Sunday, September 22, 2019

A Call to Revisit the Prepa RSA

By on July 11, 2019

Editor’s note: The following was first published in the July 11-17, 2019, issue of Caribbean Business.

We traveled to Puerto Rico in March with several of our congressional colleagues to hear from the public on how best to rebuild civil society and a functioning economy. The same theme came up again and again: As much as anything, Puerto Rico needs relief from its crushing debt burden.

For a hurricane-ravaged community whose needs the Trump administration has neglected, the bloodless term “debt relief” might not sound to outside observers like a top priority. In fact, it is key to any hope for Puerto Rico’s future, and the people there know it.

Under previous Puerto Rican governments, the Puerto Rico Electric Power Authority (Prepa) and other agencies on the island issued billions of dollars in bonds that they cannot now repay. Any hope for Puerto Rico’s recovery lies in reducing that debt burden in a way that does not cause more people to permanently leave the island for lack of essential services or an excessive cost of living.

The public rightly demands a debt solution that does not put all the burden on working people. For that reason, we strongly oppose the recently announced agreement to restructure Prepa’s debts, and we urge the parties involved to go back to the negotiating table.

As Democrats on the U.S. House Natural Resources Committee documented in a 2015 report (naturalresources.house.gov/download/profit-at-any-cost) called “Profit at Any Cost,” much of Puerto Rico’s debt is owed not to disinterested lenders who just want their money back but to investment firms that spent millions of dollars on risky, high-yield bonds with a well-advertised risk of default. Those firms, which claim to want no more than justice, are hoping politics or the courts will bail them out on a bad bet. The May 3 Prepa deal represents exactly this kind of bad politics, and if it goes into effect, the result will be disastrous.

The agreement, which must be confirmed by a federal judge before taking effect, has many parties, none of whom are giving the public’s needs enough consideration. The deal, formally known as the Restructuring Support Agreement (RSA), includes Prepa; the Puerto Rico Fiscal Agency & Financial Advisory Authority; the Financial Oversight & Management Board for Puerto Rico; the Ad Hoc Group of Prepa Bondholders; and Assured Guaranty Corp., one of the bond-insurance companies that enabled Puerto Rico’s former leaders to issue excessive debt in the first place.

One way or another, these actors have to find a way to restructure $8 billion of Prepa’s legacy debt. This RSA is not the way to do this, and we recently wrote (twitter.com/NRDems/status/1140654859248656384) to the leaders of the Puerto Rican House and Senate urging them to oppose the deal.

The problems with the RSA are almost too numerous to lay out here. The agreement makes it impossible to meet the affordable energy goals laid out in the Puerto Rico Energy Public Policy Act of 2019, which recently became law. By all accounts, it will result in higher electricity rates for average Puerto Ricans, which will make businesses less able to expand or hire new employees, among other problems.

Despite an analysis by a Nobel Prize-winning economist for the National Bureau of Economic Research suggesting Puerto Rican debt needs to be reduced by about 80 percent, the RSA reduces the Prepa debt principle by only 22.5 percent—a drop in the bucket if the goal is to make Puerto Rican society able to flourish rather than to maximize third-party returns on bad investments.

Treating Puerto Rico as no more than a source of investor revenue will lead to a downward spiral and destroy what is left of Puerto Rico’s economic foundation. Unfortunately, that is what the RSA does. It ensures the first-priority use of every dollar that comes into Prepa from ratepayers goes toward paying off debt, not in building a more sustainable energy system or repairing the severe hurricane damage to the island’s infrastructure.

Like any other community, Puerto Rico cannot rebuild a modern power grid, provide good schools or offer attractive terms for potential investors without enough money to operate. Unfortunately, much of the money that should be spent on those programs is now earmarked for debt repayment. If that dynamic does not change, it is not too strong to say that Puerto Rico as a functional society will cease to exist.

People are already leaving Puerto Rico in record numbers. If we allow the island to become nothing more than a shell from which wealthy investors can squeeze money, it ceases to be an attractive business destination or a livable community.

The judge overseeing the case is expected to rule in July. Anyone who cares about avoiding an economic collapse for millions of American citizens should very carefully watch the next few weeks—and make their voices heard on the need to prevent the Prepa RSA from going into effect.

—Rep. Raúl M. Grijalva (D-Ariz.) chairs the House Committee on Natural Resources. Rep. Nydia Velázquez (D-N.Y.) chairs the House Committee on Small Business.

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