Long before Hurricane Maria hit in 2017, Puerto Rico was an economic mess. Stumbling under more than $70 billion in debt and billions in more in uncovered pension obligations, the U.S. territory has been struggling to keep the lights on, the trash picked up and police departments functioning.
Hundreds of thousands have headed to the mainland, particularly Florida, to escape a 13-year recession — an exodus that has kicked into high gear since Maria.
On Friday, a federally appointed commission presented a plan that hopes to reverse that trend and put the island on firm financial footing for the first time in decades.
The Financial Oversight and Management Board unveiled a proposal to restructure $35 billion in debt held by the island and the more than $50 billion in pension liabilities. In the process it’s asking bondholders to take steep discounts and retirees to have their pensions cut.
If the plan wins court approval, it would reduce the amount Puerto Rico spends to service its debt to about 9 percent of the island’s annual revenue. Before the federal government stepped in, in 2016, the island was spending about 30 percent of its revenue solely to pay its debts.
“Today we have taken a big step to put bankruptcy behind us and start envision what Puerto Rico’s future looks like under fiscal stability and economic sustainability,” José Carrión, the Oversight Board’s Chairman, said in a statement. “Two years after the most severe Hurricane in more than 100 years hit Puerto Rico, after more than a decade of economic decline and fiscal disarray, after tens of thousands of Puerto Ricans left their island to find prosperity elsewhere, we have now reached a turning point.”
Under the proposed plan, holders of Puerto Rico’s General Obligation bonds and Public Building Authority bonds issued before 2012 would be hit with penalties of 35 percent and 28 percent, respectively. Holders of Employee Retirement System bonds would take an 87 percent reduction, according to the board.
For those holding Puerto Rican debt issued after 2011 – debt that has been challenged as unconstitutional because it violated the island’s own debt-limit rules – the board is recommending penalties ranging from 42 percent to 65 percent.
In addition, public sector retirees who receive more than $1,200 a month would see their pensions cut by 8.5 percent.
While the Financial Oversight Board had reached agreements with a broad swath of bondholders, there’s likely to be pushback. Wall Street firms have taken the island to court over failure to pay its debts, but many of the bondholders are average Puerto Ricans, people who depended on income from the bonds for their retirement.
In a national address, Gov. Wanda Vazquez said she was generally opposed to pension cuts but said turning down this deal would be an even greater risk —including pension reductions of up to 25 percent. She also said the deal would likely be amended repeatedly before it wins final approval.
And she said the deal reduces the government’s debt obligation by about 65 percent.
“I’m confident that at the end of this process, Puerto Rico will recover its financial autonomy and be on its way to economic recovery,” she said.
The debt plan comes as the U.S. Census this week shed more light on Puerto Ricans heading to the mainland.
In 2018, the island lost about 4 percent of its population, as 133,500 people moved to the continental U.S., the Census said.
Of those, 33.5 percent moved to Florida — more than anywhere else — followed by Pennsylvania, Texas and New York.
The Census also found that the poverty rate on the island decreased by 1.3 percentage points in 2018, to 43.1 percent. Even so, it’s a staggering number. The poorest state on the U.S. mainland is Mississippi, which had a poverty rate of 19.7 percent.
It’s unclear if Friday’s deep restructuring will help turn the tide. But the Oversight Board said deep reforms are needed.
When it began its work in 2016, “Puerto Rico’s government and public corporations… had amassed more than $70 billion in debt they could not pay and owed Puerto Rican retirees over $50 billion in unfunded pension benefits,” the Oversight Board said in a statement. “The Puerto Rico government alone had to spend almost $3 of every $10 dollars in tax revenue just to service its debt.”
The announcement comes amid unprecedented turmoil on the island. Gov. Ricardo Rosselló stepped down on Aug. 2 after mass protests erupted as some of his cabinet were indicted for corruption and messages from a vulgar chat group he participated in were leaked.