Puerto Rico has outstanding bond obligations of $72 billion and owes pensioners another $46 billion. The territorial government and many of its public utilities and organizations are no longer able to borrow from the capital markets, and emigration, unemployment and flat economic growth have made it increasingly difficult for those entities to meet existing obligations.
The entities have indicated they are likely to default on payments due in May and June, including a $770 million payment owed to holders of territorial general obligation bonds.
Bishop’s draft legislation envisions a five-member control board appointed by the president. Two members would be selected from a list provided by the speaker of the House; another two would be selected from a list provided by the Senate majority leader.
The structure is similar to the congressionally imposed financial control board that oversaw the District of Columbia government from 1995 to 2001 — an entity that has been widely credited with putting the capital city on a path to its recent prosperity.
The board would have access to audited financial statements from the territorial government and would have the authority to oversee, draft and ultimately implement budgets. But its most important powers are likely to involve debt restructuring.
Under the bill, the control board would have to vote to authorize the filing of a restructuring petition in federal court — and that could happen only after audited financial statements are provided, an approved budget and long-term fiscal plan is in place, and mediation has taken place between Puerto Rico’s public borrowers and their creditors.
“This discussion draft will change,” Bishop said in a statement. “We are releasing it now to encourage feedback, so people can respond to the draft proposal, not a supposition of its contents. … Perfecting this legislation has been and will remain a transparent process with input from all stakeholders.”
The Treasury Department, which has called on Congress to create a path for a comprehensive restructuring of Puerto Rico’s debt, said Bishop’s proposal “needs improvements” in a statement issued Tuesday night. “Final legislation must provide Puerto Rico with tools to achieve a lasting, workable solution to this crisis and create a path to recovery for the people of Puerto Rico,” the statement said. “Only Congressional action can end this crisis.”
The draft’s release comes ahead of an April 1 deadline set by House Speaker Paul D. Ryan (R-Wis.) for various House committees with a stake in the Puerto Rican fiscal crisis to weigh in with proposals. The Natural Resources Committee, which has jurisdiction over territorial matters, has taken the lead in that effort.
Ryan thanked Bishop for his efforts in a statement Tuesday: “This draft is thoughtful, comprehensive legislation that gives the U.S. territory the tools it needs to deal with its systemic fiscal and budgeting problems—without a taxpayer bailout. I look forward to working with the committee so we can get Puerto Rico on a path to fiscal health.”
But the solution to Puerto Rico’s fiscal woes faces political headwinds in Washington, where forces on the left and the right have lined up against some of the provisions in Bishop’s proposal.
The conservative group Heritage Action, for instance, may balk at restructuring provisions that could be seen as bankruptcy under another name, and it has also pushed for pro-growth measures that do not appear in the draft.
“Heritage Action is still reviewing the text, but conservatives must ensure the bill would not set any bad precedents by retroactively changing the terms of contracts or reversing payment prioritizations,” chief executive Michael Needham said in a statement.
On the left, some advocates for the Puerto Ricans are balking at the imposition of a control board. Rep. Luis V. Gutiérrez (D-Ill.) said in a statement Monday that the board amounted to “a new layer of colonial oversight.”
“The solution is not a tighter rein on self-determination, but a growing, dynamic economy that creates jobs for Puerto Ricans in Puerto Rico,” he said. “I am glad proposals are finally being crafted, but as I feared, at first glance this proposal looks like it was crafted by people who care more about bondholders being paid than Puerto Ricans being employed in building their own economy.”
Rep. Raúl M. Grijalva (D-Ariz.), the ranking Democrat on the Natural Resources committee, said he was “optimistic” about negotiating a compromise bill but also balked at the powers granted to the control board.
“The provisions are onerous and undermine the sovereignty of Puerto Rico,” he said. “In order to gain Democratic support of the bill, the sweeping power of the oversight board will need to be reined in.”
On the flip side, the inclusion of any mechanism offering a court-ordered restructuring means that creditors could be forced to swallow billions in losses, and they are none too happy about that.
Stephen Spencer, a financial adviser to one major group of bondholders, said in a statement Tuesday that the Bishop proposal would be “worse for creditors than Chapter 9 and would “transfer billions of dollars from retail investors and retirees to pay for Puerto Rico’s mismanagement and reckless spending.”
“If this draft moves forward the people of Puerto Rico will see their Commonwealth’s standing fall in the credit markets and its fiscal problems go unaddressed,” he said. “The people of Puerto Rico deserve a far better solution than what is contained in this bill.”