10 key moments in García Padilla’s term
More than a challenge, selecting ten key moments of this four-year term may be impossible. Reforms, taxes, debts, defaults, bankruptcies, a Board, promises and Promesa, and even a “humanitarian crisis”—among many other aspects—coincided during the past four years against the backdrop of a backward economy, an emptying island and unbearable pessimism about the future of Puerto Rico.
Beyond headlines, the government’s debt and public finances occupied much of the public policy of Alejandro García Padilla’s administration. These issues also placed the document ratified in 1952 – the Constitution of Puerto Rico – and the figure of the Commonwealth under the magnifying glass.
The fiscal and economic situation brought the international press’ unremitting attention on the island, perhaps since the August 2013 article in Barron’s magazine that warned the market about Puerto Rico’s debt. A few months later, brokerage houses announced that the island’s bonds were “junk” while just days later the government issued $3.5 billion in bonds.
The government fiscal team’s victorious gesture on Wall St. while announcing this transaction—the largest ever made without investment grade—increasingly resembled a robbery victim’s gesture while claiming to have nothing else to give out. At the end of June 2015, in an interview with the New York Times, García Padilla said for the first time—in English—to Puerto Ricans and the rest of the world that Puerto Rico’s debt could not be paid.
With that began a rollercoaster journey in which days sometimes were not enough for the events that took place, in crescendo until the summer of 2016. The signing of Promesa, the fiscal control board, the Sánchez Valle case and its implications on the commonwealth status, and the first ever default on the island’s constitutionally protected debt—it was the final act to an unprecedented four-year term and marked the beginning of a new era for Puerto Rico.
Retirement System Reform
Shortly after taking over La Fortaleza, the governor succeeded in approving a retirement-systems reform that reduced pensions, increased contributions and transformed its structure. The promised injection of funds into the systems never materialized and the assets continued to vanish. The reform, which reached the island’s Supreme Court, remained unfinished and the severely underfunded retirement systems continue to face a grim outlook.
A 6.5% IVU
In April 2013, on the floor of the House of Representatives, García Padilla vowed to reduce the sales & use tax (IVU by its Spanish acronym) to 6.5%, a surprise announcement even for some members of his administration. The reduction never took place. Criticism by credit rating firms regarding the governor’s management quickly ensued, to which García Padilla replied by quoting a famous Spanish rock song: “me vale,” which roughly translates to “I don’t give a damn.”
$3.5 Billion in Junk Bonds and “Criolla” Bankruptcy Law
When Puerto Rico bonds were downgraded to “junk” in February 2014, it was a “bad night” for García Padilla. But not even that day, or night, made it impossible for the commonwealth—at a higher cost, of course—to issue $3.5 billion in general-obligation (GO) bonds just two weeks later. A few months later and in preparation for negotiations with creditors, particularly those of the Puerto Rico Electric Power Authority (Prepa), the Criolla (Local) Bankruptcy Act was passed—and was declared unconstitutional two years later by the United States Supreme Court.
The First Default
Long before the debt was labeled ‘unpayable’ by the governor, Prepa already knew that it could not fulfill its obligations to its creditors. And so it happened that in August 2014, a technical default by Prepa was temporarily pardoned by a group of its creditors. The indulgence period saw 18 months of negotiations—led by Lisa Donahue and AlixPartners—focusing on the future of Prepa and the restructuring of its debt.
For García Padilla, the plan was to increase the crude-oil tax known as la crudita once again, and inject liquidity to the Government Development Bank (GDB). By the end of 2014 a private bank would buy more than $2 billion in loans issued by the GDB to the Highway Authority. But the legislative majority did not welcome a third increase to the crudita in the four-year period and passed legislation that was not enough for La Fortaleza to realize its plan. In the end, amendments in tune with the original bill were approved, but “when we are unable to do something so obvious, well everything comes tumbling down,” admitted the governor.
Tax Reform and Dissidents
A “populist absurd” was what García Padilla called the opposition from a group of majority legislators who refused to change to a value-added tax (VAT) and opposed his tax reform. He tried twice and failed both times. In the end, the IVU was increased to 11.5%, with no relief on the tax forms. Even today, the outgoing governor says he cannot find a “logical reason” to explain opposition to his reform.
“The Debt is Unpayable”
This is what García Padilla announced in the summer of 2015. With the famous Krueger report on hand–a document that evidenced the island’s fiscal problems—and with a large team of advisors and the US Treasury in tow, the government tried to convince its creditors that the debt had to be restructured.
After more than a year of negotiations with creditors and multiple extensions to the indulgence agreements, in late 2015 the administration reached a preliminary restructuring agreement between Prepa and its creditors. A 15% reduction of its debt, a rate increase to secure payment to creditors and an ambitious plan to “revitalize” Prepa with the help of the private sector were some of the results. Although the Legislature—grudgingly and with amendments—approved the legislation that would allow the agreement to materialize, it is unknown to this day if it will finally pull through.
On the night of April 4, a meeting between majority legislators and the governor’s fiscal team at La Fortaleza ended up heading to the Capitol, where work began that same night. At dawn, the Senate passed extensive legislation authorizing the Executive to suspend public debt payments and “guarantee essential services” from the government. Two days later the House did the same, and a few hours later García Padilla signed the Emergency Moratorium and Financial Rehabilitation Act. In addition to preparing the way for the defaults that followed, the law placed the GDB—the “caterpillar” of the economy according to García Padilla—in a state of trusteeship, a corralito (coop or pen) that to date maintains frozen millions in funds belonging to municipalities and public agencies. The GDB also stopped being Puerto Rico’s fiscal agent after more than 60 years acting as such.
Puerto Rico defaulted on more than $800 million in secured debt; President Obama signed the Promesa Act and with it the imposition of the fiscal board; the audited financial statements were finally published; the United States Supreme Court expressed itself regarding the commonwealth as it had not done, perhaps, since the early twentieth century so-called insular cases and reminded everyone that the sovereignty of Puerto Rico resides in Washington D.C., in Congress. All this happened in a period of no more than 30 days.
During the summer of 2016 alone, about 10 key moments in Puerto Rican history took place.