PROMESA after four years: Key questions remain

Four years after PROMESA, Puerto Rico's path forward remains murky.
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The first of three stories marking the anniversary of PROMESA

Four years after passage of the Puerto Rico Oversight, Management, and Economic Stability Act, many observers say the Oversight Board it created has not accomplished its stated goals and doesn’t have enough power to fix the island's woes as it continues to struggle.

The local government's inertia and PROMESA's unwieldy structure, along with uncontrollable natural disasters and a global pandemic, has made for a perfect storm for any sort of Puerto Rico recovery.

President Barack Obama signed PROMESA on June 30, 2016. Since then, restructuring settlements have been reached for three of the island’s 18 classes of debt. Using PROMESA, the board and the Puerto Rico U.S. District Court approved deals for Puerto Rico Sales Tax Financing Corp. (COFINA), Government Development Bank bonds and notes, and ports-related Puerto Rico Infrastructure Finance Authority debt.

Nearly all the remaining 15 classes of debt will also be restructured.

Board Executive Director Natalie Jaresko has said it’s impossible to develop a structurally balanced budget for the island without having an adopted restructuring settlement for the central government debt. PROMESA requires the board to remain until there has been four years of structurally balanced budgets.

Though more than a dozen bondholders or their representatives were contacted, only one responded. Many bondholders continue to participate in the bankruptcy process.

At least 17 people answered questions about their confidence in the process, whether the law should be changed, and hopes and expectations for the future.

The Oversight Board takes stock
In an interview on Wednesday, Board Member David Skeel and Executive Director Natalie Jaresko pointed to several areas they think the law has helped. Skeel said there had been "enormous progress" using the law’s Title III and Title VI to advance debt restructuring.

Prior to the COVID-19 epidemic Jareskso said the board had done "quite well" by reaching a deal with broad array of bondholders on the central government’s debt. After the virus spread to the island and the consequent lockdown to the economy, the board will have to relook at the deal, she said.

Jaresko said the board had broken the cycle of deficit spending and because of its work, Puerto Rico’s government is "in a fiscally sustainable environment."

She also said the board had created a "depoliticized road for the economy." Nearly all groups across the political spectrum now agree the board’s goals, as found in its fiscal plans, are the proper goals, she said.

While there is disagreement about implementation, some agree that labor participation and the labor markets need to improve, the electricity sector must improve, the competitiveness and ease of doing business must improve, and that there must be educational reform, she said.

“The issue is being able to manage your way through the change and that is hard, especially with these interruptions,” Jaresko said, referring to Hurricane Maria, the January earthquakes, and the COVID-19 epidemic.

As concrete achievements, Jaresko pointed to the creation of an emergency budget reserve and a recent announcement that private firm LUMA would take over the island’s electrical transmission and distribution from the Puerto Rico Electric Power Authority.

However, even its drafters have criticisms. A federal official who had been involved in crafting the law said that when it was created those involved knew there had to be a pairing of debt restructuring and oversight. The former has been more successful than the latter, the official said.

The Puerto Rico board wasn’t given the powers the Detroit emergency manager, New York control board, and Washington, D.C. control board were given in those distressed situations, the official said.

"We underestimated the local government’s willingness to oppose the board," the official said. The Puerto Rico board doesn’t have enough power to straighten out the island and the local government doesn’t want to take the necessary steps, he said.

Board member Andrew Biggs said similar comments in tweets in late May and early June. “I went into this process hopeful that things could really improve in Puerto Rico. But PR’s problem isn’t this-or-that public policy, that in theory could easily be fixed. It’s a dysfunctional system that produces those policies, and that system won’t fix itself. Pessimistic now.”

Experts weigh in
“To some extent the board has been asked to do an impossible job,” said José Javier Colón, University of Puerto Rico professor. What the board needed was the power to jumpstart the economic relations between the island and the 50 states. But Congress didn’t give the board this power, he said.

Center for a New Economy Policy Director Sergio Marxuach agreed that things haven’t been going well and Congress bears some of the blame. U.S. Treasury officials had incorrect assumptions about Puerto Rico politicians when they created the law.

They thought local government officials would accept the board’s proposals as well as its dictates. But Puerto Rico politics is very different from that in the U.S., he said, adding the pushback from local officials was predictable.

Center for a New Economy Public Policy Director Sergio Marxuach
Center for a New Economy Public Policy Director Sergio Marxuach said Congress has some blame for PROMESA's failings in practice.

Several other commentators said the law wasn’t working and the blame lied with the board, but their criticisms varied.

Center for a Popular Democracy’s Julio Lopez Varona said, “PROMESA has failed to resolve the Puerto Rican debt crisis and in doing so, it has brought suffering and hardship to the people of Puerto Rico. In the last three years, Puerto Rico has faced a worsening economic crisis, natural disasters, and severe austerity measures.”

Lopez Varona, who is co-director of Community Dignity Campaigns for the center, continued, “While PROMESA requires every approved fiscal plan to ‘ensure the funding of essential public services,’ in practice, the [board] has failed to define or discuss essential services in any fiscal plan to date ... Even worse, since its inception, the unelected [board] has been riddled with conflicts of interest that have made many organizations question the real motives of the [board].”

Coming from a different perspective, Tim Travis, chief executive officer of T&T Capital Management, said, “I think PROMESA has been an unmitigated disaster. The intent was to grandfather the original [Puerto Rico Electric Power Authority] deal, honor pledges and liens, put an emphasis on obtaining consensual deals, and put Puerto Rico on a path to accountability, transparency, and fiscal responsibility so that it could once again gain access to capital markets.

T&T owns general obligation, PREPA, HTA, and COFINA bonds.

“Instead the Oversight Board and government of PR have yet to provide current audited financials or anything close to it. They have rejected multiple PREPA deals that had been agreed upon after months of negotiations, setting PREPA back even further and hurting the island greatly. Puerto Rico is the only municipal bankruptcy that has increased spending during the bankruptcy process, which is absurd," he said.

Board spokesman Matthias Rieker responded, "The Oversight Board used its mandate under PROMESA to break the Government of Puerto Rico’s cycle of deficit spending. The government rightsizing measures in the Certified Fiscal Plan have already reduced the government’s payroll and overall operating expenses while securing essential government services, as mandated under PROMESA. The general fund budget, looking only at operational costs, declined from $8.9 billion in fiscal year 2016 to $6.2 billion in fiscal year 2020, a more than 30% reduction. The general fund budget operational costs for the coming fiscal year 2021 are projected to increase to $7 billion because of COVID-19 and the reclassification of certain expenses (about $600,000) from the Special Revenue budget.

"Separately and in addition, since fiscal year 2018, the government’s budget also includes paygo pension costs, which did not exist in general fund budgets before. That cost fluctuates between $2.5 billion and $2.6 billion per year, prior to any pension reform proposed in the Plan of Adjustment. Ensuring pensions is mandated under PROMESA. Further, the government must budget for Puerto Rico’s expenditures on Medicaid, which fluctuate dramatically based on Federal funding. Medicaid costs not included in the above general fund budget numbers has fluctuated from about $400 million to over $1.5 billion. The Oversight Board has always ensured that the Certified Fiscal Plan projects costs of Medicaid based on current Federal legislation."

Travis said the Oversight Board has worked with a select few "vulture hedge funds" to try to cram unfair deals that hurt long-term supporters and financiers of Puerto Rico.

“The [board] has tried to break liens and pledges, including on the GO bonds, which are guaranteed before any other expense, including salaries, via the constitution of Puerto Rico. They have spent four years and well over a billion dollars litigating and have almost nothing to show for it,” Travis said.

Puerto Rico commentator Cate Long said, “Generally one measures ability to manage public finances by the timeliness of audited financial statements and paying debts as they come due. According to this criteria PROMESA has been an enormous failure as the Puerto Rico government have only published their audited financials for fiscal year 2016 and fiscal year 2021 begins on July 1.

“Also PROMESA required the payment of interest on debt during the pendency of the bankruptcy and instead the Oversight Board has allowed the government to accumulate $19 billion in cash. Puerto Rico has increased their spending since filing for bankruptcy in May, 2017 and has cut taxes multiple times,” Long said.

For others the measure of failure is quite simple.

Attorney John Mudd said after four years there should have been an approved plan of adjustment for the central government debt. Jubilee Executive Director Eric LeCompte said all of the debt restructuring should have been completed by now. Mudd is an attorney for unsecured creditor Servicios Integrales en la Montaña in the bankruptcy as well as a long-time commentator on the board and the bankruptcy.

Advantage Business Consulting President Vicente Feliciano
Advantage Business Consulting President Vicente Feliciano said PROMESA prevented debt restructuring from going into a tailspin.

Others were more positive about the law and the board.

Chief Financial Officer Carlos Vazquez of Banco Popular — the largest bank in Puerto Rico — said, “Like any law intended to address multi-faceted and complex problems, the statute is far from perfect. Having said that, to the extend we are making progress in improving the PR government’s income statement (via controlled and prudent management of the budget); the government’s balance sheet (via debt renegotiations) and structural challenges (via government restructuring); then the statute is moving matters in the correct direction.”

Advantage Business Consulting President Vicente Feliciano said of PROMESA, “It is certainly working because without a stay in the claims to the government of Puerto Rico, the restructuring process would have gone into a tailspin of conflicting claims and chaos. Regrettably, the actions undertaken under the PROMESA umbrella have been derailed twice by the largest external setbacks to the economy of Puerto Rico since German U-boats were sinking merchant ships in the Caribbean: Hurricane Maria and the Covid-19 pandemic.”

Estudios Técnicos Chairman José Villamil said, “PROMESA, through the [board], has returned some degree of sanity to fiscal management, and I am convinced that had there been no [board] the local political class would have made the situation much, much worse than it is.”

Next: Should the law change and, if so, how?

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Puerto Rico Commonwealth of Puerto Rico Puerto Rico Electric Power Authority Puerto Rico Infrastructure Financial Authority Puerto Rico Highway & Transportation Authority Puerto Rico Sales Tax Financing Corp (COFINA) Government Development Bank for Puerto Rico Puerto Rico Electric Power Authority PROMESA Coronavirus