Gov’t officials give House panel the backstory on PREPA debt crisis
By The Star Staff
Officials from the Fiscal Agency and Financial Advisory Authority (AAFAF by its Spanish initials), Office of Management and Budget, and Treasury Department made explanatory presentations to the Treasury Committee of the island House of Representatives, which through House Resolution (HR) 563 is investigating the justification and legality of Puerto Rico Electric Power Authority (PREPA) bond issues dating from March 26, 2010 to April 12, 2012.
“Our goal is to understand each of the issuances that were made, the money that was borrowed, the use that was made of it, and the reasons why the Authority fell into a situation where it cannot pay a large part of its debt,” Treasury Committee Chairman Jesús Santa Rodríguez said.
In his presentation, Jean Peña Payano, special adviser to AAFAF, detailed a report commissioned by the Financial Oversight and Management Board to the firm Kobre & Kim LLP, which independently investigated the factors that influenced the fiscal crisis as well as in matters related to the issuance of Puerto Rico public debt. That research was published on Aug. 20, 2018.
“The report indicates that the crisis that began in 2006 required the implementation of long-term measures that would promote the economic development of the island,” Peña Payano said. “However, the central government and the Government Development Bank [GDB] resorted to the debt markets for short-term solutions.”
“With these short-term solutions, certain public corporations, including PREPA, incurred billions of dollars in debt,” the AAFAF official added.
Peña Payano stressed that “the GDB allowed these entities to subsist on transfers from the General Fund, short-term transfers from the GDB and debt issues, instead of making them responsible for their debts, ensuring that they received sufficient income to pay that debt and demand fiscal responsibility.”
As can be deduced from the AAFAF, to the extent that the level of debt of these entities increased significantly, the accrediting agencies lowered the credit ratings to the point of declaring the debt of certain government entities as junk in 2014.
Meanwhile, Peña Payano highlighted other factors that had a negative influence on PREPA’s operations and helped cause its fiscal crisis.
“Regarding the dependence on oil and the difficulties in transitioning to energy production with natural gas, the [Kobre & Kim LLP] report highlights how partisan politics influenced the failed projects of the Gasoducto del Sur and Vía Verde,” he said.
In both projects, despite their not materializing, PREPA invested tens of millions of dollars, the AAFAF official noted.
“In that sense, having completed the construction of any of the projects would have meant the significant substitution of oil with natural gas,” Peña Payano said.
“Other factors that had a negative influence were the excess of trust employee positions, constant personnel changes, costs of benefits to employees being much higher than other government employees, and the lack of continuity in capital projects,” he highlighted.
At the same time, the AAFAF adviser said, for many years PREPA’s governing board set the price of the cost of energy, leaving the fixed rate unchanged from 1989 to 2016.
“PREPA needs a structural reform that produces a better use of the funds it receives and separates from its operation the factors that have historically prevented it from being self-sufficient,” Peña Payano said.
On March 8, Gov. Pedro Pierluisi Urrutia announced that he will cancel the restructuring plan for PREPA.
“As we all know, the governor is asking us to sit down to negotiate and reach new agreements,” said Rep. José “Cheito” Rivera Madera, who authored HR 563. “This is a new Legislature that did not participate in the agreement that was made in 2019, and that is why we want to have all the details to improve and not pay others a debt that 90 percent does not belong to Puerto Ricans and, yes, [does belong] to corporations on Wall Street.”