Balancing between Sustainable Fiscal Futures & Creditors

July 15, 2015

Is Puerto Rico Being Held Up? Congressional refusal to act to permit Puerto Rico access to the U.S. courts means that it has fewer options than Greece in terms of dealing with its creditors. And not just creditors—but its own citizens and taxpayers. That is, Puerto Rico is near to entering Rod Serling’s Twilight Zone where it faces not just its many creditors without the kinds of protections granted by a U.S. bankruptcy court, but also its own citizens and taxpayers: Puerto Rico is embarking on an untraveled route where it must create a fiscal blueprint to address politics, angry creditors, and the island’s sustainable future. With default on its $72 billion debt looming, leaders from the U.S. territory met this week in New York with participant-creditors from among more than 300 representatives of institutional investment firms, hedge funds, and insurance companies—a meeting, unsurprisingly, that did little to resolve how the island could balance its obligations and public responsibility to provide essential public services versus its obligations to its creditors. This week’s meeting was an early effort to discuss options for the debt restructuring plan—or quasi plan of debt adjustment—Puerto Rico hopes to complete by the end of next month—a timeline far short of the 18 months it took Detroit to complete its plan of debt adjustment. Nevertheless, the meeting marked the first such meeting since Governor Alejandro Garcia Padilla last month issued his debt doomsday warning. With more municipal debt outstanding than any U.S. state but New York or California, the stakes and risks—especially without a referee such as a U.S. Bankruptcy judge—are unprecedented. Thus, unsurprisingly, Melba Acosta, president of the Government Development Bank, which handles Puerto Rico’s debt sales, told creditors it was “premature” to even begin to discuss which types of outstanding municipal bonds would be affected—much less how; instead, she asked for investor’s “patience while we develop a credible plan.” One can appreciate that absent a credible referee, the prospects for any orderly process on such an uncharted road are bleak: creditors or holders of Puerto Rico GO bonds have Puerto Rico’s constitutional pledge that such debt must be repaid before other expenditures, but without a judicial process, who is to judge? OppenheimerFunds Inc., the biggest mutual-fund holder of Puerto Rico debt, has already warned it is “ready to defend” its investments. What lies ahead could well be a disorderly conduct of irresolution. Moreover, this building battle will have different players: for instance, Puerto Rico’s Aqueduct and Sewer Authority is set to raise water rates and “should be able to meet its existing financial commitments without modification,” according to one advisor: that is, there are multiple classes of Puerto Rican debt at issue—and there is some recognition that every day devoted to litigation will drain not only revenues due to the islands bondholders—but also to essential public services. Puerto Rico faces a $93.7 million debt-service payment due today on its Public Finance Corp. bonds—and another $140 million on August 1st. Thus, at this week’s meeting, Puerto Rican officials devoted most of their time addressing the bleak fiscal condition of Puerto Rico’s economy and calling for drastic measures, such as cutting sick leave for local workers and lowering the minimum wage: that is, the U.S. territory is seeking to simultaneously reduce expenditures, while at the same time bolstering the economy—all in a place which today has more debt per capita than any other state. Anne O. Krueger, a former chief economist for the World Bank and co-author of the recent report on Puerto Rico’s fiscal unsustainability, told investors that the United States territory was caught in an unusual bind: it is not a struggling sovereign nation that can tap the International Monetary Fund, nor is it a state with voting members of Congress. Yet, she concluded that its economy had great potential and was entirely “underutilized.”

Recovery? Wayne County Executive Warren Evans has proposed a two-year budget—one which he believes would eliminate the county’s estimated $52-million structural deficit, noting: “The budget submitted to the (Wayne County) commission is realistic and balanced. It contains no trickery and has the support of the sheriff, prosecutor, and our department directors.” The $1.55-billion proposal for FY2016 proposes about a 10 percent reduction from this year’s: it comes with budget hearings scheduled over the next few weeks—and as a five-person review team appointed by Gov. Rick Snyder assesses whether Wayne County is in a financial emergency: if the state so finds, Wayne County could be on a path to a consent agreement, as the County Executive has sought—or, possibly, the appointment by Gov. Snyder of an emergency manager. Under a consent agreement, Mr. Evans would gain greater leverage as he negotiates for concessions from Wayne County’s unions in his efforts to implement, in effect, a voluntary “plan of debt adjustment,” or recovery plan—though which he is seeking $230 million in savings over four years. With Headlight Data yesterday reporting that Wayne County has the best manufacturing economy in the United States, the County Executive must be feeling upbeat: the new report finds that recently released data show that manufacturing job creation in 2014 across counties in the US varied from a high of 4,200 manufacturing jobs in Wayne County to a loss of 4,800 jobs in Los Angeles County: out of more than 2700 counties with data available, four counties in the Top 10 were in Michigan: Wayne, Macomb, Kent and Ottawa; three counties in the Top 10 were in California: Alameda County in San Francisco, Santa Clara County in San Jose, and San Bernardino County in Riverside. Wayne topped the list with the addition of 4,225 jobs in 2014.

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