Congressional Democrats want to give restructuring powers to Puerto Rico, where advisors face customer complaints over the island commonwealth's debt.
Sen. Bob Menendez and other Democratic legislators introduced two bills on Monday to give Puerto Rico broad restructuring powers, as well as better federal tax and healthcare treatments, but the legislative package is likely to face stiff resistance in Congress where many Republicans have opposed territory-wide debt adjustments.
Senate Finance Committee chairman Sen. Orrin Hatch said after the bills were introduced, "While I have yet to see the full legislative text of the proposals, from what I've read, Senate Democrats appear to want to move the goal posts on broad debt restructuring to favor public pensions and pair it with tens of billions of federal funds for Puerto Rico without any sense of where the funds come from. While this may make for good sound bites, it does not seem to be a serious effort to help the people of Puerto Rico."
Both bills would apply to all U.S. territories, but they are most immediately relevant for Puerto Rico.
SEEKING STABILITY
The first bill, The Puerto Rico Stability Act, would give the broad restructuring capabilities, establish an oversight authority, and mandate that Puerto Rico's governor appoint a chief financial officer and create a five-year fiscal plan subject to the board's approval.
The bill's proposed restructuring would use similar mechanisms to those in the bankruptcy code, but it would not amend and does not sit within the bankruptcy code, a spokesperson for Menendez said. However, it does include language from a previously introduced bill that would extend federal Chapter 9 bankruptcy protections for state public authorities to authorities in Puerto Rico.
The second bill, the Puerto Rico Recovery Act of 2016, is meant to improve Puerto Rico's treatment under federal tax and healthcare programs by increasing Medicaid funding and extending the Earned Income Tax Credit to people working on the island. While Menendez spearheaded the bills, Sens. Sherrod Brown, Maria Cantwell, and Richard Blumenthal co-sponsored the stability act and, Brown and Cantwell co-sponsored the recovery act.
"Congress has to act immediately to fix the federal funding shortfalls and give Puerto Rico the tools it needs to fully restructure its debt," Menendez said. "I look forward to working with my colleagues on both sides of the aisle so we may prevent this fiscal crisis from devolving into a full blown humanitarian calamity."
Puerto Rico Gov. Alejandro Garcia Padilla said in a statement that the legislation will provide Puerto Rico with "the requisite tools needed to not only stave off the worst effects of the crisis in the near term, but will allow [Puerto Rico] to stabilize [its] economy and build upon that foundation for a prosperous future."
The bills' inclusion of territory-wide restructuring, an oversight board, healthcare improvements, and economic growth initiatives closely mirrors the ideas the Treasury Department had put forward when it released its proposal on Puerto Rico in late October. Since that time, Congress has been trying to forge an agreeable solution for the island commonwealth with the Republican-led House Committee on Natural Resources taking the lead. That committee could release a bill on Puerto Rico as soon as this week, several observers said.
MAINTAINING OVERSIGHT
Under the stability act, Puerto Rico would be able to restructure all of its approximately $70 billion of debt if its legislature opts into a nine-person oversight board. The members of the oversight board would have to have financial management expertise. Six of the nine would have to be full-time residents of Puerto Rico and the same number would have to have knowledge of Puerto Rico's history, culture, and socioeconomics, according to the text of the bill. The Puerto Rican legislature would appoint four of the members, the U.S. president would appoint two, Puerto Rico's governor would appoint two, and Puerto Rico's Supreme Court would appoint one who would serve as the board's chair.
The act would also impose a 12-month stay on debt litigation from the date the legislature agrees to the oversight board to allow the governor and the board to work through the fiscal plan. The governor would then issue a restructuring proposal and if creditors object to the terms, the proposal would go to a judge selected by the First Circuit Court of Appeals for approval. The judge would have to make sure the governor's restructuring proposal complies with the fiscal plan and also treats the commonwealth's pension obligations as senior secured debt. That would mean pensions would have higher priority than Puerto Rico's constitutionally backed general obligation debt.
The pension portion of the bill is likely to be one of the most contentious. The concept already drew criticism several weeks ago when a Treasury proposal that treated pensions similarly was circulated.
Matt Posner of Court Street Group, a financial consulting firm with a focus on municipal and Latin American markets, said the senators' idea to set pensions as senior and first priority secured debt has negative implications for the municipal market.
"To date, no legal precedent has been set on this issue, but the results of the Detroit bankruptcy, wherein pensions landed better than bond investors, has set the perception," Posner said. "If Congress passes this bill, it will largely enhance that notion."
He added that allowing GO bonds to be available for restructuring "flies in the face of how state GOs are treated in the U.S. bankruptcy code."
"Treasury claims that because Puerto Rico is a territory and not a state that it sets no precedent," Posner said. "Even though the bill doesn't change the status for GOs in the U.S. bankruptcy code, it will change the perception of the GO pledge for state-side issuers and I'd expect to see state GO yields increase as a result."
OPPOSITION EXPECTED
Daniel Hanson, an analyst at Height Securities, said in a Monday commentary on Puerto Rico that the legislation is "very creditor unfriendly."
"The legislation from Senate Democrats is unlikely to be seriously debated and will be hotly opposed, but its key purpose is to serve as a political bludgeon against the Republican legislation, further polarizing the debate over P[uerto] R[ico] to the detriment of all stakeholders," Hanson said.
Another observer who follows Puerto Rico closely said he questions whether the two bills from the Democrats help or hurt the larger process of Congress trying to find a solution to Puerto Rico's problems.
"In some ways it's designed to push the Republicans in a direction, in others it may just deepen the chasm between the parties to even reach agreements," the observer said.
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