2021 was yet another year of overcoming challenges but instilled with great hope. While we continue to struggle with the long COVID-19 pandemic, Puerto Rico’s economy is responding positively to federal stimulus and rebuilding funds, seeing growth, providing opportunity and stability. In addition, Puerto Rico took a big step towards ending its fiscal crisis.
The Oversight Board, with the broad support of public employees, the Official Committee of Retired Employees, creditors, the Governor and Legislature, filed a Plan of Adjustment that massively reduces the claims against the Commonwealth to a level Puerto Rico can afford. The Oversight Board has been working on this bankruptcy for almost four-and-a-half years, and Judge Laura Taylor Swain of the U.S. District Court for the District of Puerto Rico confirmed the plan on January 18, 2022.
There has never been a public debt restructuring like this anywhere in America, or anywhere in the world. This was an astonishingly complex and large bankruptcy. The Plan is fair and sustainable for Puerto Rico.
With the confirmation, we completed the task of restructuring a large majority of the more than $72 billion of crushing debt accumulated by Puerto Rico. These restructurings leave behind a sustainable level of debt that allows the government to plan, to spend on priority services, and hopefully to regain access to credit markets in the future. We still have work to do to complete the Puerto Rico Electric Power Authority and the Puerto Rico Highway and Transportation Authority bankruptcies. But we have already started working on both – along with some smaller debt restructurings.
Puerto Rico is well on its way to end the financial crisis that for so long has kept the economy from reaching its full potential and has affected, in one way or another, every life in Puerto Rico.
What is left for the Oversight Board?
Debt restructuring is one of the biggest prerequisites to recovery. Financial responsibility is the other important element of our mandate under PROMESA. To ensure this type of fiscal crisis never occurs again, best practices and policies must be put in place to avoid the mistakes of the past and ensure a better future. The Plan of Adjustment itself provides for a debt management policy to avoid the poor borrowing practices of the past. Moreover, we have already made real progress in other areas. The government budgets certified by the Oversight Board ended the destructive practice of deficit spending. For the last five years, government spending has remained within its means. However, more needs to be done to assure better practices in budgeting, procurement, cash management, etc.
The past year brought some setbacks. The government passed several laws that were not affordable. Worse, the government did not even evaluate what the real costs of those laws would be in advance of adopting them. This is not the new approach to fiscal responsibility required by the people of Puerto Rico, and the Oversight Board could not approve such actions. The court agreed. We would prefer to work out such differences out of court, but we will continue to take any and all measures necessary to ensure fiscal responsibility for the benefit of the people of Puerto Rico.
Our first task this year is to update the Fiscal Plan for Puerto Rico, to make it reflect the Plan of Adjustment and incorporate increased federal funding, the latest Census data, and current data about Puerto Rico’s economic results. The Plan of Adjustment provides for a fresh start. To take advantage of this historic opportunity, the government will need to make prudent spending and investment decisions and redouble its efforts to manage its resources carefully. The decisions made today will shape the future.
2022 will provide the Government with truly unprecedented opportunities to go beyond restoring much-needed financial stability and increasing economic growth with investments financed by federal stimulus and reconstruction funding. I am looking to this new year with hope and optimism. Optimism that Puerto Rico’s economy will continue its recovery, that the debt restructuring processes will be concluded, that we make substantial progress in achieving a new level of fiscal responsibility, and that the countdown will begin for the Oversight Board to complete its mandate under PROMESA.
My wishes for 2022 are that we leave our differences behind, that we find common ground in our mutual desire to see Puerto Rico prosper, and that we find efficient solutions to improve the island’s economy. May you all have a happy and -most importantly- healthy year.
Why this is a good plan for Puerto Rico?
The Plan of Adjustment enables Puerto Rico to focus all its energies on building an economy that delivers prosperity for all residents of Puerto Rico. It’s a good plan because it delivers sustainable levels of debt, but also protects the pensions of public employees and restores a level of stability necessary for every resident and business.
The Plan of Adjustment:
- Slashes the government’s debt payments. Before PROMESA, Puerto Rico had to pay 25 cents of every dollar it collected in taxes and fees from its residents to creditors; the Plan cuts that to 7.2 cents.
Reduces the level of claims against the Government by 80%, from $33 billion to $7.4 billion.
Protects government retirees from any reduction in their monthly benefits.
Restores up to $1.3 billion of lost contributions and interest in government employees’ System 2000 pension accounts.
- Creates a Pension Reserve Trust, funded for a decade with at least $175 million each year so government pensions are paid even in difficult economic times.
Ensures that the government maintains sufficient cash for day-to-day and emergency expenses.
Provides a path for Puerto Rico to regain access to capital markets, a mandate under PROMESA.
- Establishes a Debt Management Policy that defines rules under which the government can borrow in the future, how much it can borrow, and for what it can use borrowed monies.
We have made significant progress in 2021 despite great uncertainty, unease, and difficulties. The Plan of Adjustment, now confirmed by Judge Laura Taylor Swain, reduces the government’s debt substantially, so Puerto Rico can afford the restructured debt and leave bankruptcy behind. For the first time, the Government of Puerto Rico submitted a compliant budget to the Oversight Board for certification, including $4 billion in health care investments and $3.9 billion in education funding. The Fiscal Plan continued to make significant investments in Puerto Rico’s future. The Oversight Board and the government together launched a comprehensive reform of Puerto Rico’s civil service to fundamentally improve the way the government hires, trains, and pays its public employees.
- The Puerto Rico Aqueduct and Sewer Authority (PRASA) has been making great strides on its path to fiscal responsibility and operational sustainability, including refinancing most of PRASA’s 2008 and 2012 Senior Bonds that resulted in total debt-service savings of $918 million through 2047.
- The Puerto Rico Department of Education (PRDE) launched an important project to connect its automated time and attendance system to its payroll to ensure only active employees who show up to work are paid. Once fully implemented, PRDE will be better able to respond to chronic teacher absenteeism and enforce monetary and disciplinary action, including removal of inactive employees.
- The Department of Economic Development and Commerce (DDEC) consolidated 10 agencies with different accounting systems and personnel backgrounds into three agencies, creating savings and efficiencies.
- Puerto Rico’s energy transformation continued. LUMA Energy now manages the electric grid and will begin the modernization of Puerto Rico’s energy system. The transition had a rockier start than expected, largely because LUMA depends on an old, badly maintained electrical grid still damaged by Hurricane Maria. The process to transfer power generation to private operators got underway.
The U.S. District Court’s ruling on the Plan of Adjustment to end the Commonwealth’s bankruptcy process is, of course, a historic moment for Puerto Rico. Two days later, the court also approved the Oversight Board’s proposals to modify $1.9 billion of Puerto Rico Infrastructure Financing Authority (PRIFA) bonds and about $383 million of Puerto Rico Convention Center District (CCDA) bonds under Title VI of PROMESA.
Together with the elected leaders of Puerto Rico, we firmly believe the Plan of Adjustment is affordable for Puerto Rico. It puts us on the road to a new economy, financial responsibility, greater governmental capacity to deliver necessary services; and enables structural reforms to the economy that will be rooted in substantial federal funding investments into the people and infrastructure of the island.
We are not yet completely done with Puerto Rico’s long and complicated debt restructuring process, but we are very close. Reducing PREPA’s $9 billion of liabilities to sustainable levels is our next priority, and you will soon hear more about how we intend to lead PREPA out of bankruptcy and continue to work together with the government to rebuild an electrical system so it delivers more reliable, cleaner and affordable energy to all consumers. We are also working on completing the restructuring of the Highway and Transportation Authority’s over $6 billion of debt to just over $1.6 billion, a 75% reduction.
Much of what we have been able to accomplish in the Commonwealth, PRIFA, CCDA, and HTA debt restructurings is based on long, complex negotiations, supported by an excellent mediation team. The use of novel contingent value instruments (CVIs) allowed us to bring the process to an end not withstanding great uncertainty and differences with creditors. The CVIs provide certain creditors with a share in future economic improvements via a sharing in a small number of specific government revenue streams, under 8% of total revenues. In doing so, the government keeps by far the largest share of any outperformance, but we bring this bankruptcy to an end rather than continuing to debate what will happen.
Reducing Puerto Rico’s debt is a critical step but only a first step toward achieving the fiscal stability and lasting economic growth every resident of Puerto Rico wants and deserves. Once we know what we need to pay annually for the restructured debt, the government can focus on prioritizing spending of remaining available revenues. This prioritization is critically important in the budget process. However, even after that, we are not yet where we wish to be.
Why stop there? The Fiscal Plans for the Commonwealth and several government instrumentalities are road maps to stability and to a future of growth and prosperity in Puerto Rico. Even as we complete much of the debt restructuring, we still need these maps to guide us along the path of instilling financial responsibility, building governmental organizational capacity to deliver efficient services, and rebuilding the economy of Puerto Rico such that it delivers hope and opportunity for prosperity for all. This first post-bankruptcy Fiscal Plan will be a significant document on this road to Puerto Rico’s future growth. Structural reforms that would enable the size of the economy to grow and result in increased revenues are critical.
So renewed efforts must be made to improve K-12 education, human capital and welfare, ease of doing business, electricity, and infrastructure reform. These renewed efforts should all be focused on creating a more competitive environment for investment, for job creation, and for encouraging residents to stay or others to return because of growing economic opportunity on the Island. The investment of substantial federal funds available to Puerto Rico can accelerate this process, literally paving the roads to economic growth.
History has shown that choices made during difficult times can shape our future for decades to come. 2022 is critical for Puerto Rico’s future. Let us focus on getting all the debt restructurings behind us and ensure the Government of Puerto Rico continues implementing the structural reforms, the fiscal responsibility, and better delivery of public services that the people of Puerto Rico deserve.
I am confident that we can all continue working together to end this difficult chapter and create a brighter future for Puerto Rico. Let’s charge forward this year with vision and determination, holding tight to that bold and unshakeable resilience that is so characteristic of the people of Puerto Rico. That is how we’ll create a better future.