Analysts say an apparent debt and policy deal for Puerto Rico will likely pass but it will not be fair and may ultimately fall apart in the coming years under pressure from Puerto Rico's economic decline.
The Oversight Board made important concessions on cuts to pensions and spending to the local government Thursday. After the leaders of Puerto Rico's legislature and the governor met with Oversight Board members on Sunday, Board Chairman David Skeel said, “We’re happy about the meeting and happy about where things are. There’s just a little further to go and this is the week that needs to happen.”
Puerto Rico House Speaker Rafael Hernández Montañez said Sunday he expected the House to approve the bond restructuring bill, House Bill 1003, on Monday and that the Senate would follow suit on Tuesday.
Most observers told The Bond Buyer the apparent deal between the board and local government seemed to have resolved the last major obstacle for approval of the board-proposed Plan of Adjustment. “It seems that it’s all systems go,” said Vicente Feliciano, president of Advantage Business Consulting.
Milbank LLP Attorney Atara Miller, who represents bond insurer Ambac Assurance, called it "a positive development. We hope that it means that Puerto Rico is well on the path to passing a Plan of Adjustment and emergence from Title III" of the Puerto Rico Oversight, Management, and Economic Stability Act, Miller said.
Natalia Renta, senior policy strategist for Center for Popular Democracy, thought the deal still had some obstacles, including “one, the local legislature passing the legislation; two, the governor signing the legislation into law; three, creditors voting in favor of the plan; and four, Judge [Laura Taylor] Swain confirming the plan.”
Center for a New Economy Public Policy Director Sergio Marxuach was also cautious. “The parties were still negotiating as of [Sunday] and I fear there is plenty of fine print to go through before we can say there are no more significant hurdles for the restructuring of the central government’s debt. Furthermore, the math of debt restructuring has a certain brutal, Darwinian character to it. One extra dollar allocated to pensioners, the University of Puerto Rico, or the municipalities, is one dollar less that is available for everything else. The board has to amend both the Fiscal Plan and the Plan of Adjustment to reflect that reality."
The government of Puerto Rico "appears to be trying to sidestep this issue by relying on additional Medicaid funding from the federal government, which, in theory, would allow the government of Puerto Rico to re-allocate funding from healthcare to other areas,” Marxuach said. “This is a risky proposition to say the least."
Marxuach said the current calculus of the federal share for Medicaid in Puerto Rico is based on an administrative interpretation made by U.S. Health and Human Services. The calculus has not been made public.
"In addition, even if the HHS interpretation is correct and binding, Congress still has to legislate to increase the federal share applicable to Puerto Rico, from 55% to 76%, and, as you know, Congress is essentially gridlocked," he said. “Finally, everything still has to be approved by the Tittle III Court and there is a risk there that the judge would not approve the proposed plan or order the parties to keep negotiating.”
University of Puerto Rico Professor José Garriga Picó said he was optimistic but, “I will not feel at ease until it is finalized and in force.”
Observers generally did not think deal to be “fair” but some were reconciled with it.
“Nothing is fair here … that’s why there is a negotiation going on,” said Antonio Fernós Sagebien, associate professor at Interamerican University of Puerto Rico. “What is not fair is the party claiming full pensions must be honored" — the executive and legislative branches — "is the same party (not political party) that allowed this situation to escalate.”
“PROMESA does not require the Plan of Adjustment to be fair," Marxuach said. “It requires that it be in the ‘best interest of the creditors,’ among other things.”
Muni Credit News Publisher Joseph Krist said, “Clearly, the deal reinforces the trend seen in Detroit whereby pensions are treated much better than are debts. So, I’m not sure if bondholders are being treated fairly. The rest of the fairness issue seems to be in the eye of the beholder.”
By contrast, Renta said, “It is a huge victory for organized pensioners that the board has stopped insisting on the 8.5% pension cuts for those receiving payments of more than $1,500 a month. However, many pensioners will still see their bottom line affected by benefit freezes and the elimination of cost-of-living adjustments.”
Feliciano was more positive. The deal’s terms are “more than fair with pensioners and not totally fair with Puerto Rico’s younger generations that must carry the burden of the payments to creditors and pensioners. Having said that, it is a compromise that allows the closing of the chapter. In this sense, everybody gains.”
When observers were asked if Puerto Rico would be able to afford the deal in the long term, most expressed skepticism. “Strategically speaking, it is a smart move from the [board],” said Fernós Sagebien. “This places the entire burden on the Puerto Rico’s two branches of government [executive and legislative] responsible for the budget as they are now forced to identify nonexistent free cash flow in order for Office of Management and Budget to honor the full pension expenditure.
He said the deal was not affordable and “I don’t believe any of the three parties (Federal Oversight and Management Board, executive branch, and legislative branch) involved care. They all know time is of the essence and we are running out ... they have proven unfit to serve. The citizens of Puerto Rico feel like this is like in Evolutionary Game Theory’s ‘Red Queen's race’: ‘constantly running but remaining in the same spot.’”
Marxuach said the feasibility of the deal could be measured using economic development tools or simply through examining whether it would prevent hunger, provide a good education, decent healthcare, and a reasonable livelihood for the elderly.
“I fear though that Judge Taylor Swain has a strong incentive to approve a plan, any plan, regardless of whether or not it is the best plan for Puerto Rico and the current circumstances,” Marxuach said. “She was appointed to this job by Chief Justice [John Roberts, Jr.] so it is in her professional interests to confirm a plan and put an end to this long process. The risk is that a whole generation of Puerto Ricans would be paying the price of living with a ‘good enough’ plan for decades to come.”
Jubilee USA Network Executive Director Eric LeCompte said, “If not enough debt was cut and revenue plans fail, Puerto Rico will likely default again in a few years. Growth assumptions seem unrealistic, austerity slows growth and Medicare and other federal monies are not certain."
Feliciano also worried about growth. In the short term, he said there is no doubt that the debt is sustainable.
"In the medium term, the Puerto Rico economy needs to start growing in order for the debt to be paid," Feliciano said. "According to the fiscal plan, the tipping point would be in 2036. This should focus the minds and political will to advance economic growth legislation such as reducing the current corporate tax rate of 37%.”
Renta also highlighted the 2036 date, which the board projects as the year the government could start to run deficits. “This could mean a second bankruptcy for Puerto Rico.”
Krist was cautious. “The long-term prospects for Puerto Rico depend on the ability of the island to build a reliable power system. Can Puerto Rico leverage its role as a U.S. entity and its location to develop economically? While ability to pay has always been an issue, the question has always been whether there would always be a will to pay. Without a resilient power system and better housing, the outlook for P.R. is guarded at best.”
Garriga Picó was more hopeful. “I think that the arrangement will be workable but only if the board continues to act with resolve and rein in the spending proclivities of the local government,” he said.
