SAN JUAN, Puerto Rico—Puerto Rico narrowly avoided a multimillion-dollar default on Tuesday by announcing a last-minute bond payment while warning that a deepening financial crisis has forced the government to divert money slated for future debt payments to avoid a shutdown of basic services.
The announcement by Puerto Rico’s Government Development Bank came as Gov. Alejandro Garcia Padilla testified at a hearing of the Senate Judiciary Committee that the island was facing a liquidity crunch.
“Let us be clear: We have no cash left,” he said. “This is a distress call from a ship of 3.5 million American citizens that have been lost at sea.”
Garcia signed an executive order that allows the island’s Treasury Department to retain certain revenues from several public agencies to pay off the island’s $72 billion public debt and ensure the continuity of essential services, including health, education and public safety. Officials said they expect that up to $329 million will be diverted through June to pay off the debt.
Melba Acosta, president of the Development Bank, said the majority of agencies whose revenue is being diverted would still have enough funds left to honor other upcoming debt payments. The agencies targeted include the heavily indebted Highway and Transportation Authority, the Infrastructure Financing Authority and the Metropolitan Bus Authority.
“We hope today serves as a clear indication that we intend to honor our obligations to the extent possible without interrupting essential public services,” Acosta said. “However, the Commonwealth’s overall fiscal position remains tenuous.”
She said that officials will keep meeting with creditors to talk about restructuring a portion of the island’s $72 billion public debt that the governor has said is unpayable.
Puerto Rico Justice Secretary Cesar Miranda acknowledged that some might view Puerto Rico’s move as a technical default since the government is diverting money meant for future bond payments.
At Tuesday’s U.S. Senate hearing, some senators warned that Puerto Rico needs to take concrete steps to organize its finances.
“The financial somersaults and headstands must end,” said Democratic Sen. Richard Blumenthal of Connecticut.
Garcia’s administration is seeking access to Chapter 9 bankruptcy as the island struggles to emerge from a nearly decade-long economic slump. Victor Suarez, Puerto Rico’s secretary of state, said the island is running out of options to generate money and meet debt payments if Congress doesn’t allow access to bankruptcy.
“If we default, this would cause catastrophic consequences,” he said.
Puerto Rico legislators recently approved a measure to create a fiscal control board that would help oversee a five-year fiscal reform plan. Garcia also has taken other measures including raising taxes and closing dozens of schools to cut costs and generate more revenue.
Puerto Rico previously announced that it did not have the money to make a $58 million bond payment due in August. However, officials argued that the failure of that payment did not represent a default because it involves moral obligation bonds, which means there is no legal requirement to repay them.
Sen. Chuck Grassley (R-Iowa), chairman of the Senate Judiciary Committee, said the island’s ballooning debt is an indication of what he called “serious fiscal mismanagement.”
“Puerto Rico’s debt crisis didn’t happen overnight. It’s been years in the making,” he said. “It was easier for the island to borrow … than address financial shortcomings and economic realities.”
The Obama administration has proposed a plan to help the island, but Republicans in Congress have said they want to first address the root causes of the crisis and see more data on Puerto Rico’s financial condition.
“Merely extending debt restructuring authority, absent tools to address the fundamental causes of the fiscal problem, is not a long-term solution that will help Puerto Rico,” Grassley said.
He asked no questions of the governor after his testimony.
Pedro Pierluisi, Puerto Rico’s delegate to Congress, told senators at the hearing that the federal government’s policies toward the territory are “inequitable and incoherent” and have made it impossible for the island to prosper. He asked lawmakers to enact legislation to give the territory more equitable treatment under federal programs and authorize Puerto Rico to restructure a meaningful portion of its debt.
“We are reduced to the role of supplicant, pleading for equal treatment, or at least more equitable treatment,” Pierluisi said.
The Obama administration has said that Puerto Rico’s economic woes could turn into a humanitarian crisis unless Congress adopts a blueprint for dealing with the island’s debt. It has proposed a territorial bankruptcy regime that would allow Puerto Rico to restructure its debt and impose new oversight on finances, expand Medicaid benefits and allow residents to qualify for the same low-income tax credits that are offered to other American citizens through the Earned Income Tax Credit.