San Juan-In a conference room within the La Fortaleza, the governor’s mansion in Puerto Rico, Governor Ricardo Rosselló gave a brief and thorough overview of the island’s debt crisis to a group of reporters from Politico, Washington Examiner, Daily Caller, Breitbart, and Townhall. In short, years of borrowing, overspending, and lack of transparency landed the commonwealth in severe financial shape. They’re facing a combined debt of $70 billion with a current $7.5 billion deficit. As a result, Gov. Rosselló had to institute various financial reforms, like cutting government appointees by 20 percent, a government-hiring freeze throughout the government, and directed all agencies to adopt zero-base budgeting practices, in order to get the wheels moving on reform. Also included in his fiscal state of emergency, the Rosselló administration cut the number of government agencies from 131 to 35, a decision that was not favored by his advisers.
Since then, the governor has also been on a legislative sprint, signing a slew of new laws and issuing executive orders to get the island’s fiscal house in order. He’s initiated labor reforms to make those markets more attractive to new investments, expanded public-private partnerships, and a new permits bill for the development of land use and the renewal and construction of new buildings. By cutting the red tape to the permits process, the governor hopes that too would make the island more open to new economic activity. For starters, those who are looking to obtain a permit now have a single hub to find such information. The Rosselló administration streamlined the process. Part of the mad dash was the crisis, but also the timetable.
Gov. Rosselló told the group that the previous administration’s plan to tackle the debt crisis was not approved by the board under the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), which was passed and signed into law by the Obama White House last year (via NBC News):
It creates a fiscal control board comprised of seven members. The board would be not accountable to the island government and would have control over Puerto Rico's budget, laws, financial plans, and regulations.The control board has the power to force the island government to balance its budget and force a restructuring with bondholders (about $65 billion of the island debt is in bonds) and other creditors if an agreement is not reached.
It allows for the federal minimum wage to be lowered to $4.25 an hour for island workers 24 and under. Additionally, the U.S. Labor Department's new rule on overtime pay for salaried workers would not apply to Puerto Rico.
The governor noted that he does not support the PROMESA bill, nor do many on the island since many say it reeks of colonialism. In truth, the board is acting in a function that is no different from the various state takeovers of American cities (Harrisburg, Detroit) we’ve seen who were in disastrous financial condition. Still, even here, the notion of an unelected board overruling the representative body is disconcerting. Regardless, despite his opposition, the governor understood that this is the law and the new reality.
Upon being sworn in as governor, he noted the challenges, one of them was that since the previous administration’s plan was not accepted, the deadlines within PROMESA forced the Rosselló administration to submit a new one with in 58 days. The governor was sworn in on January 2. There were three goals with the new plan: reduce health care costs, enhance revenue by $1.5 billion, and reduce the deficit.
As he spoke, he noted that 22 bills had been signed into law. That’s the most in history at this point into an administration both in Puerto Rico and the United States proper. He also had three with him, which he would sign at the conclusion of our meeting.
Gov. Rosselló was also aware that many don’t like his reductions in spending, with protests erupting during May Day. Second, he said that while he’s a Democrat, you would be hard pressed to find any other fiscal plan that cuts spending by 25 percent. He also said that protecting the services and the people of Puerto Rico are at the forefront of these debt negotiations. In some ways, Gov. Rosselló’s remarks mirrored conservative tax policy. There was one time where he said his goal was to broaden the base and reduce the rates. That sure sounds familiar, doesn’t it? Yet, on taxes, he wants to punish tax evaders and make the property tax system more efficient to help with revenues. He wasn’t talking about boosting the rates. He estimated that there were 350,000-400,000 properties on the island, especially when it comes to improvements. Many on the island start such renovations, but keep putting off completion to avoid a higher property tax rate. On health care, the governor said he hopes to have a system that will expand choice and reduce costs.
Yet, while the PROMESA Oversight Board approved of the Rosselló administration’s restructuring plan on March 13, May 1 was also a setback since the bondholders rejected it (via Bloomberg):
Puerto Rico bondholders rejected Governor Ricardo Rossello’s debt-restructuring proposal days before a May 1 deadline to craft a deal or face a potential wave of creditor lawsuits.Investors rebuffed the offer as Congress reached a bipartisan $1.1 trillion spending bill that would keep the government open through the end of September. Under the tentative deal, the commonwealth would receive $295 million to help fund its Medicaid program, which is set to run out of supplemental funding by Dec. 31.
The Caribbean island is offering holders of its general-obligation bonds as much as 77 cents on the dollar while proposing as much as 58 cents on the dollar for its sales-tax debt, according to the commonwealth’s latest creditor proposal, dated April 24 and posted at midnight Saturday on the Municipal Securities Rulemaking Board’s website, called EMMA.
The cash-strapped commonwealth is negotiating with its investors and has until Monday night to reach a restructuring accord, otherwise a legal stay that shields the island from creditor lawsuits expires. Absent a restructuring deal or an agreement to suspend legal claims, Puerto Rico may face potentially adverse rulings on cases already filed, as well as new legal challenges.
Today, the creditors filed lawsuits against the commonwealth (via TeleSur):
Bondholders of Puerto Rico's multi-billion dollar debt load filed to sue the U.S. territory early Tuesday after the expiration of litigation freeze, accusing the government of violating the U.S. Constitution with its debt-cutting plans.The complaint, filed in federal court in San Juan, represents the group of so-called COFINA bondholders, which bought bonds backed by Puerto Rico’s sales tax revenue. In the lawsuit, the creditors accused Puerto Rico’s leadership of impairing their contractual rights and slammed the government’s latest plan to restructure the debt as unconstitutional.
Another lawsuit was filed by Ambac Assurance Corp., which insures US$1.3 billion of the debt. It alleged its constitutional rights were also violated and had been forced to pay more than US$52 million in insurance claims.
So, where does the island go from here? Well, an option that mirrors bankruptcy might be in the cards (via NPR):
PROMESA doesn't call this "bankruptcy," and it's not identical to Chapter 9. But the underlying principles are the same.
"It mirrors conventional bankruptcy processes that are ordered and arbitrated through a court system," says Eric LeCompte, the executive director of Jubilee USA Networks, a religious development organization that supports debt relief and debt forgiveness.
The "Title III" process, as it's called in PROMESA, allows Puerto Rico to address all of its debts at once, in a comprehensive process — which even Chapter 9 doesn't allow, LeCompte says. It's essentially a bankruptcy process custom-built for Puerto Rico's debt crisis.
Yet, it’s not doom and gloom. Even with the May 1 deadline looming, Gov. Rosselló said that there was definitely chatter about the pending deadline, but added that everyone thought they could never renegotiate the bond with the electric company. They were able to with savings of $1.5 billion; some reports have it saving $2.2 billion over the next five years.
At the time, the governor noted that talks with the bond holders were ongoing, that they have shown through their certified plan that they’re willing to do what is necessary to right the fiscal ship, and that they’re ready to renegotiate. He also said that is was a false narrative that if things go south on May 1, that it’s the end of the world. There were alternatives being discussed, but because of non-disclosure agreements, the governor could not go into detail. He added that yes, this form of bankruptcy is an option, though he hopes he can renegotiate the bonds through the PROMESA board certified plan that he drafted.
We’ll see how things go from here, but one thing that is an agenda item for the Rosselló administration is statehood. On June 11, the commonwealth will be voting on whether to remain independent or vote to become the 51st state. The governor thinks statehood is key to the island’s economic recovery, though even if the referendum passes—Congress still has to sign off on it. Gov. Rosselló added that he respects the independence camp, but noted that he feels the island’s interests are best served in becoming a state. Yet, he also knows the politics behind it.
There is a fear that with Puerto Ricans being predominantly Democratic in their voting behavior that the island would just be another bastion for liberal politics. Gov. Rosselló said that in actuality, the island has more of a swing state mentality. It’s more socially conservative and he added that when Alaska and Hawaii were admitted into the United States, the prevailing narrative was that Alaska would be a blue state. That didn’t turn out to be the case. The other perception the governor wants to change is that of the United States being the largest debt holder to the last colonial territory in the world.
There was a bit of a back and forth regarding whether the assistance the island was receiving was a bailout. This was centered on the debate over Medicaid, which the governor admitted was a crisis that was sending the island over the cliff. He also stressed that they’re a new administration. It’ll take time, but they are accepting responsibility for it and taking hard measures to ensure sustainability. He added that when he visited Washington D.C. recently, Secretary of Health and Human Services Tom Price understood that aspect. The governor accepted that it may look that way, but it’s needed to successfully carry out the fiscal reforms he’s outlined. Concerning health care, one of them is protecting against fraud by managed care organizations.
One last point the governor made during the meeting was the exodus. A stronger economy at home means fewer people leaving the island, which equals to three times more health care costs to the federal government, $15 billion to be exact—with an additional $11 billion added to the states if the Puerto Rican health care system collapses over the next 15 years. He’s already directed administrative costs and other cuts totaling $300 million.
Given the brief Twitter spat, the governor added that he doesn’t feel that having a relationship with the president of the United States, no matter whom it is, would be a detrimental factor to Puerto Rico. Moreover, it appears that he worked behind the scenes to secure $295 million in Medicaid funding in the latest budget agreement. The current Medicaid system on the island was set to run out of cash towards the end of the year.
And what about Corey Lewandowski, the former Trump campaign manager, who was hired by the commonwealth to represent their issues in Washington? Well, he may not be delivering on what he promised. Anna Giaritelli of the Washington Examiner had more:
Puerto Rico hired Lewandowski's Avenue Strategies lobbying firm in Washington, D.C., to help influence the White House to come around to his positions.The second generation governor said Lewandowski will be kept on beyond his four-month contract if he is able to attain results.
"I've had the chance to sit down with him. He's been quite knowledgeable of what we want to do in Puerto Rico so forth ... a little over four months into both administrations and the jury's still out," Rossello said.
[…]
A report published last week stated another Lewandowski firm, Washington East West Political Strategies, promised to arrange "meeting with well-established figures," including Trump, Vice President Mike Pence, "key members of the U.S. administration" and outside Trump allies.
Rossello said Lewandowski never promised that he would meet Trump, but the potential end in contract could indicate the K Street lobbyist over-promised and under-delivered.
As we left, the governor signed three more bills, one on an Internet tax, the other relating to health care reform, and the last was codifying amendments to the traffic laws.
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