On June 30, 2016, when then-President Barack Obama signed the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) into law, he warned that the island’s scenario was complicated because it couldn’t pay back the government’s $70 billion-plus debt load. Even so, he stated that “Puerto Rico is up to the challenge of stabilizing the fiscal situation, restoring growth and building a better future for all Puerto Ricans.”
Five years since Promesa was enacted, which paved the way to filing the largest bankruptcy in the history of the municipal bond market, the federal law’s outlined goals are still on the table.
Promesa brought along the Financial Oversight and Management Board (FOMB) to oversee public finances and help implement changes to improve the local economy and reach agreements with creditors.
Today is the fifth anniversary of Promesa. Since then, there have been four governors in Puerto Rico and no balanced budget, as required by the federal law, nor have essential services been defined. The Oversight Board argues that it has made “great progress,” while the sectors that analyze Puerto Rico’s financial scenario have different opinions among themselves, with some saying that another bankruptcy could emerge in a decade.
FOMB spokesperson Edward Zayas assured that much has been achieved, while FOMB Chairman David Skeel stated earlier this year: “We hope that we are on track for Puerto Rico to emerge from bankruptcy, ideally before the end of the year.”
Zayas listed several accomplishments, including the restructuring of the secured debt of the Puerto Rico Sales Tax Financing Corporation (Cofina by its Spanish acronym), which was lowered from $18 billion to $12 billion, as well as adjusting the debt of the Government Development Bank from $5 billion to $2 billion. He added that the Puerto Rico Aqueduct and Sewer Authority (PRASA) also achieved an adjustment in the annual payment of part of its debt, with a cut of $380 million.
According to the FOMB, if at the end of 2021 the restructuring agreement of $35 billion in central government debt - the largest amount - is confirmed, a reduction of $60 billion will have been achieved.
Zayas pointed out that the COVID-19 pandemic put some advanced negotiations on hold and that a restructuring had been negotiated that covered most of the creditors of the Puerto Rico Electric Power Authority (PREPA), which is before U.S. District Court Judge Laura Taylor Swain, who is overseeing the process. The Oversight Board also affirmed that the selection of LUMA Energy to take over PREPA’s energy transmission and distribution system is a “great step” towards transforming the island’s energy system and infrastructure, although the FOMB says that this is not enough for PREPA’s overhaul.
A Failed Colonial Experiment?
The Center for a New Economy noted that it did not support the Promesa bill for several reasons, among them, that “the political costs associated with the oversight part of the bill [were] extremely high and quite definite, while any benefits to be derived from debt restructuring [were] fairly uncertain and contingent on the successful implementation of a complicated, new territorial debt restructuring process.”
Now, five years on, the CNE issued a policy brief, stating that unfortunately, time has proven that their initial assessment was essentially correct. “To be fair, Puerto Rico has had a respite from bondholder claims and has been able to spend money that otherwise would have gone to debt service. However, the stay on litigation did not apply to other legal (nonpayment) claims while the debt restructuring process, although orderly, has been extremely slow and expensive.
“With respect to the longer-term goals of Promesa, we are still a long time away from regaining access to the capital markets and balancing our budgets. All the while an unelected ‘dictatorship for democracy’ keeps making decisions crucial to Puerto Rico’s future,” as per the CNE.
While the San Juan-based think tank noted that much has happened in five years and some events were beyond the FOMB’s control, “their actions to date reinforce the argument made by CNE back then, that PROMESA would not provide the platform to achieve political, economic and social stability. If Promesa was drafted, as some government officials stated back in 2016, to chart a sustainable path forward, then the bottom line is that the current track is far from sustainable.
“Worse yet, a whole host of proposals made by the financial body in its most recent Fiscal Plan suggests that FOMB members themselves don’t quite understand how their sequester-like cuts across the government will continue to hinder any chances of success for the island,” according to the policy brief.
Analyzing the Current Situation
Some sources interviewed by THE WEEKLY JOURNAL opined that Promesa was not necessary to resolve the debt’s nonpayment, but others assured that without the statute, chaos would have unleashed in the markets that would have lacerated the credit capacity of everyone in Puerto Rico.
House Speaker Rafael “Tatito” Hernández said that to complete the process in a positive way “it is essential to reach an understanding, in which we all work together to support the renegotiation of the government debt,” but “subject to a clear date and without delaying the fiscal entity’s departure.”
Eva Prados, executive director of the Citizens Committee for the Debt’s Audit, affirmed that the first thing that had to be done was a thorough study with the appropriate standards to establish which debts were illegally issued, to leave them out of the restructuring. Then, she indicated, it was necessary to sit down with the creditors and present them with information on what can be paid without dismantling the services offered in schools and hospitals, the University of Puerto Rico and without cutting pensions to avoid a “humanitarian” crisis.
“I do not see any positive results from the presence of the FOMB. In these five years what we have seen is a lot of suffering and backwardness... The Board is supposed to define the essential services in any case, make sure that the funds are allocated to provide those services, and with what is left over then say: ‘this it is what I have to contribute to the debt,’ not the other way around. But if who represents us is an entity that was not selected by the people and that has no real commitment to the welfare of the people, plus they have conflicts of interest, then we see how many errors have happened in five years,” Prados stated.
She opined that the Board is lobbying so that there is no parity in Medicare funds, while the debt restructuring agreements pending approval are so beneficial for creditors and so bad for the island, that in 10 years all the projections “point to us being bankrupt again.”
The Benefit of the Stay
Economist Heriberto Martínez Claro believes that the only real benefit that Puerto Rico obtained from the law was to stop paying the debt. “If this ‘stay’ had not been decreed, the market would have collapsed. The contagion effect was created because Puerto Rico’s municipal bonds are part of other larger financial packages, [but] it is not known exactly what they are or where they are. Faced with that uncertainty, everyone would have panicked, and access to credit for both the country and the people would have been halted. They would begin to deny you loans in the banks, in the cooperatives, you cannot buy on credit to keep your business operating. There would have been consequences at all levels,” he underscored.
Outside of that protection, the balance, according to Martínez, has been the imposition of “austerity measures” that predominantly impact economically disadvantaged groups, which in the case of Puerto Rico is the majority of the population. He said that there has been little social investment and that the FOMB’s work on welfare “has been a failure.”
Regarding the Cofina agreement approved by Judge Swain, the economist regretted that the debt cut was too little. He criticized the inclusion of the provision that if more money is collected than projected - from the island’s Sales and Use Tax - it must continue to be contributed to the creditors instead of going to the government’s General Fund.
Martínez affirmed that the debt must be audited, particularly the emission made between 2010 and 2011 of $4 billion in PREPA bonds for infrastructural projects. “We have to know what that money was used for then,” he asserted.