Congress moved closer to addressing Puerto Rico’s dire fiscal situation with the introduction of a revised rescue bill that won tentative support Thursday from House leaders of both parties, as well as the White House and some creditors.
The fundamentals of the new House bill are unchanged from previous versions: Puerto Rico’s territorial government would be subject to a federal oversight board; in return, it could begin an orderly, supervised process of restructuring its $72 billion debt.
But changes to the structure and powers of the oversight board, new guarantees to preserve the relative priority of the island’s various creditors, and the exclusion of a controversial proposal to transfer parkland to the territorial government won agreement between the Republican authors of the bill, House Democrats and the Obama administration.
“We got this bill exactly where we wanted it,” House Speaker Paul D. Ryan said Thursday. “We wanted to make sure that the restructuring worked, and that the restructuring is done in a way that it prevents any taxpayer bailout, or some precedence that could affect the bond markets. And we’re very confident that we’ve achieved that.”
Treasury Secretary Jack Lew in a statement said the “restructuring tools” were “comprehensive and workable.”
The bill still includes a contentious provision allowing for a limited suspension of the minimum wage and federal overtime regulations and omits an administration proposal for equalizing Medicaid benefits.
“There remain extraneous provisions in the bill, such as those regarding labor standards, which will not help address Puerto Rico’s debt crisis,” Lew said. “However, the bill represents a fair, but tough bipartisan compromise.”
The bill also spells out a series of steps required before the new oversight board can turn to a court to impose a restructuring plan on bondholders.
“All in all the bill has been improved drastically by being more voluntary and protecting creditor priorities,” said Susheel Kirpalani, a partner at Quinn Emanuel Urquhart & Sullivan representing a group led by 10 asset management firms. They hold $1.8 billion of bonds issued by COFINA, an Puerto Rican agency funded by sales taxes.
The revised bill’s introduction follows weeks of fits and starts as GOP negotiators, led by House Natural Resources Committee Chairman Rob Bishop (R-Utah), tried to forge a compromise with the Treasury Department and congressional Democrats while also preserving a final product that could win the support of most House Republicans.
Puerto Rico’s government faces a July 1 deadline when roughly $2 billion in bond payments come due. Those include payments on general obligation bonds, usually the most reliable, which are backed by the taxing authority of the government. The Government Development Bank, a fiscal middle-man for the island’s municipalities and other public entities, has already defaulted on the majority of a $422 million payment that was due May 1.
A cadre of conservative Republicans have come out strongly against any fiscal rescue, arguing that any territorial restructuring would be unfair to bondholders and could open the door to future state bankruptcies.
The conservative group Heritage Action for America expressed reservations about the bill Thursday, saying it “would do little to advance much-needed economic reforms” on the island. But an influential conservative voice who has been closely involved in the negotiations, Rep. Raul Labrador (R-Idaho), said he was “very positive” about the bill.
“What I have seen so far, I believe this is a good bill that will get majority Republican support,” Labrador said. “We wanted to make sure that the priorities were in place, that there was no special protection for pensions, and I think that all has been taken care of.”
The bill could be approved by the House Natural Resources Committee next week, readying it to hit the House floor in early June, after a weeklong Memorial Day recess. Senate action would follow.
Democrats gave the bill a cautious endorsement Thursday. “It would not be the bill we would have written, but it does contain a restructuring that can work,” said House Minority Leader Nancy Pelosi (D-Calif.).
Rep. Raul Grijalva (D-Ariz.), the ranking Democrat on the Natural Resources Committee, said there was “some consternation” among Democrats about the bill’s provisions but a willingness to move forward.
“Is there enthusiasm for the product? No,” he said. “But I think we’re down to a few choices: If not this, what?”
The plan also won tentative praise from Pedro R. Pierluisi, Puerto Rico’s nonvoting member of Congress, who said the bill was “not perfect” but “it is clear we are moving in the right direction.”
“I hope every Member of Congress will bear in mind that the collapse of the bill could mean the collapse of Puerto Rico’s government,” he said in a statement. “History will judge us harshly if we do not act swiftly and wisely.”
The new version of the bill would provide a stay through early 2017 against lawsuits that might be filed while the new oversight board gets organized.
The oversight board would have the explicit authority to sell assets of the territorial government, reduce its workforce and overrule acts of its legislature and orders of its governor.
New language mandates that binding fiscal plans developed by the territorial government under the federal board’s oversight must “respect the relative lawful priorities” of existing creditors and requires any court-approved restructuring plan to be “feasible and in the best interests of creditors.”
The bill requires that holders of two-thirds of the bonds of any Puerto Rican agency must agree on any restructuring proposal. Agreement is required for both senior and subordinated bonds, which have lower standing. If that fails, then the new oversight board can turn to a court to impose a plan, acting much as a bankruptcy court would.
A provision transferring a portion of the Vieques National Wildlife Refuge to the territorial government was removed in response to Democrats’ objections.
The power previously vested in the oversight board to make recommendations for economic growth would now lie with an eight-member congressional task force.
Much of the new language in the bill sets out a detailed protocol for choosing the seven members of the oversight board. While all seven are ultimately chosen by the president, only one would be entirely of the president’s prerogative. The other six are to be chosen from lists drawn up by congressional leaders. Five of the seven members would have to agree before any territorial entity could access restructuring.
“The overarching issue was no one trusts anybody else,” Bishop said. “So you want to write it in there so that everyone has to do what we want them to do.”