Government tries again to pass state bankruptcy law

The government presented to Chamber of Deputies President Rodrigo Maia (Democrats, DEM, of Rio de Janeiro) the new state financial recovery bill, a fundamental part of bailout efforts to Rio de Janeiro, Rio Grande do Sul and other states. The proposal was supposed to be forwarded to Congress still on Monday, 23rd February, and defines several austerity measures that states have to adopt in exchange for halting payments of their debt to the federal government, refinancing bank debts and borrowing more to balance accounts.

The so-called Fiscal Recovery Regime would allow states to halt repayment of loans from public and private-sector lenders by up to 36 months, and renegotiate them under the same terms of their debt to the federal government, if the state requests to join the program. “We are using the same concept from the bankruptcy law for the fiscal recovery of states,” an official says. It serves as a kind of warning to banks better review the financial situation of each state before extending new loans while also protecting the federal government from having to shoulder the entire bill.

The proposal includes a mandate allowing banks that lend in anticipation of privatization revenue to appoint a board member “whose role will be contributing to the divestment plan’s success.” The privatization of Rio de Janeiro’s water and sanitation company, Cedae, which will count on a guarantee from Banco do Brasil, is one example of this mechanism.

Known as the states’ bankruptcy law, the bill represents the government’s second attempt to secure a bailout for barely solvent states after failing last year to convince the Chamber to keep the austerity demands.

Regarding December’s failed proposal, whose austerity measures were removed by deputies, the new draft evolved them by referencing more explicitly the Fiscal Responsibility Law (LRF) and granting exemptions for cases when states are forbidden from taking new loans.

The bill also forces states that file for bankruptcy to prove that legislation demanded in exchange (like authorizing privatizations and raising pension dues) already is in effect, meaning the federal government will not allow new borrowing that creates high risks to the Union, which guarantees the loans, and to banks.

The new bill removed the possibility of cutting hours and pay of government workers from states that join the process. The measure was included in the December bill and remains controversial. It’s currently under review by the Federal Supreme Court (STF).

Demands on states to liquidate leftover spending and debts every six months through auctions were also removed. The new draft lets the fiscal recovery plan decide the auctions frequency. The new version also blocks withdrawing deposits in court, except those allowed by complementary law 151, of 2015, which deals with cases linked to the public sector. Even in this case, the withdrawals are not allowed until states can keep at least 30% of the amount deposited.

States also will have to lower payroll spending to join the program. The original draft mentioned three criteria: lower net current revenue than consolidated debt; current revenues lower than fixed costs; and higher spending than available cash from non-constitutionally mandated expenditures. The new draft clarifies the first and second items (including which period and the law that sets the criterion) and replaces the second item with payroll spending of at least 70% of current revenues collected before filing for bankruptcy protection. Those criteria try to prevent that all states end up joining the program, which could generate an unbearable cost to the Union.

The bill also creates a supervisory council for the program, with three fixed members and three alternates. Three new jobs will be created at the highest federal pay level (DAS 6, of R$15,500) for them. States will not participate in the council, whose members will be appointed by the ministries of Finance and Transparency.

The council members will have access to all states’ financial data and can recommend revising or even suspending contracts in case of rule violation. They will have to file monthly reports on the fiscal situation of each state and a final report on the entire process.

Source: Valor Econômico S.A.