As if all the struggles that Puerto Ricans have faced in recent times weren’t enough, now there is a global coronavirus pandemic to deal with. Infections and deaths are ticking up as we all hope that the worst is behind us.
In these uncertain times Puerto Ricans justifiably look to their leaders to lead. Instead of the disappointments like the controversy surrounding the Puerto Rican government allocating $40 million to a company with no experience in handling medical products, or the ongoing plans for climbing out of the fiscal crisis, the good of the people needs to come first for Puerto Rico to thrive as a whole.
On the debt restructuring process, the Oversight Board has asked for a delay in the approval proceedings of the current Plan of Adjustment (POA). While far from ideal, it is a necessary step to ensure the process is done fairly and will lead to the best outcome for residents of Puerto Rico. Hopefully this delay will allow all participants to carefully review the current POA to ensure it can bring about the best economic outcome for the island. As it stands right now, the POA has some significant flaws.
As I and members of Congress have spoken about previously, throughout the bankruptcy process there have been major complaints about the lack of transparency from the Puerto Rican government. One of the larger concerns has been about the pension estimates. As House Natural Resources Committee member Tom McClintock (R-CA) said in a recent letter to the Oversight Board, an independent audit of pension funds is needed. McClintock’s letter stated that, “these funds—which total $55 billion according to the Oversight Board’s most recent estimates—do not appear to have been properly verified as to either amount or validity”. It is astonishing that these estimates have never been audited before the POA was put forth by the Oversight Board.
Another key provision that has not received much attention provides that hedge funds begin accruing interest on to-be-issued General Obligation bonds and Junior COFINA bonds as of March 1, 2020, to the tune of more than $580 million annually. At a time when the island so desperately needs access to cash and the ability to preserve future debt capacity, there are legitimate questions about allowing such a substantial handout to hedge funds simply because the Oversight Board is trying to get their votes for approval.
Neither the legislature nor the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF) supported the terms of new debt issuance. Both were ignored by the Oversight Board.
Protecting hedge funds with a $586.2 million annual backstop will cost the Commonwealth $490 million just through the end of this year to service this debt.
The reality is that the effects of the coronavirus pandemic will mean that the Plan of Adjustment is highly likely to change anyway, so now would be the time for the legislature to object and at the very least pause the accrual that is running day by day. This money would be better spent elsewhere helping the people of Puerto Rico.
The POA has many flaws and the rush to push through the first plan that came together has dire consequences for Puerto Rico’s ability to re-enter capital markets and begin to recover from the hardship the people have suffered in recent years. As the pandemic response has shown us, we cannot rush through responses to a crisis because if we do, there is a huge risk that the situation will be worse than it was at the start.