The Fiscal Oversight Board (FOB) has approved the Restructuring Support Agreement (RSA) for the Government Development Bank (GDB). This is the first voluntary Title VI debt restructuring agreement under PROMESA. The FOB certified the RSA, with additional conditions that have yet to be made public. Implementation of the agreement is subject to the enactment of a separate public corporation that would absorb the GDB’s “healthiest assets” and repay creditors. The “healthy assets “would serve as collateral for new bonds, which would carry haircuts from 25% to 45%. Interest rates would vary between 3.5% to 7.5% The higher the haircut, the higher the interest rate.
The agreement is a relief for local credit unions, whose balance sheets are heavily reliant on GDB notes. Municipalities with large deposits in the GDB will suffer some losses, although the extent of such losses remains unclear. The situation for municipalities is complicated: while their outstanding GDB loans will serve as part of the healthy assets for the new bond series, nonetheless their deposits will be cut substantially.
Population loss stands to worsen, soon surpassing 1950s “Great Migration”
Puerto Rico has lost a total 15% of its population over the last ten years, an estimated average of 90,000 per year since 2006. If current trends continue, the growing migration will surpass the “Great Migration” that began in the 1940‘s and ended in the 1960‘s. Dr. Mario Marazzi, Director of the Puerto Rico Statistics Institute, presented the latest demographic data at a U.S. Senate briefing on the Island’s “Medicaid cliff”, including dates in early 2018 when Puerto Rico’s Medicaid funding stands to be dramatically reduced from $1.6 billion per year to $400 million. Dr. Marazzi and other experts argued that without a Congressional Medicaid fix, outmigration will drive-up healthcare costs in Florida, Texas, and other states. Experts noted that it costs 3 to 4 times more to treat patients in most U.S. states than it does in Puerto Rico.
Municipalities face imminent fiscal crunch
One of the most significant requirements of Puerto Rico’s Fiscal Plan is a $350 million cut in Commonwealth funding to local governments, a reality that Puerto Rico’s 78 municipalities are now facing at the start of a new fiscal year. Many municipalities are eyeing user fees (i.e. trash pickup) and reduced working hours as options to deal with the funding shortfall. The Puerto Rico Manufacturers Association warned municipalities against an increase in taxes, fearing that such a move would result in further economic contraction.