Why PREPA restructuring deal faces a political hurdle


Puerto Rico’s legislature may prove to be a roadblock to the debt restructuring deal for the island’s electric utility.

Since early September about 90% of bondholders and insurers have signed on to support the Puerto Rico Electric Power Authority restructuring, according to the Puerto Rico Oversight Board.

“At least the base case understanding of PREPA’s restructuring is that the legislature will have to approve the rate increase,” for the restructuring to go forward, said Municipal Market Analytics Partner Matt Fabian, speaking at the “Ravitch Fiscal Reporting Program: Puerto Rico’s Many Challenges” event last week at City University of New York.

Municipal Market Analytics Partner Matt Fabian said getting Puerto Rico’s legislature to approve an electric rate increase in the debt restructuring deal is likely to be difficult.

The rate increase would be in the form of a surcharge that would pay off legacy debt.

“So politically it’s difficult… It’s a political issue to have the legislators agree, in effect, to raise rates in an election year when they are fighting the beast that is the [Oversight] Board that is sitting on top of them,” Fabian said.

Some observers are suggesting that the board could force the deal through without the local legislature’s support, Fabian said. But that would create a “political frenzy.”

El Nuevo Día Reporter Joanisabel González said some have argued that there is already a law in place that would allow the rate increase.

Also at the conference, University of Puerto Rico Assistant Professor José Caraballo Cueto and Council on Foreign Relations Tannanbaum Senior Fellow Brad Setser talked about Puerto Rico’s economic problems.

Many people have traced Puerto Rico’s downturn to the U.S. Congress’s 1996 approval of a 10-year phase out of the Law 936 tax credit. Setser said that while this had some impact, not all the decline was due to this.

Setser said that the 50 U.S. states have also seen a decline in manufacturing from 2000 to present. The forces affecting the states are also partly responsible for the decline of Puerto Rico’s manufacturing, he said. Puerto Rico’s real estate boom up to 2006 and subsequent bust also has had an impact.

Caraballo Cueto said that the federal government has some responsibility for the island’s long economic decline since 2006. The government has exempted the U.S. Virgin Islands from the Jones Act, a federal law that increases the costs of shipping Puerto Rico’s goods. The federal government has given Guam and the Northern Mariana Islands a visa waiver program, which eases travel to those islands from nearby nations, Caraballo Cueto said. He said the federal government should extend these things to Puerto Rico.

Caraballo Cueto said that the U.S. Federal Emergency Management Agency has approved less than 50% of the grant applications after Hurricane Maria. Further, only about 1% have received the maximum $33,000 grant.

Setser said he was mainly pessimistic about the future. He outlined five reasons for pessimism and four reasons for optimism.

For reasons to be pessimistic, Setser pointed to the aging population, with an increasing share being elderly and thus outside the workforce. Second, he said that the island’s international tax position is more likely to worsen than improve. The level of taxes that the island’s government gets from taxing foreign corporations is probably unsustainable.

Third, Setser said the federal disaster aid funding would run out at some point.

Fourth, the board’s proposed debt restructuring would leave the island with more debt per capita than any state, at around $8,000 per capita. This would be well above the maximum $4,000 per capita found in the 50 states. The burden of a high level of debt would encourage emigration.

Fifth and finally, Setser said that the U.S. tax code encourages emigration from the island.

Setser said avoiding these problems would be difficult.

As reasons for optimism, Setser said unlocking federal aid would help. Second, simply making sure property owners have titles to their property would also help. Many island property owners don’t have registered legal titles to their real estate.

Third, simplifying business permitting would boost the economy.

Fourth and finally, it’s possible the federal government will give the island government a better deal on programs that it does currently.

Setser said the island has a natural advantage in that its residents speak two languages.

In a separate presentation, William Glasgall said Puerto Rico’s government has given out $15.7 billion in economic incentives, about 15 times more than New Jersey gives out. Glasgall is program and editorial director for the State and Local Accountability and Improvement program at the Volcker Alliance.

Glasgall said the local government has poorly evaluated the tax exemption incentives. If one could analyze the relationship to the incentive to the number of jobs created, “the cost per job would be astronomical.”

Puerto Rico Clearinghouse researcher Cate Long said that many parts of Puerto Rico’s economy are either untaxed or taxed at a low level.

She said that Puerto Rico’s government is delaying the release of its fiscal year 2016 Comprehensive Annual Financial Report because it would have to say Puerto Rico hadn’t breached the debt limit. This would be significant because the Oversight Board is arguing that Puerto Rico stepped beyond its debt limit in 2012. On this basis, it is trying to invalidate general obligation and Public Buildings Authority bonds sold after the early months of that year.

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