Puerto Rican Debt Relief (June 14)

Mike & Co.,

This afternoon, Senate Majority Leader McConnell promised that the Senate would take up the Puerto Rico debt relief  bill before the end of June, leaving hope that Congress can act in time to help the Commonwealth.  Puerto Rico faces a $2 billion July 1 debt payment; a payment that the island’s Governor has stated unequivocally they cannot fulfill.

The Supreme Court ruled Monday, 5-2 (Justice Alito recused himself), that Puerto Rico cannot write its own bankruptcy legislation, meaning that Congress is the island’s last hope for avoiding a messy default.

Until today, it wasn’t clear there was a path to relief in Congress.  With McConnell’s announcement, the path is clearer, if the timing isn’t, and is likely to involve tough votes for GOP moderates.

Tomorrow: report on the Fed meeting.

Best,

Dana

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Sup Ct Bars Restructuring Scheme

At the core of yesterday’s decision was a Puerto Rican plan to restructure $20 billion of its debt, specifically the debt that stems from three of its utilities companies: those responsible for water, electricity, and road work/public transportation.

While Congress has long allowed states to enable local governments and government entities to file for bankruptcy should they become insolvent.  But not so for Puerto Rico.

In response, Puerto Rico’s legislature passed its own Financial Recovery Act two years ago.  The law would have restructured the public utilities’ debts without gaining consent of all of the investors who hold those debts.  The Recovery Act was challenged by investors, mostly hedge funds.

 

Puerto Rico’s lawyers argued that the Bankruptcy Code’s definition of “state,” combined with Congressional amendments to that code which specifically rule Puerto Rico “not a state” regarding Chapter 9 proceedings, essentially exempted the commonwealth from Chapter 9 requirements.  That would free the Puerto Rican legislature to make its own laws determining municipal bankruptcy and debt restructuring.

 

That argument did not persuade a Court majority, and Justice Thomas’ majority opinion mentions that the Court’s interpretation of the relevant laws tends toward a more narrow restriction than Puerto Rico’s does.  Because of this, Congress’ changes are seen as restricting Puerto Rico from undergoing Chapter 9 as well as restricting it from making its own municipal bankruptcy laws.

 

Sovereignty 

 

Yesterday’s ruling comes on the heels of two other territory-focused decisions:  last Thursday, the Court ruled that Puerto Rico could not independently prosecute individuals if they have already faced federal charges for the same crime, and in a separate ruling on Monday SCOTUS turned down an attempt by American Samoans to be granted U.S. Citizenship at birth.  Samoans are considered U.S. Nationals, not citizens, a unique designation among America’s territories.

 

Following these rulings, Puerto Rico’s Governor is seeking a chance to appear next week before a United Nations committee on self-determination to register a complaint about the commonwealth’s lack of clear self-governing capacity.

PROMESA — The Relief Bill

H.R. 5278, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), is now the only thing standing between Puerto Rico and a messy default.  The legislation passed the House of Representatives this past Thursday, June 9, and now awaits a Senate vote; the Obama administration and its Treasury Department have leant their support to the bipartisan effort and will move to sign the bill once it’s presented.

The main provisions of the bill:

 

•  Oversight and Management Board

—  Composed of 7 members: 2 appointed by Ryan, 2 appointed by McConnell, 1 each appointed by Pelosi, Reid, and the President.  One of Ryan’s nominees must be Puerto Rican.

—  Will require annually approved fiscal plans, submitted by the Puerto Rican government and subject to revisions required by the board.

–  Will require annually approved balanced budgets, submitted by the Puerto Rican government and subject to revisions required by the board.

—  Upon enactment there is a 7.5 month stay of litigation against Puerto Rico.  May be extended for a court ordered restructuring.  This is the first time that the federal government has created a statutory cooling off period that benefits a debtor.

—  All liabilities can be restructured through federal powers.  Allows for Puerto Rican debt to be brought to a sustainable level in a very powerful and sweeping way.

 

Miscellaneous

—  Creates the position of “Revitalization Coordinator,” appointed by the Governor of Puerto Rico who will be responsible for evaluating and helping guide forward “critical projects” to assist in the revitalization of Puerto Rican infrastructure.

—  Allows Puerto Rico’s Governor to lower the island’s minimum wage to $4.25 per hour for a time period not exceeding 5 years.

 

The legislation represents a major win for Speaker Paul Ryan, who has long supported the legislation specifically and a plan to help Puerto Rico generally, and for Minority Leader Pelosi.  Not only did the two leaders manage to pass the bill, the compromise earned a majority in both parties and sailed through the House, 297-127.

PROMESA creates a debt-restructuring process for Puerto Rico, and also establishes a 7-member financial oversight board which has the power to enforce balanced budgets and make difficult spending cuts within the island’s government.

Senate Action 

The Senate now needs to take up PROMESA, but lawmakers in that chamber are markedly less enthusiastic about the package than their House colleagues.  Senate Energy and Natural Resources Committee Chairman Lisa Murkowski said Thursday that her committee would “probably” consider the Puerto Rico bill, leaving open the possibility that it could move directly to the Senate floor.

 

Not only do Senators face pressure from their own parties – White House Press Sec. Josh Earnest: “We urge leaders in both parties to build on today’s bipartisan momentum and help Puerto Rico move toward lasting economic prosperity” – but the impending July 1 repayment represents a hard deadline for the bill to become law.

 

Senate Finance has oversight of PROMESA, and its Chairman, Orrin Hatch, said today that he would support the bill out of obligation to his party: “I think I’m going to have to [support H.R. 5278] but I don’t think it’s the solution.”

 

Concerns for the Next Steps

 

Some PROMESA supporters are concerned that Senators will amend the legislation and send it back to the House in an unpassable form.  Bob Menendez has hinted at marking changes which would make it harder for the Puerto Rican governor to initiate the minimum wage rollback provision, and would tighten language on pension treatments.

 

Sen. Bernie Sanders has threatened to filibuster the bill if the Senate decides to move it, but sources say the Senate likely has the 60 votes necessary to invoke cloture and limit debate on the bill.  The Senator from Vermont also released a competing bill in the Senate to handle Puerto Rico’s crisis – his bill would allow the island to declare bankruptcy, set up an avenue for Federal Reserve cash injections, and set up a “Reconstruction Finance Cooperation” entity.

 

Considerations for June

 

The House will be in recess during the last week of June, meaning that any changes to the bill in the Senate, which will then require House approval, will delay PROMESA enactment until early July at least.  Additionally, the careful and long lasting negotiations which led to the bill’s current contents indicate that fairly little room exists on either side of PROMESA to retain the bipartisan support that was used to pass PROMESA in the first place.

If the Senate acts in a way that jeopardizes the chances of PROMESA helping Puerto Rico before its July bond payment comes due (which is the only time that PROMESA is really helpful), then the United States will be forced to come to bear against a spreading panic within the municipal bond industry.  $800 million of the $2 billion bond payment due July 1 are backed by the “full faith and credit” of Puerto Rico, and a default on those bonds would throw into doubt the security of other American municipal debts.

Policymakers need to come to terms with how far they’re willing to go to voice their displeasure with this legislation – and then square that against the dire consequences that would follow the failure of this legislation.

Majority Leader McConnell may move the bill directly to the Senate floor for a vote to limit opportunities for changes and minimize debate on the package.  Most observers predict passage: it’s unlikely that McConnell would announce his plans if he didn’t have a path forward for this bill.