The Puerto Rico Oversight Board and Puerto Rico Gov. Ricardo Rosselló are engaged in a complicated dance over future debt payments and policy.

While the governor’s rejection of austerity measures in the board’s April 19-approved fiscal plan fueled protests, the board is taking an approach to debt that's very much in line with that of the governor.

Puerto Rico anti-austerity and anti-Oversight Board demonstration on May 1 in San Juan
Puerto Rico residents marched against austerity and the Oversight Board on May 1 in San Juan. Bloomberg News

In successive versions of a fiscal plan that the governor submitted to the board in January, February, March, and April, the governor said the amount of debt Puerto Rico should carry should be determined through a comparison with debt medians in the 50 U.S. states. The board’s certified plan largely agreed with this model. Like the governor’s proposed fiscal plans, the board certified plan has a comparison to the medians for the 50 states and to the 10 states with the highest levels for four measures of debt.

The board certified plan stated, “The implied debt capacity and expected growth in debt capacity in debt capacity must be sufficient to cover both the payments due on the restructured debt and all payments due on future new money borrowings. Accordingly, the aggregate debt service due on all fixed payment debt issued in the restructuring of the government’s existing tax-supported debt should be capped at a maximum annual debt service level.

“The cap would be derived from the U.S. state rating metrics, and specifically what Moody’s [Investors Service] calls the ‘Debt Service Ratio.’” The debt service ratio is defined as ratio of total debt payments due in a year divided by a state-government’s own source revenues.

Using this definition would lead one to say that Puerto Rico could pay about $19 billion of the roughly $45 billion that the central government and its closely related lending entities owe, according to the plan’s exhibit 26. In the same exhibit, the board alternately suggests that one should use an average of a set of four measures of debt capacity and not just own-source revenues. Using this composite measure would mean that Puerto Rico should pay back about $10.7 billion in outstanding debt.

But the board plan says this is optimistic for a promised level of payments. It says that the fixed amount committed to should be cut by 10% to 30% to allow for “implementation risk.” It suggest that 20% should be used and the coupon be adjusted to 5%. These would lead to Puerto Rico committing to pay 19% of its debt.

“Any additional cash flow above the maximum annual debt service cap applied to the restructured fixed payment debt that is generated over the long-term from successful implementation of the new fiscal plan could be dedicated to a combination of contingent ‘growth bond’ payments to legacy bond creditors, debt service due on future new money borrowings needed to fund Puerto Rico’s infrastructure investments and additional ‘PayGo’ capital investment to reduce the government’s historically out-size reliance on borrowing to fund its needs, among other purposes,” the board stated.

In contrast to the general agreement between the governor and the board on debt payment, since the board’s fiscal plan approval the governor has repeated his refusal to institute its cuts to pensions, reductions of mandatory vacation and sick time for the island’s employers, elimination of the island’s mandatory Christmas Bonus, and cuts to government employee health benefits. He has claimed that the board doesn’t have the authority to institute these on its own.

On April 25 the governor’s ally and party brethren Carlos Méndez Nuñez, president of the Puerto Rico House, sent a letter to Board Chairman José Carrión that said, “Please explain to the board members that the proposed [labor law] legislation will also be challenged in any forum that you intend to introduce it and that the intention to submit medieval rules to our economy will not be supported by any legislator in this House."

Some observers say that the governor’s opposition to the board is mainly for political purposes. Rosselló “is going to try to paint the board as the ‘bad guys’ to retain some semblance of popularity among voters,” said Cumberland Advisors Portfolio Manager Shaun Burgess. Cumberland holds some insured Puerto Rico debt.

“The pre-[Hurricane] Maria governor’s fiscal plan included pension cuts, labor reform and other measures consistent with the Junta’s post-Maria plan,” said University of Puerto Rico Sociology Professor Emilio Pantojas in an email, referring to the Oversight Board by the local term. “The straw that broke the camel’s back was labor reform, as there had already been a labor reform law approved; the Junta’s plan now required a second round of cuts in labor benefits that were rejected vehemently.

“Even former New Progressive Party governor Carlos Romero Barceló declared that another round of cuts to labor would affect the party’s chances for the next election. Hence, the governor is assuming an adversarial posture vis-à-vis the Junta’s fiscal plan to ‘save’ his party from the ‘voto de castigo’ (retaliation vote), which is used by Puerto Ricans to get back at governors that adopt unpopular policies,” Pantojas continued.

Puerto Ricans' protested the board's fiscal plan policies in several marches on May 1.

Burgess said the surplus found in the board’s “Macroeconomic Overview of Puerto Rico” through fiscal year 2023 was more interesting than the board’s discussion of debt payment.

The board’s projection of $10 billion more in surplus in comparison with the governor’s plan was “very surprising,” he said. “Both plans have really fueled the rebound we have seen in Puerto Rican debt.”

Both Pantojas and Burgess predicted the board would ultimately prevail in their struggle over policy. Burgess said the U.S. Congress may have to step in and mediate the dispute. Pantojas said the governor would succeed in portraying himself as the defender of those who are most vulnerable.

While the board has asked the governor to submit a central government budget the end of Friday, Pantojas said he thought it would be delayed.

As for the board’s definitive word on debt – the plan of adjustment required by the Puerto Rico Oversight, Management, and Economic Stability Act – Burgess said this will have to wait until a dispute between holders of general obligation bonds and of Puerto Rico Sales Tax Financing Corp. (COFINA) bonds is settled.

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