MIAMI — Puerto Rico received approval from a federal judge on Tuesday to leave bankruptcy under the largest public-sector debt restructuring deal in the history of the United States, nearly five years after the financially strapped territory declared it could not repay its creditors.
Since Puerto Rico entered bankruptcy, its economic crisis has only been further deepened by Hurricanes Irma and Maria, a series of earthquakes and the coronavirus pandemic.
The restructuring plan will reduce the largest portion of the Puerto Rico government’s debt — some $33 billion — by about 80 percent, to $7.4 billion. The deal will also save the government more than $50 billion in debt payments.
And, though at a discount, Puerto Rico will start repaying creditors, something it has not done in years. The government said in 2015 that it could no longer pay its loans.
“Today is truly a momentous day, and it is a new day for Puerto Rico,” Natalie A. Jaresko, the executive director of the oversight board that has overseen Puerto Rico’s finances since 2016, said a virtual news conference on Tuesday afternoon. “This period of financial crisis is coming to an end.”
The unelected board, which was created by Congress, is far from well loved in Puerto Rico, where many of the island’s more than three million people refer to it as “la junta.” Critics worry that Puerto Rico will not have enough money in its general fund to make even the reduced debt payments over the long run, eventually forcing more painful economic cuts.
When the territory entered bankruptcy in May 2017, it had more than $70 billion in bond debt and more than $50 billion in unfunded pension obligations to public workers. The bankruptcies of other public entities, including the Puerto Rico Electric Power Authority, remain unresolved.
“The agreement, while not perfect, is very good for Puerto Rico and protects our pensioners, university and municipalities that serve our people,” Gov. Pedro R. Pierluisi said in a statement. “We still have a lot of work ahead of us.”
The scale of Puerto Rico’s bankruptcy was unlike anything seen before in the United States. The territory had more than $120 billion in debt and pension obligations, far exceeding the $18 billion bankruptcy filed by Detroit in 2013.
Judge Laura Taylor Swain of the Federal District Court for the Southern District of New York, who presided over the Puerto Rico bankruptcy case, noted in her findings on Tuesday that some creditors objected to the restructuring plan. But she also wrote that the plan would “enable the commonwealth to provide future public services and remain a viable public entity.”
Judge Swain held lengthy hearings over the plan in November, including some in San Juan, the Puerto Rico capital. Protesters gathered outside the federal courthouse when the hearings began.
On Tuesday, Julio López Varona, an activist and interim campaign manager for the Center for Popular Democracy, a left-leaning advocacy organization, attacked the deal as terrible for average Puerto Ricans.
“We’re talking more budget cuts, more compromising our services and potentially rate hikes like the ones we’ve seen for the last 10 years,” he said, referring to Puerto Rico’s very high electricity rates. “We know it’s an unsustainable deal. Many, many economists have said Puerto Rico is not cutting enough debt. It’s a recipe for disaster.”
José Caraballo-Cueto, an economist and associate professor at the University of Puerto Rico, says that when a federal law giving foreign companies a tax incentive to operate on the island stops at the end of the year, it will result in less money for the government’s general fund.
“What’s happening to the general fund will translate to more austerity measures to essential services or higher taxes to make the payments,” he said.
The oversight board pushed back hard against those arguments on Tuesday, forcefully defending the restructuring plan, which says the government has enough to make debt payments through 2034. David A. Skeel Jr., the board’s chairman, said that the plan was long and complicated and that many of its critics have most likely not read it.
“This is absolutely sustainable,” he said. “It’s not going to lead to more cuts. I really think there’s a lot of misimpression out there.”
An earlier deal had been struck in early 2020, but it had to be reworked after the coronavirus pandemic wreaked havoc on Puerto Rico’s frail economy, which in recent years has relied heavily on federal tax breaks and disaster relief funds. Hurricane Maria hit just days after Hurricane Irma in 2017, devastating the island.
Activists and elected officials did notch a big victory in the debt restructuring negotiations late last year when the oversight board backed away from plans to cut pensions for retired teachers and other government workers. That proposal was dismissed out of hand by Puerto Rico politicians. Many Puerto Ricans feared that such cuts would exacerbate poverty among older people.
Johnny Rodríguez Ortiz, who spent 31 years working for the power company, now spends every Wednesday morning protesting outside the company’s headquarters. He fears that the company’s bankruptcy proceedings may cost him his pension.
“The only path they left us is poverty or to struggle in the streets,” said Mr. Rodríguez, 73, of the town of Sabana Grande, in southwestern Puerto Rico.
Critics have also demanded an audit of how the large debt was incurred and demanded that those responsible face prosecution or other accountability.
But for all of the controversy the restructuring plan has stirred on the island, it has also charted a way forward — albeit not necessarily an easy one — after years of debt limbo.
“The restructuring plan will give Puerto Ricans a level of certainty of how much the island will have to pay annually and allow us to create effective economic policy,” said Heriberto Martínez Otero, the executive director of the Ways and Means Committee of the Puerto Rico House of Representatives.
The plan, he added, also “starts the countdown” to the exit of the oversight board. Frustration about the board’s power was so intense that when angry Puerto Ricans took to the streets to oust Gov. Ricardo A. Rosselló in 2019, they often chanted, “¡Ricky, renuncia, y llévate a la junta!” — Ricky, resign, and take the board with you. (Mr. Rosselló resigned. The board remained.)
To do away with the board, Puerto Rico must balance budgets for four consecutive years and meet other requirements, such as obtain access to the credit market at reasonable rates.
“So at the very least, the board will be around for at least three more years,” Mr. Skeel said. “It may be a bit longer than that.”
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