New debt issue policy

Hoping to avoid repeating practices that ended up  in PROMESA Title III, Governor Wanda Vázquez Garced sent yesterday a bill  to the Legislature seeking to establish certain limits on the government's debt issuance and restrict the use of that money.  

Specifically, the measure defines what collections or transactions will be considered when determining the margin debt established by the Constitution and provides that the government may only borrow to invest in capital improvements.

The proposed "Debt Issuance Liability Law" will also establish that the government will be able to refinance its current debt  only if it achieves savings in the payment of interest; that no debt or bond can be longer than 30 years and that the Fiscal Agency & Financial Advisory Authority (FAFAA) will have the last word when any government instrumentality seeks to borrow in the capital market.

"What we want is to leave a legacy," Vázquez Garced said in a meeting with Economy and Business journalists where she offered details on Puerto Rico's new debt issuance policy.

According to FAFAA Executive Director Omar Marrero, through the proposed statute, Puerto Rico will leave behind the current ambivalence, when determining the government's borrowing capacity.

But according to Vázquez Garced and Marrero, the bill before the Legislature reflects much of the restrictive language for issuing future debt that is contained in the Plan of Adjustment (POA) proposed by the Oversight Board.

On September 27, the Board filed before Judge Laura Taylor Swain - who presides over the island's bankruptcy cases - the plan to restructre some $35 billion in bonds issued by the central government and another $50 billion in obligations related to pensions.

As part of that plan, and different from the financial terms to modify the central government's current debts, the document establishes the conditions for  Puerto Rico to borrow in the future. According to the POA, these public debt guidelines are based on the conclusions of the Board's Special Investigator Committee report, by Kobre & Kim.

In that sense, both the POA and the bill Vázquez Garced introduced yesterday are further examples of how the Puerto Rican government's insolvency continues to transform what has been done so far in public administration terms and how this affects people, businesses and, therefore,  the socio-economic development of the island.

In response to questions from El Nuevo Día, Vázquez Garced, Marrero and the government representative before the Board, Elí Díaz Atienza, admitted that the bill is aligned with the POA.

However, the officials insisted that the bill before the Legislature is not an imposition by the Board. They explained that it establishes a set of provisions aimed at strengthening the constitutional terms and that responds to the vision shared by the fiscal agency and government on the issue.

Article VI of the Puerto Rican Constitution establishes, among other things, that the annual payment to bondholders must not exceed 15 percent of the average Treasury annual income in the two fiscal years prior to taking debt  and that in no instance - except in the case of housing construction projects – the bond will be issued will be for more than 30 years.

According to Vázquez Garced, the restructuring of the Puerto Rico Electric Power Authority (PREPA), the Puerto Rico Aqueducts and Sewers Authority (PRASA), the Puerto Rico Highways and Transportation Authority (PRHTA), as well as that of the central government, is "essential" for recovery, but other measures are required to return to the capital markets in sustainable conditions.

For Vázquez Garced, there is an urgent need to strengthen what the Constitution establishes to avoid repeating  the current fiscal framework.

Vazquez Garced said that the bill - which, by press time had not been released - was discussed with legislative leaders before it was filed. The governor was confident that the Legislative Branch will proceed with the measure to establish what she described as "a new era of fiscal responsibility."

The governor explained that while the POA establishes certain conditions for the government to issue debt, once it modifies its current obligations, the bill - the first since arrived at La Fortaleza nearly three months ago - is not a condition for the POA to be certified in federal court.

What does the bill seek?

According to Marrero, the bill would put an end to several of the practices that contributed to the government's financial collapse.

He stressed that under the new law, it will be prohibited to take debt to cover budget deficits or operating expenses.

"If the numbers don't add up, we can't mortgage the future of future generations," argued Marrero, adding that the government won't be able to refinance debt to extend the life of the loan and thus reduce the annual payment. This practice is known as "scoop and toss."

Vázquez Garced explained that the government will only be able to refinance debt if it reduces interest payments or if Puerto Rico experiences a natural or major disaster and needs to improve its cash flow. That is to say, to reduce what it directs to the debt repayment  until it overcomes the catastrophic event.

According to the POA, this type of refinancing could only last for 10 years.

"All new debt has to amortize principal within two years of its original issuance," said the governor.

Díaz Atienza said that the bill proposes a series of mechanisms to monitor debt performance and compliance with regulations. This part, PRASA Executive Director added, will be in the hands of FAFAA, the entity that will have to approve any future loan or debt issue.

Díaz Atienza said the scope of the measure has been discussed with the Board.

"We want to stress that in the future, no one can use that 15 percent (established in the Constitution) and interpret it in another way," the governor said.

The Board's plan and recipe

The bill will establish that when the central government borrows, it will have to serve as evidence for the payment of income that comes from contributions, or taxes such as the Sales and Use Tax (SUT). This is the same way that consumers, when buying a car or a house, determine their ability to pay by demonstrating their income from formal employment or payrolls.

For Marrero, in the central government case, when determining the capacity to pay, it will also be necessary to consider the 15 percent margin, that if the government has acted as a guarantor of a public corporation's debt, the estimate would have to consider that guarantee. In this calculation, the debt of the Sales Tax Financing Corporation (Cofina) would also be included.

Both Vázquez Garced and Marrero assured that the definitions contemplated in the law will not require any amendment to the Constitution.

Like the bill, the POA establishes that the government will only borrow to finance permanent works and that the debt will have to amortize principal within two years of its issuance or no later than five years, as provided in theUS  Internal Revenue Service.

If Judge Swain approves the POA, Puerto Rico will be subject to two restrictions on the issuance of debt. On one hand, it will be subject to the cap established in the Constitution and, also, to "a maximum annual debt service." This special cap will be established with the consent of the Board and no debt may be issued to be paid with taxes, including Cofina if it exceeds that "maximum annual service."

The POA and the bill also have one thing in common: none of the documents impose liabilities on officials or contractors who fail to comply with the new restrictions.

However, Vázquez Garced stressed that multiple laws impose criminal responsibilities on those officials or third parties who do not comply with their duties, which would be included in the measure if approved by the Legislature.

Public Corporations

Díaz Atienza stressed that the new statute would not include debt that may be issued by public corporations within the constitutional margin.

In that sense, he stressed that, from now on, the debt issued by public corporations will not be guaranteed by the central government. As a result, the debt that can be issued by PRASA, PREPA or any other public corporation will have to be paid withthe resources of that instrumentality.

Although the bill validates the bonds' 30-year maximum term established in the Constitution, this amortization will not apply to public corporations and therefore, neither to the controversial PREPA Restructuring Support Agreement (RSA).

In that case, Marrero said, the 47-year amortization is necessary due to the amount of the debt to be restructure.

"The greatest danger would be to do nothing," Marrero told El Nuevo Día when asked if they would continue to support PREPA RSA despite new studies about the adverse effect the agreement would have on economic activity.