If we have the votes next term, we should cut PR loose.
Puerto Rico’s Broken Promise
The cash-strapped, debt-laden island takes one step closer to bankruptcy.
By
Mary Anastasia O’Grady
April 30, 2017 4:28 p.m. ET wsj.com
A federal stay barring Puerto Rico’s creditors from taking legal action against the commonwealth and most of its entities for nonpayment of debt expires on Tuesday.
The stay was ordered under the Puerto Rico Oversight, Management and Economic Stability Act, or Promesa, passed by Congress in June 2016. It was designed to give a cash-strapped Puerto Rico time to come up with a viable long-term fiscal plan, and to work with creditors toward a voluntary debt restructuring. But as we go to press both sides appear to be far apart.
The expiration of the stay could allow Puerto Rico’s newly elected Gov. Ricardo Rosselló to seek bankruptcy protection for much of that debt, as provided for under Promesa. Yet creditors won’t go down without a fight.
To ensure accountability and adherence to the rule of law, Promesa created a “financial oversight and management board.” On March 13 the board certified Mr. Rosselló’s fiscal plan even though it violates the Puerto Rican constitution. More troubling, the plan is inconsistent with Promesa’s broader objective, which is to restore Puerto Rican growth.
Mr. Rosselló forecasts a decade of stagnation averaging an annual decline in gross national product of 0.1%. Either the governor is purposely lowballing his revenues to justify bankruptcy or his campaign promises to make Puerto Rico better off were hot air. It could be both: The plan significantly underestimates the cost to future financing of burning creditors and destroying market confidence.
Bankruptcy was not an option for Puerto Rico or its municipal corporations when together they issued the $73 billion of debt that is now outstanding. A long history of willingness to pay back creditors had given Puerto Rico a high credit rating and, together with its triple-tax-exempt status, helped it attract capital at low rates.
It also made it too easy for the political class to pile up unproductive debt. In June 2015 then-governor Alejandro García Padilla announced that his government was running out of money and that he wanted Washington to step in and allow Puerto Rico to declare bankruptcy. Yet while the governor was crying poor, he was paying big money for “consultants.” For example, in 2015 Puerto Rico initiated an 18-month, $615,000 contract with the politically connected Podesta Group in Washington. Curious.
To paraphrase Bartleby the Scrivener, Mr. García Padilla seemed to “prefer not to” service Puerto Rico’s bond obligations. A scare campaign about a looming humanitarian crisis followed. Conveniently, it was a U.S. election year and that’s how Promesa was born.
Creditors complained that bankruptcy would alter bond contracts. But the best reason to oppose the change was that it opened an escape hatch for a political class that had manufactured the crisis narrative to shed the burdens of debt and carry on with big-government populism.
Promesa’s supporters promised that the creation of the independent financial oversight board—four Republicans and three Democrats—would address that concern. It was to be the guarantor of reform.
Yet with the board’s March approval of Mr. Rosselló’s fiscal plan and the path to bankruptcy cleared, Promesa now looks like another Washington scam. On Wednesday oversight-board member David Skeel is scheduled to deliver a talk in Philadelphia titled “Inside the Mind of a Bankruptcy Expert: Thoughts on the Need for U.S. States to Access Bankruptcy and Puerto Rico’s Status.”
One glaring inconsistency between what Promesa promised and the board-approved fiscal plan involves the seniority of constitutionally protected general obligation bonds and other debt issues.
Puerto Rico owes roughly $18 billion in constitutionally protected bonds that must be paid before allocating revenues to other expenses in the budget, including public pensions. And Promesa states that the fiscal plan must “respect the relative lawful priorities or lawful liens, as may be applicable in the constitution, other laws or agreements.”
Yet the plan approved by the oversight board does not recognize debt seniority. What’s more, the government projects annual revenues of $18.5 billion, yet budgets only about $787 million annually for debt service. It also puts aside some $620 million annually for contingencies, never a good thing with politicians.
The plan further fails to differentiate revenues available for 11 different debt issuers, as if they should all receive a uniform buzz cut. As University of Puerto Rico finance professor Carlos Colón de Armas told me in a telephone interview from the island last week, “the concept of a balanced budget only applies to the general fund. It no longer makes sense if you mix in the activities of public corporations.”
Many politicians on the island and in Washington will celebrate bankruptcy. But it won’t be good news for Puerto Ricans. They will suffer higher borrowing costs as their homeland is branded a deadbeat. And the pressure to rein in public-sector unions, which have ballooned spending, will be eliminated. |
