Saturday, December 16, 2017

Alphabet Soup Fiscal Plans

By on February 23, 2017

Alphabet soupeditorial-philipe-schoeneLike so many Sunday newspapers, draft fiscal plans by five covered entities—the Puerto Rico Electric Power Authority (Prepa); Puerto Rico Aqueduct & Sewer Authority (Prasa); Government Development Bank (GDB); Highways & Transportation Authority (HTA) and Cooperatives Supervision & Insurance Corp. (Cossec by its Spanish acronym)—were recently tossed at the doorstep of La Fortaleza to be reviewed prior to their delivery to the Puerto Rico Oversight, Management & Economic Stability Act’s (Promesa) financial oversight board. The alphabet soup of fiscal roadmaps could not have come a moment too soon as these are essential catalysts to kickstart the restructuring of debt and operations. Time to fasten seatbelts; it’s going to be a bumpy ride.

Observers of the Promesa sweepstakes on Capitol Hill are hoping that the plans contain credible numbers and austerity measures to cut losses. The solons on the Hill are saying deal with austerity first, “then we can discuss economic development incentives.”Cuidado; the patient is on life support.

Puerto Rico’s ailing instrumentalities, led by the bankrupt Prepa, are in dire need of overhaul. The moribund power company is saddled with $9 billion in debt holding up the utility’s transformation. Front and center is a restructuring support agreement (RSA), a monster of a deal with retail bondholders, fuel-line lenders and monoline bond insurers sewn together by threadbare covenants that could quickly unravel if the commonwealth government continues to tug at it.

The recommendations contained in Prepa’s roadmap—an integrated resources plan that contemplates retrofitting antiquated powerplants and more efficient integration of renewable energy—are being held up by the RSA because the deal is the thing—but, it comes at a cost. We, the people, will pay in the form of a rate hike to securitize a bond exchange that is a key component of that deal.

The draft of the fiscal plan obtained by Caribbean Business reportedly addresses some of the observations—to cut the power rate hike and spread monoline bond insurance exposure—made by the Fiscal Agency & Financial Advisory Authority and financial adviser Rothschild.

At this writing, however, it remains unclear whether the original recommendations to relieve surety stress on monolines with a cap of $442 million, and Prepa sharing some of the pain above the cap would remain. The surety is set to be replaced over nine years, beginning in the third year after the securitization closes under certain conditions.

In a column published on the Caribbean Business’ website earlier this week, economist Vicente Feliciano importantly points out that Prepa’s fiscal plan does little to deal with severely overburdened pension plans. He is right; that is the gigantic elephant in the room that no one talks about.

Prepa financials obtained by Caribbean Business pointed to pensions costing the utility $39 million per month. The huge drain on Prepa’s finances traces to Cadillac pensions, the retirement of entire families being subsidized by the state.

One source with knowledge of Prepa’s finances told Caribbean Business that nobody wants to deal with the underfunded pension issue at this juncture—they want to deal with debt through Promesa’s Title VI to bind the holdouts and then handle the pension problem through legislation working its way through el Capitolio.

Republicans on the Hill want the Prepa deal closed, come hell or high water. One need only look at the work of Puerto Rico’s Resident Commissioner Jenniffer González on Capitol Hill for signs of congressional ambivalence on Puerto Rico’s economic development. The island’s nonvoting member of Congress has co-sponsors on only one job-creating measure—the so-called Empleo Act introduced by Sen. Marco Rubio (R-Fla.). It is far too meager a start for sustainable growth.

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