Tue 04/02/2019 10:55 AM
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At a conference held over the past weekend, a member of the PROMESA oversight board and a main creditor advisor warned against trying to amend the PROMESA law, saying such a move could put at risk the progress made over the past two years in restructuring Puerto Rico’s debt. Meanwhile, PROMESA board officials indicated they would make changes to the latest draft of the commonwealth’s fiscal plan after complaining that government officials are losing their resolve to make fiscal and structural reforms because of growing commonwealth cash balances and an influx of federal disaster funding.

PROMESA oversight board officials, Gov. Ricardo Rosselló, key creditor representatives and other stakeholders discussed these issues during the forum “Puerto Rico at a Crossroads: Investing in the Future,” which was sponsored by the Wharton School of Business of the University of Pennsylvania and took place in San Juan, Puerto Rico, on Friday and Saturday.

The issue of changes to PROMESA has generated additional discussion in the wake of the First Circuit's Appointments Clause ruling, which held that the nomination process of PROMESA oversight board members was unconstitutional but that the board’s work is valid. The ruling also held that the oversight board’s authority remained in place for the duration of 90-day stay period after the Feb. 15 decision. The oversight board has said it will appeal the decision to the U.S. Supreme Court and request a stay of the First Circuit’s mandate pending consideration of its petition for a writ of certiorari. At the same time, President Donald Trump could extend the appointments of all or some of the current oversight board members or nominate an entirely new board ahead of a May 16 deadline set by the First Circuit or the August expiration of the oversight board members’ original three-year terms. Meanwhile, the U.S. House Committee on Natural Resources plans to hold a public hearing on PROMESA in May and has not ruled out potential amendments to the law.

Amid the uncertainty over the future shape of PROMESA and its oversight board, the Rosselló administration appears to have stepped up its pushback against the oversight board, amplifying its criticism that the oversight board is overreaching its mandate by trying to set public policy for the commonwealth. Administration officials have said they would support PROMESA amendments aimed at limiting the board’s ability to interfere in government operations and public policy.

PROMESA

Stephen Spencer, a managing director at Houlihan Lokey who has nearly five years of experience with Puerto Rico’s debt restructuring as financial advisor to creditor constituencies including the ad hoc group of PREPA bondholders and large municipal funds with broad holdings of the island’s public debt, said that there is “risk in fixating too much on PROMESA” and that “fixating on amendments now would be misplaced.”

Spencer, who was centrally involved in Detroit’s chapter 9 case and the drafting of PROMESA, said there has been “a lot of work done and progress made” on Puerto Rico’s debt restructuring and fiscal reform fronts. He credited the commonwealth for “really scrubbing its finances” to get at a cash balance, adding that the oversight board exercised “its proper role in supporting that effort.”

“Continuity is good,” Spencer said when asked about a potential shakeup of the oversight board. Spencer also said the oversight board “has done a huge amount of work behind the scenes and from an operational perspective that work needs to be continued.”

Spencer acknowledged there are “some areas we wish they would push harder” and said the oversight board members have “one of the most difficult jobs in the world,” adding that a description of the board’s relationship with the commonwealth as “frenemies” is “probably accurate.”

Spencer said the parties that played roles in the drafting of PROMESA “knew there were issues,” adding that the oversight board members are “doing the best they can do.”

He noted that capital is being invested in the market. “I think maybe the best commentary is from the capital market providers, the people who are invested in Puerto Rico debt,” Spencer said, pointing to the trading values of the new COFINA notes. “You have a unique opportunity where markets are cohesive in terms of wanting to put capital to work, and they are looking at Puerto Rico again, which I think is a very positive sign.”

Spencer was speaking on a panel that included oversight board member David Skeel, Bonistas del Patio President Rafael Rojo and island economist Joquin Villamil.

Rojo, the president and CEO of VRM Cos. who also heads Bonistas del Patio, a group of on-island bondholders, said he would like to see some members of the board reappointed with “maybe some new people coming in with a more cold economic outlook.”

“I would have wanted the oversight board to have more fiscal authority,” said Villamil, who is president of Estudios Tecnicos.

Skeel raised red flags over potential fiddling with a “remarkable piece of legislation” that was approved in a “highly bipartisan” process of compromise that saw Republicans and Democrats “stepping in to help Puerto Rico.”

“What is really dangerous in my view is once you start pulling at one thread in PROMESA you’re going to create other problems,” Skeel said, adding that he has not yet heard of a potential amendment that is “essential.”

“Be really careful what you wish for, and make sure you are not going to do harm first. It is really important not to create new problems in what is already a complicated situation,” Skeel said, likening the PROMESA process to a “multi-dimensional chess game.”

The University of Pennsylvania law professor, who was recommended to the oversight board by U.S. Senate Majority Leader Mitch McConnell, reiterated his willingness to continue serving on the oversight board, calling it the biggest privilege of his professional life.

“I really do feel we are on the cusp of real progress,” Skeel said, citing a commonwealth plan of adjustment by year’s end. He added that “despite all the difficulty, there has been significant progress” made between the oversight board, the Rosselló administration, the commonwealth Legislature and creditors.

Skeel noted that the oversight board is “going to be around a little longer” because of PROMESA’s requirement for four successive balanced budgets. He said that although the same seven oversight board members should not be in place for the better part of a decade, “it could be useful for us to be in place a little longer.”

Skeel indicated that the oversight board’s mission has been made more challenging by the “realization that we don't have as much power as we might have wished we had,” noting that the District of Columbia control board and Detroit’s emergency manager had far more sweeping authority. “That has constrained us a bit. We can't push as hard as we might like to push,” Skeel said. “We can’t go it alone. We have to work with the government.”

The upside to the oversight board’s relatively limited powers is that it allays some of the concerns about its non-democratic nature, Skeel said. “We didn't take over the government like Kevin Orr did,” he said, referring to the emergency manager appointed in Detroit’s chapter 9 case. “The government is alive and well and establishing policy,” he said.

Skeel pointed to the commonwealth government’s refusal to act on the oversight board’s recommendation for a labor reform that moves to a more at-will employment structure through a repeal of Act 80, the island’s wrongful dismissal statute. He said Puerto Rico’s labor laws are “out of whack” with those in the rest of the United States, adding that Act 80 creates a lot of “rigidity” in the labor force, providing “wonderful benefits” for current workers but acting as a “drag” on job creation. Skeel said the oversight board “would jump through if a window opens” to repeal Act 80, noting that its elimination, according to oversight board estimates, could boost the island’s GDP by as much as 1% annually.

Skeel acknowledged that the oversight board has faced setbacks in both the Title III court and the First Circuit but noted that its budget and fiscal plan powers have been largely sustained. “Ask the bond market folks whether the First Circuit has slammed down the oversight board, and I think they would say no,” he said.

Saying he “never understood the obsession with Law 80,” Villamil characterized the oversight board’s 1% related growth estimate as “nonsense.”

“We need a human capital policy. We need to invest in our people, but we don’t,” Villamil asserted.

The PROMESA Board Vs. the Commonwealth

Skeel downplayed the notion that the oversight board has not wielded its powers forcefully enough. “I don’t think the Rosselló administration would agree we have been lenient,” Skeel said. “We have been pushing as hard as we can for the reforms we think are important.”

When questioned about the latest commonwealth fiscal plan draft, which pushes out some of the savings targets from government reforms and fiscal measures, Skeel said that the board is having an “ongoing conversation” with the Puerto Rico government about the plan and said that judgment about the adequacy of the fiscal plan’s reforms and fiscal measures should wait until a certified plan is in place. The oversight board is slated to hold a public hearing on April 25 with an agenda centered on certification of a new fiscal plan, according to sources close to the process.

Skeel and Natalie Jaresko, the oversight board’s executive director, concurred that there is an upside and downside to the inflow of federal recovery funds in the wake of Hurricane Maria, agreeing it has made it harder to get the commonwealth government to commit to structural changes needed for a sustainable economy once the short-term stimulus runs out.

While the influx of federal money is “absolutely essential” and there would be “no near-term hope for Puerto Rico” without it, Skeel said the funding shot has “significantly reduced the government’s willingness to make change.”

“It’s much much harder for elected officials to make hard decisions when they see short-term surplus. So we worry about that,” he said.

Jaresko echoed the idea that “fears that needed and deserved federal recovery funds have made some see less urgency for needed structural reforms.”

Villamil said it is safe to “assume we are not going to get all that money,” anticipating that federal recovery funding would be “a lot less” than included in the current certified fiscal plan and that “disbursement is going to take a long time” given federal controls and Puerto Rico’s capacity to “absorb that much money.”

Villamil said there is still no clear idea what is going to happen after the reconstruction process is over, adding that it is important to be very careful about how economic indicators are interpreted. “The economy will grow and GDP will grow but that really doesn’t mean a whole lot,” he said, adding that further structural reforms are needed along with shoring up institutions.

“I’m afraid that as long as we think federal funds come in we are in good shape. We are not,” Villamil said.

The Estudios Tecnicos chief said fixing the commonwealth’s finances does not necessarily set the stage for economic growth unless combined with some stimulus issues.

Rojo said he sees an “immense window of opportunity” in the wake of Hurricane Maria, noting that additional clarity on both federal recovery funding and debt restructuring is essential to sustain an evident pickup in economic activity “A better outlook of monies coming in gives the government the opportunity to make the changes it needs to make in a working economy,” Rojo said.

Jaresko: Our Main Tool Is the Budget

Jaresko characterized the fiscal plan as “budgetary choices paired with structural reforms,” adding that while the oversight board is tasked with providing oversight of “implementation and budgetary discipline,” her job is not to act as Puerto Rico’s economic development officer.

“Our main tool is the budget,” the oversight board executive director said, noting that annual spending plans are not about “simply reducing spending but prioritizing spending” to improve the island’s business climate and quality of life for its residents.

Jaresko reiterated that a “full wipeout” of Puerto Rico’s debt is “impossible “under PROMESA and would not solve Puerto Rico’s problems even if it could be done.

“We have to agree on what is more important. But we also have to agree what is less important because we have to take the money from there,” Jaresko said, adding that a “vision of priorities will emerge” through work toward right-sizing the government.

Jaresko pointed to funding for public schools and the University of Puerto Rico as key issues in the “age of right-sizing and austerity,” seizing on two fronts that have emerged as a focus of U.S. House Committee on Natural Resources Committee Chairman Raúl Grijalva, D-Ariz.

Jaresko said Puerto Rico has historically relied too much on federal tax privileges rather than ease of doing business and other structural reforms. She said the structural reforms pursued to date are “not enough,” adding that there are “additional answers and steps” that can be taken to better position the island in an “ultra-competitive global economy.”

“Puerto Rico has a chance pave its own path to prosperity,” she said.

During the Friday evening forum, PROMESA oversight board Chairman José Carrión said economic incentives are very important in attracting offshore investment and will play a central role in its transformation but the board wants more transparency so the public can know where the government is investing public funding and the government can analyze the return on investment it is getting on its investment through specific exemptions.

Carrión said the board does not want Puerto Rico to be a “fiscal paradise” but rather an ideal place to do business that all Puerto Ricans can benefit from. He said the implication of a fiscal paradise is that it is a place where you do not have to pay taxes, whereas the oversight board wants to establish conditions that will ease the flow of offshore capital into Puerto Rico as well as increase local capital.

Rosselló Reiterates Overreach Criticism But Cites Joint Progress

Asked during the forum about the administration’s relationship with the oversight board and what potential changes may be needed to the PROMESA law, Rosselló quipped, “How much time do we have?”

The governor signaled that media focus on clashes between the commonwealth and the oversight board underplays the extent of collaboration. “News becomes sexy when there is conflict,” the governor said, noting that the standoff over Christmas bonuses got more coverage than the substantial amount of “work done together to reduce the size of government.”

Rosselló reiterated that he has “strong objections to the [intervention] of the board into operational matters of government or policy decision-making at any point.” The governor said the oversight board’s three roles are working with the restructuring of the debt, lobbying in Washington for Puerto Rico’s economic development “as creatures of the imagination” of Congress and setting a ceiling on annual budgets.

“The problem is that we get budgets that are obtuse and restrictive,” Rosselló said, adding that the oversight board is slow in considering reapportionment requests.

“The board should not be intervening in day-to-day operations of government. They should ensure that high-level limits are set, that we get access to the markets and get our economy growing again,” the governor said. “If we do that I think we’ll be able to find a working path forward even as I am philosophically opposed to a non-democratically elected board having power.”

“The results that I’ve seen recently in the intervention into government are validated because they are overstepping their boundaries as to what they are supposed to be doing,” Rosselló asserted. “It either needs to be fixed from within or Congress needs to act in some sort of fashion to make sure that those roles are clarified,” he said.

“As long as the elected government of Puerto Rico gets to set policy, gets to determine what priorities are, gets to invest in those priorities so long as we reach the fiscal control points, then I think we will be able to work together and get results as we’ve done in other areas,” the governor said.

The two-day forum featured panel discussions on federal disaster aid, the electric power market, economic challenges and opportunities, public education in Puerto Rico and the island’s political situations. During a Friday evening seminar, Resident Commissioner Jenniffer González, oversight board chairman Carrión, Banco Popular Chairman Richard Carrión and other leaders discussed Puerto Rico’s challenges and opportunities with Wharton Center for Leadership and Change Management Director Michael Useem and Wharton Dean Geoffrey Garrett, who said Wharton held the forum to ”learn about the rebuilding of the island and to try to contribute to its success.”

Dean Garrett and other speakers credited Wharton 2020 MBA candidate Julio A. Cabral Corrada, a Howard E. Mitchell fellow, with proposing the forum and being one of its main organizers. Prior to entering Wharton, Cabral Corrada played a key role in Puerto Rico’s debt renegotiation, serving as a liaison between investors and government officials while serving as an investment vice president at Stone Lion Capital, one of the original GO ad hoc group members. Cabral Corrada, who noted that his main objective in coming to Wharton was to find ways to help his island home, said that professors and graduate students participating in the conference will write a white paper with fact-based recommendations and positive ideas regarding Puerto Rico's development that will be submitted to the government of Puerto Rico, the oversight board, the Puerto Rico Chamber of Commerce and Congress.
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