Like Nero fiddling as Rome burned, the costs of inaction are high. This is especially true when it comes to the Puerto Rico’s debt crisis.
Unfortunately, the legal and government structures that have been put in place to guide the economic recovery of the commonwealth are not functioning with the level of urgency or foresight the situation requires. If this doesn’t change soon, the consequences for inhabitants of the commonwealth, as well as creditors, could be dire.
The Puerto Rico Oversight, Management, and Economic Stability Act was signed into law on June 30, 2016, and it laid out a framework for resolving Puerto Rico’s financial ailments, notably providing for bankruptcy relief only as a last resort. This bill was the product of more than a year of debate and negotiation. One key element of PROMESA was that a group of experts be appointed by the Obama administration (based on recommendations by Congressional leaders from both parties) to an Oversight Board to supervise the restructuring and manage the fiscal crisis.
However, since the board’s formation on Aug. 31, 2016, its lack of action has been concerning (to say the least). For example, the Board has still not hired an executive director, or settled on its full roster of advisors. This is the equivalent of a football team not having a quarterback or a complete roster a few games into the season. In the case of the NFL, this would definitely not go unnoticed. Yet little attention has been paid despite the urgency of Puerto Rico’s situation.
I don’t doubt that with Congress back in session, it will soon have its eye on the Board’s lack of progress if this pattern continues (particularly the House Committee on Natural Resources, which drove the passage of PROMESA).
Another wrinkle in the process is newly inaugurated Gov. Ricardo Rossello. Rossello seems to be more focused on his political appointments and scoring more relief money from Washington than negotiating in good faith to reach consensual deals with creditors. While it’s understandable that the Oversight Board wants to work closely with the new governor, their role is to oversee the process in a non-political, professional manner, which means they have to step in when the situation and timetable call for it.
The best example of where action is needed now, not later, is when it comes to the deal between the Puerto Rico Electric Power Authority and its creditors. This agreement is the product of more than two and a half years of work by both sides, and is the only consensual deal to date between Puerto Rico and creditors. It would restructure over $9 billion of debt while revitalizing the power supplier for the future. But there is a looming deadline on Jan. 31, 2017 for the deal to get done. At that point, the deal will expire, and if the Oversight Board fails to commit to a restructuring by that date, PREPA will default. Clearly, the PREPA deal is consistent with the overall policy of PROMESA, because the bill specifically exempted the PREPA restructuring from Oversight Board review and accommodated the quick implementation of the deal. So why no action?
It isn’t as if the remedies here are mysteries. There are clear steps the board could take to fix this situation. For example, the Oversight Board should push forward with the implementation of the bond exchange envisioned under Title VI of the PROMESA bill. Additionally, they should support consolidating the various lawsuits objecting to the PREPA deal in federal court. Actions such as these would show the sort of serious commitment to getting deals done that the Oversight Board should be demonstrating.
As to concerns that utility rates would rise if the PREPA deal is finalized, the opposite is true. The reality is that the 15 percent principal haircut coupled with a reduction in interest rates on PREPA’s remaining debt ensures that electricity rates in Puerto Rico will actually be lower than historical average rates and well below comparable islands’ electricity rates. In fact, after implementing rate increases already approved by the Puerto Rico Electric Commission to restructure the bonds, Puerto Rico’s rate payers will pay nearly 24 percent less in electrical rates than they did in 2014 — and Puerto Rico’s 20.14 cents per KwH rate (the 2017 projected average in the rate case) will be lower than rates in Hawaii or any Caribbean island.
Getting the PREPA deal on track and moving forward should be a key concern of the Oversight Board. Clear and specific actions like this on their part would set the tone for a successful and expeditious resolution of the commonwealth’s ills, and provide a blueprint for additional consensual agreements with creditors. Let’s not let the situation in Puerto Rico get any further out of hand, and let’s stop repeating the mistakes of the past.
Horace Cooper is a contributor to the Washington Examiner’s Beltway Confidential blog. He is co-chair of Project 21 and an adjunct fellow with the National Center for Public Policy Research. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
