Academic journal article Centro Journal

The Economics of PROMESA

Academic journal article Centro Journal

The Economics of PROMESA

Article excerpt

The Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) was enacted by Congress and signed into law by President Barack Obama on June 30, 2016. At that time, Puerto Rico's public debt was over $74 billion, not including nearly $50 billion in public pension obligations, and its economy was in a prolonged recession that resulted in massive migration to the U.S. and a steady decline in the island's population. These factors in turn resulted in a sizeable decline in tax revenues and associated austerity measures. The unemployment rate in Puerto Rico remained more than double the U.S. national average, only about four of ten adults participate in the labor force, and nearly half of the population lived in poverty-a rate substantially higher than any state. In this context, Hurricane Maria landed in Puerto Rico in September 20, 2017. And, according to the 2018 Fiscal Plan, the hurricane caused an estimated "over $80 billion in damages, and is projected to cause a real decline to GNP of 7.4 percent in FY18."

The debt restructuring of Puerto Rico became the largest debt restructuring by a governmental unit in the history of the United States. From the U.S. Congress's perspective, extreme circumstances called for extreme measures. PROMESA created the Financial Oversight and Management Board for Puerto Rico (the "Oversight Board") to oversee the territory's finances "to achieve fiscal responsibility and access to the capital markets."1 One of PROMESA's main goals, is to restore Puerto Rico's access to credit markets under favorable terms. In 2014, Puerto Rican bonds were downgraded to non-investment grade (better known as "junk status") by three bond credit rating agencies.2 To achieve these overarching goals, PROMESA has three core policy components intended to address interrelated aspects of the fiscal and economic crisis:

* Authorizing a legal framework for the restructuring of Puerto Rico's public debt;

* The establishment of a fiscal control board to oversee public finances and establish a Fiscal Plan and corresponding annual budgets (including payment of substantial unfunded pension obligations); and,

* Enabling and expediting economic development projects, especially as they relate to energy and infrastructure.

The Oversight Board created under PROMESA is constituted by seven members appointed by the United States President and has control over Puerto Rico's finances through its budget setting authority that supersedes local law.3 To make viable the restructuring of the debt, PROMESA granted a stay on debt services until May 1, 2017. Shortly after this deadline expired, the Oversight Board extended the debt moratorium by filing for bankruptcy on federal court on behalf of the Commonwealth of Puerto Rico. Yet, Congress acted on the premise that the legislation was not a "bailout" to bondholders or Puerto Rico and enacted a law that did not include stimulus policies or funding for the economic recovery of the island (Schroeder and Lane 2016). Considerations for federal policies to support economic development was delegated to a Congressional Task Force on Economic Growth in Puerto Rico (the "Task Force") created by PROMESA to make recommendations to Congress. To date, Congress has not acted on those recommendations.

PROMESA's promise was as simple as it was powerful: Puerto Rico's fiscal and economic house would be put in order without spending one penny of federal money-avoiding a so-called "bailout." But has PROMESA kept its promise? The main goal of this paper is to evaluate PROMESA as a policy intended to stabilize the commonwealth's finances. The analytical question examined in this study is whether the core components of the act are sufficient to achieve the act's stated goals of restructuring the government budget (and by implication operations) to achieve balanced budgets consistently, and to restore Puerto Rico's access to credit markets under favorable terms through debt restructuring. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.