SAN JUAN (Reuters) - Short-term fixes, deficit financing and political pressures helped drive Puerto Rico into a fiscal catastrophe that landed the U.S. commonwealth in bankruptcy court last year, according to an investigative report released late on Monday.
The 600-page report commissioned by the island’s federally appointed oversight board last September also addresses potential claims for investors and regulators and recommends ways for Puerto Rico to avoid future fiscal problems.
With roughly $120 billion in debt and pension liabilities, Puerto Rico commenced bankruptcy proceedings in federal court in May 2017. A fiscal oversight board created by the U.S. Congress in 2016 under the so-called PROMESA Act tapped law firm Kobre & Kim to produce the report.
“The 10-month investigation involved an extensive evaluation of evidence from many sources. We conducted over 100 witness interviews and reviewed voluminous productions of documents in both English and Spanish,” John Couriel, a lawyer at Kobre & Kim, said in a statement.
In conducting its probe, the law firm had access to documents that had been restricted from public view by U.S. Judge Laura Taylor Swain, who oversees the island’s bankruptcy.
The report found that contrary to accusations by some bondholders, Puerto Rico’s Sales Tax Financing Corporation, known as COFINA, was not created to evade the island’s constitutional debt limit.
“Over time, however, COFINA 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,” the report said.
It recommended amending the island’s constitution so that debt issued by COFINA, which securitized sales tax revenue to achieve higher credit ratings, counts toward the debt limit.
Political pressures impacted rates charged by the Puerto Rico Electric Power Authority (PREPA), which became dependent on short-term loans from the island’s Government Development Bank that were paid off through bond issuances, according to the report.
Meanwhile, investigators could not determine how the Puerto Rico Aqueduct and Sewer Authority (PRASA) spent some proceeds from bonds issued between 2010 and 2013. The report recommended a mix of governor-appointed and independent members for utility boards and the establishment of audit committees and independent rate boards.
The probe found deficiencies with Puerto Rico’s budgeting process and chronically late annual audits, as well as with credit rating agencies.
While the report said it could not conclude the rating agencies significantly contributed to the island’s fiscal crisis, it faulted them for undeserved high ratings that made bonds more attractive to certain investors.
“Indeed, certain of Puerto Rico-related bonds retained investment-grade ratings for a prolonged period despite mounting levels of debt service, declining issuer performance, and worsening macroeconomic indicators, with several issuers ultimately landing in a form of bankruptcy after (the rating agencies) reduced the ratings below investment grade,” the report stated.
The report will be the subject of a public hearing the oversight board set for Sept. 18.
Reporting by Luis Valentin Ortiz in San Juan; Additional reporting by Karen Pierog in Chicago; Editing by Matthew Lewis