Let’s stop the predatory lenders from draining Puerto Rico even further
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Earlier this month, in its first meeting in Puerto Rico, the Federal Oversight Board, which Congress empowered to assume control of Puerto Rico’s finances following a lengthy legislative battle, unanimously rejected outgoing Governor Alejandro Garcia Padilla’s Fiscal and Economic Growth Plan for the Commonwealth.

The move was unsurprising given the governor’s lame duck status and the fact that the plan provided little in the way of substantive reforms. Instead, the plan relied heavily on generous growth projections and unlikely boosts in federal healthcare subsidies to return Puerto Rico to solvency. Nevertheless, it was noteworthy in how strongly board members, nearly to a man, condemned the proposal, with Chairman Jose Carrion calling it a “missed opportunity.”

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Indeed, much of the nearly six hour-long marathon meeting was devoted to reinforcing just how grim the Commonwealth’s fiscal picture really is.

Given the severity of the situation and the momentous nature of the task at hand, it is surprising that more time wasn’t devoted to a singular fact: nearly all analytical work done on the island’s finances, including the Conway Mackenzie report and the outgoing governor’s FEGP, omits billions in current and future sales tax revenue that should be on the table in crafting a path forward for Puerto Rico.

Every year, the Puerto Rican Government sets aside hundreds of millions in sales tax revenue and diverts it into a trust set up to pay off bondholders of COFINA, a public corporation created in 2006 for the sole-purpose of issuing bonds backed by the island’s sales tax. In 2015, that number amounted to nearly $700 million, and the Commonwealth is slated to pay more than $50 billion in additional sales tax revenue to COFINA holders over the remaining life of the bonds. This money, collected from Puerto Rican taxpayers, will never be used to provide services for Puerto Ricans. Instead, it flows directly to investors, many of which are speculative, Wall Street-type hedge funds.

COFINA is a public corporation that does not actually provide any services, it was set up merely to give the far over-leveraged Puerto Rican Government a vehicle to issue new debt without having to worry about the island’s 15 percent constitutional debt limit, and has been described as both “extra-constitutional” debt by the Puerto Rican government itself and the equivalent of a municipal payday loan scam by some experts.

As noted by a former FDIC chair last year, this arrangement has always been dubious, but in the face of fiscal crisis the COFINA structure is truly an absurdity. While every other Puerto Rican bond is in default, and the Puerto Rican people are told to brace for severe cuts to government services, the government continues to pour hundreds of millions of their tax revenues into the COFINA trust for the payment of a small group of predatory lenders. It makes no sense that a special group of bondholders should continue to profit while the Puerto Rican people are left with nothing, and plunged into austerity.

This puts both the Puerto Rican people and the Oversight Board at a tremendous and unnecessary disadvantage. 

Now more than ever, Puerto Ricans, who have seen their sales tax rise from 6 percent to roughly 11.5 percent in large part because of COFINA, should be entitled to the full scope of their tax revenue for the purposes of ensuring that the government can continue to provide services like education and healthcare.  The Oversight Board, meanwhile, should have all revenues at its disposal if it is to make the most of its “once-in-a-lifetime opportunity.”  This is why I have launched a new campaign – Transparencia en las Finanzas Gubernamentales– to ensure we have the clearest possible picture of the island’s finances so we can put our economy back on track toward growth. 

As he takes office in January, Governor-elect Ricky Rossello must craft a plan for ensuring that this is the case, and must do all that he can to put the board and his own administration in a position to succeed. Addressing the ills that a predatory lender like COFINA bring to Puerto Rico’s return to greatness would be a good start.  Unlike the outgoing governor, this is an opportunity that he cannot afford to miss.

Ivan Rivera is a Puerto Rican political analyst who recently launched Transparencia en las Finanzas Gubernamentales, a Puerto Rican citizen’s organization dedicated to promoting transparency and accountability amongst the Puerto Rican Government, the Federal Government, and the Federal Oversight Board in their handling of Puerto Rico’s financial crisis. 


The views expressed by authors are their own and not the views of The Hill.