A promise yet to be fulfilled: Two years of PROMESA

Signed on June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act sent Puerto Rico’s bondholders and residents on a difficult odyssey that is far from over.


The U.S. government adopted the Puerto Rico Oversight, Management, and Economic Stability Act two years ago on June 30, responding to a 10-year economic decline that had put $69 billion in local government debt on the precipice of the biggest municipal default in history.

Passage of the act set the stage for battles that have only escalated, as protesters took to the streets over planned austerity measures, the local government struggled with the Oversight Board on budgeting decisions, and bondholders battled among themselves for position in the law’s bankruptcy process.

Since the Oversight Board’s members were named in late August 2016, the board has been razor focused on achieving a structurally balanced budget, even if this means big budget cuts and substantial tax increases.

Its March 2017 central government fiscal plan assumed the payment of at most 24% of due debt in the first 10 fiscal years. Its April 2018 fiscal plan suggested that the government should pay about 19% of its debt going forward.

The local governor and legislators have frequently tried to maintain independent authority from the board. On Nov. 13 the governor succeeded in using the courts to beat back the board’s attempt to appoint a new electric power authority director. However, the governor and legislators have more often been on the losing end.

The board put the central government into PROMESA’s Title III bankruptcy process on May 17, 2017. Since then chief judge Laura Taylor Swain has made little progress on deciding the central issues in the case. On Aug. 10, 2017 she said she would try to rule on the dispute between holders of general obligation bonds and Puerto Rico Sales Tax Finance Corp. (COFINA) bonds by Dec. 15, 2017. As of June 25 she hadn’t done so.

Hurricane Maria’s devastating blow to Puerto Rico in late September 2017 threw a wrench in PROMESA’s turnaround efforts. Court hearings were delayed. The board reconsidered the island’s resources and needs. However, the storm also led to greatly increased federal economic aid and an at-least temporary positive economic trajectory (albeit after an enormous blow).

Since the start of PROMESA, Puerto Rico bond prices have been on a roller-coaster, responding to both Puerto Rican and Washington developments.

As of late June 2018 Title III bankruptcy participants were saying that the bond bankruptcy process was likely to go on for two or more years. Members of Congress who voted for PROMESA had hoped for Puerto Rican government and economic turnarounds, which are likely to take considerably longer.

Articles in this compendium on PROMESA were written by: Robert Slavin, Jack Casey, and Brian Tumulty.

Photos: Bloomberg News


President Obama prepares to sign PROMESA.

With Puerto Rico headed for a major default, Republican and Democrat legislators crafted a bill intended to reverse the island’s 10-year economic slide and bring an end to what they saw as an even longer period of irresponsible island government borrowing. Besides the naming of board members, little was achieved in the first six months.

Analysis and source documents


Gov. Ricardo Rossello took an axe to bond payments in his fiscal plan.

In early 2017 new Governor Ricardo Rosselló developed an approach to the island’s troubles that was partly his own and partly developed under the Oversight Board’s influence. Ultimately the board found the proposed fiscal plan too far from its own vision and the board approved a version it created. A few weeks later the board hired Natalie Jaresko to be its executive director. Jaresko was Ukraine’s minister of finance in 2014 to 2016, when the Ukrainian government struggled through its own fiscal crisis.

Analysis and source documents


Elias Sanchez, the governor’s first representative on the Oversight Board, draws a flock of reporters.

In the second quarter of 2017 the process of debt restructuring went into high gear. The Oversight Board approved fiscal plans for the island’s water and sewer authority and highways and transportation authority. Shortly thereafter, it put Puerto Rico’s central government and its electric power authority into Title III bankruptcy. Title III Judge Laura Taylor Swain ordered a stoppage to payment of the bond types with the largest outstanding debt, the senior and subordinate debt of the Puerto Rico Sales Tax Financing Corp. (COFINA). Finally, a group of mediators were appointed to oversee a parallel process in the Title III bankruptcies.

Analysis and source documents


Hamacao, Puerto Rico, is flooded amid the historic damage from Hurricane Maria.

The second half of 2017 got off to a seemingly peaceful start with a preliminary consensual agreement in August to restructure the Government Development Bank’s debt. Then things turned violent and ugly in September when Hurricane Maria devastated the island. The hurricane’s impact and President Trump’s response to it led Puerto Rico bond prices to plummet in secondary market trading. The impact also delayed the development of the bankruptcy process and led the Oversight Board to say it would develop a new fiscal plan for the central government and its authorities. In January, 2018 Gov. Rosselló declared that the electric authority should be largely privatized.

Analysis and source documents


Protesters at Trump Tower as the president’s response to the hurricanes came under fire.

In winter 2018 Judge Swain ruled that Puerto Rico’s special revenue bonds didn’t have to pay debt service during the bankruptcy. This upset many in the municipal bond community, who saw it as a break with precedent. Later, the federal government gave Puerto Rico good news when it promised a large amount of federal aid in the aftermath of September’s two hurricanes. Finally, the board released a new central government fiscal plan whose plans for debt were either more generous or more stingy than its March 2017 plan, depending on whom was interpreting it.

Analysis and source documents