Treasury Secretary Jacob Lew, left, meets with Puerto Rico's Senate President Eduardo Bathia in San Juan. (Senado De Puerto Rico/via European Pressphoto Agency)
There is one thing that Republicans and Democrats can agree on in this partisan period: Puerto Rico is in deep economic trouble.
What to do about it is another matter. But after failing to include relief language in the December budget deal, Congress returns this week with a Puerto Rico bill near the top of its agenda.
House Speaker Paul D. Ryan (R-Wis.) wants legislation on the floor by the end of March. The House Natural Resources Committee, which oversees U.S. territories, plans a hearing on Tuesday to consider establishing a powerful financial-control board to restructure debt and oversee finances without taking away the island’s self-government. The committee hopes to have a bill ready for mark up by the end of February.
The White House has been asking for a package of relief for months to no avail. Treasury Secretary Jack Lew flew to Puerto Rico on Jan. 20, and President Obama talked it over with Senate Minority Leader Harry M. Reid (D-Nev.) and House Minority Leader Nancy Pelosi (D-Calif.) last week.
Democrats late last year coalesced around the idea that Puerto Rico, like Detroit, needed to have the Chapter 9 bankruptcy option to reach a deal with the most-recalcitrant bondholders. The administration also called for additional transfer payments and for the idea that many Republicans support: a financial-control board with the power to help restructure all of the commonwealth’s debts.
“My administration has put forward a comprehensive proposal to give Puerto Rico the necessary tools to address its crisis, create a path to recovery,” Obama told Democrats at their retreat in Baltimore on Thursday. “And the most urgent tool that we need right now — a comprehensive restructuring authority — costs taxpayers nothing and will help more Americans regain control of their own economic security. That’s the kind of thing Democrats believe in.”
With roughly 1 million Puerto Ricans living — and voting — in Florida, a solution to Puerto Rico’s crisis is becoming the kind of thing all politicians believe in.
Meanwhile, running out of cash in the face of new debt payments, the island’s negotiators are inching forward on their own.
In a meeting Friday, Puerto Rico’s government floated a proposal that would restructure about $49 billion of the commonwealth’s crushing $72 billion in debt, covering bonds issued by 17 government entities.
The deal would suspend principal repayments for five years, reduce interest rates that the territory is paying for five years, and swap existing debt for new 35-year bonds backed by all of the island’s tax revenues instead of specific streams of taxes, according to a person briefed on the proposal. The territory would issue $26.5 billion of the new “base bonds,” a figure roughly valued as the same as the old ones, on average, in the market. Creditors holding higher quality bonds would get larger portions.
In a novel twist, the deal also could give bondholders a way of capturing part of the upside of any recovery that may outstrip forecasts. If a recovery is greater than the 4.5 percent annual nominal rate that’s anticipated, the commonwealth would give creditors a quarter of the extra revenues, but not for the next decade. To do this, Puerto Rico would issue $22.7 billion of “growth bonds” that would expire after 35 years.
The likelihood of that sort of upside, though, is remote. Puerto Rico is hemorrhaging money and people; about 3,000 a week are fleeing its sinking economy. And now tourism could take a hit. The U.S. Centers for Disease Control and Prevention recently advised pregnant women to postpone travel to the island because of the spread of the Zika virus there. The virus is suspected as a possible cause of congenital brain abnormalities in newborns. Puerto Rico is among 24 countries and territories now listed on the CDC’s Zika travel alert.
Turning around the island’s decade-long economic decline will take years, even though the government has boosted taxes and cut spending to get its fiscal house in order. On Jan. 18, advisers to the Puerto Rican government said that the commonwealth’s shortfall for meeting debt payments had grown to $16 billion over the next five years, up about $2 billion from September estimates, because of rapidly deteriorating economic conditions and delays in a solution.
“Our crisis is real and getting worse as time passes,” said Melba Acosta Febo, president of the Government Development Bank of Puerto Rico.
To complete any restructuring deal, the Obama administration and negotiators for the island continue to press Congress to give Puerto Rico the option of filing for bankruptcy protection or to create a financial-control board to corral bondholders reluctant to accept lower terms. As a territory, Puerto Rico lacks those options.
Lately the administration’s rhetoric has omitted Chapter 9 bankruptcy, which would cover only about a third of Puerto Rico’s debt and is opposed by many Republicans. But it stresses the need for an authority to enforce debt restructuring.
“The people of Puerto Rico are sacrificing, but unless that sacrifice is shared by creditors in an orderly restructuring, there is no path out of insolvency and back to growth,” Lew said in prepared remarks made in Puerto Rico. “Without congressional action, Puerto Rico will face a long and difficult recovery that could have harmful consequences for the American citizens who call the island home.”
Puerto Rico could become a politically contentious issue this election year. With a population of about 3.5 million people, and about a million Puerto Ricans living in Florida, lawmakers in both parties want to avoid seeming deaf to the pleas for assistance there.
One sign of the obstacles that still lie ahead is the trouble sealing a deal reached in December to restructure the debt of the badly managed Puerto Rico Electric Power Authority. Although negotiators for the territory were able to persuade the bulk of bondholders, including two reluctant bond insurance firms, to agree to new terms, that deal has been mired in controversy in Puerto Rico, where local politicians — anxious about what they might give away — balked at adopting legislation blessing the deal.
One bondholder said sarcastically that Puerto Rico’s legislature “made our Congress seem downright competent.”
Puerto Rico’s resident commissioner, Pedro R. Pierluisi, the territory’s sole member of Congress, said on Tuesday that there had been only one hearing on the PREPA deal in Puerto Rico’s legislature, which he said needs more time. He said the bill — called the PREPA Revitalization Act — “appears to be full of defects or areas that need to be revised.” He said the amendments take up 35 or 36 pages.
He said that the bill would undercut a recently appointed energy commission that oversees the utility, even though bondholders prefer a new board to run the utility more independently. And Pierluisi said that he feared the restructuring deal would raise the island’s already high rates and limit investment, whereas the dealmakers say that the restructuring would have the opposite effect.
“It’s unfortunate because this negotiation with PREPA has already taken 18 months,” he said, “and it could serve as a template for other similar restructuring deals.”
Though negotiators had set a Jan. 22 deadline for Puerto Rico to adopt legislation approving the deal, the bondholders group on Wednesday agreed to extend the date to Feb. 16 and linked the legislation to a $111 million payment.
“Hearing from the politicians on the island that they want to get the deal done and that this extension would give them the time they needed was key for us,” said Dan Zacchei of Sloane & Co., a communications firm representing major bondholders. “There is still a lot of work to do but the goal now is for everyone to stay on the same page and get this across the finish line.”
Harder problems lie ahead. Even if Puerto Rico, the White House and Congress agree on a financial-control board, Republicans and Democrats still differ on other parts of a package that the administration is seeking.
The administration has said it wants a special allocation to balance Medicaid funds that Puerto Rico doesn’t get; Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) wants to pay for that by taking funds from Obama’s health-care plan. Half the Puerto Rican population, or about 1.6 million people, are on Medicaid. The Affordable Care Act provided funds that run out in fiscal 2018.
The administration also wants to extend the earned-income tax credit to Puerto Rico, which doesn’t pay federal income taxes and therefore doesn’t currently get the EITC. Republicans have adamantly opposed anything they say might resemble a bailout of Puerto Rico.
Time is running short. The government has not paid tax refunds, it has raided state pension funds, and it owes money to suppliers and contractors. In May, the island’s Government Development Bank is supposed to pay $400 million to bondholders, and in July, the government must pay $1 billion more. One of the government’s advisers said they “did not have tricks left up our sleeve.”
“We’re at the point where suppliers are stretched as far as we can stretch them,” said Jim Millstein, a former Treasury official and a restructuring expert advising Puerto Rico’s governor. During a Jan. 18 conference call, he said that would mean no more supplies for hospitals or schools and further blows to the economy.
“When we don’t give taxpayers their money, that means that’s money they aren’t spending,” he said. Money paid to bondholders is flowing out of the territory, hurting growth further. Millstein said, “We have to get something done with creditors; otherwise, there will be widespread defaults.”