Keeping Puerto Rico honest

ANALYSIS/OPINION:

Congress wisely declined to bail out Puerto Rico when its leaders turned to Washington with hat in hand for help with its $70 billion debt. Instead, they created an oversight board to compel the island commonwealth to solve its self-inflicted fiscal mess. Unfortunately, both the oversight board and the territory’s government have failed to adhere to congressional requirements and are not taking the bold steps necessary to spur economic growth and fix Puerto Rico’s finances.

The Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) was passed by Congress last year and aimed to restore fiscal responsibility to the commonwealth. In addition to creating the oversight board and tasking it with overseeing the island’s finances, the act provided a stay on litigation in order to give the government time to negotiate with bondholders. Crucially, it also mandated that any fiscal plan would “respect the lawful priorities or lawful liens, as may be applicable in the constitution, other laws, or agreements of a covered territory.”

Some debt restructuring is a necessary component of any realistic solution for Puerto Rico. How exactly that is accomplished makes a big difference, however. The island will eventually need access to bond markets again, which means excessive haircuts aren’t going to work. Nor can it play favorites and advantage certain debt-holders over others or ignore the legally established priorities. There won’t be many willing to lend to Puerto Rico in the future if rules are ignored.

Unfortunately, the government and the oversight board have not attempted to work with debt-holders in good faith. Instead, they’ve put forward a plan that ignores PROMESA’s requirement of respect for lawful priorities by advantaging certain interests over the general obligation debt that is guaranteed by the island’s constitution. The plan also only provides $800 million in debt service per year while keeping nearly 94 percent of revenue for other expenditures. There is virtually no fiscal reform — in fact, the budget plan calls for significant increases in payroll and operational expenses over the next decade — and no significant changes to the island’s pension system with its whopping $48 billion debt.

The plan does not represent the serious reforms that PROMESA was designed to bring about.

To make matters worse, the plan proposes a side deal to creditors of the Puerto Rico Electric Power Authority (PREPA), that would limit its bondholders to a 15 percent haircut while other debt-holders are likely to face haircuts of 77 percent under the current plan. A recent agreement reached between PREPA and its creditors imposing the 15 percent haircut and a new charge on consumers should likewise be rejected by the oversight board.

By Andrew F. Quinlan

Fiscally Irresponsible in Puerto Rico Illustration by Greg Groesch/The Washington Times
Congress must insist the commonwealth stick to its fiscal oversight deal
Keeping Puerto Rico honest