If you follow the news on Puerto Rico’s fiscal problems, you might have noticed that the Governor of Puerto Rico, arguing that the territory is in a “death spiral,” reported that he has ordered clawbacks.
So what’s a clawback? At its simplest, it means taking money that has been allocated to one entity to use for a higher priority.
Sometimes contracts have a clawback laid out before they’re signed. For example, a worker’s contract might say that salary or bonuses will be clawed back if the worker commits a crime or breaks rules in the contract. Stock options that are part of a compensation package might be clawed back if the company doesn’t do as well as expected.
In this case, revenue for the Highways and Transportation, Infrastructure Financing, Integrated Transportation, San Juan Convention Center and San Juan Metropolitan Bus Authorities were taken to pay for bonds of the Government Development Bank most of which were guaranteed by the insular government.
Puerto Rico’s constitution requires that payments be made on bonds issued or guaranteed by the Government before any other expenditure.
The Governor announced the clawbacks at a recent U.S. Senate Judiciary Committee hearing. He contended that his Administration “will have to claw back revenues pledged to certain bond issues in order to maintain essential public services.” He directed clawbacks as needed for the next six months.