November 3, 2017 Read More →

IEEFA Update: Hope for Puerto Rico if Control Board Uses its Muscle to Promote Partnerships

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With the passage of the Puerto Rico Oversight Management and Economic Stability Act (PROMESA) in 2016, the venue for solving the commonwealth’s fiscal and economic problems shifted sharply from the governor and the Legislature to the PROMESA board.

Today, the Puerto Rico Electricity Authority (PREPA), specifically, is subject to PROMESA board oversight, and PREPA’s operations are also regulated by the Puerto Rico Energy Commission (PREC), which was established in 2014.

Given recent change, there is confusion—understandably—and conflict around how the board, the power authority and the commission are by law supposed to interact.

Why a Control Board Was Established

The PROMESA board was established by Congress because the economy of Puerto Rico is weak, its population and job losses have been mounting for some time and investment capital has fled the island. To make up for these losses the government lived on borrowed money. It now has $74 billion in debt, and its 2018 budget pays only 12 percent of the debt service owed.

PREPA’s revenue base was a Wall Street target for an unsustainable bailout. To PREPA’s discredit, it proposed paying 85 percent of bond principal at a time when the bonds in question were worth 60 percent of face value. The PROMESA board, to its credit, rejected this proposal. This was after PREPA had spent more than $60 million on consultant fees and received no value in return.

IEEFA views these bonds today as largely worthless.

The island’s economic difficulties are creating a broad downward spiral that causes the social needs of Puerto Rico to increase while its ability to address those needs shrink. This is a fiscal crisis—a fundamental inability of government to bring recurring revenues into balance with recurring expenditures.

A fiscal crisis is also a crisis of political legitimacy. The government has failed.  When confronted with long-term decline in the economy, its leaders adopted an unsustainable “everyone-for-themselves” philosophy. This corrosive approach to the public interest turned government into a dispenser of patronage. The political system which should support the voices of a new Puerto Rico silences them to protect its own lies. Another group of elected leaders — Congress — decided to substitute its judgment for that of the Island’s elected team.

What a Control Board Does

In theory, the PROMESA control board is a tool for democracy—a forum for working out the dysfunctional dynamics of stakeholder interests. It is not designed simply to cut budgets, raise taxes and reorganize debt. Its main job is to work with the governor to establish a vision for Puerto Rico going forward. Budget cuts are not legitimate if they are not proposed in a way that shows the Puerto Rico public how such cuts will turn austerity into economic growth.

In practice, the leadership of the board is at loggerheads with the governor of Puerto Rico. What each has in common is a failure to do the stakeholder groundwork that can help rebuild public trust. This failure will undermine the credibility of both.

Puerto Rico’s current political leadership also fails to grasp the collaborative nature of what’s required to answer to Puerto Rico’s problems. The PROMESA board and the elected leadership of Puerto Rico at all levels must begin a process of education and inclusion if they are to succeed in rebuilding the island in a way its residents deserve.

The people of Puerto Rico—individually and through their respective affiliations—religious, occupational, community, and economic, must speak out. Over the past decade, the political system of Puerto Rico has shut out public participation. Petty interests were protected more and more at the expense of the public interest, a predictable trend in any rapidly declining economic environment but an unsustainable one nonetheless. This dynamic is on full display at PREPA. Management has been infected by corruption and politics that of course have no business in a an agency responsible for a life-and-death public necessity. Whitefish is not the first rotten fish to come out of PREPA.

What the PROMESA Board Can Do Now

PROMESA is not immune from the similar afflictions. One need only look at the long list of consultants being employed by the board, firms that in some cases are the same ones that have advised Puerto Rico’s leader’s into the current mess. They are Wall Street’s best, which is to say they have no regard for the public interest.

To its credit, the board has hired an investigator to look at how Puerto Rico’s debt load mounted as its economic fortunes deteriorated. It has issued 84 document-preservation notices, and we—among others—await a public analysis of what happened and hope it contains an explicit apportionment of liabilities between the bond holders, federal and Puerto Rico elected officials, Puerto Rico public appointees, underwriters, law firms, accounting firms, financial advisors, bond insurers and credit agencies.

Anything short of such an accounting will not help establishing a responsible budget, a prudent settlement of the debt, nor a restoration of access to the capital markets.

To its credit, too, the PROMESA board has initiated a series of “listening meetings” aimed at gathering public input.  This is a step in the right direction, but it must be one of many steps in that direction.

A Partnership-Driven Way Forward

Puerto Rico’s economy today is wildly out of balance because so much of its value is being shipped offshore by way of outrageous debt payments to Wall Street and in excessive amounts to fossil fuel interests.

If the island remains trapped in this cycle, it will not recover.

What’s called for, to put it bluntly, is an end to gimmicks, false books, quick contracts, and fast cash from Wall Street in deals that blindly nod to every wink mean to keep fat-cat fees flowing.

The PROMESA board and the governor can forge a new working consensus that adheres to the public interest and that promotes leaders who can articulate a way forward. The job now is to make unpopular decisions and to support one another in becoming better advocates for their constituencies.

This direction will set the PROMESA control board on a course toward becoming a forum that transcends business as usual.

Done right, partnership will mean the PROMESA board and the governor will fight less often. The board will be a champion for new fiscal and political design—communicating as it goes each success to Congress, to bond markets and to the people of Puerto Rico, who need leadership and progress above all. The governor, in a chronic love/hate relationship with the PROMESA board, will begin to see it as a tool for new investment in Puerto Rico and new partnerships with Washington.

One model to follow: The New York City Financial Control Board, which was established in 1975—when New York was in dire straits—and 42 years later still exists, albeit in stripped-down form, as a cudgel against fiscal excess. Time, effort and serious commitment by the New York board created a responsible budget process and, more important, a City that with all its imperfections works rather well today.

The normal rough and tumble of democratic life is played out today in New York against a backdrop of broader growth. The brush with near fiscal ruin in the 1970s shaped the character and quality of its business, labor, political and civic voices for the better today.

A similar story can one day be told about Puerto Rico as well.

Tom Sanzillo is IEEFA’s director of finance.


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