How the Puerto Rico board may need to adjust its approach
Part V of five-part series "Austerity on the Island"
Nearly all sides in Puerto Rico’s debt crisis have attacked the Oversight Board since its establishment in the summer of 2016. Various local parties have protested the board’s actions and said that it should have found money through further bond cuts. This is despite the board’s already deep restructurings, either proposed or actual, to most of the bonds.
Bondholders and bond insurers have said the board hasn’t respected the bonds enough and have called for cuts to wasteful local spending. However, they haven’t given specifics as to what programs should be cut and by how much.
The reality is that, as Oversight Board Chairman José Carríon has said, the local government has made unrealistic promises to many parties and many of these promises cannot be observed. Puerto Rico’s government will have to make deep spending cuts, painful tax increases, and reductions to its debt and promised pensions.
With the Oversight Board announcing this month that the central government can continue to pay the Christmas bonus, some observers may conclude that the board’s austerity for Puerto Rico has been and continues to be minimal. The "bonus," a mandated part of government worker pay since the 1970s, has been a sore point for bondholders, who saw it as an item that should be cut to free up money for debt payments.
In fact, while the board in November retreated on cutting the $60 million annual Christmas bonus, it has already implemented significant austerity measures, such as closing at least 255 public schools. The school closings are part of $2.23 billion in education cuts from last fiscal year through fiscal year 2024.
Most of the board’s planned spending cuts and tax raises are due to take place in the current and next few fiscal years, rather than in the last few.
Of course bondholders have suffered considerable pain since Puerto Rico stopped making payments on at least $59 billion of debt, covering a variety of issuers and bond types. The board has given holders of Government Development Bank and subordinate Puerto Rico Sales Tax Financing Corp. (COFINA) bonds deals formalizing cuts to principal ranging from 44 cents to 48 cents on the dollar.
The board is either seeking or appears to be near to imposing losses on other bond types. For commonwealth-issued bonds, it is offering cuts from 28% to 87% and is even threatening to cut 100% from bonds issued after 2011 unless the bondholders accept discounts steeper than those accepted by holders of early issue bonds.
However, the pain that bondholders are experiencing doesn’t necessarily mean that their interests are served by having the board incur as much pain as possible on the local populace, through austerity and cuts in the social safety net. If these policies only lead to a return to the economic contraction that the island experienced with little interruption from 2006 to 2017, then it won’t matter what’s in the court-approved debt restructuring plans, because Puerto Rico and its authorities will ultimately default on their new debt deals.
In September 2018 Moody’s Analytics projected Puerto Rico’s economy would contract by 17% to 19.6% by 2028, though many economists and the board are more optimistic. If Moody’s turns out to be correct, many or all the currently completed or soon-to-be completed bond restructurings probably will be revisited down the road with further cuts.
The board plans to cut spending and increase taxes to balance the budget. However, it remains to be seen whether future revenues will come in as the board is predicting.
The federal government has been slow in releasing money for post-Hurricane Maria aid, raising the possibility that the Trump administration is trying to avoid giving this money to Puerto Rico altogether. This would be important because the board’s projection for the government’s revenue in the coming years depend directly and indirectly on this aid.
In September the U.S. government has said it will revoke support for an excise tax providing 18% of Puerto Rico’s General Fund revenue.
Any solution to Puerto Rico’s conundrum of fiscal and economic problems must involve not just the board but also the federal government, local government, and other sectors of Puerto Rican society.
The board has been poor at predicting revenues. For example, fiscal year 2019 General Fund revenues ended up coming in 34.5% higher than the board had predicted at the fiscal year’s start.
In this context, some will question whether it makes sense to institute all the board’s austerity measures or cut bond payments as much as the board says is necessary.
However, as this series has shown, there are other reasons to question the board’s policy prescriptions.
Even though Democrats appointed three of the seven board members, the board has been promoting mostly conservative approaches to restoring economic growth.
Oversight Board Executive Director Natalie Jaresko provides experience on budgetary matters to the board, much of it from her stint as Ukraine’s Finance Minister. Board Member Ana Matosantos worked as California chief deputy director for budget and Finance Department director in a difficult fiscal period. Other board members provide other valuable expertise as they confront an economy that has largely been in decline for 13 years.
It will be hard to promote economic growth in Puerto Rico even while cutting spending and raising taxes to balance budgets. And there is no doubt that Puerto Rico will have to do these latter two things to gain a structurally balanced budget.
But the solutions to Puerto Rico's problems must go beyond this and beyond the board's structural reform recommendations.
"Puerto Rico is facing the total collapse of economic and political systems," CNE Policy Director Sergio Marxuach said. People need to plan institutional reform and new institutions, he said.
As the experiences of Portugal and some other countries have shown, and as Marxuach and economic consultants Jose Villamil and Heidi Calero have suggested, instead of the board’s mandates and recommendations,there may be better and less painful paths to restore Puerto Rico’s long-term growth, balance its budget, and pay its debt.