A group of creditors, which collectively holds a substantial portion of Puerto Rico’s outstanding $73 billion public debt, responded to the Commonwealth’s most recent version of its Fiscal and Economic Growth Plan, saying “a pragmatic, transparent and growth-focused policy agenda is critical to the island’s recovery.”
Although Puerto Rico’s creditors have differing perspectives on a number of issues related to the ongoing restructuring, we share a unified view,” the group stated. “This view has only strengthened since the devastation caused by Hurricanes Irma and María exacerbated the already difficult economic situation on the island.”
The group of creditors comprises Ambac, Assured, the COFINA Seniors Coalition, National Public Finance Guarantee Corporation, the Mutual Fund Group, Syncora, the Puerto Rico Funds, and individuals living in Puerto Rico and the mainland. Collectively, the group holds or insures a substantial portion of Puerto Rico’s outstanding debt.
The creditors believe the Commonwealth’s recently proposed FEGP represents a major step backward on the road to recovery, they said, because the plan “fails to provide a credible basis on which to restructure the island’s debt, while completely lacking a foundation for revitalizing the local economy and restoring access to the capital markets.”
“Perhaps the most troubling issue with the FEGP is that it was developed in an opaque manner, essentially relying on outputs from underlying analyses that have never been made public,” they said.
“This flies in the face of the Commonwealth’s commitment to transparency and undermines recent guidance from House Natural Resources Committee Chairman Rob Bishop, who stated ‘[i]t is imperative the Oversight Board and governor fully integrate those who hold the debt into the development of these [fiscal] plans, thereby guaranteeing accuracy and transparency in the underlying assumptions’.”
As long-time lenders to the Commonwealth and its instrumentalities, “we are committed to supporting the economic, commercial and social revitalization of Puerto Rico. Now is the time to lay the foundation for how private capital will augment federal aid and local revenues on the road to recovery.”
The group believes the plan reveals a number of fundamental flaws that need to be addressed before moving forward, including:
Detailed, substantive growth agenda is needed
To date, the Commonwealth’s focus on litigation has distracted stakeholders from the fact that it has no vision for igniting growth.
“A number of government officials have grown alarmingly comfortable assuming continued population decline and economic stagnation. In addition, policymakers have not yet put forth a detailed plan to encourage citizens and businesses to remain on the island,” they said.
The government must create and drive a growth agenda that supports a vibrant economy, stems outmigration and incentivizes recent departees to return to the island as part of its revitalization. Toward this end, the Commonwealth should begin working with providers of private capital and industry experts to develop a broad, comprehensive economic development program, the group noted.
Commonwealth must exhibit fiscal discipline
Reductions in government expenses under the Plan are minimal, with government payroll figures growing by 1.2 percent annually, even as population is projected to decline by 20 percent during the Fiscal Plan period.
“This disconnect stands in stark contrast to the reductions in government expenditures achieved in practically every other municipal restructuring. While Puerto Rico’s government expenses — on a per capita basis — are projected to increase by 2 percent annually throughout the FEGP’s time horizon, the likes of Detroit, Stockton and San Bernardino exhibited annual declines of 5.2 percent, 3.0 percent and 3.7 percent, respectively, in the four-year periods following their restructurings,” the group noted.
Show real accountability and transparency
The group asked that the Commonwealth make public the underlying analyses shared with the Federal Oversight and Management Board to evaluate the FEGP.
Right now, the Plan is unacceptably opaque on a number of levels, the group said, including:
- Neglecting to distinguish between essential services and expenses the government would simply like to pay;
- Failing to fully account for cash held at various accounts that may be available to meet needs outlined in the Plan;
- Not sharing 2015 audited financials;
- Relying on an outdated migration forecast; and
- Using healthcare cost and plan participation assumptions that contradict the government’s own outmigration forecast.
“Unfortunately, our concerns have been validated by the federal government’s own refusal to provide taxpayer-backed Community Disaster Loan funding without improved transparency and accountability from the Commonwealth,” the group stated.
Credible debt sustainability analysis is essential
The Plan’s debt sustainability analysis is built on sparse data and outright mischaracterizations, including a comparison of Puerto Rico to U.S. states.
“This overlooks the fact that citizens of Puerto Rico do not pay federal income taxes. The Commonwealth has acknowledged this reality when trying to access the capital markets in the past, stating that the ‘GDB believes that any comparison of the public debt levels of Puerto Rico with the states should include state, local and federal debt’,” the creditors stated.
“Rather than comparing Puerto Rico’s debt levels to those of a state, we believe the Commonwealth’s municipal finance advisers should construct an overlapping debt analysis that is consistent with accepted public finance practices,” the creditors said.
“Any objective assessment will evaluate the amounts of debt existing at all levels of government stateside relative to Puerto Rico. Only through this type of analysis can Puerto Rico’s burden and, therefore, debt sustainability be effectively measured,” they added.
The group also suggested benchmarking Puerto Rico’s debt sustainability against sovereign debt metrics. Although the World Bank and International Monetary Fund have found that 18 percent to 22 percent of revenues is a sustainable level of debt service for low-income countries, the proposed FEGP projects debt service as a percentage of revenues at only ~8 percent.
The Plan also reflects a debt versus Gross National Product ratio of ~20 percent and debt vs. Gross Domestic Product ratio of 13 percent, while the conservative New York Federal Reserve reports on Puerto Rico’s economy have suggested 60 percent as a reasonable target level, they noted.
“A coherent analysis is needed to regain the confidence of creditors, citizens, and current and future enterprises contemplating economically-beneficial investments in Puerto Rico,” the group pointed out.
Reduce excessive Title III expenses
While creditors are told there is extremely limited money for debt service, and pensioners take cuts, the FEGP provides that hundreds of millions in excessive litigation expenses will be paid in full and in cash.
“Earmarking exorbitant fees for legal and financial advisors, whose interests are not closely aligned with those of Puerto Rico’s stakeholders, is a recipe for protracted litigation in lieu of consensual restructuring agreements,” the group warned.
“This reality is even more unsettling when taking into account the outsized fees paid to advisors working for the Oversight Board and the Puerto Rico Fiscal Agency and Financial Advisory Authority,” they added.
“Together, we call on the Commonwealth and [Oversight Board] to carefully evaluate and address our valid concerns. Although this week’s revised FEGP was a small step forward, addressing these issues in a comprehensive manner will ensure Puerto Rico is put on a long-term path to growth and prosperity,” they concluded.