PROMESA

Updated on Oct 18, 2023

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Acronyms (colloquial) PROMESA Public law Pub.L. 114-187		Effective June 30, 2016

Long title To establish an Oversight Board to assist the Government of Puerto Rico, including instrumentalities, in managing its public finances, and for other purposes. Enacted by the 114th United States Congress

The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) —designated as Pub.L. 114–187 and originally as H.R. 5278— is a federal law enacted by the United States Congress that establishes an oversight board, a process for restructuring debt, and expedited procedures for approving critical infrastructure projects in order to combat the Puerto Rican government-debt crisis. With this protection the then-governor of Puerto Rico, Alejandro García Padilla, suspended payments due on July 1.

Overview

PROMESA enables the island's government to enter a bankruptcy-like restructuring process and halt litigation in case of default. Specifically, the establishment of the oversight board operates as an automatic stay of creditor actions to enforce claims against the government of Puerto Rico. The oversight board is to facilitate negotiations, or, if these fail, bring about a court-supervised process akin to a bankruptcy. The board is also responsible for overseeing and monitoring sustainable budgets. The President appointed all seven members of the board, six of whom were chosen from a list of individuals recommended by Congressional leaders. The Governor of Puerto Rico (or a designee) serves ex officio as an eighth member without voting rights. PROMESA authorizes the oversight board to designate a territory or territorial instrumentality as a "covered entity." Once designated, the covered entity is subject to the terms of PROMESA. On September 30, 2016, the oversight board designated the Commonwealth of Puerto Rico and certain other territorial instrumentalities as covered entities under PROMESA. As a covered entity, Puerto Rico is required to submit a fiscal plan. A fiscal plan must provide a method to achieve fiscal responsibility and access to the capital markets, and:

provide for estimates of revenues and expenditures in conformance with agreed accounting standards and be based on--

applicable laws; or

specific bills that require enactment in order to reasonably achieve the projections of the Fiscal Plan;

ensure the funding of essential public services;

provide adequate funding for public pension systems;

provide for the elimination of structural deficits;

for fiscal years covered by a Fiscal Plan in which a stay under subchapters III or IV is not effective, provide for a debt burden that is sustainable;

improve fiscal governance, accountability, and internal controls;

enable the achievement of fiscal targets;

create independent forecasts of revenue for the period covered by the Fiscal Plan;

include a debt sustainability analysis;

provide for capital expenditures and investments necessary to promote economic growth;

adopt appropriate recommendations submitted by the Oversight Board under section 2145(a) of this title;

include such additional information as the Oversight Board deems necessary;

ensure that assets, funds, or resources of a territorial instrumentality are not loaned to, transferred to, or otherwise used for the benefit of a covered territory or another covered territorial instrumentality of a covered territory, unless permitted by the constitution of the territory, an approved plan of adjustment under subchapter III, or a Qualifying Modification approved under subchapter VI; and

respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to June 30, 2016.

On October 14, 2016, Puerto Rico submitted a proposed fiscal plan to the oversight board. On November 23, 2016, the oversight board released its initial assessment of the fiscal plan submitted by Puerto Rico. The oversight board requested that the fiscal plan be amended to incorporate the following:

Define and incorporate key aspirational goals, benchmarks and metrics for a ten year vision for Puerto Rico. This aspirational vision should drive Puerto Rico to stabilize its current economic, social, demographic and financial situation, increase the economy’s resilience, shore up public finances, support long-term, durable growth, address basic needs and restore opportunity for the people of Puerto Rico;
Exclude any funding from an extension of Affordable Care Act as well as revenues from an extension of Act 154 revenues in light of their expiration (unless the assumption is accompanied by a specific bill). The Board supports efforts to extend Affordable Care Act funds and Medicaid parity for Puerto Rico, but consistent with the PROMESA Act the Board has to insure that the Fiscal Plan is based on existing law or a specific bill.
Incorporate a revised baseline forecast to reflect pay-go funding for pension benefits and segregation of current employee contributions beginning no later than 2018; and
Include a debt restructuring proposal and also a debt sustainability analysis.

On November 29, 2016, the Governor of Puerto Rico responded to the oversight board's assessment of the Commonwealth's proposed fiscal plan.

In late January 2017, the board created under PROMESA gave the government of Puerto Rico until February 28 to present a fiscal plan (including negotiations with creditors) to solve the problems. It is essential for the Commonwealth to reach restructuring deals to avoid a bankruptcy-like process under PROMESA.A moratorium on lawsuits by debtors was extended to May 31.

Recently-elected Governor Ricardo Rosselló hired investment expert Rothschild & Co in January 2017 to assist in convincing creditors to take deeper losses than they had expected on Puerto Rico's debts. The company was also exploring the possibility of convincing insurers that had guaranteed some of the bonds against default, to contribute more to the restructuring, according to reliable sources. The governor also planned to negotiate restructuring of about $9 billion of electric utility debt, a plan that could result "in a showdown with insurers". Political observers suggest that his negotiation of the electrical utility debt indicated Rosselló's intention to take a harder line with creditors. Puerto Rico has received authority from the federal government to reduce its debt with legal action and this may make creditors more willing to negotiate instead of becoming embroiled in a long and costly legal battle.

Composition

On August 31, 2016, President Obama appointed the seven members of the board.

Criticism

Critics indicate that the law continues to treat the island as an anomaly, neither as a state nor a municipality, fails to provide a way to statehood or independence, and does not deal with underlying economic problems such as high unemployment, lack of opportunities, welfare issues, and brain drain. The oversight board will have broad sovereign powers to effectively overrule decisions by Puerto Rico's legislature, governor, and other public authorities, under the federal government's constitutional power to "make all needful rules and regulations" regarding U.S. territories. For this reason, the board has been criticized as colonial and anti-democratic in nature.

References

PROMESA Wikipedia

(Text) CC BY-SA

Contents

Overview

Composition

Criticism

References