Puerto Rico's cooperativa system — state-insured credit unions that are a foundation of many communities — can withstand the island's financial crisis, even though they heavily invested in government bonds.

That's the word from the Fiscal Oversight Board — the institution created by Congress to sort out the fiscal mess that has led to the island seeking court protection from its debts.

The board has amended and approved the fiscal plan submitted by the Corporation for the Supervision and Insurance of Cooperativas (COSSEC), which insures and regulates the cooperativas that operate in addition to the credit unions insured by the NCUA.

That plan provides the first official glimpse into the financial cooperative system since the financial crisis.

And despite the current financial health of the cooperativas, the board created a new committee to oversee the agency. The committee was directed to develop a long-term plan that could ultimately include moving the institutions into the NCUA system or the banking system operated by the Office of Commissioner of Financial Institutions of Puerto Rico.

If the cooperativas are not moved under the NCUA umbrella, the agency should develop a governance model based on the NCUA, the fiscal board said.

The cooperative movement has a strong following on the island, according to the report. There are 116 cooperativas holding $7.9 billion for nearly one million customers.

As a comparison, banks operating on the island have some $45 billion in deposits.

“Co-ops have gained popularity in Puerto Rico as customers feel a greater sense of loyalty to their local institution, especially given that the coops are owned by their shareholders rather than stockholders,” the fiscal document states.

And their members believe they offer a more personalized banking experience, the oversight board said.

“The co-ops are viewed as an important institution in many Puerto Rican municipalities, with the president of the local co-op often serving as one of the leading figures in the community,” the fiscal board said.

That's not to say that the cooperativas are immune from the island's fiscal woes.

Some cooperativas have a high concentration of island “special investments” and could face solvency issues, the regulators and fiscal experts said. Island regulators estimated that five of the cooperativas could face liquidity issues, but they added that COSSEC and larger credit unions would cover all the credit unions' obligations.

While officials representing cooperative executives have said the system will remain healthy, the fiscal plan represents an assurance from regulators that the institutions can weather the crisis.

The oversight board approved the fiscal plan with amendments.

“COSSEC has adequate capital to perform its regulatory and insurance duties under ordinary and relatively stressed scenarios,” the regulators said.

The document states that COSSEC strongly encouraged cooperativas to invest in island bonds during the past several years — investments that have proven to be highly risky.

“While these bonds may have appeared to be safe investments at the time the circular was written, these bonds have since performed poorly and could suffer substantial losses due to a Government debt restructuring,” the fiscal plan states. “Several of the co-ops feel they were unduly pressured into purchasing these bonds at the encouragement of the Government and that the Government has an obligation to address this issue.”

Last year, an attorney representing 25 cooperativas in a memo to the House Natural Resources Committee accused government regulators of threatening punitive taxation if they did not purchase government bonds.

COSSEC has also been plagued by allegations of conflicts of interest since there is a high concentration of cooperativa representatives on the agency's board, according to the fiscal plan. COSSEC regulates and insures deposits for the cooperativas, but the agency is run by those same institutions.

The fiscal board said a new committee with greater independence will be formed to ensure confidence in the cooperative system and to ensure the long-term financial health of the system.

In addition, the board said that Puerto Rico law must be amended to allow COSSEC to sell a cooperative to a non-co-op when the agency orders the consolidation, liquidation or merger of the institution.

The committee will include officials from financial institutions, regulators and government fiscal experts and will assume all the powers of the COSSEC board of directors.

That committee will be charged with developing a contingency plan in case COSSEC cannot cover its financial obligations in the future.

And it will have the responsibility of sorting out the governance problems that come from the agency being run by the cooperativas and the agency's role as a regulator and insurer.

“The Fiscal Plan should be amended to include a reform plan that redefines the mission and governance of COSSEC to eliminate conflicting regulatory and insurance missions and captive governance,” one amendment to the fiscal plan states.

That amendment also left open the possibility that sometime in the future, the cooperativas might move into a federal charter with the NCUA.

The goal should be a “once-and-done” approach to structural reform for both COSSEC and the cooperatives it supervises, the report stated.

 David Baumann is Correspondent-at-Large for Credit Union Times. He can be reached at [email protected].