Economy

Puerto Rico, mired in debt, has a new rescue plan

Mary Williams Walsh
WATCH LIVE
Governor Ricardo Rossello (L) talks with reporters after a speech in San Juan, Puerto Rico, March 9, 2017.
Nick Brown | Reuters

Puerto Rico, reeling from a debt crisis lasting more than a year, reached an agreement Monday that should set the stage for meaningful talks with its creditors, who hold more than $70 billion of defaulted debt.

Under the agreement, new taxes will be imposed but public workers will be spared from furloughs for now, a measure that had been on the table.

The island's federally appointed oversight board voted unanimously to approve an amended plan, submitted by Gov. Ricardo Rosselló, for restoring fiscal solvency over the next 10 years. Approving the governor's plan spared the seven-member board from having to impose an austerity plan that probably would have caused an outcry on the island.

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"It's essentially the same plan I submitted, except for the economic baseline numbers," Mr. Rosselló said in a telephone interview after the meeting. "The board approved our plan, conditioned on us meeting some milestones."

Those "milestones" remain significant hurdles for the island's government. But while the government works to meet them, it can now show creditors a board-certified document explaining how much cash is available to repay the large debt, and where the cash is going to come from.

As the island's financial troubles have worsened in recent years, its audited financial statements and cash flow reports became unavailable, making meaningful restructuring talks impossible. And time was running out. Under a special federal law for insolvent United States territories, Puerto Rico has court protection from its creditors until May 1. Some have already tried to sue to recover their money.

The governor's fiscal plan includes enough belt-tightening to cause an annual economic contraction of 2 to 3 percent — a bite that residents of the island will almost certainly resent. But that is nothing like the 17 percent economic contraction the board had warned about earlier this year, in a document describing a worst-case scenario.

To get the board's provisional approval, Mr. Rosselló said he had to find ways to come up with $160 million more in government revenue than he had in a previous version of the plan, which was rejected by the board Thursday. The oversight board warned him then that his original version was "unrealistic," leading to marathon discussions over the weekend.

The governor's new measures include higher traffic fines, an increase in an excise tax on tobacco products, a tax on insurance, and the extension of an existing tax break for manufacturers on the island.

But the governor remained unwilling to bend in three contentious areas: how much to cut pensions for retired government workers; whether to constrain the current public work force to two- and four-day workweeks to save money; and whether to stop paying all public workers a Christmas bonus, in light of the fact that bondholders are not being paid.

Mr. Rosselló had especially opposed any furlough, saying it would hurt the economy too much.

"A reduction of 30 percent of the work force represents 45,000 people in Puerto Rico," he said. Reducing the work force by that much could cause a 9 percent economic contraction, he said.

The board agreed to avoid furloughs for six months to give Mr. Rosselló's revenue measures a chance to start working. If the measures are not considered effective enough by October, the board will consider carrying out some type of furlough.

The governor also opposed the board's recommendation that retired public workers' pensions be cut by about 10 percent to make the retirement system sustainable. He had called for 3 percent cuts.

In the board's meeting in New York on Monday, it amended the governor's plan so work could begin immediately on converting the existing pension system to a pay-as-you-go system, in which the retirees' benefits will be paid directly out of the government's general fund. The size of the cuts was not specified, but board members said no retirees would be pushed below the poverty line.

The amended plan also calls for all current public workers to be shifted into defined-contribution retirement plans. Public workers are currently required to contribute to large pooled pension funds that use their money to pay pensions to retirees, sometimes in the manner of a legalized Ponzi scheme.

The governor's plan would end that practice. In addition, it calls for newly hired public workers to be enrolled in Social Security, and for current public workers younger than 40 to enroll "to the extent practicable."

The board was established by an act of Congress last year to guide Puerto Rico through a restructuring of its more than $70 billion of debt. Puerto Rico amassed the debt by borrowing year after year to give the appearance of having balanced its budget.

Before any restructuring can start, Puerto Rico was legally required to produce a credible plan for bringing its budget back into balance. Mr. Rosselló's government had already requested the maximum allowable time extensions, and if no credible plan had been submitted by Saturday, the board was required to impose one.