Facing over $72 billion in debt, Puerto Rico is in the midst of a battle within the US legal system and Congress to help bring relief to its 3 million US citizens. As a territory, existing law does not allow P.R. the types of bankruptcy options that are afforded to US cities or states. With a large portion of its payments due in May, time is of the essence to provide relief for Puerto Rico. Rare bipartisan support in the House leadership and the Executive branch have created a unique policy opportunity that could be a light at the end of the tunnel for the struggling Commonwealth.
On Tuesday, March 22, Speaker Ryan announced that the House Committee on Natural Resources will take up a relief bill on April 13 to assist the territory, with a discussion draft of the legislation likely ready by the end of March . Once Congress returns from its recess on April 12, it will have to act quickly to meet the May payment deadline when $400 million in debt payments are due . If all goes according to plan, what provisions would a meaningful relief bill include? Would Congress even consider such a piece of legislation in a contentious election cycle?
What’s Happening with Puerto Rico?
Puerto Rico’s financial troubles have been ongoing for nearly a decade, when the island territory lost a special tax-exempt status from Congress as it battled the 2007 economic recession. As economic conditions worsened and the government raised taxes to pay off its growing debt, many citizens left and headed for the mainland while still maintaining their U.S. citizenship. As their debts became due, the territory had to continue raising taxes or deferring payments to bondholders, ultimately digging themselves into a $72 billion hole .
(Washington Post, 2015)
During oral arguments before the Supreme Court on March 22, bondholders and the Commonwealth disputed Puerto Rico’s bankruptcy status. Federal bankruptcy law prevents territories and other non-states (that includes Washington, D.C.) from using Chapter 9 bankruptcy or from creating their own bankruptcy legislation. Puerto Rico took such action in 2015 when it passed legislation to restructure its debt, and bondholders have argued that this clearly violates federal statute. While it appears that Justice Sotomayor may have supported Puerto Rico, Justices Breyer and Kagan both seemed to agree that the Court could not justify the Commonwealth’s actions within the language of the current US bankruptcy code.
What Would a Relief Bill Look Like?
In October of 2015, the White House issued a series of legislative proposals to help bring Puerto Rico off its debt-cliff. President Obama called on Congress to:
- Give Chapter 9 bankruptcy protection to municipalities and the Commonwealth
- Provide independent fiscal oversight and assistance with proper accounting and disclosure procedures
- Give Puerto Rico access to the Earned-Income Tax Credit (EITC) to support growth
- Help expand access and quality of Medicaid coverage to the Commonwealth’s population.
Providing Puerto Rico with the proper tools to restructure its debt is also at the center of a November 2015 proposal from the Treasury Department, which said the Commonwealth should receive a federal bankruptcy regime specifically tailored to its large debt (debt service alone takes 1/3 of governmental revenue of the Commonwealth) and status as a territory. The Treasury Department notes that Puerto Rico would gain restructuring authority for its debts only if it accepts an independent fiscal oversight board to help streamline spending.
Some measures have already been introduced by Congress on both sides of the aisle, including separate legislation authored by Senator Menendez (D-NJ), Senator Orrin Hatch (R-UT), and Representative Sean Duffy (R-SC). While each of these bills offer creation of an independent fiscal oversight board of some sort, only Sen. Hatch’s legislation does not call for placing Puerto Rico under the Chapter 9 bankruptcy provisions. According to GovTrack, Senator Menendez’s legislation currently has a 22% chance of making it past committee, and a 10% chance of being enacted, which means the language within Menendez’s bill is more likely to exist in a comprehensive relief bill.
While it is unclear what the final text of the relief bill will include, it is likely to consist of an oversight mechanism to monitor fiscal spending and a payment plan or restructuring plan to help pay-off at least some of the Commonwealth’s $72 billion debt. An early outline of the GOP draft bill that has been leaked to the press confirms these two points, as well as a stay on any lawsuits regarding debt payments. Any final legislative package would also need to consider the bondholders that are awaiting fulfillment of their payment obligations.
What Happens Next?
The House Natural Resources Committee is set to hold a hearing on the relief bill on April 13, when the bill can be passed from Committee to the full House for a vote. If Speaker Ryan is adamant about passing this relief package, a floor vote should quickly follow. The Senate, which has offered several versions of relief packages as well from both sides of the aisle, would have to follow suit quickly before the May deadline to help Puerto Rico meet its payments. If the Supreme Court delivers a decision on the Commonwealth’s status before the legislation is completed, this could further complicate Puerto Rico’s pathway to recovery.