PROMESA Has Failed: How a Colonial Board Is Enriching Wall Street and Hurting Puerto Ricans
PROMESA fracasó: Cómo una junta colonial enriquece a Wall Street y le hace daño a Puerto Rico
2021 marks the five-year anniversary of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which created a legal framework for restructuring Puerto Rico’s $74 billion debt and established the Financial Oversight and Management
Board (the Board).
Although Congress passed PROMESA to provide much-needed relief to Puerto Rico in the midst of a crushing debt crisis, the Board has used its power to impose devastating austerity measures and negotiate unsustainable debt restructuring plans that enrich Wall Street and hurt Puerto Ricans. These two approaches both stunt economic development and growth, and make it very likely that Puerto Rico’s debt will soon become unsustainable again. The unelected and unaccountable Board has failed to deliver on PROMESA’s key mandates of representing the interests of Puerto Rico in the debt restructuring proceedings, and helping Puerto Rico achieve balanced budgets and regain access to capital markets.
Since 2006, Puerto Rico’s residents have suffered a protracted economic recession. In recent years, the island has been battered by a series of natural disasters as well as the COVID-19 pandemic. Throughout this devastating series of natural and public health crises, the Board has continued to push fiscal plans that: 1) impose harmful austerity cuts, 2) ensure hefty payments to bondholders and Wall Street firms, and 3) take advantage of federal disaster relief funds to secure larger payouts for Wall Street bondholders.
Under the Board’s watch, Puerto Rican communities are contending with decimated public services, limited resources to rebuild their homes and businesses, and a struggling economy that cannot support them. During its tenure, the Board has privatized the publicly-owned
power grid and pushed rate hikes on utility customers; weakened labor protections for workers; imposed massive cuts in education funding and over 250 school closures; proposed cutting pensions for public sector workers by 8.5%; imposed significant cuts to healthcare and the state-run Medicaid program; and narrowed eligibility for vital food assistance programs. These austerity measures are being imposed on communities that already face an enormous degree of economic precarity. Over 43% of the island lives in poverty, one-third of the island’s residents are food insecure, and the unemployment rate is consistently nearly double that in the United States.
While the Board forces sweeping service cuts on residents of Puerto Rico, it is leading a debt restructuring process projected to cost a total of $1.6 billion through 2026, the entirety of which is funded by Puerto Rican taxpayers. To make matters worse, several Board members appear to have significant conflicts of interest, raising questions about whether members of the Board are truly acting in the best interests of Puerto Rico. Indeed, the overwhelming sentiment amongst those on the island and the diaspora is that the Board represents an extreme and undeniable manifestation of the colonial relationship between the United States and Puerto Rico.
In the years before PROMESA became law, Wall Street predation was a driving factor in Puerto Rico’s debt spiral. The banks that underwrote Puerto Rico’s bonds did not merely enable its borrowing spree; in many cases they targeted the island with unsustainable levels
of debt that they knew it would not be able to pay back, all in order to pad their profits. Puerto Rico was subject to a host of predatory Wall Street financial instruments, including capital appreciation bonds (CABs) and toxic swaps. This allowed banks like Santander, Wells Fargo, Goldman Sachs, and JPMorgan Chase to close more deals and collect more fees, while making Puerto Rico’s debt portfolio significantly riskier and more costly. In fact, a large portion of Puerto Rico’s debt isn’t debt at all; it is unpaid interest on CABs—the municipal version of a payday loan. Additionally, a staggering $6 billion of Puerto Rico’s general obligation (GO) debt was allegedly issued illegally, as it violated Puerto Rico’s
constitutional debt limit.
Rather than rein in Wall Street speculation, the unelected Board has overseen a slow and expensive debt restructuring process using a bevy of high-paid consultants and lobbyists. In some cases, their restructuring plans have proposed awarding hedge fund creditors close to the full amount of their investment even though they bought bonds at steep discounts, while at the same time seeking to cut 80% of the payments owed to local small businesses, public
sector workers, and individuals who won civil rights claims against the government. These deals are a boon to Wall Street speculators but fail to provide fiscal and economic stability for the island. The Board’s debt restructuring plans are unsustainable and, even based on the Board’s own estimates, would result in deficits as early as 2036.