Fiscal year 2023 was in many ways one of great success – a turning point for Puerto Rico as we, the Financial Oversight and Management Board for Puerto Rico, together with the Government, shifted our focus from Puerto Rico’s debt to Puerto Rico’s economic future.
We also welcomed our new Executive Director, Robert F. Mujica Jr. When the members of the Oversight Board hired Robert Mujica, we were confident we found the right person to lead this new phase of the Oversight Board’s work and complete our mandate under PROMESA, so the Oversight Board can terminate.
Robert Mujica joined the Oversight Board after a long and extraordinarily distinguished career in New York State Government. He has the skills, the experience, and the passion to continue the Oversight Board’s work. In the six months between his hiring in January and the end of the fiscal year 2023, Robert Mujica has taken a decisive lead in defining the Oversight Board’s path forward, through renewed cooperation with the Puerto Rico Government and a keen focus on our priority to cement the success of our debt restructuring and fiscal stability efforts by ensuring long-term fiscal responsibility and sustainable economic growth.
Our mandate is clear: Help Puerto Rico achieve fiscal responsibility and regain access to capital markets. Then we must leave. We have made substantial progress. But we have some ways to go to ensure that Puerto Rico can maintain its course of fiscal stability. Fiscal responsibility and market access are not two lines on a term sheet that we can simply tick off and be done.
Institutionalizing a disciplined budget process that does not deviate from the path of stability, effective procurement, and fiscal management all still must be fully implemented to prevent Puerto Rico from falling back into deficit and crisis. The debt of the Puerto Rico Electric Power Authority (PREPA) is not yet restructured.
I never thought I would be a member of the Oversight Board for seven years when President Barack Obama appointed me. I have no interest in prolonging the lifespan of this board. But I am also determined to help finish the job we were given. I want Puerto Rico to succeed, and that includes making sure solid processes are in place to prevent Puerto Rico from falling back into instability.
In the new fiscal year our focus will shift more decisively from fiscal stability to economic growth as another step towards fulfilling PROMESA’s mandate. Economic development is the key to Puerto Rico’s future, just as it is the key to regaining the confidence of investors. Without it, there won’t be opportunity for the people of Puerto Rico. Without it, there will be no fiscal stability. Without it, the painful adjustments that Puerto Rico has endured will have been in vain. The Oversight Board will be working hand in hand with the elected Government, the business community, civic groups, and other stakeholders to put in place a plan that will help secure Puerto Rico’s economic success.
One last piece of Puerto Rico’s legacy debt still needs to be restructured. PREPA’s huge debt needs to be reduced to sustainable levels. The massive pension liabilities that PREPA and the PREPA Employee Retirement System (ERS) neglected to fund for so many years also needs to be restructured so current retirees are protected while PREPA’s future pensioners will be able to invest their retirement savings responsibly in defined contribution plans, like so many Americans do.
A year ago, at the beginning of fiscal year 2023, I had hoped we would soon be able to conclude negotiations with creditors and present a consensual Plan of Adjustment that was fair to creditors and the people of Puerto Rico. But PREPA’s debt proved a tougher issue than any other restructuring we have resolved under PROMESA.
PREPA was the first instrumentality that had a potential debt deal in place in 2017. The Oversight Board was not involved in the negotiations between PREPA and its bondholders and their preliminary agreement was not a Plan of Adjustment under Title III of PROMESA. A Plan of Adjustment is much more comprehensive than a deal with bondholders. It restructures liabilities owed to all creditors, including retirees.
The Oversight Board reviewed the 2017 agreement and concluded that the terms, including recoveries to certain bondholders, were not in Puerto Rico’s best interests. I do not think that a debt charge of almost 6 cents per kilowatt hour in fiscal year 2023, which is what that agreement would have cost PREPA’s customers, was a good deal. The agreement simply did not support the energy transformation that is so critical for Puerto Rico’s future. Nobody wins – not Puerto Rico and not the bondholders – if electricity remains unreliable and PREPA remains financially unstable.
In 2019, the Oversight Board, together with the Fiscal Agency and Financial Advisory Authority (AAFAF) and PREPA reached a Restructuring Support Agreement (RSA) with certain bondholders that awarded Puerto Rico’s households and businesses significant protections, including preventing electricity bills from rising should electricity demand decline in coming years.
However, the implementation of the RSA through a Plan of Adjustment for PREPA required legislation. The Puerto Rico Legislature did not adopt the required legislation, and the Puerto Rico Governor terminated the RSA in 2022 with the support of the Oversight Board.
Since then, we have been analyzing and negotiating carefully to find a path for PREPA to emerge from bankruptcy. The path must allow PREPA to operate and invest in a way that makes electricity more reliable and cleaner, and strike the right balance between bondholder’s claims and the economic impact on the people and businesses of Puerto Rico. Most importantly, the path must include safeguards that will prevent PREPA from ever becoming insolvent again in the future.
A lot is at stake for Puerto Rico, and a lot has changed since we started the bankruptcy process under Title III of PROMESA in 2017. Hurricane Maria, earthquakes, the pandemic, the global move to save electricity through more energy efficient appliances, and the accelerating push towards renewable energy have created an ever-changing environment. The challenge is to arrive at the terms for a restructuring that will work not only today and tomorrow, but for decades to come. To predict a changing world of energy usage and energy generation years ahead is a really difficult thing to do.
Despite these challenges, the bondholders have not relented, insisting on full or nearly full payment of the contractual debt. After months of mediations with bondholders in the past fiscal year, we reached an impasse, and in September 2022, the Oversight Board resumed the litigation with creditors that we had put on hold and had hoped to put to rest with a fair, sensible, and sustainable agreement. We had analyzed so carefully what we could expect the residents and businesses of Puerto Rico to pay for electricity, and we knew there was an immense risk in going forward with a deal we were not absolutely sure was sustainable for PREPA in the long run.
The litigation focused on two issues, the amount of collateral the bondholders are entitled to and the size of their claim. On the first issue, the Board contended that the bondholders’ claims are limited to the money PREPA deposits in accounts established pursuant to the trust agreement governing the issuance of the bonds. In March, the U.S. District Court for the District of Puerto Rico, which has jurisdiction over PROMESA, upheld the Oversight Board’s position that the bondholders’ collateral security is limited to those funds. On the second issue, the judge ruled in June that bondholder’s remaining claim was for $2.4 billion.
Our proposed solution for this massive problem of PREPA’s debt remains a Plan of Adjustment. We filed a proposed plan with the U.S. District Court in December 2022, but filing a plan does not mean the members and staff of the Oversight Board could take their eyes of the ball. We could not refuse to look at new data as it became available. We also had to update the PREPA Fiscal Plan, as we do regularly, to reflect the latest estimates on cost and energy consumption. The Fiscal Plan, and the Plan of Adjustment, are based on reality, not wishful thinking.
The Oversight Board certified a new Fiscal Plan in June 2023 with updated projections developed by PREPA, Luma Energy LLC, and Genera PR that impacted the Fiscal Plan’s debt sustainability analysis for the Plan of Adjustment. Most significantly, the new projections presented to the Oversight Board reflect significantly higher costs related to the energy efficiency programs, such as future discounts and rebates to encourage customers to switch to more energy efficient appliances and light bulbs, and higher pension costs. Those discounts are common in many U.S. states and introducing them to Puerto Rico was mandated by the Puerto Rico Energy Bureau (PREB).
The Oversight Board is now in the process of amending the Plan of Adjustment. Given the updated projections, a further reduction in PREPA’s debt from the currently filed plan is necessary so PREPA can provide essential electricity to the people and businesses of Puerto Rico at sustainable rates. As I am writing this, we are continuing to negotiate – hopefully leading to a final deal or deals with bondholders reflecting the new reality.
Some critics accused the Oversight Board of moving the goal posts. In fact, we continued to update our projections as new information came in. At every stage, we have relied dispassionately on data to predict PREPA’s future costs. At the same time, we have been accused of overburdening the people of Puerto Rico with a proposed increase in electricity rates that everyone knew would be unavoidable given the need to pay at least a portion of PREPA’s legacy debt and to stabilize its underfunded pension system. We will continue to work hard to find a fair middle ground and propose a Plan of Adjustment that will stand the test of time – and the test of law. In the end, we must propose a Plan that the U.S. District Court can confirm under the parameters set by law.
We hope we will close this last chapter of the debt restructuring soon and in a way that is in the best interest of all involved. We want to end Puerto Rico’s bankruptcy for good, so that PREPA can move on and the transformation of Puerto Rico’s energy system can be completed, and the people of Puerto Rico can reap the true benefits of PROMESA as Congress intended.
