Puerto Rico had $74 billion in bond debt and $49 billion in unfunded pension liabilities as of May 2017, according to a debt investigation report issued Tuesday by the Financial Oversight and Management Board for Puerto Rico.
"For an economy of Puerto Rico's size, the burden of this debt has been catastrophic," said the 608-page report prepared by the independent investigator, law firm Kobre & Kim. The Financial Oversight and Management Board for Puerto Rico hired the firm in September to review Puerto Rico's fiscal crisis and its debt issuance practices.
"Instead of implementing long-term plans to stimulate the Puerto Rico economy, to balance the budget and to fund (the Employees Retirement System) during the relevant period, Puerto Rico's political branches and (Government Development Bank) turned to the debt markets for shorter-term fixes," the report said. The fixes included creating a sales tax source for revenue and debt issuance, swap arrangements, increased deficit financing, and issuing bonds "purportedly secured" by ERS contributions, the report said.
Of the $74 billion in bond debt, $17.6 billion was issued by the Puerto Rico Sales Tax Financing Corp. known as COFINA, $13.3 billion is from general obligation bonds, $9 billion was issued by the Puerto Rico Electric Power Authority, and $3.2 billion from debt issued by the pension fund.
The debt report notes that nearly $3 billion of ERS bonds issued in the first half of 2008 "were payable from and purportedly secured by the stream of employer contributions that government employers were required by statute to make to ERS." Those bond payments were to be invested to improve unfunded pension liabilities. As of the June 2005, ERS was only 19% funded, and today its assets are depleted.
"The strategy of borrowing against future employer contributions and investing the proceeds may have succeeded in improving both ERS' shorter-term cash positions and long-term underfunding problem if reasonable projections about market behavior and other variables had held true (which they did not)," the report said.
Several parties to the commonwealth's bankruptcy proceedings have challenged the enforceability of ERS bonds, "contending that they lacked appropriate authorization," the debt report said. On Aug. 17, U.S. District Judge Laura Taylor Swain for the district of Puerto Rico, San Juan, the federal judge overseeing bankruptcy proceedings agreed, denied ERS bondholders' bid to claim any security interest over ERS revenues, including employer contributions.
The COFINA debt, the investigators said, "became a comparatively accessible source of liquidity that staved off the need for Puerto Rico to find a more permanent solution to its financial problems," while also suffering from insufficient checks and balances to encourage fiscal discipline.
The oversight board's special investigation committee will hold a public hearing on the report Sept. 18 in Puerto Rico.