Four years after its approval, the implementation of the Puerto Rico Oversight Management and Economic Stability Act (PROMESA) has been tortuous.
The federal law is little understood, partly because it´s a combination of federal laws that incorporates concepts from European law such as the collective action clause and, above all because it takes precedence over Law 600 (the Constitution of Puerto Rico).
To begin with, the statute created the Fiscal Oversight & Management Board, a body whose validity was confirmed by the U.S. Supreme Court less than a month ago. Since its creation, the composition of the Board has been marred by allegations of conflict of interest, and when these went to the back burner, questions to the powers of the Board and those of the territorial government arose. The federal judicial scenario shows how complex the matter is: six bankruptcy processes and about a hundred lawsuits and adversarial procedures, almost a dozen between the government -including municipalities- and the Board.
The Board is tasked with restoring budgetary discipline and government financial disclosure. The publication of financial statements, according to economists, could serve to know how effective the Board has been in that mission. Still, Puerto Rico has a three-year delay in publishing its annual financial statements.
On the other hand, once the federal law went into effect and Title III protections were invoked, Puerto Rico accumulated a liquidity position that may now be the envy of jurisdictions facing the economic effects of the coronavirus. That liquidity is explained by the fact that the federal law has freed the island from paying its creditors while it reorganizes its finances. According to the CAFR for fiscal year 2016, but which incorporates recent entries, as of March 31, 2019, Puerto Rico maintained a balance with bondholders of some $8.214 billion.
Although the coronavirus has been shaking the Treasury, on June 22, the Treasury secretary's account totaled $7.66 billion. Considering restricted funds (such as pension payments) and the $2.2 billion allocated to Puerto Rico to address the COVID-19 emergency, the central government and public corporation bank accounts hold some $19.573 billion.
In contrast, budget cuts have put the government in a precarious position regarding its ability to respond to two hurricanes, this year's seismic events, and the coronavirus pandemic. The Board admitted that in last month's certified fiscal plan.
Regarding the debt restructuring process, the Board has achieved a restructuring agreement under Title III and another under Title VI. That is the COFINA agreement for some $17.58 billion, and the former Government Development Bank (GDB), which owed another $4.126 billion.
Considering Puerto Rico's debt obligations through bonds and according to the report made by Kobre & Kim commissioned by the Board, of the total debt to restructure before the court, which is about $51.18 billion, the Board has restructured about 34 percent. The Board endorsed the restructuring of obligations for the Puerto Rico Aqueducts and Sewers Authority (PRASA), the Environmental Protection Agency (EPA), and the U.S. Department of Agriculture (USDA).
El Nuevo Día knocked on the door of different experts on the island wit first-hand knowledge on PROMESA. Below is their opinion of the federal statute and the congressional measures that had impacted on Puerto Rico over the last century.
Alejandro García Padilla
Former Governor of Puerto Rico (2012-2016)
The Board and the government are allies
Between 2006 and 2012, Puerto Rico doubled its debt. As agreed, it was unpayable. The White House and the U.S. Treasury confirmed this and joined us in demanding Congress to approve a legal mechanism to restructure the debt and ensure protection against creditor claims.
The lobbying by creditors was intense and unfortunately included some Puerto Rican politicians. Upon seeing that legislation was imminent, those who opposed it convinced the republican Congress to include a condition: the Board.
Today, the government pays its teachers, police officers, health workers, and others because the debt is not being paid and accounts cannot be seized in court by creditors. Without those protections, we would have ended up like Detroit, New York, Washington, DC, Argentina, or Greece. The collapse of the economy would have been absolute.
The Board is tasked with verifying the government's fiscal plans and overseeing their implementation. It also has a duty - which it has not fulfilled - to recommend legislation seeking economic growth to Congress.
To evaluate PROMESA, one must understand that the government operates by its virtues. To evaluate the Board, one must note that its operation is interdependent on the government. You cannot evaluate one without the other. In my opinion, the Board has been too conservative, implementing economic models that have been proven wrong in other countries and times. To establish conservative policies, the Board has had an ally in a conservative government in Puerto Rico, despite its apparent discrepancies.
David E. González Montalvo
President of the Association of Certified Public Accountants of Puerto Rico
"Relative" success and a long way to go
When analyzing the performance of the Board we must refer to its responsibilities and objectives according to PROMESA. It seems to us that in the balance of these four years, the Board has had successes and failures. We recognize that the task is monumental and regarding certain issues, the authority conferred by PROMESA has been limited. In the area of development, evaluation, and monitoring of the island's budgets and fiscal plans, the Board has been relatively successful in injecting a certain fiscal discipline, which Puerto Rico has lacked for decades, for different reasons, and which will help us regain access to markets.
On the fundamental issue of economic development, PROMESA delegates to the Board the promotion – along with the government of Puerto Rico - of strategies that result in economic growth. We think that there is still a long way to go and the Board could play a more leading role than it has up to now.
There should be no doubt that the greatest virtue of PROMESA that has benefited Puerto Rico has been a debt restructuring process, which otherwise would not have been possible. The fact that over the past few years Puerto Rico has not had to pay its debt service, which was around $3 billion, has been key in getting it out of the crisis.
President of the Puerto Rico Economists Association
A "stop" in payments while renegotiating
The most important thing the Board has achieved is the presentation of fiscal plans with updated macroeconomic information and with variables that are useful for the economic and fiscal analysis of Puerto Rico.
We must recognize that they have presented data and methodologies that we do not necessarily find in the reports by agencies such as FAFAA and the Office of Management and Budget (OMB).
The Board continues to consistently fail in its irrational defense of austerity policies in areas of social investment that are important to the island. Instead of promoting cuts to institutions such as the DMO (Destination Marketing Organization), what they have done is put the weight of public spending cuts on instrumentalities such as the University of Puerto Rico.
For example, the earthquakes revealed that the Puerto Rico Seismic Network (part of the UPR) was left without funds and now with the COVID-19 pandemic, people linked to the UPR had to respond immediately, but with budgetary resources that were strongly reduced by the structural adjustment policies promoted by the Board.
The positive aspect of PROMESA has been the moratorium on debt payment while negotiating restructuring processes. However, the fundamental problem lies in the fact that the process has been accompanied by an inadequate economic framework for the island, which has led to increased migration, loss of human capital, and citizens losing interest in having a life plan in Puerto Rico.
President of the organization Bonistas del Patio (Backyard Bondholders)
"Blow" to the local savers
In 2012, $25 billion of the local debt was in the hands of 60,000 Puerto Ricans, most of whom depended on those savings for their retirement. Since 2013, Puerto Rico's bond prices have plummeted, and in the face of repeated interest defaults, particularly after the bankruptcy was declared, many local savers were forced to sell their bonds at a loss of 50 percent and sometimes as much as 70 percent, depending on the type of bond. The blow has been so severe that, as of March 31, 2020, only about $6 billion remains in local hands.
For local bondholders, it has been difficult to understand how the Board has allowed the government to continue consuming with important budgets, considering that fiscal savings have come almost entirely from debt restructuring, that is, from the bondholders' pockets, mainly locals who bought at the original price without any discount.
In the next five years, in the certified fiscal plan, we do not see a substantial spending reduction or a focus on a more efficient government, that should be the goal. There is still close to a $50 billion debt to be restructured and we expect local bondholders to be treated with the deference and fairness they deserve, not the same way as those who bought at a discount, as has been the case.
Former presiding judge of the District Court of Puerto Rico
A mechanism like no other
PROMESA is an attempt to manage the largest U.S. public debt default that turned Puerto Rico into a virtual laboratory to test some mechanisms to remedy a default.
The global economic downturn due to COVID-19 has highlighted the importance of a public insolvency resolution system and that Puerto Rico has through PROMESA.
None of the 50 states has a mixed bankruptcy, judicial and extrajudicial system as Puerto Rico has, to solve its fiscal problems since Chapter 9 of the Bankruptcy Code does not apply to the states. Nor do the states have the mechanism of the collective action clause (CAC) of PROMESA Title VI to avoid the Argentine vulture fund problem.
On the other hand, PROMESA introduced an anachronistic Oversight Board, imposed on elected leaders, which constitutes an undemocratic setback. Besides, the judicial process created by federal law has proven to be extremely litigious, costly, and conflictive between bondholders, government, and the Board. The selection of Board members has been criticized, as has the investigation of conflicts between lawyers and consultants, for not producing any effective action.
Freezing collection actions against the government, savings resulting from three years of debt repayment, the mediation process created by court, and the reserve requirement for emergencies are significant achievements of the Board.
Bankruptcy lawyer and representative of the Electrical and Irrigation Industry Workers Union (Utier)
"A de jure government"
Under the colonial regime, it is not possible to achieve the goals for the Board to complete its work in Puerto Rico: four consecutive balanced budgets and access to markets at reasonable costs.
PROMESA is four years old and the first balanced budget has not yet been achieved. The misguided policy of implementing austerity measures further impoverishes the population, encourages emigration, reduces consumption, and thus reduces revenues. We fall into a vicious circle where the only measure the Board takes is to make cuts. It is a cycle that plunges us further into misery and financial deficit.
The Board's actions will lead us into a second apocalyptic bankruptcy because it is pursuing agreements with bondholders that turn credits into insurance. A secured debt is always collected as long as there is value in the guarantee. Therefore, in a second bankruptcy, creditors would collect their claims and Puerto Rico would be forced to reduce investment in essential services and pensions. It is socio-economic chaos and a humanitarian crisis.
PROMESA has exacerbated the colonial and human rights problems. The Board exercises all public policy powers through the imposition of fiscal plans and budgets. It has the power to determine the validity of any law or regulatory action based on inconsistencies with the fiscal plan. The Board is the de jure government in Puerto Rico and this makes local elections inoffensive, accentuating, in an intolerable manner, the lack of political rights motivated by the ideological substratum of the racist Insular Cases doctrine.
Leader of the Citizens' Front for Debt Audit
PROMESA is "part of the problem."
PROMESA was approved with the strong opposition of important social sectors in Puerto Rico. With it, a new political pillar was created over the Caribbean colony that would decide on its economic and social future, taking away more control from the island. The message of the law was clear: the public debt had to be paid, no matter what.
Although its architects claimed that PROMESA would promote a fair debt restructuring process, protecting pensions and essential services, this has not been the reality. Four years later, we are still bankrupt, with essential services dismantled. Pensions that were previously cut, are - again - under threat and even debt adjustment plans already approved have not been implemented.
We now have a Puerto Rico hit by hurricanes, earthquakes, and a pandemic, but with a Board that insists on restructuring plans that cannot be paid and more austerity.
The only viable way out is bond debt cancellation and a comprehensive, citizen-based audit process to ensure that this does not happen again.
The global trend is towards debt cancellation so that countries prioritize their health systems and strengthen their economies. In Puerto Rico, local and international economists insist that the only way to avoid a second bankruptcy is a substantial or total cut in bond debt. Time has proven us right. PROMESA was not the solution, it is now part of the problem.
Legal advisor to the Service Employees International Union (SEIU)
"A formula for disaster"
The last four years force us to conclude that PROMESA has been a failure. The Board is pushing proposals that increase electricity rates and therefore increase the cost of doing business and the cost of living in Puerto Rico.
Instead of adequately funding retirement systems, the Board approved liquidating them and now threatens to cut pensions. Instead of using bankruptcy to cut illegal debt, the Board prefers to cut 96 percent of the claims of government suppliers. They are taking money out of the pockets of local workers and entrepreneurs, the main engines of Puerto Rico’s economy, to give it to vulture funds that do not create jobs or invest in businesses in Puerto Rico.
None of this creates the necessary conditions for sustainable economic development. Without growth, there will never be real sources of debt repayment. This is a formula for disaster and will lead to further emigration. Thus, we will never regain access to capital markets nor will we succeed in balancing the government's budget, which are the conditions required by PROMESA to dismantle the Board.
Puerto Rico needs to recover from two category 5 hurricanes, the earthquakes, and now COVID-19. We need to sow the seeds of a new economy, but the Board and PROMESA only brought problems. Puerto Rico needs to cut its debt almost completely, and at the same time, invest in a new economic vision. Until that happens, Puerto Rico will never get out of bankruptcy.