Sunday, January 29, 2023

Much-Anticipated Promesa Draft Surfaces

By on May 19, 2016

By: Philipe Schoene Roura & Rosario Fajardo

The run-up to amend the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) in Congress has been an exercise steeped in divisive politics among competing interests that are making if difficult for House Speaker Paul Ryan (R-Wis.) to achieve consensus and secure the necessary votes.

After several delays, the new Promesa version was released by the U.S. House Natural Resources Committee late Wednesday. The bill does not contain access to Chapter 9, but keeps the seven-member federal fiscal-control board.
However, several problematic issues remain.

The most recent sticking point has surfaced on the issue of Puerto Rico’s ailing pension systems. The U.S. Treasury and its lobbyists are insistent on having some sort of prefunding mechanism for pension systems that are severely underfunded. “As of [May 13], our impression is that there aren’t going to be any radical changes to the bill,” said one lobbyist on the Hill tied to the GOP. “Obviously, there is a tremendous amount of pressure from U.S. Treasury. The collective-action mechanism is still being discussed and then the pension issue is a big issue that has surfaced.

Washington DC, United States landmark. National Capitol building with US flag.

Washington DC, United States landmark. National Capitol building with US flag.

“Treasury has been pushing for pensions to be treated as a priority and for the pension liability to be prefunded in some form or fashion. The Republicans are saying we aren’t going to impair the pensions, but we aren’t going to create through this legislation a priority to fund. It is our understanding that [Jim] Millstein along with Dick Ravitch are pushing very hard to create some sort of prefunding or catch-up funding,” the lobbyist said. Millstein is the founder of Millstein & Co., the lead restructuring advisers for the Puerto Rico government, while Ravitch is the former New York lieutenant governor, who is advising the Puerto Rico government pro bono.

The unnamed lobbyist was alluding to the debate about whether bond payments should have priority over pensions.

Promesa is legislation aimed at helping the island with its $70 billion debt load and fiscal and economic crisis. The bill would create a federal fiscal-control board, and is expected to contain some provisos for debt restructuring, among other things.

Puerto Rico’s unfunded pension systems have been ticking time bombs for years. In 2013, the Alejandro García Padilla administration, which had just entered office, enacted legislation to reform Puerto Rico’s ailing retirement systems. The reform package included increasing retirement ages as well as employee contributions, while participants were moved to defined-contribution accounts, similar to 401(k) retirement plans.

Three years later, though, the three main pension systems—commonwealth employees, teachers and the judiciary—are still severely underfunded and facing a $30 billion actuarial deficit, which is pushing the pension systems to the brink of insolvency in 2019.

Jockeying for position

As previously reported by Caribbean Business, there is a creditor sideshow going on that makes the Balkans pale by comparison. The pension prefunding has general-obligation (GO) bondholders lining up behind the U.S. Treasury initiative. “What the GO creditors are focused on now is, even if they lose, what happens with their pension obligation,” said the GOP lobbyist. “One could argue here that the only thing that is bankrupt here is the general fund. If you really think about it—if you carve out Prepa [Puerto Rico Electric Power Authority], Prasa [Puerto Rico Aqueduct & Sewer Authority], HTA [Highways & Transportation Authority], Prifa [Puerto Rico Infrastructure Financing Authority; AFI by its Spanish acronym] and everything else, and you say that the clawback is no longer effective under this legislation, then the general account creditors are in trouble.

“Then you throw in the pension liabilities with the general fund liabilities, then you have serious problems for the GOs. So, they are focusing on the pension issue to keep the pensions within the constitutional priority scale, so that the pensions don’t come in with them or above them,” the Republican lobbyist said.

With 18 different types of credits at play, creditors have been jockeying for position for months, with each competing interest seeking to shield their credits as much as possible from haircuts. Those with the most protected bonds want their credits to be among the first in line—GOs at the top of the list, followed by Sales Tax Financing Corp. [Cofina by its Spanish acronym], and so on with the rest of the affected credit claims. GOs are backed by the Puerto Rico Constitution, while Cofina is backed by a portion of the island’s sales & use tax.

Other stakeholders, though, want all credits to go into one big tranche, or instrument, so that all credits would get haircuts.

Congress has been receiving a barrage of calls and messages from bondholders against one big tranche, according to another Washington, D.C.-based source with knowledge of the matter.

“Some bondholders are continuing to say that Puerto Rico can pay and the Puerto Rico government being late with audited financial statements shows that it cannot be trusted,” this person said.

In response, one Republican member of Congress has reportedly said there is a crisis in Puerto Rico and to say otherwise is false, citing the massive outmigration from the island as the clearest sign there is a crisis, as people are voting with their feet.
Some congressional leaders are adamant there has to be one big tranche for everyone so that people down the line would not be shafted, the second D.C. source said.

However, Raúl Labrador (R-Idaho), who is of Puerto Rican descent, has been among those most vocal against one big tranche, as he believes constitutional or statutory provisions regarding bond payments should be respected. Labrador is said to wield considerable power in drafting the Promesa amendments.

Labrador could be a determining factor on whether Ryan will meet the Hastert Rule threshold, which calls for a majority of the majority for legislation to be passed.

The competing viewpoints even among the GOP showcase the internal battle that is being waged in Congress about how best to deal with Puerto Rico’s crisis.


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