The plan is eagerly awaited by institutional and retail investors throughout the United States and on the island, who have been baffled by the Governor’s announcement in late June that the Commonwealth’s $72 billion debt “is not payable,” followed by a decision to default on a payment due by the government’s Public Finance Corporation. Indeed, beyond identifying needed budgetary cuts and structural reforms, the Fiscal Adjustment Plan will shed light on “the adjustment of the aggregate debt load of the Commonwealth and its instrumentalities so that such debt can be repaid under sustainable terms,” as per the official statement filed by the Puerto Rico Aqueduct and Sewer Authority (PRASA) in connection with its recent, unsuccessful attempt to place revenue-backed bonds.
To help ensure implementation of the plan, Gov. García Padilla will probably endorse the task-force suggestion to establish a local Financial Control Board, to be made up of individuals from Puerto Rico plus one or two confidence-inspiring members from the mainland.
Gov. García Padilla remains persuaded that Puerto Rico can deal with its fiscal and economic emergency on its own
Evidently, the Governor remains persuaded that Puerto Rico can deal with its fiscal and economic emergency on its own, even though the evidence to date has been overwhelming that every attempt to “go it alone” has made matters worse. Exhibit A was last year’s “Puerto Rico Public Corporation Debt Enforcement and Recovery Act,” a home-grown version of Chapter 9 bankruptcy for Puerto Rico’s public sector which the administration rammed through the legislature. In fact, the law undermined investor confidence, triggered a cascade of rating-agency downgrades, was immediately challenged by creditors in the federal courts—and has since been twice ruled unconstitutional. Obtaining a Chapter 9 mechanism from the U.S. Congress has been this year’s back-up plan—and that too has failed.
Any attempt to self-impose a Financial Control Board is more likely than not to bite the same dust. There is a reason why these boards are historically established by states in order to clean up a municipality in trouble, or by the federal government in order to discipline a wayward territory under its control. They are chartered by a higher authority because their purpose is to override the decision-makers who caused the municipality or territory in question to dive deeply into the red, thereby causing a loss of access to the municipal bond market. These boards are thus empowered from above to take the tough decisions on management, spending, revenues and assets for which there was no local political support.
Governor of Puerto Rico Alejandro García Padilla evidently remains persuaded that the island can deal with its fiscal and economic emergency on its own, even though the evidence to date has been overwhelming that every attempt to “go it alone” has made matters worse. (Photo by Joe Raedle/Getty Images)
Dr. Porzecanski is a distinguished economist in residence at American University.
Arturo C. Porzecanski
Puerto Rico Needs An Effective Financial Control Board--Meaning, Not A Local One
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