Senate Finance Chairman Orrin Hatch (R-Utah) introduced a bill this week that would offer some relief to cash-strapped Puerto Rico and could serve as the starting off point for negotiations over what Congress can do to help the island manage its debt problems.
Puerto Rico is pressing Congress to allow it to restructure its debt in bankruptcy, which Republicans oppose but has the support of many Democrats.
The Hatch bill is the first proposal from Senate Republican chairmen to address the fiscal crisis in Puerto Rico, which has $73 billion in outstanding debt, and could signal progress toward providing some aid to the island.
Although allies of the Puerto Rico government and creditors do not support the entire bill, both sides acknowledge it is a start.
“We believe the Hatch bill would help prevent a default and protect bondholders on both the mainland and in Puerto Rico,” said Phil Anderson, a lobbyist for the Puerto Rico Fiscal Stability Coalition. “However, any final congressional assistance plan for Puerto Rico must also include legislation that gives the territorial government the authority of a state to enable municipalities to use the provisions of the Federal Bankruptcy Code to restructure its debts.”
The coalition includes former Puerto Rican officials as well as bondholders working with the Puerto Rico government to lobby for the ability to declare bankruptcy.
Because Puerto Rico is a U.S. territory, it cannot declare Chapter 9 bankruptcy the way that U.S. cities and municipalities can. Puerto Rico Gov. Alejandro García Padilla has been lobbying Congress for months to give the island access to bankruptcy, saying it is the best way to restructure its debt.
The Hatch proposal, co-sponsored by Sens. Lisa Murkowski (R-Alaska) and Chuck Grassley (R-Iowa), would offer up to $3 billion in cash relief, reduce employee payroll taxes for five years and establish a new independent authority that could borrow on the government’s behalf. It would also require Puerto Rico to disclose more detailed financial information about its pension obligations.
Gov. Padilla made a plea this week for Congress to include a measure allowing bankruptcy in the must-pass omnibus spending bill currently being negotiated, saying it would be “the most likely way for Congress to act prior to January.”
The island faces a Jan. 1 deadline to make bond payments of roughly $900 million.
But the likelihood of a Chapter 9 omnibus rider is not high, as there remain a number of other policy riders being considered as part of the bill that are higher priorities for both parties.
Some investment funds that hold island debt oppose allowing the island to declare bankruptcy. They argue that when the investors bought the bonds, bankruptcy was not an option and to allow it now would violate the terms of those agreements and impose a risk on bondholders that they did not anticipate. If Puerto Rico is allowed to declare bankruptcy, it would lose incentive to negotiate with creditors, the investors contend. The funds invest on behalf of retail investors who would be at risk of losing their investments.
“These people should not lose their investments because Puerto Rico can’t control its spending habits,” said a representative for bondholders and creditors.
The creditors consider Hatch’s bill a sensible starting-off point for lawmakers to negotiate a path forward for Puerto Rico. They oppose putting anything in the omnibus bill and would like to see the Hatch bill negotiated over the holidays, although any deals may have to wait until next year because Congress is expected to leave for the year once a spending deal is completed.
“Hatch has some good provisions that we would like to work off of over the holidays to get a solution,” the representative said. “Anything in the omnibus will be disappointing.”
The White House has called on Congress to create a new class of bankruptcy available only to U.S. territories that would allow Puerto Rico to restructure its debt in bankruptcy.