Puerto Rico Debt Deal (Apr. 4)

Mike & Co. —

The House, which is still on recess this week (the Senate is in) continues to march toward Speaker Ryan’s self-imposed April 29 deadline to vote on a legislative solution to deal with the Puerto Rico debt crisis.  Two relevant SCOTUS   cases to be handed down before June further complicate the picture.

If a bill cannot be passed by the end of the month, Puerto Rico will run up against a $470 million bond payment, due May 1, that it likely cannot make, with bigger obligations coming due this summer.

More on the terms of the debate over a solution in Congress and the cases in the Court below.  Next will be a prospective and then a look back at the Fiduciary Rule expected from DOL midweek.

Best,

Dana

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Right now, most of the wrangling in Congress is over a draft bill that would tackle the two main issues surrounding Puerto Rico’s financial troubles.  Negotiations revolve around how to combine two proposals for dealing with the Puerto Rico crisis, both of which must be present to gain enough bipartisan support to push legislation forward.

1. Debt Restructuring

Either allow for Puerto Rico to carry out a Chapter 9 bankruptcy proceeding (which US states, but not territories, can do already), or create some other similar system to restructure the territory’s debts.

2.  Conditionality

Among the main conditions that the GOP insist on, and the Democrats tend to resist, are:

—  completion of private negotiations with creditors take place before relief is implemented

—  creation of a credible fiscal plan

—  passage of a balanced budget

—  establishment of a Financial Control Board of financial advisors who will audit Puerto Rico’s finances, control the territory’s budget, and work to put Puerto Rico on a path to sustainable investment.  The Board’s activities would include:

•  establishing reporting and disclosure requirements for the Puerto Rican government
•  auditing the government’s books to look for inefficiencies and waste
•  pushing through a budget if the Puerto Rican government cannot
•  determining whether or not a fiscal plan form the government is reasonable

Forward Calendar

The full House bill is expected to be introduced by April 11, with markup occurring by April 13.  Already the House has flown past Ryan’s original March 31 deadline, causing it to be extended to April 29.  The bill is the product of weeks of intense negotiations with Treasury and Puerto Rican officials.  A House Natural Resources mark-up is expected during the week of April 11.

Puerto Rico’s next large bond payment, scheduled for May 1, when $470 million is due.  If somehow a stop-gap measure is put in place then Congress would have until July 1 to make more permanent arrangements, as a $1.9 billion payment comes due that day.

Legislative State of Play

Rep. Rob Bishop, chair of Natural Resources, released on March 28 a bill that would create an independent Fiscal Control Board and allow for Puerto Rico to restructure some of its debt, under the auspices of that same Board.

Democrats quickly announced that they could not support the draft in its current state, citing concerns that the legislation goes too far in empowering the Board and would undermine the authority of Puerto Rico’s government.  Under the bill, the Board would exist within the government of Puerto Rico but would be independent of the Governor or legislature of the island.  In return, Puerto Rico would be able to restructure some of its $70 billion in debt.  Restructuring would only be an option after the government turned over audited financial statements to the Board, passed a budget, and pursues voluntary debt negotiations with creditors.

Regarding the House bill, Minority Leader Nancy Pelosi said in a statement that “

the “sweeping powers of the oversight Board proposed in Republicans’ discussion draft are far from what Democrats can support.”

In the Senate, Finance chair Orrin Hatch has talked about sending a relief bill through his own Committee.  It calls for debt restructuring, an oversight board, and tax breaks designed to bolster economic growth on the island.  Until he releases a draft bill, it is assumed that the House will be the first to legislation on the issue.

Subtext:  Conditionality vs. Paternalism

Puerto Ricans could be forgiven for hearing in some of the arguments in Washington a vaguely paternalistic tone to them.   Legislators routinely — perhaps very reasonably in the context of debt relief legislation –bring up the need for oversight, budget auditing, control boards, and reporting requirements for the government of Puerto Rico.  For some Puerto Ricans, the debt crisis right now feels like another instance of Congress micromanaging their affairs.

It is clear that the Treasury Department is trying to thread a political needle in pushing a fix for Puerto Rico’s debt crisis. However, this is a time sensitive situation. A top Department official warned lawmakers last that the island is in need of “an immediate solution” and that delay will only increase the ultimate size of the restructuring deal.