It is very likely that the summer of 2021 will go down in history as the point that marked the beginning of the end of the bankruptcy of the Government of Puerto Rico.
On July 1, the first day of Fiscal Year 2022, the first budget prepared by the government of Puerto Rico and approved by the Oversight Board since Congress passed PROMESA five years ago, began to take effect. And in late July, Judge Laura Taylor Swain approved the Disclosure Statement for the Plan of Adjustment (POA), which represents the beginning of the end of the debt-adjustment process for the Government of Puerto Rico.
Both events are significant milestones in the process of complying with the two conditions imposed by PROMESA for Puerto Rico to emerge from bankruptcy and the Oversight Board to cease operations on the island: four consecutive years of balanced budgets and returning to the capital markets at reasonable rates.
What is truly significant is that since the enactment of PROMESA in July 2016, the government of Puerto Rico had not been able to implement its own budget, as provided for in the Constitution of Puerto Rico, because they were all rejected by the Board. The budgets that governed FYs 2018, 2019, 2020 and 2021 were the budgets imposed by the Board.
This time it was different. After all these years of hard work—sometimes collaborative, sometimes contentious—the Legislature, Governor Pedro Pierluisi and the Board, all did their part, making relentless demands as to some things and giving in generously as to others, to achieve the common goal. The truth is that we did not agree on everything. Differences remained, some of them considerable, but the end result was that the government of Puerto Rico was able to draw up a budget that the Board approved and certified as being in compliance with the Fiscal Plan for the first time since the beginning of PROMESA. It is easily said, but it has been an extraordinary achievement and a milestone on the road to emerging from bankruptcy, restoring our finances and achieving better opportunities for everyone in Puerto Rico.
We are now engaging in the process of approving the debt adjustment plan for the central government. Just as the average Puerto Rican family finds it impossible to thrive when it has debts up to its neck, Puerto Rico also needs to restructure its debt in order to exit the bankruptcy, dismiss the board and move forward.
When Congress passed PROMESA in 2016, the Government of Puerto Rico and its public corporations had accumulated more than $70 billion in debt that they could not repay. The Government and the public corporations had to spend nearly $3 out of every $10 in revenue just to service the debt. In addition, the government had another $55 billion in unfunded pension debt, that is, obligations to our retirees that could not be paid because the pension systems were broke.
Although the process of restructuring Puerto Rico’s debt has been going on almost since the beginning of PROMESA, and the restructuring of significant amounts of debt, such as that of COFINA and the Government Development Bank, among others, has already been completed, the next step will be perhaps the most important.
Following the approval of the Disclosure Statement, in the coming months Judge Taylor Swain will begin the process of considering the Plan of Adjustment that covers all of Puerto Rico’s central government obligations: approximately $35 billion in general obligation bonds, Public Buildings Authority (PBA) bonds, Highways and Transportation Authority (HTA) bonds, Government Employees Retirement System (ERS) bonds, other uninsured general debt of the Central Government, PBA, HTA and ERS, as well as another $55 billion in pension liabilities.
At the moment, the POA confirmation hearing is scheduled to begin on November 8. In other words, there is a real probability that by the end of this year, a POA will be confirmed for the central government, thus marking the end of the bankruptcy.
As with the budget, the Executive Branch, the Legislative Branch and the Oversight Board do not agree on everything relative to the POA. Governor Pierluisi’s well-known public policy is that such a plan should not entail cuts in the pensions of public employees because these have already been cut in the past.
We are confident that we will be able to reconcile those differences and reach a POA that benefits Puerto Rico, since reducing debt to sustainable levels is another very important step on the path that Puerto Rico must follow to emerge from bankruptcy, regain access to capital markets and end the mandate of the Oversight Board under PROMESA.