Concerns about lack of Puerto Rico government reform raised

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Puerto Rico Oversight Board members and investors raised concerns Wednesday about the pace the local government on the island was taking to reform itself and its economy.

Meanwhile, Ambac Financial Group, on behalf of its subsidiary Ambac Assurance Corp., filed an adversary complaint Tuesday against the board in U.S. District Court for Puerto Rico arguing that the Puerto Rico Oversight, Management, and Economic Stability Act is unconstitutional.

At Wednesday’s board meeting the board voted six to zero to approve its staff-proposed fiscal plan for the central government. Board member Ana Matosantos was absent.

The board is projecting COVID-19 pandemic’s effect on the local — and international — economies will reduce government revenues over the next several years. Compared to the board-certified May 2019 fiscal plan, it has 65% less surplus money available for paying debt service through 2032.

Evercore Howard Cure
Evercore Director of Municipal Bond Research Howard Cure said Puerto Rico's government needed to be restructured if there is to be hope of a balanced budget.

Bond insurer Ambac Financial Group, on behalf of its subsidiary Ambac Assurance Corp., filed an adversary complaint against the board in U.S. District Court for Puerto Rico.

Ambac is arguing that the Puerto Rico Oversight, Management, and Economic Stability Act is contrary to the uniformity clauses of the U.S. Constitution’s Bankruptcy Clause. Ambac says the clause requires Congress to create bankruptcy laws that are uniform for all debtors. PROMESA picked out the island’s government entities for special treatment, the bond insurer said.

Adversary proceedings are like lawsuits within the PROMESA Title III bankruptcy process.

Elizabeth Prelogar, partner at law firm Cooley LLP, which is representing Ambac, said, “No creditors of any other territory, municipality, or governmental debtor have been subject to the sort of discriminatory treatment being faced by creditors of the commonwealth – and the Constitution requires uniform bankruptcy laws to guard against this result.

PROMESA board members had various thoughts on how the local government has functioned — or not functioned.

Board member José González said since the board was founded in late summer of 2016, the local government’s progress in changing its practices has been slow. It hasn’t rethought the way it is delivering services. He said it was “critically important” the local government follows through with reforms.

Board member Andrew Biggs said the government’s failure to institute “structural reforms” affects aspects such as the labor market and the ease of doing business on the island.

Oversight Board Executive Director Natalie Jaresko said the local government has shown a lack of appetite for structural reforms and a lack of application of agreed-upon reforms in the past.

Evercore's director of municipal bond credit research, Howard Cure, said: “Puerto Rico’s government and operations clearly need to be restructured if there is any hope of balancing their budget going forward. Delaying change simply makes restructuring that much harder.”

Jaresko said the fiscal plan includes “milestone budgeting,” which provides bonuses for government workers and additional funding to parts of government after certain goals are met. She said she hoped that would help induce the government to make some of the changes and advances that the board seeks.

On Wednesday Puerto Rico commentator Cate Long tweeted that the board has a history of projecting lower revenues than have actually come about.

Cure said: “The current situation also highlights the dependency of the commonwealth on the federal government. … Hopefully, someone in Washington will lobby on their behalf, but without direct representation in Congress, that also becomes difficult.”

Puerto Rico attorney John Mudd said, “The real question now is whether there will be new negotiations with bondholders, how long it will take, and whether there will be a new plan of adjustment.” Mudd represents creditors in the Puerto Rico bankruptcy.

Jaresko said Wednesday that she wouldn’t comment on possible revisions to the February-proposed board plan of adjustment for central government debt.

AllianceBernstein Municipal Credit Analyst John Ceffalio said: “The economic impacts of COVID-19 as identified by the fiscal plan are sobering. I am skeptical that the surplus the plan identifies will be enough to satisfy bondholders and bond insurers. I am concerned that negotiations for both the general government credits and [the Puerto Rico Electric Power Authority] will extend past the [November] election, which may lead to further delays if there are political changes.”

At Wednesday’s board hearing ex officio board member Omar Marrero said the local government, of which he is a member, is projecting that revenues next fiscal year will be down 6.7% from this fiscal year.

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