Puerto Rico Issues Revised Fiscal Plan for COSSEC

On April 19, the Government of Puerto Rico issued its Revised Fiscal Plan for the Public Corporation for the Supervision & Insurance of Cooperatives in Puerto Rico (COSSEC). However, the Financial Oversight and Management Board for Puerto Rico on April 20 postponed certifying the Fiscal Plan for COSSEC until it can complete further analysis of COSSEC's projections.

COSSEC is responsible for insuring deposits and shares at the island's cooperatives up to $250,000 per person, regulating the island's cooperatives, and promoting the benefits of cooperatives.

According to the plan, Puerto Rico's 116 financial cooperatives have $8.7 billion in assets, $8.1 billion in shares and deposits, and $4.7 billion in loans as of December 2017.

The report notes that cooperatives have played an essential role of meeting the financial service needs of Puerto Ricans after Hurricane Maria.

The report noted that at the end of 2017, approximately 56 percent of the cooperatives investment portfolio of $1.5 billion or $852 million was in distressed Puerto Rico bonds. But the market value of these distressed Puerto Rico bonds was $235 million. In other words, the market value to par value was 27.6 percent.

The report notes that these Puerto Rico bonds are treated as special investments and subject to regulatory accounting principles (RAP). These special investments are carried on the books of these cooperatives at par value and losses on these special investments are to be amortized over 15 years.

The Revised Fiscal Plan states that the cooperatives will suffer a reduction in cash flows due to the probable restructuring of Puerto Rico government bonds.

The revised fiscal plan further notes that under RAP Member Shares are treated as capital instead of a liability. This overstates the cooperatives capital base and understates its liabilities.

However, RAP has been widely discredited, as it was viewed as one of the underlying causes of the savings and loan crisis in the late 1980s.

According to the plan, COSSEC estimated that it will need $391 million in capital support and $150 million in additional liquidity to address at-risk cooperatives. This includes a capital injection of $45 million from COSSEC, $200 million in COSSEC reserves for expected losses from Puerto Rico bonds, $46 million in COSSEC reserves for unexpected losses, and $100 million in possible capital injections from Banco Cooperative.

The Revised Fiscal Plan also discusses the need to address the governance structure of COSSEC. Currently, cooperatives constitute a majority of the COSSEC Board of Directors. This limits the ability of COSSEC to act as an independent regulator.

In addition, the plan outlines regulatory reforms, such as strengthening cooperative's capital and accounting reforms, and tools to monitor capital and liquidity of Puerto Rico's cooperatives.

Go to the Financial Oversight and Management Board for Puerto Rico to find the Revised Fiscal Plan.