Monday, September 25, 2017

Promesa Stirs Investor Mistrust in Other US Territories



By on July 25, 2017

Editor’s note: This article originally appeared in the July 20 print edition of Caribbean Business.The 2016 Puerto Rico Oversight, Management & Economic Stability Act (Promesa), enacted to rescue Puerto Rico from its $70 billion debt load, is economically jeopardizing other U.S. territories in the Caribbean Sea and Pacific Ocean.

U.S. investors are losing faith in the ability of U.S. territories to pay their debts because of the existence of the Promesa law, according to some credit-rating agencies. Besides keeping an eye on the U.S. Virgin Islands, which is going through its own fiscal woes, these same investors punished the U.S. territory of Guam early this year despite not being at risk of default. Fitch Ratings cut Guam’s business-tax revenue bonds to junk earlier this year, contending Promesa “fundamentally” alters the premise used to rate debt issued by territorial governments. Standard & Poor’s, however, kept the territory’s rating up.

Guam’s debt has been around $1.1 billion, or less than 2% of Puerto Rico’s estimated $70 billion bond debt, but the Pacific island territory only has 160,000 residents compared with Puerto Rico’s 3.5 million population. Guam’s credit limit is less than $300 million to hitting the ceiling, according to published reports.

According to the Guam Daily Post, even though the governor there has said they will not use Promesa, the territory was forced to pass into law legislation promising not to use the federal bankruptcy law. Under the federal law, Promesa, which allowed Puerto Rico to file for bankruptcy protection, is available to the other U.S. territories of Guam, American Samoa, the Commonwealth of the Northern Mariana Islands and the U.S. Virgin Islands (USVI).

One of the things Promesa does is require the Government Accountability Office (GAO) to evaluate each territory’s debt. Chuck Jones, the GAO’s public affairs director, told Caribbean Business that “for each of the territories, [the] GAO will report on public debt and revenues for fiscal years 2005 to 2015. [The] GAO will also report on the drivers of the debt and what is known about the territories’ ability to pay,” he said, adding that the report will be ready in the coming months.

U.S. investors have reason to worry, as mentioned in a U.S. Supreme Court ruling concerning Guam. In that 2007 case, the top court analyzed a dispute between Guam’s governor and the attorney general. The Guam governor wanted to issue bonds to fund government operations. Like Puerto Rico, Guam has debt limits.

At the time, Guam’s governor calculated the debt limitation as 10% of the appraised valuation of properties in the territory. The attorney general, however, calculated the debt limitation as 10% of the assessed valuation of property in Guam. Because Guam assesses properties at 35% of their appraised value, the attorney general’s interpretation resulted in a much lower debt limit and the bond issue was rejected. The Guam Supreme Court agreed with the governor and held the debt limitation at 10% of the appraised valuation of properties in Guam. The matter went to the U.S. Supreme Court, which sided with the attorney general.

“The debt-limitation provision protects both Guamanians and the United States from the potential consequences of territorial insolvency. Thus, this case is not a matter of purely local concern,” the U.S. Supreme Court said.

The other U.S. territories have what appear to be frail economies. In 2013, the Commonwealth of the Northern Marianas had a $354.7 million long-term debt. That amount is now $471.7 million, with $88.8 million owed to bonds payable. As of 2015, the territory had less than 100,000 inhabitants, so it has a small taxable base. American Samoa has a population of less than 200,000 residents. A bond issue in 2016 allowed that territory to eliminate some old debts. According to a news report, American Samoa ended the fiscal year, in September 2016, with a $1.2 million surplus.

USVI case

Although the USVI is working hard to avoid a fiscal cliff and trimming its yearly deficit by $34 million, the approval of Promesa put the brakes on a bond issue that the territory had scheduled for early this year. The USVI government tried, and failed, to sell bonds to finance its deficit of $110 million, with a $247 million bond issue that was supposed to be issued in January. The government decided to stop the transaction after finding there were orders for only $127 million in senior lien bonds and $13 million in subordinate lien bonds, USVI Gov. Kenneth Mapp said in December.

The territory’s total debt is about $6.5 billion. The three credit-rating agencies have downgraded its credit even though the government issued a decreased spending plan of $1.35 billion.

How did the USVI get to its precarious situation? As happened in Puerto Rico, the USVI government passed laws that discouraged investment, a situation worsened by the 2008 economic crisis, according to published reports. The territory also lost its main employer in 2011, the Hovensa Oil Refinery, located in St. Croix, which caused a hike in unemployment.

The territory is fighting hard to restore investors’ confidence. Jeremy Stephen, president of the Barbados Economic Society, went public with a review of the USVI’s financial outlook in which he praised the governor’s actions in trimming spending costs. He noted that the USVI’s debt-to-gross-domestic-product (GDP) ratio is about 55%, with matching fund bonds constituting 59% of the USVI debt.

“For the first time in five years, the USVI realized a slight uptick in its GDP and increased economic forecast,” said Stephen, whose remarks were published in USVI government websites. He encouraged the territory to raise taxes since property taxes are still very low and the gross receipt tax, which is similar to a sales tax, is only 5%.

Promesa’s impact on other U.S. territories

How would Promesa apply to the other U.S. territories? Some of Promesa’s dispositions were geared for Puerto Rico and not for the rest of the U.S. territories, according to a Caribbean Business analysis.

For instance, another U.S. territory seeking protection under Promesa will not receive the benefit of a Revitalization Coordinator to approve critical infrastructure projects under Title V, as is the case with Puerto Rico. Similarly, a disposition that created a Congressional Task Force to analyze federal laws that impact Puerto Rico’s economic development appears not to have been extended to the other U.S. territories.

While the federal Promesa law created a board specifically for Puerto Rico, other territories must request the appointment of a board. Promesa says that if a court “holds invalid any provision of its law or the application of the law on the ground that the provision fails to treat similarly situated territories uniformly, then a court shall, in granting a remedy, order that the provision or the entire act be extended to any other similarly situated territory, provided that the legislature of that territory adopts a resolution signed by the territory’s governor requesting the establishment and organization of a Financial Oversight & Management Board (FOMB).”

As is the case in Puerto Rico, the provisions of Promesa prevail over any territorial law. How would an oversight board be created for another U.S. territory? Section 101 of Promesa says that “an Oversight Board established under the law will be an entity within the territorial government for which it is established in accordance with this title; and will not be considered to be a department, agency, establishment or instrumentality of the federal government. The law contends that a board will be selected by the U.S. president from names suggested by majority and minority congressional leaders.”

As with Puerto Rico, “the Oversight Board of the territory will have to require fiscal plans from the government and opt to cover some territorial instrumentalities” as Puerto Rico’s FOMB did locally with some entities such as the Government Development Bank and the P.R. Electric Power Authority.

Promesa would also require the oversight board of a specific territory to file a bankruptcy case for a specific entity through Title III or restructure the debt of a territory through a consensual agreement through Title VI.

All budgets would have to be certified by the territorial board after they are approved. The law says that cases “arising from the act, except those relating to the issuance of an order enforcing a subpoena, and Title III (relating to adjustments of debts), any action against the Oversight Board, and any action otherwise arising out of the act, in whole or in part, shall be brought in a United States district court for the covered territory or, for any covered territory that does not have a district court, in the United States District Court for the District of Hawaii.”

Further, Section 406 of Promesa amended Section 302 of the Omnibus Insular Areas to read as follows: “The Governments of the Commonwealth of Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands and the United States Virgin Islands are authorized to make purchases through the General Services Administration.”

The law also requires the Comptroller General to submit reports on the territory to the U.S. House Natural Resources Committee. As part of his / her responsibilities, the comptroller must also analyze the debt of the territories even though only Puerto Rico has filed for bankruptcy protection.

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