Puerto Rico debt restructuring up in the air after deadlock in island legislature

A plan to pull Puerto Rico out of the bankruptcy that has strangled its economy for years appears in serious jeopardy, facing opposition from politicians and other critics who contend that it doesn’t go far enough to protect government pensions and services and could put the island deeper in debt.

Puerto Rico’s House of Representative leadership proposed a bill it negotiated with the Financial Oversight and Management Board for Puerto Rico (FOMB), a federally appointed body that oversees the island’s finances since 2016. It passed 30-15 in the House this week, but legislative leaders say it doesn’t have enough support to pass the Senate.

The oversight board, in a statement, had warned the island would face dire financial consequences if the Senate didn’t approve the proposal by Friday, saying, “As a result, Puerto Rico would remain in bankruptcy and the burden of unsustainable debt will remain on the shoulders of all Puerto Ricans, threatening economic progress on the island.”

There was no vote.

Gov. Pedro Pierluisi, who leads the pro-statehood New Progressive Party, supports the bill, which was authored by the pro territorial-status-quo Popular Democratic Party. Despite the impasse, Pierluisi wasn’t ready to pronounce the effort dead.

“It is obvious to me that the next step is for the leadership of the House and the Senate to agree to make a couple of minor but necessary modifications to the measure to obtain its approval by both legislative bodies,” he told the Miami Herald in a written statement. “As soon as that happens I will give my signature.”

Supporters say they hope the law will put an end to the island’s debt woes and the oversight board’s tenure while also safeguarding retiree pensions and the public university system. The bill includes no pension cuts for retired public employees, a total allocation of $500 million for the University of Puerto Rico for five years, and additional funding for municipal waste management services. There is also $1 million for the Puerto Rico Health Department to carry out a study on how to establish a universal healthcare plan.

The debt adjustment plan would reduce the island’s outstanding debt from $33 billion to $7 billion and limit annual government debt payments to $1.15 billion a year, according to the oversight board. Bondholders would receive over $7 billion in cash upfront, while the House Project 1003, known as the “Law to End the Bankruptcy of Puerto Rico,” allows for the issuance of $7.4 billion in new bonds — a key component of the adjustment plan as it stands.

“When a person wants to refinance their debts, they have to take out a new loan to pay off the old loan,” explained José Caraballo Cueto, a professor and economist at the University of Puerto Rico. “In the case of the government, in order to restructure an old debt, it has to issue a new bonds. And that’s the new debt. In the case of the government, it is a law that must be passed.”

‘The beginning of new debt’

But critics of the bill — which include legislators from multiple parties — say it could lead to another debt and austerity measures that slash essential public programs and services. Local groups and unions opposed to the project celebrated the legislative roadblock, saying it was the result of their protests and political pressure.

“It has been the consistent militancy from different spaces — teachers, retirees, students, allies — that has gained this respite. It is a great lesson in the power of the People,” wrote Sen. María de Lourdes Santiago, of the Puerto Rican Independence Party.

Among other legislators opposed to the project is independent Sen. José Vargas Vidot, who on Thursday evening joined crowds of protesters outside the Capitol building. He described the project as “bad for the people, bad for the economy, bad for pensioners, bad for the University of Puerto Rico.”

“There is no way they can convince me as long as the project is the beginning of a new debt,” Vargas Vidot said, as protesters chanted. “There must be a bargaining table where all sectors are genuinely represented.”

Sergio Marxuach, policy director at think tank Center for a New Economy, told the Miami Herald that the language in the bill surrounding funding for the University of Puerto Rico is vague.

“What it says is to support the budget of the University of Puerto Rico,” the analyst said. “That is not truly creating a legal commitment.”

He added that the law itself states that the funding for municipalities is contingent on receiving additional federal government funding for Medicaid services, which would allow the island’s government to reallocate funds.

“That not only depends on the Board, but also depends on what is happening in Washington,” he said.

The governor and legislators in support of the measure had negotiated as much as they could with the oversight board, said Heriberto Martinez, director of the Ways and Means Committee of Puerto Rico’s House of Representatives, securing concessions like zero pension cuts and funding for the university system and towns.

He added that compromises were part of the process — especially since it is the island’s government facing bankruptcy.

“It is not the totality of what we were negotiating and what we wanted to achieve, but we understood that we had obtained sufficient protections that would be worse if the project wasn’t approved,” he told the Miami Herald.

Uncertain next steps

Judge Laura Taylor Swain, who oversees the bankruptcy proceedings in federal court, called a meeting scheduled for Monday morning with Pierluisi and legislators to discuss the impasse. Swain has the final say on the debt adjustment plan.

At a press conference on Friday afternoon, Rep. Rafael Hernández Montañez, House Speaker and bill co-author, doubled down on his support for the measure. The PPD politician also warned that failure to pass the legislation opens up the possibility that the island’s government could have less say in how the debt restructuring and payment are handled.

The purpose of Monday’s meeting, he said, is for the court to explore alternatives on how to move forward in the debt process, including measures “without legislative action.”

“In other words, how she can settle controversy without intervention of Puerto Rico’s government,” he said.