Putting Promesa’s Pieces in Play
On June 30, President Barack Obama signed into law the Puerto Rico Oversight, Management & Economic Stability Act, better known by its Promesa acronym, which means “Promise” in Spanish.
According to the law, first introduced as a bill in the U.S. House of Representatives in May, Promesa will “bring lawful order to chaos” and “restore the rule of law” in the context of protecting “the lawful rights of the island’s investors.”
Board with broad powers
Among other things, Promesa allows for the creation of an independent “territorial oversight board,” or federal fiscal-control board, with the authority to restructure Puerto Rico’s $70 billion debt.
Fiscal control board members would be appointed by President Obama, who would choose from congressionally approved lists for all but one of the seven board slots, or face a full U.S. Senate-approval process for his candidates.
Restoring Puerto Rico’s Fiscal Integrity
The governor of Puerto Rico and the commonwealth’s Treasury secretary will be ex-officio members of the board, with voice but no voting rights. Members will be reimbursed for expenses from local revenues, but they will work pro bono.
The board will have offices in Puerto Rico and Washington, D.C. The office also will have an executive director, who can hire financial and management experts; a chief managing officer and a revitalization coordinator, who will be appointed by the governor from a list of three candidates submitted by the board.
In addition, Promesa contains a number of additional provisions, including freezing bond payments until next year, a mandate to continue funding the island’s pensions systems, a lower minimum wage for young workers in Puerto Rico and a limitation of special restructuring authority to the island.
The board will have the power to facilitate a court-supervised debt restructuring if voluntary agreements are not feasible; review and approve five-year fiscal plans and budgets submitted by the governor; review any act of the Legislature; and obtain official data from the federal government, the commonwealth government and its instrumentalities, among others.
In addition, the board will issue a stay on all proceedings and claims upon its enactment; can accept gifts, properties and dispose of them as it sees fit; has subpoena powers; can request assistance from the U.S. General Services Administration on a reimbursable basis; can enter into contracts; prohibit public-sector employees from participating in strikes. Board members also are granted immunity for claims.
Pointing out that he opposed the establishment of a fiscal control board on the island, economist José Joaquín “Joaco” Villamil, chairman of Estudios Técnicos Inc., said he felt that proper handling of fiscal issues could have avoided what he deemed an “embarrassment” for Puerto Rico.
“But that was not to be, and there is no question in my mind that very serious and expensive mistakes were made by the government that made Promesa unavoidable. Procrastination in facing up to the problems was perhaps the worst of the many mistakes made,” Villamil told Caribbean Business.
In his view, Promesa’s objectives are quite ambiguous, a result of Congress trying to accommodate varying interests.
“The ambiguity expresses itself in clauses that suggest Puerto Rico’s development and ‘mitigating a looming humanitarian crisis’ as the primary objectives, while in others where safeguarding creditors’ interest is paramount,” Villamil said.
What this suggests, he indicated, is that much of what will happen with Promesa will depend on who is named to the seven-member board. This also suggests that the position of executive director will be key in determining which way the board will go, he added.
“It is relevant to point out that board membership will be a part-time, unpaid assignment, whereas the executive director will hold a full-time job. Curiously, there has been practically no discussion on who should hold that job and what his or her qualifications should be,” Villamil said.
However, the Estudios Técnicos chairman said there are a number of initiatives that almost certainly will be put in place regardless of the board’s composition.
One is a determined effort by the commonwealth government to have its fiscal plan in place in the next few months, and it will certainly reflect a reduction in expenditures and identifying opportunities for improved efficiencies in line with Promesa’s objectives.
“Lowering government expenditures almost automatically means lowering payroll numbers. This will, of course, impact the economy,” Villamil stated.
One good thing that could come from Promesa is the humbling of the island’s political class, something much needed and long overdue, he said.
“It is their dreams of grandeur that lead to many of the decisions that ultimately created the fiscal morass and made Promesa unavoidable,” Villamil added.
Consensus for debt restructuring
Vicente “Chenti” Feliciano, president of Advantage Business Consulting, is also against the imposition of a territorial oversight board for Puerto Rico.
He pointed out that there are four major issues with regard to Promesa’s fiscal control board—debt restructuring, fiscal control, economic growth and democratic concerns.
“Most Puerto Rico business organizations, major religious groups, major media outlets, among others, have taken a position in favor of debt restructuring. So has the U.S. Treasury, economists from the U.S. Federal Reserve and economic Nobel Prize-winner Joseph Stiglitz. Thus, giving the control board the power to initiate debt restructuring is in line with the overwhelming consensus,” Feliciano told Caribbean Business.
By the same token, he said the need for fiscal control is the overwhelming consensus in Puerto Rico as well.
“Therefore, the board will be knocking on an open door. However, a balanced budget is not possible until the debt is restructured down to a sustainable level, and the pension system is reviewed until it is put on a solid footing,” Feliciano indicated.
Ironically, he noted there are no clear measures toward economic growth in Promesa and so far, it does not look like economic growth will be the main thrust of the board.
“With economic growth, balancing the budget becomes manageable; without economic growth, it is a challenge,” Feliciano noted.
Highlighting that Washington, D.C., voted for the U.S. president that imposed a control board in the city and Detroit voted for the governor of Michigan that imposed the emergency manager to that city, Feliciano said that in the case of Puerto Rico, the board is hardly “the government of the people, by the people and for the people,” thus raising democratic concerns.
Heidie Calero, president of H. Calero Consulting Group, concurred with Feliciano, stating that many elected officials remain opposed to the use of financial control boards in aiding local governments during times of fiscal distress.
“First, the state imposition of powerful control boards, constitute improper restraints on elected officials’ ability to properly govern. Secondly, boards are only truly able to offer solutions to locally created sources of fiscal distress and do not address the underlying issues causing fiscal distress for local governments,” Calero said.
When asked what type of economic development policies he would like the board to address, even though it would not be their main focus, Feliciano indicated a renegotiation of the Puerto Rico Electric Power Authority (Prepa), more flexible labor laws and lower transportation costs.
“We can’t have a new beginning in the electricity sector with a $9 billion debt legacy,” Feliciano said regarding the need to renegotiate the deal Prepa recently inked with its bondholders.
Feliciano also noted the investment made by Lufthansa Technik for an aviation maintenance, repair & overhaul facility at the former Ramey Air Force base in Aguadilla as proof of the potential for investment when Puerto Rico’s labor laws are modified. In the specific case of Lufthansa Technik, Puerto Rico’s overtime laws were modified to be in line with U.S. federal laws.
“Whether supporting changes to the Jones Act or to the local and cargo transportation, transportation issues should be addressed to lower their costs,” said the president of Advantage Business Consulting.
Lessons learned from other boards
A look into the history of control boards in the U.S. suggests that the main concern of these boards, mostly imposed by states on municipalities with financial difficulties, was re-establishing fiscal integrity.
“In fact, very few were able to terminate the board in less than five years and in some cases, notably New York City, the board was in place for over a decade. Detroit is a different situation since it involved a bankruptcy procedure in 2013, which makes it very different from the Promesa process,” Villamil pointed out. Detroit came out of bankruptcy in late 2014.
The president of H. Calero Consulting Group said that in the case of New York City in 1975, the board lasted 11 years and imposed stringent measures, but the state and federal governments assumed the financial cost of the city’s university system and a portion of the welfare and the court systems.
“The state committed to buy $2.5 billion in city obligations through a Management Assistance Commission, or MAC. The city got $2.3 billion in short-term federal loans,” Calero commented. In the case of Washington, D.C., in 1995, she indicated the board lasted seven years, during which time the federal government took financial and administrative control of prisons; raised Medicaid to 70% of the total cost; assumed the District’s $5 billion pension unfunded liability; provided cash by borrowing from the U.S. Treasury; allocated $1.4 billion in federal funds to infrastructure projects; provided $300 million in grants and tax incentives; and the U.S. Internal Revenue Service assisted in the collection of city taxes at a savings of $117 million.
In most cases, the results of these control boards were positive, both in fiscal and economic terms, although social costs have been high, Villamil pointed out.
A good example is the situation in Flint, Mich., where an emergency manager, with basically the same responsibilities as a control board, balanced the budget by shifting to a contaminated water source and this has had very serious long-term health consequences for the population, particularly children, Villamil said.
“The Flint lesson is that the social costs of fiscal measures also have to be taken into account, not just economic impacts. It is by now well-established that austerity measures that could be adopted will incur in these costs,” he warned, adding that the board could force budget cuts and can even sell off public assets to make debt repayments possible.
Villamil noted that in addition to the bill’s statements concerning the rule of law, lawful order and protecting the lawful rights of investors, Promesa’s procedures for debt readjustment must take into account the “best interest of creditors.”
“What this means in terms of reordering fiscal matters, particularly with respect to social programs, remains to be seen,” he said.
Promesa and economic development
There are some indications in Promesa of interest in economic growth, including the creation of a bipartisan task force that will consider federal laws and regulations that are impediments to Puerto Rico’s economic development.
In Villamil’s view, one good thing that could come from this bipartisan group is for Puerto Rico to finally achieve equality in its treatment from federal health programs. However, the task force, he pointed out, is not—as has been erroneously mentioned in the local media—an economic-development task force.
“Its brief is considerably less than putting together an economic development plan. Such a plan should be prepared by a local alliance of private organizations, academia and the government. Promesa also calls for adopting measures that will make it possible to advance ‘strategic projects.’ This has raised some concerns about environmental consequences of this measure if it entails weakening planning and environmental laws and regulations that frame the permitting process,” Villamil said.
For Calero, if Promesa’s board does not focus on economic growth and only concentrates on restructuring debt, it will not achieve much.
“I believe that when the bipartisan task force submits its report on Puerto Rico by Dec. 31, highlighting its findings, and the fiscal control board and its executive director begin to find the deep hole in which Puerto Rico is in, they will have no option but to offer a bailout, whether it be Medicaid, Medicare, Earned Income Tax Credit or some type of Section 936 to help restore growth,” Calero said. “Without addressing economic growth, Puerto Rico will continue to see migration, which will deepen the recession.”
Nevertheless, Promesa establishes the position of revitalization coordinator under the board. This coordinator, she added, could have other personnel assigned to him or her.
“The revitalization coordinator will set the criteria for infrastructure projects, which will be classified as critical, energy and emergency projects. Once the board approves nominated projects, the permitting and regulatory process will be expedited through Puerto Rico law and federal reviews,” said Calero, who featured Promesa in the March 2016 issue of “Economic Pulse,” her firm’s monthly newsletter. “However, no funding sources have been identified for these projects.”