With PAD locked in, steps taken to prevent another fiscal crisis
By The Star Staff
As a debt adjustment plan (PAD by its Spanish acronym) for the central government went into effect Tuesday, the government also put in place provisions that seek to prevent another fiscal crisis and ban certain entities from issuing bonds.
Secretary of State Omar Marrero Díaz, who on Tuesday was acting governor, said Puerto Rico may not be able to incur in new debt through bond issues unless they are aimed at financing capital projects. Financial Oversight and Management Board Executive Director Natalie Jaresko said Puerto Rico may not be able to sell bonds in the markets unless it presents all of its audited financial statements. The last audited statement produced by the island government is from 2018.
Besides the restructuring of the central government debt, which was reduced from $33 billion to $7 billion, the government restructured its Puerto Rico Sales Tax Corp. (COFINA) debt as well as the debts of the Government Development Bank, whose $5 billion in debt was reduced to about $3 billion, and the Puerto Rico Aqueduct and Sewer Authority debt, whose debt service payments were reduced.
In 2020, the government enacted the Puerto Rico Debt Responsibility Act, which established a debt management policy to help prevent future debt problems. For instance, long-term debt can only be used for capital improvements, long-term debt or bond issues must be limited to 30 years, and the principal of debt backed by taxes must be repaid two years after the issuance.
“Debt is not going to be issued to finance the deficit or to balance the budget with cash,” Marrero Díaz said at a press conference. “That is prohibited. To issue debt, provision is made for capital improvements. And even the principal of that debt has to be paid off in the first two years immediately.”
He noted that “clear restrictions are placed on how and when debt can be issued to guarantee that those practices that were done in the past do not happen again.”
Marrero Díaz said there will be new economic restrictions for some government agencies that will not be able to issue bonds as part of the PAD that is now in force. The debt limit was also reduced.
“The new social contract requires that no administration exceed what is a new debt limit of 7.94 percent. That’s the new debt limit,” Marrero Díaz said. “We are currently going to be at 6.5 percent. However, we do not foresee the need to issue debt.”
The agencies that will not be able to issue debt again are the Infrastructure Financing Authority, the Convention Center District Authority, the Public Buildings Authority, the Public Finance Corp. and the central government retirement system.
“Those entities that issued debt and that had outstanding bonds, that were restructured or canceled as part of this adjustment plan, will no longer be able to issue debt,” Marrero Díaz said.
In addition to reducing the total amount of central government debt, the new PAD reduces annual debt service (what Puerto Rico will have to repay annually in principal and interest on central government and COFINA debt) from $4.2 billion to $1.15 billion, which represents a reduction of 73 percent.
Meanwhile, that transaction involves reducing the ratio of debt to gross product from 101 percent to 53 percent. In addition, the restructuring of the debt promotes the climate of investment and opportunities by eliminating the uncertainty caused by the bankruptcy, and in turn, restores investors’ confidence in Puerto Rico, and directs the return of the island to the capital markets, Marrero Díaz said.