Treasury says Rio’s recovery plan was precarious and had fragile premises

The National Treasury classified the fiscal recovery plan presented by Rio de Janeiro as precarious and based on “fragile technical premises” to promote the rebalancing of the state’s accounts.

as revealed to leaf, Treasury and PGFN (Attorney General’s Office of the National Treasury) expressed their rejection of the Rio de Janeiro government’s plan, which in practice makes it impossible for them to adhere to the federal bailout.

The decision should generate a reaction from Rio de Janeiro, which can appeal to the Federal Supreme Court (STF) to remain in the program and ensure the continuity of the suspension in the collection of billions of debts.

“This secretariat believes it has found elements that indicate the precariousness of the plan presented for the rebalancing of the state’s finances, since it is based on fragile technical premises to promote the sustained financial balance that it aims to achieve with the Recovery Regime Fiscal”, says the opinion of the Treasury.

RRF is a relief program designed for indebted states. Rio de Janeiro was the first to enter, in 2017, and is now applying for a new membership after changes to the program’s rules.

Upon joining the regime, the state has immediate relief in the payment of debts with the Union and other creditors, in exchange for the implementation of fiscal adjustment measures.

The state government is committed to carrying out concessions, privatizations and other actions to improve collection and reduce expenses. At the same time, it needs to respect the prohibitions on creating new positions, granting raises and raising expenses.

The Treasury criticized the Rio de Janeiro plan for providing for salary readjustments in all years of the recovery regime. This year alone, personnel expenses would rise 17.1% in 2022, with the application of retroactive increases.

In 2023, the increase would be 8.9% in payroll expenses. From there, the state government plans to grant adjustments to restore inflation, at 3.25% in 2024 and 3% per year between 2025 and 2030.

In addition, in the week in which the federal government would complete the analysis of the recovery plan for Rio de Janeiro, the governor, Cláudio Castro (PL), announced on his Twitter account an increase in bonuses paid to military police and firefighters in the state.

Castro, who took over the government after the ouster of Wilson Witzel (PSC), intends to run for re-election in 2022.

Rio de Janeiro also included estimates of an increase in public investments and a reduction in the stock of debts with suppliers (inscribed in the so-called balances payable) until 2029, with a sudden reversal in the following year. In the Treasury’s assessment, this is an indication of the precariousness of the plan.

In 2030, investments would suffer a cut of 83%, while the remaining payable would jump to R$ 9.8 billion, a value just below what Rio de Janeiro accumulates today in this item (R$ 11.8 billion). The accumulation of this liability is seen as an indication of a mismatch in the accounts.

For the Treasury, the data set presented by the state “shows a structural imbalance and would possibly give rise to a new application to join the RRF” as of 2031. In practice, the government of Rio de Janeiro would remain dependent on the Union’s assistance.

Since 2017, when it first joined the RRF, until now, Rio de Janeiro has failed to pay R$92 billion in debts with the federal government.

The new adhesion would mean relief of another R$ 52.5 billion in the coming years, according to the Treasury.

Without the protection of the recovery regime, the state would have to pay what has been suspended until today. Of the total amount, R$ 30 billion would need to be paid off in 24 monthly installments. The other R$ 62 billion would be incorporated into the debt with the Union, which can be paid in up to 20 years.

In 2020, the STF granted an injunction to Rio de Janeiro for the state to remain in the relief program – even after numerous indications of violations – until the RRF was reformulated.

The program’s design was modified to allow more time for states that were not fit to implement fiscal adjustment. The maximum duration of the regime was increased from six to ten years.

The injunction by Minister Dias Toffoli guaranteed protection to the Rio de Janeiro government until the conclusion of the regulation of the program, which was done in April 2021. Then, Rio de Janeiro presented its new plan, whose analysis has now been completed.

Therefore, the understanding of government technicians is that the state can no longer count on the effects of the injunction to circumvent debt collections.

Any maintenance of Rio de Janeiro in the regime is considered an affront to other states, such as Goiás and Rio Grande do Sul, which have adopted adjustment measures to maintain the benefits of the plan.

The interpretation of technicians is that, without Rio de Janeiro’s adjustment measures, the government is simply donating resources to a state that has made little effort to rebalance its accounts.

In December 2020, for example, the Federal Government paid BRL 4.7 billion that Rio de Janeiro owed to BNP Paribas, referring to a loan contracted in 2017, right at the beginning of the tax recovery regime.

The contract had the shares of Cedae (Companhia Estadual de Águas e Esgotos) as a counter-guarantee – which assured the federal government the right to federalize the state-owned company in the event of default.

In 2021, the state pocketed BRL 18.2 billion with the Cedae concession auction, but did not reimburse the Union a single cent. The governor wants to use the money for investments. The AGU (Advocacy-General of the Union) joined the STF asking for the blocking of amounts, but is still awaiting a decision.