On February 16, the federal oversight board created in response to the Puerto Rico debt crisis held a forum for the Penn Law community to discuss the board’s fiscal plan for the territory, the restructuring of Puerto Rico’s debt, and the financial future of Puerto Rico.
The seven-member board, created by legislation enacted in June 2016, includes Penn Law’s David A. Skeel, S. Samuel Arsht Professor of Corporate Law and an expert on bankruptcy, corporate law, and financial regulation. His recent scholarship deals specifically with municipal bankruptcy and governance reform.
Puerto Rico has been in financial crisis for at least a decade, Skeel explained, but because of the island’s status as a territory, bankruptcy wasn’t an option.
“It turns out that municipal bankruptcy,” Skeel noted, “for reasons no one can explain, is not available to Puerto Rico.”
With no way to provide for the restructuring of Puerto Rico’s debt, the U.S. Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which gave the island’s government access to a restructuring process similar to bankruptcy and established the oversight board on which Skeel sits.
Since the end of August, the board has been working with the previous, and now the current, governor to certify a ten-year financial plan for Puerto Rico as well as determine how to restructure the territory’s debt.
Board member Jose Ramon Gonzalez, chief executive of the Federal Home Loan Bank of New York and former chief executive of the Puerto Rico subsidiary of Santander Bank, explained that a major issue in restructuring Puerto Rico’s debt is that the majority of it is held by retail investors, adding up to more than 700,000 holders of Puerto Rican debt.
“It’s enormously more difficult because you’re dealing with exponentially more parties,” he said.
Another part of Puerto Rico’s financial difficulties derive from poor management of its pension system, which is essentially running out of money.
“The pension situation is as bad as you could possibly imagine,” said Jose R. Carrion, the board’s chair.
Board member Andrew Biggs, a resident scholar at the American Enterprise Institute, explained to the audience that there was no clear-cut solution to the pension problem, that the issue was a “mixture of legal issues and policy issues, but also of humanity.” The board has argued for a ten-percent reduction in pension payments, distributed progressively.
“The extent to which Puerto Ricans are suffering as a result of the ongoing crisis in Puerto Rico tends not to be appreciated elsewhere in the United States,” said Skeel after the event. “The labor participation rate and standards of living are far lower than on the mainland, and the crisis is making this continuously worse. If nothing were done, it would be an unimaginable humanitarian disaster. In my view, the PROMESA legislation provides the tools for potentially reversing this downward spiral. But the adjustments that need to be made will be painful, especially in the short-run. Our starting point in thinking through these issues — on questions such as adjustments to pensions — is that it is essential that the most vulnerable Puerto Ricans be protected.”
“In our view, it’s absolutely essential that the governor and the oversight board use a “once and done” approach — that we make major, difficult adjustments now, so that the crisis is confronted head on and fully addressed,” added Skeel. “This is the only way to make sure that the crisis doesn’t happen again.”