Mike & Co. –-
On Sunday, a Commonwealth of Puerto Rico a $422 million bond interest payment comes due that can’t — or in any case won’t — be paid on time. Gov. Alejandro Padilla has repeatedly said that the island cannot make that payment; others have questioned those statements. Close behind follows a two billion dollar payment of principle due July 1, which presents a truly insurmountable barrier.
For the moment, there is little sense of urgency on the Hill surrounding HR 4900, the island’s leading debt restructuring bill. Proxy fights lurk just beneath the surface –over the Hastert Rule, moral hazards relating to future state claims, and the minimum wage _ that make the bill as much about messages as solutions.
Good weekends, everyone.
Hastert Still Rules in the House
Speaker Ryan is struggling to gain the support of a majority of House GOP members for HR 4900, the Natural Resources Committee’s Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). The legislation would create a fiscal oversight board, a key requirement for Republicans, but also allows the territory to restructure some debt in order to keep making payments. The House Freedom Caucus — about ## members –has continued to oppose any debt restructuring legislation, which it considers a “bailout” for the island.
Ryan may be unwilling to break the Hastert rule, which informally requires that the Speaker only advance legislation with a majority of support in the GOP -– a cornerstone of Ryan’s push for the Speakership last year.
Bailout vs. Restructuring
HR 4900 does not authorize any federal expenditure tax to the territory; it simply allows the island to restructure its debts. Still, the provision has been a “non-starter” for many within the Republican Study Committee — about two-thirds of Texas conference — and is fantastically unpopular with creditors asked to take a haircut on their bond holdings.
Case in point: in the past week a television ad has begun to air which claims PROMESA represents “Super Chapter 9” bankruptcy protections and is a way to bail out Puerto Rico on the backs of “savers and seniors.” These ads are bankrolled by the Center for Individual Freedom (CFIF).
The House Rescue Bill
HR 4900’s notable provisions are below:
- Territory Financial Oversight and Management Board
— 7 members appointed by the President
— requires annually approved fiscal plans, submitted by the Puerto Rican government and subject to revisions required by the board
— require annually approved balanced budgets, submitted by the Puerto Rican government and subject to revisions required by the board
- Adjustment of Debts
— the oversight board will have authority to authorize debt restructuring deals for entities with already approved fiscal plans and under specific requirements
— no new debt issuances: “For so long as the Oversight Board remains in operation, no territorial government may, without the prior approval of the Oversight Board, issue debt or guarantee, exchange, modify, repurchase, redeem, or enter into similar transactions with respect to its debt.”
NB: 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. What’s rarely mentioned is that this provision would allow for a five-year period of effectiveness and would only apply to workers hired within that five-year span.
House vs. Senate
Adding pressure to the House leadership, Senate Majority Leader Mitch McConnell: “We’re going to let the House go first on Puerto Rico… they’ll be going first on Puerto Rico.” But Senators are not sitting idly. Senate Finance Chair Orrin Hatch, opposes HR 4900, has said that his office is working on his bill. And there are two Democratic alternatives. Sen. Menendez’ Puerto Rico Stability and Recovery bill has gained a number of cosponsors: Sens. Schumer, Brown, Warren, Cantwell and Blumenthal.
The bill’s opponents claim that debt restructuring in Puerto Rico will encourage spendthrift states to do the same. This is a significant hurdle for HR 4900, driven as much by ideology as by fact. Arkansas was the last state to declare bankruptcy, in 1933. One of the chief ways that states can repay their debts, cutting spending or raising taxes, isn’t enough to cut it in Puerto Rico where nearly half of the islands inhabitants live below the poverty line.
A secondary concern regarding the impact of this bill on states is the chance for Puerto Rico’s restructuring to trigger a run on municipal and state bonds, or to at least cause a rise in their interest rates. Market actors, including PIMCO (which holds $40 billion in muni bonds, but none from Puerto Rico), have said that they don’t see much risk for “contagion” between Puerto Rico and other states if the territory restructures its debt, nor do they see cause for fear on rate changes.
The three issues above form the crux of Ryan’s predicament, to wit: any Puerto Rico bill needs support from both Democrats and Republicans to pass in time for the July 1 deadline, but any bill that can gain sizable Democratic support cannot gain the majority of Republican support necessary to follow the Hastert rule.
A Hard Deadline
The failure of Congress to address the crisis in Puerto Rico could put the $3.5 trillion municipal bond market at greater risk than if they were to allow Puerto Rico to build a deliberate and responsible framework for debt restructuring.
No matter what legislators think of Puerto Rico’s governance failures, which have certainly contributed to this crisis, the fact remains that inaction on Congress’ part will result in the territory’s default and a far greater chance that federal money will need to be used to bail out the island. As things stand now, the GOP risks ensuring that their own worst nightmare comes true in Puerto Rico – that the island will get a bail out, will restructure its debts, and will continue to operate without any sort of financial oversight board.