After three years, the Oversight Board laid the foundations for a culture of fiscal discipline in Puerto Rico and completed the restructuring process of one-third of the debt under PROMESA Title III, but, according to several sources, its performance has been erratic, expensive and plagued with controversy.
The Board completed its term by filing the government’s adjustment plan, making viable public employees´ pensions and a preliminary agreement in the Electric Power Authority (PREPA), although full of questions about its economic possibilities.
The legacy of the Board is now being discussed as its directors officially completed their three-year term and are waiting to be reappointed or replaced by President Donald Trump. The Board’s work is also very likely to be discussed during the Supreme Court oral hearing to review the constitutionality of the appointments to that federal entity.
Since it is an entity affiliated to the government of Puerto Rico, but to which the territorial laws do not apply, its work has been paid by the island taxpayers with a budget allocation that would reach about $ 180 million by the end of the term.
“This has been a new experience for everyone. It´s a government that wasn’t designed to have a board to be accountable to and a Constitution that never contemplated insolvency,” said economist Gustavo Vélez, who promoted – along with many in the private sector and even bondholders – an oversight body for the island’s public finances. This, after almost 15 years of deficit budgets and an already decade-long economic contraction.
According to the economist, after three years, the Board has had several successes.
Among these, the Board promoted different structures for the disclosure of government financial data and took affirmative actions when Hurricane María hit the island. Specifically, the immediate authorization of a $ 1 billion budget reallocation to respond to the disaster.
"I believe that the Board can be credited for addressing the issue of pensions," said attorney John Mudd, in referring to the approval of Act 106-2017, which created the PayGo system.
The president of the Puerto Rico Society of Certified Public Accountants (CPA), David González, agreed that the Board promoted improvements to the island’s budget process.
However, according to those interviewed, the Board’s work was, from the beginning, overshadowed by controversy, partly due to weaknesses in PROMESA and to public and court disputes, both with the administration of former Governor Ricardo Rosselló Nevares and Republican and Democratic representatives, as well as with the island’s creditors.
The Board was created on August 30, 2016, when former President Barack Obama appointed its members from a list prepared by U.S. congressional leaders.
It took the fiscal agency almost six months to organize, and that included the creation of its regulatory framework, a code of ethics and recruiting its staff, as well as its Executive Director, former Ukrainian Finance Minister Natalie Jaresko. At that same time, the Board designated about thirty Puerto Rican government agencies designated as initial covered entities that were subject to oversight, which later extended to the entire government and, last May, to all municipalities.
In March 2017, when the government and the Board were allegedly working together, Puerto Rico’s first certified fiscal plan was approved, an event that Rosselló Nevares – who was forced to step down due to corruption scandals and the Telegram's controversial chat – celebrated as a milestone of his administration.
Three years later, the Board has extensively reviewed the fiscal plan on at least three occasions, particularly after Hurricane María, and approved eight of fiscal plans in public corporations and government-related entities, such as PREPA and the University of Puerto Rico (UPR). These plans are intended to turn the island’s public finances.
In each of those reviews, municipal insurers like Assured Guaranty and the General Obligation bondholders group (GO), among others, sought to defeat the fiscal plan in court, questioning assumptions and projections regarding Puerto Rico’s ability to pay.
“They started on the left foot because the power to make things happen was not shown. There was a relationship between the Board and the government without respect or efficiency and they invested a lot in external resources, who took too long to learn about how things work here, with the costs that this entails,” said González.
According to the Board’s Chairman José B. Carrión, the fiscal entity´s successes are growing.
“During fiscal year 2019 (FY2019) that ended June 30, 2019, the Board made substantial progress on the path to undoing the damage of Puerto Rico’s fiscal and economic crisis,” Carrión said in the annual report that the Board sent to Congress and to the White House.
“We advanced in renegotiating Puerto Rico’s debt, establishing budgetary discipline and fiscal transparency, and raising the importance of critical structural reforms required to make the economy competitive again,” reads Carrion’s message.
For the Board directors, there still a lot to do, but they have worked diligently. The report details, for example, the creation of the Special Claims Committee, a group that challenged the validity of about $ 6 billion in GOs and another $ 2,5 billion in Retirement Systems Administration (ERS) bonds.
The report also highlights that this fiscal year, the government would end up with a $ 2.6 billion surplus, a figure that would lay the groundwork for pensions payment and offers a recount of the different budgetary and cash reports that the government now publishes.
The Board also highlights that they “completed two restructurings involving more than $22 billion in public debt and other liabilities that had been issued by COFINA, (Sales Tax Financing Corporation), and GDB (Government Development Bank).”
Oversight or Control
“When PROMESA was created, no one anticipated that there would be all these litigations and differences with the government. Moreover, Title III was thought of as a last resort because the idea was that these restructurings would be carried out through Title VI,” Vélez said.
PROMESA Title III allows invoking the protection of the federal court to suspend any debt collection action and to impose changes of the debtor's obligations – in this case, the government – on all creditors. Title VI promotes a debt modification through a voluntary agreement between the parties and endorsed by court.
In 2017, the Board invoked Title III for the central government, Cofina, PREPA, ERS and the Puerto Rico Highways and Transportation Authority (PRHTA). On September 27, it did the same with the Public Buildings Authority (PBA), when filing the government’s adjustment plan.
In contrast, since the summer of 2017 and although they are based on recommendations made by the government, the last three budgets have been implemented under the guidelines of cuts or allocations established by the Board.
According to González, despite its deficiencies, PROMESA provided a kind of shield to Puerto Rico by extending the automatic stay on litigation.
However, with everything and operating under Title III, the Board´s decisions have resulted over 80 litigations, including claims for transparency from the Center for Investigative Journalism and the Center for a New Economy, as well as claims from savings and credit cooperatives and workers' organizations such as the Electrical Industry and Irrigation Workers Union (Utier) and the Puerto Rican Association of University Professors.
That list also includes four lawsuits with the government: Rosselló Nevares' FY 2018-19 budget lawsuit; the Board lawsuit against the government to appoint Noel Zamot as PREPA´s Chief Transformation Officer; the Board lawsuit against the Senate to access its bank accounts information, and on last July, a lawsuit to invalidate Law 29 that reduces the administrative burdens of municipalities and about 23 joint resolutions allocating funds from previous years and for other purposes to municipalities. Law 29 exempted municipalities from contributing to pensions and the health reform.
On Saturday, El Nuevo Día also reported that after Title III, cases started, attorneys and consultants to the Board, as well as those working for the government and negotiating committees authorized by the U.S. Trustee, were authorized by court to receive over $ 360 million in fees and reimbursements for their work in Puerto Rico’s bankruptcy. The figure does not include other expenses, such as the $ 7.3 million invested in the special debt investigation conducted by the firm Kobre & Kim.
According to Mudd, although the Board addressed pensions payments, the decision implied adverse effects on other groups of creditors, including government bondholders and suppliers.
Yesterday, this newspaper revealed that the adjustment plan filed by the government would virtually throw about $ 5.566 billion in unsecured liabilities. According to the adjustment plan, the class that groups suppliers, contractors, and lawsuits against the government would recover up to 1.8 percent of what the government owes them for services or products sold to the government.
“In that plan, all those who had rulings against the government and suppliers would see a very hard effect,” said Mudd, adding that the Board will seek to impose the adjustment plan based on a fiscal plan that has been repeatedly questioned and without the government having updated on the filing of financial statements.
Bondholders and local market
Creditors don´t really recognize the Board´s work. For them, the fiscal entity has turned its back on Puerto Rico’s rule of law and has repeatedly violated PROMESA, which, in turn, impacts on the entire local market.
At first, bondholders took a hard look at the rejection of PREPA restructuring agreement (RSA) reached before the Board was constituted. Meanwhile, the Cofina agreement is being reviewed in the Boston First Circuit Court of Appeals.
"It seems to me that the performance has been poor from the beginning," said economist Antonio Fernós Sagebién.
According to Fernós Sagebién, many of the Board’s decisions on fiscal matters and debt restructuring are opposed to the goal of increasing and strengthening economic activity. The economist understands that the problem has a lot to do with what he believes has been poor advice on many issues.
For Vélez and Fernós Sagebién, the most important task of the Board goes beyond promoting structural reforms and directing the discussion towards a real development plan.
According to these economists, it still remains to do that part of the corrective work that goes beyond consolidating agencies or balancing the budget.