UPR Debt Looms Large in Noncompliance Equation
Debt Down 19.5% to $451M in Latest Proposal; Middle States: Promesa Gives ‘Mechanisms to Restructure Outstanding Debt’
In the latest draft of its fiscal plan, the administration of the University of Puerto Rico (UPR) indicated the institution has debt of $451 million and, in their “show cause” reports to the Middle States Commission on Higher Education, argued that the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) gives the university “various mechanisms to restructure its outstanding debt.”
Although Promesa includes several provisions to handle the debt for government entities, the UPR has other limitations to consider. The federal Higher Education Act permanently bans institutions from receiving Title IV funding (student aid), if they file for bankruptcy, and in general need to be up-to-date with debtors to be considered in compliance with financial responsibility requirements.
When it comes to the numbers, the university has seen a 19.5 percent reduction in its debt, going from $551 million in the first fiscal plan to $451 million in the new proposal. The largest portion of this reduction comes from a cancelation of debt with the Government Development Bank (GDB), which was owed $76 million, but in 2017 the UPR proposed using the $91 million it had in deposits with the GDB to cancel this debt. In the case of revenue bonds, the UPR went from owing $411 million to $389 million, and its Afica bond debt went from $64 million to $62 million. Afica is the P.R. Industrial, Tourism, Educational, Medical & Environmental Control Facilities Financing Authority.
Despite the reductions, the UPR administration states in its draft that “[T]he current fiscal plan indicates there is limited capacity to sustain debt during the fiscal plan period. Cash flows available for debt service (post-Capex [capital expenditures] and pension system) are [forecast] to be negative through the projection period.”
Although Title III of Promesa enables bankruptcy-like proceedings, using it for the UPR may create greater problems because Federal Student Aid (FSA) regulations prohibit, in no uncertain terms, any institution from entering into bankruptcy proceedings.
“A school is not eligible if it files for relief in bankruptcy or has entered against it in an order for bankruptcy,” reads the “Bankruptcy or Crimes Involving the FSA Program” in chapter 1, volume 2, of the FSA Handbook.
This section finishes by stating, “[T]he loss of eligibility is effective as of the date of the bankruptcy or the date the school or individual pleads guilty to, or is found responsible for, the crime, as applicable. A loss of eligibility for these two reasons is permanent—the school’s eligibility cannot be reinstated.”
Less pernicious, but still problematic would be entering a noncompliance status for the General Standard of Financial Responsibility, the Higher Education Act states, a result of taking 120 days or longer to meet its obligations or have “at least one creditor who has filed lawsuits to recover funds.”
Given that the UPR is already under Heightened Cash Monitoring 1 status with the U.S. Department of Education, noncompliance with its financial responsibilities could worsen its standing.
The UPR’s April draft indicates that the “net [cash flow] for debt service” is $70.4 million for the current fiscal year (FY) and $43.7 million for the next. The proposal then takes a bigger slash, separating $10.5 million for FY 2021, and $5.7 million for FY 2022 before dipping into negative territory for FY 2023.
These numbers are a departure from the 2017 and 2018 fiscal plans, which merely eliminated the $16 million in debt service to the GDB to separate $48 million for debt service for the years covered in the plan.
Another point of contrast between the April draft and the October 2018 plan is the outlook. While the UPR administration projects a “limited capacity to sustain debt,” the fiscal board argued in October that their measures would assure “surplus available for payments for some restructured debt service.”
However, this fiscal plan argued that the “UPR has shown no independent and sustainable capacity to generate funds to pay UPR bond debt service,” but then recognizes the UPR pledges revenue from tuition that goes directly to a bond trust.
In terms of proportion, the 2017 budget, which was the last one prepared before the fiscal control board’s budget process, states the university’s debt service was $64 million or 4.38 percent of the budget. For fiscal years 2016 and 2015, the debt service was $61.9 million, or 4.1 percent of the budget, and in 2014 the debt service was $60.9 million, or 3.7 percent of the budget.
In all these years, the repayment funds came from taking a portion of the tuition revenue, which surpassed $80 million, and the tax allocation from slot machines.
The fiscal board’s calendar gives the fiscal control board until May 1 to issue any noncompliance notice for the draft.