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Commonwealth debt adjustment plan goes into effect today


Financial Oversight and Management Board Executive Director Natalie Jaresko

By The Star Staff


The commonwealth debt restructuring plan, which would reduce some $33 billion in debt to $7 billion, is going into effect today and the stay on all lawsuits ends, the Financial Oversight and Management Board and government officials said Monday.


The restructuring does not mean Puerto Rico has returned to the markets, but it does mean that its debt has been reorganized, the oversight board’s chairman David Skeel said.


By July, the first debt payment is slated to be made. Puerto Rico is to make about $1.1 billion in debt service payments.


Some $7.5 billion in new general obligation (GO) and Public Buildings Authority (PBA) bonds are slated to be exchanged with those holders today, the oversight board’s executive director Natalie Jaresko said. The bonds should be expected to be trading on the markets today.


Starting today, between $10 billion and $10.8 billion in funds will be distributed to stakeholders:.Some $260 million will go to local residents and businesses, including $200 million to general unsecured claims and $10 million to dairy producers.


About $1.4 billion will be given to current and former employee claims, including $1.3 billion in deposits to System 2000 retirees in segregated accounts, $94 million in deposits to Act 1 and Act 447 retirement accounts, $16 million in labor-related payments and $5 million for the Pension Reserve Trust to be created to ensure retirees are paid.


About $8.2 billion will be given to pay debt-related claims, including $7.2 billion in cash to holders of GO and PBA bonds, and a $450 million cash consideration for Employee Retirement System bondholder creditors.


Today’s effective date also puts into effect several key pension provisions. The Pension Reserve Fund will be established to protect pensions and will have $10 billion over the next 10 years. There will also be zero cuts to benefits accrued through March 15 for teachers. Teachers Retirement and Judicial Retirement systems contributions stop today as they will be placed in a defined contribution plan.


About $1.5 billion will be deposited into Act 106 accounts to restore employee contributions previously made under System 2000 and lost interest for Act 1 and Act 447 participants. Teachers and judges under 45 and those 45 and over who elect, will all be enrolled in Act 106 defined contribution accounts with the first deposits to take place in April.


Shortly after the plan goes into effect, each American Federation of State, County and Municipal Employees/Public Servants United of Puerto Rico (AFSCME/SPU)-represented union leader and the secretary of each agency will execute new collective bargaining agreements to protect their employees.


Overall borrowing costs may decrease as Puerto Rico emerges from bankruptcy and risk premiums decline.


Officials said that by April or May they expect to be filing a new debt adjustment plan for the Highways and Transportation Authority. The government and the oversight board are on opposite sides of a dispute over toll hikes.


Regarding the debt adjustment plan for the Puerto Rico Electric Power Authority (PREPA), which was canceled earlier this month, Omar Marrero Díaz, who is Puerto Rico’s secretary of state and executive director of the Fiscal Agency and Financial Advisory Authority, said the government is pondering the idea of formulating a new plan that does not have a transition charge or impose any so-called taxes over self-generation.


“Yes, we are pondering that idea,” he said.


However, he added, the idea may be difficult to accomplish.


Meanwhile, time is running out. The judge overseeing the PREPA bankruptcy said officials must submit a new debt adjustment plan quickly after the existing agreement to restructure more than $8 billion in debt was axed.


U.S. District Judge Laura Taylor Swain instructed the oversight board last week to develop a plan, or a detailed plan outline, by May 2. Swain said she may consider dismissing the power authority’s entire court-supervised bankruptcy-like process, known as Title III, as well, for failing to show that a feasible plan can be put together in a timely fashion.


PREPA filed for Title III protection in 2017 alongside the commonwealth itself. Swain approved the commonwealth’s separate restructuring plan in January.


In 2019, PREPA and the oversight board made a deal with a group of PREPA bondholders, including BlackRock Financial Management, that would reduce the utility’s debt by up to 32.5%. It would have required new legislation to issue new bonds that would be backed by new charges to PREPA customers.


Gov. Pedro Pierluisi Urrutia’s decision to back out of the agreement followed longstanding opposition to such legislation by island lawmakers.


Meanwhile, Skeel revealed that there are several candidates vying for the position that will be left vacant by Jaresko in April. He declined to reveal possible names of candidates.


Marrero Díaz said the new debt adjustment plan for the central government puts Puerto Rico in a better position, as the other bankruptcies that are still pending are minor.

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