García Padilla’s Lumps of Coal
Most people in Puerto Rico will tell you that they are happy to see 2016 come to a close because it has been marked by the continued slide of an economy in a free fall of apocalyptic proportions—another 1,000 people every week continued to move North in search of better livelihoods because it is near impossible to rub two nickels together.
Not Alejandro García Padilla, the outgoing governor with whom we conducted an exit interview during which he admitted to bouts of nostalgia in his final days in office. His gluttony for punishment, says he, traces to the unfinished business of his government program on several fronts—a huge debt burden hogtied his administration and the loyal opposition within his own party kept him from passing tax reform.
The centerpiece of his proposal tied to a value-added tax of 11.5% was shot down by his own Popular Democratic Party leadership—Senate President Eduardo Bhatia and House Speaker Jaime Perelló. They should not expect Christmas cards from García Padilla this year. Lumps of coal might be more fitting.
Both legislators gave the governor plenty of grief in the run-up to pass tax reform and in his attempt to pass yet another hike in the petroleum-products tax known as la crudita. The legislative leadership demanded a series of conditions—a cap on interest for debt issued against the tax collected and triggers to boost the tax in the event of poor collections—that became bones of contention. The delay in passing la crudita dealt the García Padilla administration a mortal blow because it led to a string of events—not passing a structurally balanced budget, for one—that blocked market access for Puerto Rico.
Without a $2.95 billion bond deal, the administration insisted it would have to choose between delivering essential services and paying Puerto Rico’s towering debt service. So García Padilla kicked off 2016 with a default of some $36 million—call it a symbolic default. His fiscal maneuver utilized $164 million in clawbacks using money from revenue streams to pay other debt. The man was on a tear—call him the anti-Macri.
The truth is that there was a strategy orchestrated by officials who had ties to U.S. Treasury—former U.S. Treasury Chief Restructuring Officer Jim Millstein, U.S. Treasury Counselor Antonio Weiss and Director of State & Public Finance Kent Hiteshew—the moment García Padilla hired these advisers.
It took the report by former International Monetary Fund Managing Director Anne Krueger “Puerto Rico: A Way Forward”—the title “Dante’s Inferno” was already taken—to convince García Padilla that Puerto Rico’s debt service was unsustainable. From there, they were off to the races with Millstein selling one big tranch haircut specials for creditors, while others sold the humanitarian crisis narrative on Capitol Hill to obtain the passage of the Puerto Rico Oversight, Management & Economic Stability Act (Promesa).
If it is García Padilla’s legacy to have an act of the U.S. Congress thwart the commonwealth—trading self-government as an act of contrition because he no longer wanted to kick the can down the road—it would be an accomplishment only if it eventually leads Puerto Rico back to growth. For now, detractors and members of the loyal opposition in his own party are calling García Padilla the worst governor in the history of Puerto Rico.
What would they say of his predecessors, both statehooders and commonwealth supporters alike, who contributed to the massive debt load that Puerto Rico now faces? History will tell.