March 9, 2017 / 12:33 AM / 5 months ago

UPDATE 1-Puerto Rico oversight board recommends emergency fiscal measures

(Adds government response, background)

NEW YORK, March 8 (Reuters) - Puerto Rico's federally appointed fiscal oversight board recommended on Wednesday that the U.S. commonwealth's government enact emergency measures to avoid running out of money by July.

In a letter to Governor Ricard Rossello, the board said it now estimated a possible cash deficit of about $190 million by the beginning of July.

"We believe that without major emergency actions the Commonwealth soon will be unable to pay essential services, including pensions, education, healthcare and public safety, in a matter of months," the letter said.

According to a board-commissioned report from accounting firm Ernst & Young, the analysis concluded the government's fiscal 2017 expenditures, based on historical trends, could end up being understated by $360 million to $810 million, the letter said.

The board's letter also highlighted estimates that before the end of calendar 2017, the Employee Retirement System and Teachers Retirement System funds will both be depleted.

It also estimated a loss of about $800 million of Affordable Care Act funding for its healthcare system during fiscal 2018.

Emergency measures to address these shortfalls include immediate but limited furloughs for government employees and teachers to save $35 million to $40 million a month. Frontline law enforcement personnel should be exempted, the board recommended.

Other recommendations included cutting professional service contract spending of up to 50 percent and significant reductions in all government contract expenditures. Puerto Rico should also cut healthcare costs by negotiating to lower drug prices and rates to health plans and providers, the board said.

Late on Wednesday Governor Rossello's board liaison, Elias Sanchez, responded in a letter stating that while the government "understands and appreciates" the concerns expressed by Ernst & Young over the government's draft fiscal turnaround plan, the analysis "suffers from important defects."

The government reminded the board that it had been working with financial advisor Conway MacKenzie to audit cash flow information and liquidity forecasts for over two years. In contrast, Ernest & Young "has been at work on the fiscal plan for only 3 weeks and no doubt confusion may occur because of the pressure of time and complexity," Sanchez said.

Sanchez said the government and Conway MacKenzie were "very confident" that the accounting firm's analysis was "flawed."

The emergency measures recommended by the board are "unnecessary," Sanchez wrote, but added the government would appoint a working group to meet with the board and its advisors.

Reporting by Municipal Bonds Team; Editing by Richard Chang

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