Charting a Course Out of Crisis

Puerto Rican officials on Wednesday unveiled details of a new five-year government restructuring plan that could help the U.S. territory meet at least some of its sizable $72 billion in outstanding debt.

The lengthy restructuring proposal lays the island’s options on the table, outlining tax overhauls, spending cuts, welfare and minimum wage reforms, municipal reorganizations and debt forgiveness from the island’s increasingly impatient bondholders.

Puerto Rican officials last month failed to meet the full amount of a scheduled $58 million debt repayment, in effect triggering one of the most significant municipal bond defaults in American history.

Bondholders were promised a thorough report detailing how the island planned to cut expenses and generate enough capital to repay investors. But investors’ initial reaction was decidedly underwhelmed as bondholders balked at the prospect of forgiving billions of dollars in outstanding debt.

“Governor Alejandro Garcia Padilla’s Fiscal Adjustment Plan lacks seriousness and sets up a false choice for policymakers: Either let him stiff bondholders or face a disorderly default,” the Main Street Bondholders group said in a statement Wednesday in response to the government’s proposal.

The plan spans nearly 80 pages, and many of its proposed solutions will need formal approval before being signed into law. U.S. News has scoured the report to pull out the four key takeaways you need to know.

1. Not all of Puerto Rico’s debt will be tackled

Puerto Rico’s plan to dig itself out of its debt hole is undoubtedly extensive, but it skips over the debts of two major public enterprises. Separate negotiations are underway to address the $25 billion in debts accumulated by Puerto Rico’s electric utility and water and sewer authority, so the spending cuts and financial gap focus explicitly on the island’s remaining $47 billion debt balance.

But even with that smaller debt pool, Puerto Rico would still face a cumulative fiscal gap of about $14 billion between 2016 and 2020, and that’s in a best-case scenario in which all of the report’s proposed changes are implemented and the island’s economy is actually able to grow at a consistent rate over the next several years ? a feat that’s only been achieved in one year out of the last 10.

“While the working group recognizes that a restructuring of the Commonwealth’s debt would result in hardship to individual bondholders, unless the persistent stagnation of Puerto Rico’s economy that has helped fuel the increase in government debt over the past decade can be reversed, the public debt is not sustainable,” the report said.

Padilla has referred to the $72 billion debt-load as “unpayable,” an idea that the new restructuring proposal seems to support. The report notes that “paying debt service as currently scheduled in the face of significant financing gaps could severely impair the commonwealth’s ability to provide essential services to its residents.”

Puerto Rican officials, in short, have said that they will side with their citizens if they absolutely have to choose between paying bondholders and providing basic assistance to the public.

“If creditors are not willing to partake in this process, Puerto Rico will have no alternative but to proceed without them,” Padilla said in a public address Wednesday. “It will force us to choose between paying a creditor, a teacher, a policeman or a nurse.”

2. Wide range of tools could close fiscal gap

The work group took a broad approach to cutting down the gap between its revenues and expenses, leaving few budgetary stones unturned. If implemented in full, the new plan would streamline the island’s corporate tax system, slash government subsidies, more efficiently manage health care costs and establish a policy control board.

Puerto Rico’s woefully low labor force participation rate would also be stimulated under the plan, thanks to a newly proposed earned income tax credit for families and a 10-year waiver from future minimum wage increases for workers 25 years old or younger, which is designed to “promote the hiring of young workers.”

Though the work group highlighted the need to tackle rampant tax evasion and create a more intuitive corporate tax plan, Padilla on Wednesday made it clear that he’s not particularly eager to raise local taxes as part of a potential debt solution.

“More taxes scare off investors and weigh on our middle class. They will fail to move us forward. Puerto Rico needs sustainable growth to secure the well-being of our people and pay our debt,” Padilla said.

If Puerto Rico stays the course without any kind of reform, the island will face a nearly $28 billion cumulative fiscal gap over the next five years. The proposed reforms could potentially cut that number in half.

3. Legislators’ approval still needed

The vast majority of the proposal needs some kind of legislative approval before Puerto Rico can start chopping away at its debts. Puerto Rican lawmakers will need to sign off on budgetary adjustments, and a handful of proposals will need to work their way through the U.S. Congress before they’re officially signed into law.

“As in any jurisdiction, Washington has a role in this effort,” Padilla said Wednesday, calling on Washington-based policymakers to bolster the island’s Medicare and Medicaid allocations and ultimately construct “a legal framework to meet the commonwealth’s obligations in an orderly manner.”

Politicians from New York Gov. Andrew Cuomo to GOP presidential hopeful Sen. Marco Rubio of Florida to Democratic front-runner Hillary Clinton have visited the island in recent days, though Puerto Rico hasn’t been granted the same attention on Capitol Hill. Congress has been reluctant to extend Chapter 9 bankruptcy filings to the U.S. territory. The Federal Reserve has likewise avoided getting involved.

“While some have suggested Washington can deliver a silver bullet solution to help Puerto Rico, the reality is that Puerto Rico’s leaders must lead and do the difficult but essential work of cutting spending, reining in out-of-control big government and eliminating job-killing policies, including scores of new tax increases,” Rubio wrote in an op-ed last week published on Medium.com.

4. Bondholders aren’t pleased

“This plan should be dead on arrival, and we urge Congress to first force a conversation on spending, which is the real root of Puerto Rico’s problems,” the Main Street Bondholders said in a statement Wednesday.

The group of bondholders issued a statement on Tuesday in which it addressed allegations that it would be “unjust and unrealistic” to hold Puerto Rico to its debts despite the hardship the island’s people would incur. The group said it was “astounding” that members of Congress would adopt such a mentality.

“Let’s be clear: Defaulting on seniors who have staked their retirement on bonds backed by Puerto Rico’s full faith and credit is unjust and unconstitutional,” the group of bondholders said Tuesday. “And we hope that Congress will oppose the governor and his team’s plan for doing so.”

The Main Street Bondholders are hardly the only group impacted by Puerto Rico’s debt crisis, and Puerto Rican officials are reportedly preparing to meet with a variety of debt-holding parties over the next few weeks to reach some sort of compromise. It’s as of yet unclear to what degree bondholding groups will be willing to play ball, but it’s clear that Puerto Rico isn’t planning on addressing its debts in full.

“It is the working group’s belief that a voluntary adjustment of the terms of the commonwealth’s debt … is the best way to maximize all creditor recoveries,” the report said Wednesday.

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4 Key Takeaways From Puerto Rico’s New Restructuring Plan originally appeared on usnews.com