Rio obtains injunction to remove debts after Economy rejects recovery plan

The state of Rio de Janeiro obtained an injunction in the STF (Supreme Federal Court) to rule out the collection of debts with the Union for another three months, after the Ministry of Economy once again barred its tax recovery plan.

The rejection of the plan to join the RRF (Tax Recovery Regime) is contained in an order from the Minister of Economy, Paulo Guedes, signed last Friday (25).

In January, the ministry had already refused Rio de Janeiro’s request to join the relief program designed for indebted states, as revealed by the sheet. The decision was taken after the Rio de Janeiro government failed to comply with the requirements of the federal relief program and proposed measures to increase expenses.

The initial rejection triggered new rounds of negotiations with the Ministry of Economy, which paved the way for some adjustments to the plan, such as the withdrawal of the forecast of annual readjustments to civil servants and the expansion of other expenses, such as investments.

The governor of Rio de Janeiro, Cláudio Castro (PL), met with the economic team on at least two occasions to discuss details of the plan’s revision. He also met with President Jair Bolsonaro (PL), with whom he is allied. After these visits, he was optimistic about the feasibility of a deal.

The documents of the action in the STF, however, show that two obstacles were not fully overcome – which led to the new rejection of the plan and triggered the request for an injunction made by the state.

The PGFN (Attorney General of the National Treasury) was against the approval of the plan because Rio de Janeiro did not extinguish the additional remuneration for length of service (such as biennium, triennium or premium leave).

The legal body of the Economy has the interpretation that the cut should reach all servers, including those who have already entered the career. But the approved state law ends the benefit only for new employees, which delays the adjustment in state public accounts.

The other obstacle is the spending ceiling, a rule designed to limit the advance of spending. The PGFN understands that the basis for calculating the ceiling needs to include all state funds and capital expenditures (which include investments), to avoid dribbles that allow increased spending.

“In view of the unfavorable manifestation of the PGFN, I reject the Tax Recovery Plan presented by the State of Rio de Janeiro”, says the order signed by Guedes.

In the preliminary injunction, issued this Monday (28), STF Minister Dias Toffoli says that, given the economy’s refusal to ratify the plan, “there is well-founded fear” on the part of Rio de Janeiro that state debts are immediate.

Rio de Janeiro was the first to join the relief program, in 2017, and is now applying for a new membership after changes to the program’s rules. Upon joining the regime, the state had immediate relief in the payment of debts with the Union and other creditors, in exchange for the implementation of fiscal adjustment measures.

Since joining the program, Rio de Janeiro has already had relief of R$ 94.63 billion in its debt, according to its position on February 1 this year. This amount would be charged immediately in case of exclusion from the state.

A previous injunction, also granted by the STF, shielded Rio de Janeiro from charges until there was a response from the Economy to its request to join the program. With the conclusion of the process, there was a risk of resuming commitments.

In his decision, Toffoli defends the need to reach a solution to the impasse through dialogue between the Union and the state.

For this, the minister stipulated a period of three months, during which Rio de Janeiro will continue to be protected by the rules of the rescue program, which prevent the Union from executing the state debt.

“The present case, of a precautionary nature, has the purpose of, for a determined period, ensuring special conditions that enable a dialogic environment, so that the actors of the federal tax recovery policy, through mutual concessions, reach a conciliatory solution for the controversy”, says the minister.

Toffoli has also scheduled a conciliation hearing for April 25, when the federal and state governments will need to present proposed settlements.

By joining the federal relief program, the state 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.

In the first version of the plan presented, the government of Cláudio Castro had included salary readjustments in all years of the recovery regime. The percentages would be 5.8% in 2022, 3.5% in 2023, 3.25% in 2024 and 3% per year between 2025 and 2030.

Rio de Janeiro also initially 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 was seen as an indication of a mismatch in the accounts.

The scenario outlined by the state led the National Treasury to classify the fiscal recovery plan as precarious and based on “fragile technical premises” to promote the rebalancing of the state’s accounts.

In the action in the STF, Toffoli highlights that these points criticized by the Treasury have already been adjusted. The forecast for annual readjustments was withdrawn, reducing the forecast for personnel expenses by R$ 47 billion over the duration of the regime.

As a result, the National Treasury changed its position from rejection to approval with reservations. Even so, the contrary opinion of the PGFN made the approval of the plan unfeasible.