Omar Marrero and Elí Díaz. (GFR Media)

For Elí Díaz Atienza, the government representative to the Oversight Board, the approval of the adjustment plan, filed last Friday in federal court, will be key for Puerto Rico to adopt the administrative changes and structural reforms necessary for its economic recovery.

Omar Marrero, executive director of the Fiscal Agency and Financial Advisory Authority (FAFAA) agreed with Díaz Atienza, but he was even more specific: approving a debt adjustment plan (POA) means going one step further "to leave the Board.”

In their first joint interview as members of the government's fiscal team, Díaz Atienza and Marrero explained why Governor Wanda Vázquez Garced decided to endorse the Board´s plan. This plan cuts pensions to 4 out of 10 retirees; it would pay small amounts to thousands of government contractors and suppliers and cut more than half of the principal to certain government bonds held by Puerto Rican investors or mutual funds on the island.

"That plan will force us to implement the necessary fiscal measures. If we do not implement them, there will be no surpluses, and if there are no surpluses, we will not be able to restore the benefits proposed in the plan," Díaz Atienza said.

"The government will be under pressure to adjust its finances and to be more efficient. I think that will work for everyone´s benefit," Díaz Atienza added.

According to the POA –and if approved as filed- “if the Commonwealth generates a higher cash budget surplus than projected in the Fiscal Plan in any of the next 15 years, retirees receive 10 percent of that additional cash, which will be paid to retirees up to the amount of their benefit cut.” If the government implements efficiency measures that result in better services and savings, part of those revenues would also benefit public employees.

Since a POA could be equivalent to federal law, once approved, the government of Puerto Rico would be legally bound to comply with that agreement.

According to Marrero, including language to direct part of the surplus, in case of any, to restore benefits was one of the mechanisms promoted by the administration in order to counterbalance those cuts that will affect people's budgets

Such mechanism would be separate from the pension reserve fund, Marrero said, stating that while the government opposes the cuts, it seems academic in light of the agreement between the Board and the Official Retirees Committee (COR, Spanish acronym).

"With that, we secure resources for the current and future payment of pensions, but we are also separating $130 million over the next 10 years for an emergency fund," Marrero added, in referring to the fund they have not complied with for years.

Without a POA

According to Díaz Atienza and Marrero, the governor supported the POAbecause not having an organized debt resolution process would imply more obstacles to recovery.

"Title III must be left behind," Díaz Atienza said, pointing out that the island needs to focus on strengthening its infrastructure and promoting investment.

According to Marrero, although they oppose pension cuts, the POA is the cut proposed to the public debt that he described as substantial for the island. In dollars and cents, this represents savings of $26 billion in interest on current bonds. In percentage terms, Puerto Rico would direct 9 percent of its General Fund revenues to debt repayment, almost a third of what that payment would be today.

But the main reason for backing the proposal is the opportunity to regain "fiscal autonomy" and in turn, to put an end to what could be years of lawsuits with bondholders.

Marrero said if the POA is not approved, Judge Laura

Taylor Swain could ask for a new agreement or there could also be an automatic stay that, so far, has prevented concrete recovery actions against the government.

The risks of the Plan

However, moving the POA from paper to reality could be different if that requires legislation, as would be the case to exchange the current bonds debt for a new security instrument.

"That would be speculative at this moment," Marrero said when asked if the Legislative Assembly would have to pass any legislation to make the POA a reality.

In Marrero's agenda and before the Legislature, energies are focused on understanding the document that would reduce from some $35 billion to some $12 billion, the government´s obligations with bondholders and other creditors.

Bondholders of the Employee Retirement System (ERS), mostly local investors who would lose 87 cents on every dollar they lent to the government, are on that list.

Similarly, for the rest of the obligations, which could include government suppliers and contractors, the plan of adjustment contemplates paying these creditors just two cents on every dollar the government owes them.

"Unfortunately, in these bankruptcy processes, there are some creditors who have no guarantees and no priority," answered Marrero when El Nuevo Día asked about the economic effect of not paying thousands of local companies that provided services or goods to the government for years.

"Each party will have its day in court," Marrero said, noting that the POA approval process will require the parties to express themselves and that there will be a voting process for creditors to present their position.

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