to move to the U.S. mainland in recent years. Economist Vicente Feliciano said that if the board's demands were implemented, the local economy could contract up to 16 percent in a worst-case scenario.

"That's the sort of contraction you get in a civil war or an Ebola epidemic," he said in a phone interview. "The proposals are extreme."

He said that while major adjustments are needed, the board and Rossello's administration need to reach a consensus: "Any debt renegotiating right now is a waste of time."

A statement from the board said it was studying Rossello's letter and would respond later.

Rossello has already taken several steps to help offset the government's financial crisis, including signing executive orders to reduce spending per agency by 10 percent as well as ordering a 10 percent cut in contracts for professional services. The board has previously stated that those measures are not enough.

"We must be candid and stress that, to get closer to fiscal balance, a lot more will need to be done beyond the measures already adopted by your administration," said the board, which was created last year after President Barack Obama signed a rescue package for Puerto Rico.