The deal presented to Judge Laura Taylor Swain today to renegotiate the obligations to be paid out under COFINA bonds is in retrospect an extremely generous offer in comparison to the negotiations made for the much relevant bankruptcy of the City of Detroit. Puerto Rico and Detroit hold many similarities, for one is high obligations under public pensions funds and perhaps the most significant is a diminishing population, hence a decreasing tax base. According to Lyman Stone, the Financial Oversight Management Board demographer, Puerto Rico’s population will dwindle to 2 million by 2050. Wheither or not this is an accurate statistics, there’s no question that the island’s long term outlook seems very dim. The current consideration of the PROMESA negotiations doesn’t take into consideration the economic reality of Puerto Rico and assumes that there will be an infusion of federal funds of which President Donald Trump has stated publicly will not happen. Given the current administrations view towards Puerto Rico, it is reasonable to predict that previously approved funds that were earmarked for island will not materialize, or at least not in its entirety.
Although she stressed that several of the accusations that the court has received regarding the renegotiation of the debt of the Fund of Interest-Capping (COFINA) are “serious,” the federal district judge, Laura Taylor Swain, concluded on Tuesday that The Board of Fiscal Supervision (JSF) did enough to inform the bondholders of that entity about the process that has been followed and that seeks to modify this claim in light of the provisions of the federal PROMESA law.
The decision of Swain supposes a backing of the court to the seven months of negotiations between the Coalition of Main Bonds of COFINA, municipal insurers, the government of Puerto Rico and the JSF, as well as to the mechanism of agents that the federal agency made viable a year ago. Such negotiations, which took place since March of this year in the context of the mediation process that Swain established, resulted in a pact that, if consummated, would cut approximately 28% of the principal debt owed under COFINA, compared to a reduction of 38% in Detroit, which the city later had to revisit when they found themselves strapped for cash once again. This is an extremely generous offer, especially since this sets presidence for future negotiations of the other general obligations bonds yet to be negotiated. In a more favorable manner, if the adjustment plan is finally approved by the court in January, it would transfer part of the Taxes on Sale and Use (IVU) which is currently reserved for COFINA’s bondholders to the General Fund. This will rectify in part some of sins of the past, in the government’s and hedge fund’s creative and shady avenues to insure unsustainable borrowing practices.
Under the initial negotiations in Detroit which proved to be insufficient in providing relief for the City to recover, bond holders received between 74 cents and 14 cents on the dollar. The current offer for Puerto Rico bond holders is offering between 93 cents and 54 cents on the dollar. Still to this date, Detroit is facing a struggling economy that continues to decline. No doubt the lessons from Detroit should not be ignored as Puerto Rico faces this trial time. More over when false representation was perpetuated during the sale of bonds by individuals and companies that continue to operate today, like in the most obvious case of the Oppenheimer Municipal Funds. It would seem more appropriate to reconsider the adjustment to institutions who failed in their ethical responsibilities in providing investors realistic risks outlooks, and appropriately managing investor funds. Holding them directly accountable to a more significant lost as compared to individual investors. The fact that institutions that have deep pockets and can afford to pay for continuous representation are afforded special privileges demonstrates how broken and disconnected this process is from reality.
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