When the current fiscal year started back in July, the Government of Puerto Rico had sufficient resources to meet its debt obligations and provide the necessary services to the people of the Island. To meet these two objectives, however, the Government had to use its limited funds only for essential needs.
Instead of following that prudent course of action, the Government of Puerto Rico continued spending money in non-priority activities. At the same time, government officials, and their consultants, have been manufacturing an artificial crisis and claiming that the public debt is unpayable. These actions were taken with two goals in mind: (1) getting Congress to give the Government of Puerto Rico the tools to negotiate or restructure the debt, and (2) driving down the value of Puerto Rico’s public debt to make those negotiations easier.
As a result, the Government of Puerto Rico lost access to financial markets. This reality, together with the use of its limited cash for non-priority items, will make it very difficult for the Government of Puerto Rico to honor approximately $2 billion in debt service payments due between May and July.
For the benefit of the people of Puerto Rico, it is important that access to financial markets be restored. Otherwise, some important infrastructure investments needed to improve the quality of life on the Island would not be possible. For that access to be reestablished, these debt service commitments need to be paid. At this stage, however, with so little time left before their due dates, it would be practically impossible for the Government of Puerto Rico to honor these obligations without Congress’s assistance. Therefore, in the interest of the people of Puerto Rico, Congress should provide that help.
In providing its assistance, Congress should help the people without rewarding the behavior of government officials who caused the problems we now face. Accordingly, any kind of debt negotiations, restructurings, or bankruptcy powers should be discarded. After all, solving the fiscal problems of the Government of Puerto Rico by penalizing bondholders would only serve to reward the irresponsible actions of government officials.
Instead, Congress should assist the Government of Puerto Rico in obtaining the funds needed to honor its debt service obligations, while forcing government officials to reduce the expenses that they, thus far, have neglected to cut. One way in which these objectives can be accomplished would be as follows:
- The Government of Puerto Rico, or a new entity created just for this purpose, should be enabled to obtain a loan, from private sources, for the amount necessary to meet its debt service obligations due between May and July, up to a maximum of $2 billion.
- This loan would be payable, at the most, in two years.
- To pay that loan, the Government of Puerto Rico will make monthly deposits into a sinking fund.
- These monthly deposits will be funded from expense reductions to be stipulated as part of the debt indenture.
- A CPA will be contracted, on the basis of an “agreed upon procedure”, to certify that the expense reductions, and the monthly deposits, are made.
- In the event that the Government of Puerto Rico fails to make some, or part, of the required monthly deposits to the sinking fund, the federal funds already allocated to the Government of Puerto Rico and its agencies will be used to meet any shortfall.
- Congress should legislate whatever borrowing authority would be needed, if any, to enable this approach and to allow the federal funds to be diverted into the sinking fund, if necessary.
Two years should be plenty of time to fix the budget of the Government of Puerto Rico and to put its house in order. The backdrop of federal funds to pay for this financing, if necessary, would assure that it would obtain an investment grade rating. The possibility that federal funds, earmarked to serve the needs of the people, may instead be diverted to the sinking fund should serve as an added incentive for the required actions to be taken. After all, if the Government of Puerto Rico complies with the necessary expense reductions, the use of the federal funds would be kept intact to serve the needs of the citizens of the Island.
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Nota: Este escrito fue publicado en www.thehill.com, 19 de abril de 2016.
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