Washington D.C. - The House Indian and Insular Affairs subcommittee hearing on the implementation of the Promesa law reflected the trust deficit the Puerto Rico government still faces in handling its fiscal situation, according to experts.

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“Both sides - Republicans and Democrats - are wary that the current Puerto Rico government can bring the Electric Power Authority (PREPA) bankruptcy process to a viable conclusion,” said Alvin Velázquez, a professor of bankruptcy at the Indiana University School of Law, in analyzing the debate that took place during Wednesday’s session on the occasion of the ninth anniversary of the Promesa law and the performance of the Fiscal Oversight Board (FOMB) that controls the finances of Puerto Rico’s elected government.

The session of the House Indian and Insular Affairs subcommittee, which has primary jurisdiction over Puerto Rico issues and is part of the Natural Resources Committee, revealed that, at this time, there is no environment to end the FOMB, at least, before the restructuring of PREPA’s debt, a process that is in judicial mediation.

“Nor was anyone defending the bondholders,” stressed Velázquez, who was legal counsel for the Service Employees International Union (SEIU) and president of the Unsecured Creditors Committee during the central government’s bankruptcy process.

Velázquez was struck by the fact that no one raised the possibility of removing the FOMB and leaving the government in charge of the restructuring, but maintaining the brake on litigation against the government that the Promesa law provides. Also, he considered that there was a lack of debate on the management of federal reconstruction funds.

“Nobody said it that way, but the tone was also that ‘we don’t trust that the government of Puerto Rico is going to seek a viable agreement for the people of Puerto Rico, for the country,’” he said in a telephone interview.

The FOMB’s tenure is to extend at least until 2030, according to the Promesa law, which requires four consecutive balanced budgets, “in accordance with modified accrual accounting standards,” and that the territory’s government have “adequate access to short- and long-term credit markets and reasonable interest rates to meet the credit needs of the territory’s government.”

The FOMB’s goal, according to its executive director, Robert Mujica, is that by the time the four balanced budgets are completed, the government will have made significant structural reforms, including reducing from 20 months to six months the time it takes to present audited financial statements, which are necessary to certify a balanced budget.

At the hearing, Democratic Minority Leader of the Natural Resources Committee Jared Huffman (Calif.) argued that now is not the time to push for the exit of the FOMB, and credited Republicans with creating the agency in exchange for the sweeping restructuring process that the Promise Act created.

Sergio Marxuach, director of Public Policy for the think tank Center for a New Economy (CNE), stressed the importance - in the face of the FOMB’s future exit - of not only ending up with a good deal for Puerto Rico in the process of restructuring PREPA’s debt, but also achieving the necessary fiscal controls and human resources.

“What’s going to matter is that Puerto Rico has the capacity to put together these budgets, implement them, and comply with it being balanced. And the same on the debt side, that we have clear rules for issuing debt, that they are clear, that safeguards are followed, which is important. I think we still have a long way to go,“ Marxuach said, noting that the accounting standards required by the FOMB would include ”recognizing expenses as soon as they are incurred, not when you pay them.

On behalf of the CNE, Marxuach - an attorney and economist - submitted a written submission to the subcommittee, in which he maintained that, “as Puerto Rico finishes restructuring its debt and stabilizes its fiscal situation, it is time to start thinking seriously about phasing out the operations of the FOMB.”

Democratic Rep. Ritchie Torres (N.Y.) has previously proposed, with the support of his Puerto Rican colleagues, legislation that would allow the FOMB to exit once two balanced budgets are certified. Resident Commissioner in Washington, Pablo José Hernández, said he is exploring similar legislation that would reduce the requirement of four balanced budgets to three or two.

“I don’t think the argument that the board has to leave in two years is going to fly, but we should be preparing ourselves for when the board is gone and creating the muscle in the Puerto Rico government to be able to do this without supervision,” Marxuach said.

In that regard, he paraphrased comments made to El Nuevo Día by Democratic Senator Martin Heinrich (New Mexico) regarding the debate on Puerto Rico’s political status, saying that he does not believe this is the right presidential administration and Congress to advance legislation that would improve the conditions under the Promesa law.

Marxuach perceives that “the consensus is that the Promesa record has been mixed; much has been accomplished in terms of restructuring the debt, although PREPA is missing; it has cost and taken longer than we all expected in 2016; and imposing fiscal discipline in Puerto Rico has met with a lot of resistance, although some progress has been seen.”

In addition, both Marxuach and Velázquez argue that the leadership of the Natural Resources Committee may have realized that PREPA does not have the financial capacity to comply with the demand of a group of bondholders, such as those gathered by the firm Golden Tree Asset Management, to pay the entire debt, including the interest that has been added after the bankruptcy, some $12 billion.

“Puerto Rico would not stand for it,” Marxuach said, because of the sudden increase in rates, which would exceed 40 cents per kilowatt, at a time when it already pays about 26 cents, the second highest rate in a federal jurisdiction.

The FOMB has proposed to pay $2.6 billion of Prepa’s $8.5 billion bond debt principal.

“The $2.6 billion offer is still too high,” Velázquez said, although he is aware that it seeks to comply with the same concept of the territorial bankruptcy system created by the Promesa law.

For Velázquez, an additional 10-year moratorium on debt service payments should be obtained, once PREPA’s financial obligations are restructured, giving space for its recovery and the process of rebuilding the electrical grid.

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This content was translated from Spanish to English using artificial intelligence and was reviewed by an editor before being published.