Significant steps in debt restructuring

The first payment to bondholders of the Sales Tax Financing Corporation (Cofina), under the restructuring agreement reached between creditors and the Oversight Board.

This year's $436 million disbursement to Cofina -through a 10 percent debt adjustment over 40 years- represents almost half of the previous obligation service, which was about $800 million. After having paid that, the Puerto Rican Treasury has $362 million from the Sales and Use Tax (SUT) available to cover other priorities.

Cofina's debt restructuring is one of the steps Puerto Rico is taking to resolve its debt crisis. These efforts represent an important sign of progress to the U.S. government and the investment market.

Meanwhile, the central government's Debt Adjustment Plan separates $1.5 billion annually to pay obligations. The Plan also proposes to use 9 percent of revenues for debt payment, which includes General Obligations, Public Buildings Authority bonds, and the public employees' Retirement System. This service presented 28 percent of revenues before. The Plan was presented before Federal judge Laura Taylor Swain for consideration.

The restructuring proposal for the Electric Power Authority's (PREPA) debt still has to be confirmed by the Title III Court created by PROMESA. This agreement includes a nearly 30 percent cut on the principal owed in bonds and would reduce the annual debt service almost by half over the next 10 years. A restructuring proposal for the University of Puerto Rico's obligations has yet to be addressed.

Although these proposals are necessary for fiscal balance, they would have consequences on the people and economic sectors. The agreements include, for example, adjustments in public employees pensions while ensuring that the pension of 60 percent of retirees will not be cut. Meanwhile, PREPA's new debt restructuring must come along with a transformation process that results in reasonable rates for customers.

In order to get the most out of debt restructuring agreements, Puerto Rico has to promote deep structural reforms that bring stability to public finances. For example, it is necessary to improve the tax structure and the permits process. Simplifying processes opens the doors to the development of a competitive and sustainable Puerto Rico.

The Treasury has been able to comply with Cofina payments in four and a half months using SUT revenues and without postponing the process until the end of December as it used to do. Just as debt restructuring agreements are an essential condition for economic recovery, payment compliance is essential to regain Washington's and the markets' confidence.

These changes call for an urgent transformation in the government culture to leave behind wrong practices that largely caused the island's finances to collapse. It is necessary to ensure compliance with constitutional limits when issuing new debt. In the Plan Judge Taylor Swain is evaluating, the Oversight Board has set rigorous limits. The Puerto Rican government has also proposed establishing borrowing parameters. It is also important to take concrete and strong actions against corruption and fund misuse in all government branches.

Along with the necessary processes to come out of bankruptcy, Puerto Rico has to stimulate the economy as soon as possible and use federal recovery funds for works aimed at overcoming structural challenges and boost the economic activity.