
11-20-2015, 06:28 PM
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Mary Pat Campbell
SOA
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Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 85,993
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http://libertystreeteconomics.newyor...l#.Vk-bAXarSHu
Quote:
What can be done?
Puerto Rico is currently in a vicious cycle: poor fiscal outcomes lead to higher interest rates and debt service costs, requiring higher taxes and service cuts, which in turn create incentives for citizens to locate elsewhere, like Florida, further worsening the fiscal situation. In our earlier reports, we suggested several mechanisms for breaking this cycle, and restoring fiscal stability and growth to the Island’s economy.
Some recent discussions have focused on restructuring debt to achieve the same end. How exactly that might be done is unclear. Absent a legal framework to manage a restructuring, the process could quickly become very costly to all the parties involved. A default would lead to potentially hundreds of creditor lawsuits and attempts to attach assets. Currently, Puerto Rico has no legal framework under which it can resolve its public debt burden so restructuring would likely exacerbate the vicious cycle, with ever-increasing levels of social and economic costs.
In the fifty states, Chapter 9 of the U.S. Bankruptcy Code provides a mechanism for the orderly resolution of debts of municipalities, avoiding the high costs associated with prolonged legal battles and the potential for disruption of public services. But Chapter 9 doesn’t currently apply to Puerto Rico. To fill this gap, the Commonwealth passed the Corporations Debt Enforcement and Recovery Act (aka the “Recovery Act”) in 2014. But a July 2015 federal Appeals Court decision held that by excluding Puerto Rico from Chapter 9, Congress “preserved to itself that power to authorize Puerto Rican municipalities to seek Chapter 9 relief,” and that the Recovery Act thus violates the Supremacy Clause (Article VI) of the U.S. Constitution.
Providing a framework for an orderly restructuring process will most likely involve some kind of bankruptcy regime for the Commonwealth and its municipalities. In the language of Chapter 9, “municipalities” are political subdivisions or instrumentalities of states; states themselves are not eligible to file for bankruptcy protection under Chapter 9. Thus, a direct application of Chapter 9 to Puerto Rico (that is, treating Puerto Rico as if it were a state) would allow for the possibility that the debts of the public corporations and agencies, along with municipality debt, would be subject to protection from creditors. As shown in the table above, these debts totaled $24-28 billion as of June 2015, representing less than 40 percent of total Commonwealth debt. Reducing or rescheduling these debts would offer some relief to the Commonwealth. (It’s less clear how some special kinds of debt like COFINA and the Commonwealth’s pension bonds would be treated under this version of Chapter 9. Deciding this would likely be a costly and time-consuming process.)
Of course, Puerto Rico is not a state, and an alternative approach would be to devise a mechanism that would also apply to the obligations of the Commonwealth itself, rather than just to those of its subdivisions. Such a mechanism could include all $71 billion shown in the table, an amount roughly equal to Puerto Rico’s GNP, and would render irrelevant any ambiguity about exactly what is an obligation of the Commonwealth versus a subdivision. Including a more comprehensive set of obligations would offer significant debt relief and the potential to share the burden of restructuring over a broader set of creditors.
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COMMENTS
Thanks, Cate, for the comments. As you point out, PREPA was very close to an agreement with its creditors when you wrote the comment and a restructuring deal was reached last Thursday with some of them. That deal, however, doesn’t include everyone – the bond insurers are excluded - and it’s not clear what the economic impact will be for PREPA and its ratepayers. So we would argue that the jury is still out on how that deal will proceed. In any event, PREPA has been negotiating with its creditors since at least July 2014 so this hasn’t been a quick or easy process. A couple of other brief responses: While it’s true that public sector employment in Puerto Rico in the month of September was up very slightly – about 1,000 jobs – since the same month a year ago, it is down almost 25 percent (about 76,000 jobs) since 2008. It’s also true that up-to-date audited financial statements for some of the Commonwealth’s entities aren’t available, but in our view there is more than enough reliable information to conclude that Puerto Rico’s fiscal situation is quite serious.
Posted by: Blog Author | November 09, 2015 at 01:56 PM
The authors miss some important points:
1) The Krueger report assumes full amortization of debt which is a nice goal but something very difficult to achieve without substantial fiscal reductions.
2) Puerto Rico's electric utility, Prepa, is near agreement with bond insurers, bondholders and fuel line lenders to restructure approx $9 billion in debt outside of federal bankruptcy. It is possible that other classes of PR debt could also be consensually restructured.
3) Puerto Rico's central government has increased the number of employees in the last year although the island has lost population.
4) More precisely PR schools lost 8% of their enrollment this year but the PR Dept of Ed is moving 800 central admin employees into schools instead of downsizing.
It is very difficult for Congress to create a structure to haircut bondholders when the island has done little to reach a balanced budget. Also 4 units of the central government cannot get KPMG to sign off their 2014 financials so no one really knows what their financial condition is.
Posted by: Cate Long | November 03, 2015 at 01:20 PM
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