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“If we build labor reform, the jobs will come” might be a guiding principle of the Financial Oversight & Management Board (FOMB), inspired by economists of the IMF ilk, but Puerto Rico’s path to sustainable economic growth is predicated on a far more complex formula, according to an editorial in Caribbean Business. The most recent touting of the importance of labor reform for Puerto Rico came during an ABI podcast between ABI Executive Director Sam Gerdano and economist Andrew Wolfe, who serves as the economic adviser to the FOMB. Wolfe, a former director of the Western Hemisphere Department with the International Monetary Fund (IMF), is well-acquainted with a Puerto Rico economy hobbled by mammoth debt; he helped draft “Puerto Rico: A Way Forward,” along with former IMF Managing Director Anne Krueger and IMF colleague Ranjit Teja. The document, akin to a 12-step program for an island addicted to debt, breaks down the maladaptive tendencies of Puerto Rico’s government — a compulsion to overspend while issuing bonds to fund gaps jumps from those pages — that now has Puerto Rico owing some $70 billion to the creditor mob. A Path Forward is chock-full of recommendations that the fiscal control board is trying to implement, the most contentious among which is the rescinding of Law 80, which would eliminate protections for private-sector employees, making Puerto Rico an “at will” labor jurisdiction similar to Florida, according to the editorial. Wolfe stressed the importance of labor reform to attract investors to set up shop in Puerto Rico, thus creating much-needed jobs. Puerto Rico, which currently has a 38 percent labor-participation rate, now ranks among the 20-worst jurisdictions on the jobs front. Only a few nations torn by war, rank lower. Although this the editorial believes in labor-reform measures that lead to job creation, it does not think that there is a conga line of companies chomping at the bit to set up shop in Puerto Rico if Law 80 is rescinded. No, it is doubtful companies would come to Puerto Rico when the broken and bankrupt power grid has become the global poster child for inefficiency and lack of reliability, according to the editorial. Read more. 

Click here to listen to the ABI podcast. 

The bill passed to privatize the Puerto Rico Electric Power Authority (PREPA) does not address the utility’s fate under the bankruptcy process and would create a public energy measure separate from the utility’s proposed integrated resource plan (IRP) that is due in October, Caribbean Business News. As a matter of fact, Siemens, the company hired to create the IRP, which is PREPA’s blueprint for the use of resources for the coming years, began hearings and meetings to receive feedback on the document, which some stakeholders described as a trampled and confusing process because they were not provided any background or information on which to base their opinions. Ramón Luis Nieves, San Juan’s former Popular Democratic Party senator, who is now a lawyer in private practice, said the privatization bill does not even discuss the bankrupt utility’s $9 billion debt. If enacted, the legislation would create a working group that must produce a document within 180 days to define the island’s energy public policy and its regulatory framework. While the government will be able to ascertain the market in which to sell PREPA, the Puerto Rico Energy Commission (PREC) must certify that the sale’s contracts comply with the documents created by the working group.

A group of holders of Puerto Rican general obligation bonds said it is not ready to support a proposed deal to settle a key dispute in the U.S. territory’s $120 billion bankruptcy, Reuters reported. In a Monday filing in Puerto Rico’s bankruptcy court, the ad hoc group of GO bondholders, whose debt is constitutionally guaranteed, said parts of the proposed settlement “are simply unlawful.” Puerto Rico owes $120 billion in total debt, including about $71.5 billion in bond debt. Its two biggest debt classes — a combined $36 billion or so — are constitutionally-backed GO debt and debt issued by its sales taxing authority, COFINA. GO and COFINA holders have long debated whether the island’s sales tax revenue is property of the island’s commonwealth government — and therefore can be used to pay GO debt — or property of COFINA, which could only be used to repay COFINA bonds.

Puerto Rico sales-tax-backed bonds rallied after a tentative agreement struck in the island’s bankruptcy promised to steer a large share of that revenue to owners of the securities, leaving them facing smaller losses than investors previously anticipated, Bloomberg News reported. The details of the pact between two court-appointed agents, disclosed in a filing late Thursday, show that owners of the bonds would get just over half of the future sales-tax revenue they’re currently entitled to each year. They would also get all of the $1.2 billion of revenue that’s been frozen in a reserve account until the bankruptcy court decides who has a right to the money. The deal, if ultimately approved, would resolve a key dispute in the island’s record-setting bankruptcy, where creditors have been fighting over who has the highest claim on the government’s tax collections. The arrangement could leave owners of the most senior sales-tax bonds, known as Cofinas, paid in full.

Representatives for holders of Puerto Rico’s general obligation (GO) bonds and “COFINA” bonds, whose debt is backed by sales tax revenue, reached an in-principle agreement to settle a long-running dispute, according to a court filing yesterday, Reuters reported. The bondholders, who together own about half of bankrupt Puerto Rico’s $71.5 billion in bonds, have spent years disputing which group has the valid claim on revenues from the U.S. territory’s sales tax. In May, a proposed settlement that would have split the revenues roughly evenly was snubbed by the federally appointed oversight board that manages Puerto Rico’s finances, which called it “completely unaffordable.” As of last night, the board had not made a statement on the latest agreement. Puerto Rico owes about $18 billion each in general obligation and COFINA debt.

The closing of 167 public schools in Puerto Rico a year ago seemed drastic, a painful casualty of a deep and prolonged debt crisis. Then came Hurricane Maria, and now Puerto Rico plans to shutter another 265 schools, an even harsher measure following a calamitous natural disaster that exacerbated the island’s financial woes, the New York Times reported. As hurricane season officially began again on Friday, Puerto Rico was set to finish the school year with the doors permanently locked on more than a third of its schools. Driving the latest round of closings is a sharp drop in student enrollment that began during the economic recession and worsened after the hurricane, as thousands fled the island. Compounding the problem: Doing away with schools could prompt even more Puerto Ricans to leave. Read more. 

Recent economic developments in Puerto Rico were the topic of a recent ABI Podcast. Click here to listen. 

ABI Executive Director Sam Gerdano talks with Prof. Andrew Wolfe of American University's School of International Service about Puerto Rico's latest fiscal developments. Wolfe is currently an advisor to the government of Puerto Rico since retiring in June 2014 from the International Monetary Fund after 27 years, where he was a senior manager of the Western Hemisphere Department. Wolfe, co-author of the "Puerto Rico — Way Forward" report written in 2015, discusses Puerto Rico's current fiscal challenges and potential strategies for the commonwealth's recovery. Click here to listen.

Bond insurer Assured Guaranty sued Puerto Rico and its federally-appointed oversight board yesterday, saying their plan to resuscitate the storm-ravaged, bankrupt U.S. territory violates the U.S. Constitution by stripping creditors of property rights, Reuters reported. Assured, which insures $5 billion of bonds issued by Puerto Rico and its public agencies, wants a federal court in Puerto Rico to declare invalid a fiscal turnaround plan that sets future economic projections for Puerto Rico. The projections are meant to form the basis for debt restructuring talks between Puerto Rico and holders of $71.5 billion in debt the island cannot pay. Assured expressed frustration over the plan last week, telling the board in a letter the projections had been reached without creditor input.