IE 11 is not supported. For an optimal experience visit our site on another browser.

How close is Puerto Rico to ending its bankruptcy? Here are 3 things to know

Reducing the largest portion of the island's $70 billion public debt will significantly cut down annual repayments. But is that enough to boost the U.S. territory's economy?
A demonstrator waves a flag in front of Puerto Rico's Capitol during a protest against Puerto Rico Governor Wanda Vazquez and the government in San Juan on Jan. 20, 2020.
A demonstrator waves a flag in front of Puerto Rico's Capitol during a protest against then-Gov. Wanda Vázquez and the government in San Juan on Jan. 20, 2020.Ricardo Arduengo / AFP via Getty Images file

Puerto Rico is one step closer to resolving its nearly five-year bankruptcy battle after a federal judge approved a restructuring plan that would reduce the largest portion of the U.S. territory's $70 billion public debt.

The restructuring plan approved Tuesday will cut part of the debt, about $33 billion, down to roughly $7 billion — significantly reducing annual repayments to bondholders who own Puerto Rico’s debt.

By taking into account new and previous debt reductions, "we have accomplished what many thought was impossible," cutting annual public debt payments from about $3.9 billion down to $1.15 billion, Natalie Jaresko, executive director of the financial oversight board, said during a news conference Tuesday evening.

In other words, Puerto Rico will commit at least 10 percent of its entire general fund budget ($10.1 billion, using this year’s budget as a baseline) to repaying its debt.

While members of the board celebrated the deal as a pivotal moment in the island's bankruptcy proceeding, the largest one in U.S. history, some critics are concerned that the Puerto Rican government may be unable to meet future debt service payments if the economy doesn't do as well as projected, resulting in more austerity measures.

Sergio Marxuach, a policy director at the Puerto Rico-based nonpartisan think tank Center for a New Economy, told NBC News that Puerto Rico is expecting some economic growth this year as federal funding for reconstruction following 2017's Hurricane Maria, 2020's earthquakes and the Covid-19 pandemic makes its way to the island.

"If that growth is not as expected for whatever reason," he said in Spanish, "things will be a little tight financially."

How did Puerto Rico get to this point?

Puerto Rico’s $70 billion public debt was issued by more than a dozen local government entities and public corporations, as well as the public employee retirement system.

The Puerto Rican government declared its debt "unpayable" in 2015 following decades of mismanagement, corruption and excessive borrowing.

The declaration prompted Congress to create the 2016 Promesa law during the Obama administration because U.S. laws arbitrarily exclude Puerto Rico from the federal bankruptcy code. The law put in place the federal financial oversight board and created a mechanism for the territory to restructure its debt in federal court.

U.S. District Judge Laura Taylor Swain for the Southern District of New York, who has been presiding over Puerto Rico’s bankruptcy proceedings since May 2017, has already approved other restructuring plans that have helped reduce debts owned by local government entities such as the Puerto Rico Sales Tax Financing Corp. and the Puerto Rico Government Development Bank.

Still pending are the restructuring of debts owed by the Puerto Rico Highways and Transportation Authority and the Puerto Rico Electric Power Authority, which holds about $9 billion in debt, the largest of any public corporation.

The board hopes to finalize both debt restructuring processes later this year, Jaresko said.

The federal financial oversight board has been in charge of overseeing all these debt renegotiations, a process that has resulted in tough austerity measures as Puerto Rico tried jump-starting its economic growth.

The board's goal is to ultimately cut down the $70 billion public debt to $34 billion.

Who's paying?

Puerto Rico's bankruptcy process has generated nearly $1 billion in earnings for the attorneys involved.

"The cost of the bankruptcy has been paid with public funds belonging to the government of Puerto Rico, paid by taxpayers in Puerto Rico,” Gov. Pedro Pierluisi previously said.

That will continue to be the case as the oversight board estimates that 7 cents of every taxpayer dollar in Puerto Rico will go toward repaying the debt service following the latest restructuring, the federal financial oversight board said.

Such a financial commitment is expected to remain in place for the next 25 to 30 years.

“As long as the economy allows Puerto Rico to comply with expected tax collections, debt payments won’t exceed $1.15 billion,” Marxuach said about the new plan.

"If the economy does better, bondholders have a right to get repaid a little more. If tax collections are lower than expected, the $1.15 billion still have to be paid," he said.

The board said Puerto Rico has sufficient resources to repay its debt through 2034.

But fiscal plans from the board also show an alternate scenario in which Puerto Rico could face another deficit by 2036 if the local government fails to implement measures to strengthen the economy and attract meaningful investments.

"But what you see in the new plan is the board and the judge are essentially betting that Puerto Rico will do the right thing to avoid that scenario," Marxuach said.

If Puerto Rico avoids a short-term worst-case scenario in which the island doesn't receive the expected federal funding for reconstruction, as well as Medicaid funding, its finances "are not going to be buoyant, but I think we are going to be able to fulfill the debt obligations,” he said.

What's next?

Economic experts, government officials and members of the board agree that spreading the word that Puerto Rico is exiting bankruptcy will put the island in a better position to attract good investments that could help it avoid future deficits.

"The least number of headlines you have saying that Puerto Rico is bankrupt, the better for Puerto Rico's economy," Marxuach said.

The newest debt restructuring plan is set to go into effect March 15. It could be appealed in court, but David Skeel, chairman of the federal financial board, said Tuesday he expects the judge to affirm it.

In a statement Tuesday night, Pierluisi said that while the agreement is "not perfect, it is very good for Puerto Rico," mainly because it excludes previously proposed cuts to pensions, the public university and municipalities.

The plan also "provides guardrails for future borrowings" to prevent future fiscal crises, Jaresko said. These include limiting long-term borrowing for capital improvements only and beginning to amortize all newly-issued debt within two to five years of issuance, among other policies.

Skeel said the board will oversee implementation of such policies while it remains in place during the restructuring process. Afterward, it will be up to the Puerto Rican government.

Martin Bienenstock, the board's lawyer, added that any creditor who's a party of interest under the plan or creditors who need to be paid in the future could also enforce such policies by going to federal court.

Follow NBC Latino on Facebook, Twitter and Instagram.