Puerto Rico faces off with bondholders over statehood

Puerto Rico’s top elected leaders are doubling down on their pursuit of statehood, even as bondholders ask Congress and the White House to hold off until debt payments are made. 

Former New York Gov. George Pataki, who represents some of the island’s bondholders, said he supports statehood, but only after Puerto Rico’s financial woes are solved. 

“People may well push [statehood], but I don’t think it will be credible,” Pataki said. 

Puerto Rico’s Resident Commissioner Jenniffer González-Colón (R), who along with Gov. Ricardo Rosselló is leading the charge for statehood, said statehood and the debt issue are inseparable. 

“Puerto Rico’s economic problem is the lack of an economic model,” she said. “The territorial condition limits the island’s growth opportunities.”

Supporters of statehood for Puerto Rico say its territorial status makes it nearly impossible for the island’s economy to become self-sustaining. 

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The territory has been losing economic ground — and borrowing beyond its means — since former President Bill Clinton signed a tax reform law in 1996. That law closed a loophole that gave tax incentives for U.S. corporations to set up subsidiaries in Puerto Rico.

“By not receiving the same funds as the states, Puerto Rico has had to draw upon general obligation debt,” González-Colón said. 

Still, Puerto Rico’s officials say there’s plenty of blame to go around for the territory’s $72 billion in red ink.

Rosselló said previous administrations allowed the debt to grow through two practices: Using debt to fund government operations rather than investment projects, and “special assignments.” 

“Special assignments and multi-year special assignments were essentially funds where the government had low visibility,” Rosselló said. “[They] would be allocated for certain services, but what typically happened was that there was severe overspending from what was budgeted.”

Rosselló said that in 2015, $500 million was allocated to special assignments, and $1.6 billion was spent. 

“There was always a backstop. You could overspend because you had bond emissions and you would punt it to the next administration,” he said. 

With Puerto Rico out of the bond market for now and under the tutelage of a Fiscal Control Board appointed by Congress, Rosselló was forced to present a balanced budget that didn’t rely on new debt.

The Fiscal Control Board approved Rosselló’s budget, with some changes, on Saturday. Puerto Rico’s fiscal year runs from July to June.

But bondholders say the budget that was approved violates Puerto Rico’s general debt obligations.

“This was supposed to be an austere time, particularly when you’re not paying any of your bondholders,” Pataki said. “It basically says that the constitutional debt that is supposed to come first comes last.”

Rosselló’s 2018 budget estimates a $575 billion increase in income, fueled by $390 million in liquid asset sales from the island’s pension plan. That $390 million is earmarked for a “pay as you go” plan to pay pension holders as the money becomes available.

“We think it doesn’t reflect the finances of Puerto Rico,” Pataki said last week. “It is largely driven by the Control Board.” 

Pataki added that some bondholders are lobbying Congress and President Trump to replace the Control Board. 

“I know there are those contacting the appropriate committees, working to convince President Trump and Congress that the Control Board appointed by [President] Obama is not following the law,” he said.

Even if the Control Board were replaced, any agreement to modify the debt payment scheme would have to be approved by a federal judge in New York.

Under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) passed by Congress last year, Puerto Rico was afforded the possibility of a bankruptcy-like provision, which it exercised in May. 

The island’s power utility, PREPA, which accounts for about $9 billion in debt, followed suit on Sunday.

Bondholders and PREPA had previously negotiated a 15 percent reduction in the utility’s debt, but a deal to prevent it from defaulting fell through last week.

Pataki said litigating Puerto Rico’s debt is “ridiculous,” given that “a consensual agreement could still be reached.”

“The lawyers are going to make a ton of money, it’s going to drag on for years, it’s going to have a cloud of uncertainty,” Pataki said.

González-Colón said she would rather see direct negotiation than litigation, but added that the government’s hand was forced, leading them to activate Title III of PROMESA — the bankruptcy-like provision.  

Puerto Rico’s government decided to enact Title III as a deadline barring creditors from suing the island approached in May.

“If that legislation had not provided for the May deadline, there would have been more time for agreements and negotiations in good faith,” González-Colón said. 

González-Colón added she would push the House Natural Resources Committee, where she sits, to hold oversight hearings on the Control Board’s performance in August or September. 

The battle in Washington over Puerto Rico’s budget will provide Rosselló with an extra incentive to follow through on his plans for statehood. 

Under Puerto Rico’s statehood law, Rosselló is naming a congressional delegation— two senators and five members of Congress. On Friday, he announced the first batch: former Govs. Carlos Romero Barceló and Pedro Rosselló González — Rosselló’s father, Puerto Rico Democratic party President Charlie González, and former Major League Baseball player Ivan Rodriguez Torres. He’ll name the remaining three in the coming days.

Congress would have to pass a law to admit the island as a state, which at this point is highly unlikely.

Bondholders say the strategy will be little more than a distraction. 

“As a practical matter I think it’s going to be virtually impossible to make a case until the financial cloud is lifted,” Pataki said.

It’s unlikely the delegation will be seated as full members, but they’ll provide a badly needed lobbying force in Washington for the island’s government. 

The Puerto Rico Federal Affairs Administration (PRFAA), the territory’s representation in Washington, has been the target of budget cuts as the economy has faltered. From 2014 to 2017, PRFAA lost over $1 billion in yearly funding.

Rosselló said the presence of seven high-level representatives would bolster the island’s presence in Washington, although their ultimate goal is to be seated in Congress.

“The effort is lobbying, is symbolic, but people should know it’s had success, it’s been done seven times,” Rosselló said.

“This strategy, if it was successful in the 1700s, the 1800s and the 1900s, right now in a 24-7 news cycle with social media platforms and so forth, it should be even more successful,” he added.