Sunday, December 8, 2019

Governor presents bill to rein in Puerto Rico debt issuances

By on November 5, 2019

Gov. Wanda Vázquez (Juan J. Rodríguez/CB)

Would close loopholes, ‘clarify’ constitutional language to avoid repeat of fiscal crisis

SAN JUAN — In a move to facilitate federal court approval of the Plan of Adjustment and hasten the end of the Puerto Rico’s bankruptcy process, Gov. Wanda Vázquez Garced submitted a bill to the commonwealth’s legislature Monday to close loopholes in Puerto Rico’s constitutional debt ceiling that she said led to the current fiscal debacle.

The Debt/Bond Issuance Responsibility Act, the first piece of legislation submitted by the governor since she was sworn into office in August, would apply to future bond issuances. The measure would restrict debt financing strictly for capital improvements and prohibit debt to cover operational deficits. However, the governor said the bill gives the government authority to issue debt to respond to “any damages or destruction caused by hurricanes, natural disasters, pandemics, terrorism and other emergencies.”

“We must enact additional parameters for future debt issuances by the government of Puerto Rico and its instrumentalities, given that the limits established by the Constitution of Puerto Rico have shown to be insufficient in avoiding that the government and its instrumentalities incur in debt that is unsustainable,” Vázquez said alongside members of her economic team during a roundtable with business journalists at the La Fortaleza governor’s mansion on Monday. She read from what appeared to be a draft of the bill. A copy of the measure had not been sent to the media as of Tuesday.

She said the restrictions would apply not only to debt paid with central government income, but also to a majority of public corporations.

The governor acknowledged the legislation is part of the process to get federal court approval of the Plan of Adjustment submitted last month by the Financial Oversight and Management Board to U.S. District Court as part of the commonwealth’s debt-restructuring process under the Puerto Rico Oversight, Management and Economic Stability Act (Promesa).

“With this process involving the control board and a bankrupt country, the people of Puerto Rico have learned that laws must be enforced. That’s what we want here: to have the legal structure to bring accountability to bear on people who are responsible for making unauthorized debt,” the governor said, noting that the measure originated in “discussions and analysis” of the Plan of Adjustment. “There has never been a directive of this nature, so that future generations and governors take this into account when issuing debt.”

She said such legislation will enable the commonwealth to “reestablish economic growth while protecting future generations from the errors of the past.”

The proposed measure, the governor said, would delegate in the Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym) the “formulation of a public policy on debt issuance management,” which includes an annual debt service limit, which, she added, also applies to the debt limit established in article 6, section 2, of the Puerto Rico Constitution. The bill would require that government bond issuances be approved by Aafaf, the governor said, adding that the agency must establish a “global limit on debt backed by taxes” that will apply besides the 15 percent debt limit set by the island’s Constitution.

Article 6, section 2, of the Puerto Rico Constitution states that the commonwealth cannot issue or guarantee bonds whose annual payments in principal and interest exceed 15 percent of the island Treasury’s annual average revenue during the previous two years.

Other main points of the La Fortaleza measure, the governor, include the following:

  • No debt may be refinanced with other debt to set back the maturity date—a practice that extends the period of the loan and results in lower annual debt service payments, in what is known in the finance industry as “scoop and toss.” This ban does not apply to tax-backed debt used to finance public housing, subject to constitutional limits, or to debt with 30-year maturity dates used to refinance other debt that was extant when the legislation was approved.
  • All new debt must begin to amortize principal within two years of being issued, or any other period that does not exceed five years starting from the original issuance date.
  • Refinancing of tax-backed debt will only be allowed if it does not increase the principal and interest and generates savings in cash flow.
  • Refinancing of debt without savings will only be allowed if it is in direct response to a national emergency such as a natural disaster.
  • Any debt issued by public corporations must be strictly for capital improvements, to improve services and restore debt issued before passage of the law. Refinancing of such debt will only be allowed if principal and interest is not increased, and savings are generated, based on the present value established by Aafaf, and if such debt is used for national emergencies.
  • Debt can only be issued for projects after they have begun.
  • The bill bans the issuance of debt with maturity dates that exceed 30 years.

In fact, article 6, section 2 of the Puerto Rico Constitution also states that none of this debt, except for housing, may have maturity dates extending beyond 30 years, and no debt issued for housing purposes can have maturity dates extending beyond 40 years.

Vázquez said she had discussed the measure with the legislature’s leaders, adding that it would be sent to the Capitol on Monday. She urged lawmakers to expedite passage of the legislation, saying it “will mark a new era of fiscal responsibility in debt issuance in Puerto Rico.”

Aafaf’s executive director, Omar J. Marrero, said the governor’s measure is needed to clarify the constitutional debt limit, which he noted “has always been the focus of controversy,” particularly the “available income” language in the constitutional article in question. He said the Kobre & Kim report on the commonwealth debt that was commissioned last year by the fiscal board, also recommends the limit should be clarified.

“With this legislation, we make clear that all debt that’s backed by a tax or a central government guarantee must be included in the computation of the constitutional 15 percent,” the Aafaf chief and commonwealth CFO said, adding that the measure has been consulted with fiscal oversight board and is part of the plan to return to the bond markets. 

“For the first time in Puerto Rico’s history, the debt limit is clarified so that not only general obligation debt is included but also other tax-backed debt, like the ‘crudita’ [tax on petroleum products],” Marrero said.

The official assured that the legislation does not require amending the Constitution because it “only clarifies” what debt can be included in that 15 percent limit to cover “legal loopholes” that could be used as a means of getting around the constitutional cap.

“This sets up a framework for how you will manage the 15 percent limit,” said Elí Díaz Atienza, Gov. Vázquez’s non-voting representative to the fiscal board, adding that there has been “a great number of interpretations” on how such debt can be used. “Now there will be no room for interpretation because everything must be included within the 15 percent debt limit. This legislation will establish how that 15 percent will be managed.”

The legislation “establishes a mechanism for a constant monitoring of debt issuance, including the use of funds and the repayment process,” Atienza added.

Vázquez acknowledged that enforcement measures were not included in the bill.

“The person who violates this law will obviously be part of the considerations that will be taken into account in the legislative process so that there may be serious consequences for violators,” the governor said, adding that Aafaf will “establish parameters so that any government entity issuing debt can have a clear idea of what it can or can’t do.”

“The fact that there are no penal clauses in this legislation does not mean that the legal framework does not provide for sanctions,” Marrero said. “The penal code and special laws categorically establish that those people who make decisions that go against the public interest, such as misuse of public funds and negligence in carrying out their duty, are applicable to any violations of this law.”

Marrero said the government can’t continue to “mortgage away the future of the next generation,” noting that all tax- and fee-backed debt issued by public corporations must be included in the debt ceiling. “We can’t continue with scoop and toss, which is generally leaving the problem to others down the road to solve.”

Marrero was asked whether the legislation will address the Kobre & Kim report’s conclusion that many of the financial institutions that underwrote Puerto Rico bonds failed to carry out due diligence involving looking into the government’s ability to pay such debt.

“All that is addressed, but the best evidence will be when we return to the capital markets, and those creditors to whom we will ask again for money, they will be stricter [in evaluating such investments],” Marrero said, noting it is too early to gauge the effects of the governor’s proposal among potential investors.

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