Drowning in $73 billion of debt and facing the likelihood of cascading defaults in just weeks, Puerto Rico had hoped Congress would cast it a lifeline in the end-of-the-year spending bill Tuesday night. Instead, the territory got next to nothing.
There was no Chapter 9 bankruptcy protection to create an orderly process for restructuring debt — a move opposed by some of the island’s creditors and by many congressional Republicans who compared it to a bailout. There was no emergency infusion of money to allow the territory to make coming debt payments. And there were no new tax credits to help lift Puerto Rico’s economy out of a decade-long recession.
The omnibus bill assembled by congressional negotiators did include some good news for Puerto Rico, in the form of enhanced Medicare reimbursement rates that are projected to bring in more than $900 million to the island’s faltering health-care system over the next decade.
But that is small consolation for Puerto Rico, which is grappling with insufficient tax revenues, a continued migration of residents to the mainland, a shrinking labor force and looming debt payments.
As a territory, Puerto Rico lacks the option of bankruptcy that has been used successfully in the past in places like Detroit. The Supreme Court has agreed to review a case that would decide whether Puerto Rico could adopt bankruptcy legislation without approval by Congress.
The Treasury Department has taken the lead in pressing members of Congress in recent weeks to insert language in the budget that would enable Puerto Rico to seek Chapter 9 protection or create a financial control board that would have enough authority to coerce recalcitrant bondholders to join a restructuring plan. At the moment, a plan to restructure the roughly $9 billion debt of the Puerto Rican electric utility has been approved by all creditors except two bond insurance firms. Similar negotiations will be required for the rest of Puerto Rico's debt.
"This is not an abstract policy question," Treasury senior counselor Antonio Weiss warned last week in a speech at the Peterson Institute for International Economics. "This is a very real and very pressing problem." And he urged Congress to act before what is now "a fiscal crisis turns into a humanitarian one" for the 3.5 million Americans living in the territory. He added that more than a dozen hospitals had closed already.
"Puerto Rico lacks the tools required to resolve this crisis effectively and faces an uncertain and perilous future," Weiss said.
Pedro Pierluisi, Puerto Rico’s nonvoting delegate to Congress, on Wednesday denounced the lack of congressional action, saying it just adds the “shameful treatment” the commonwealth has long received.
“If members of Congress believe that they are somehow helping Puerto Rico’s creditors by opposing efforts to enable Puerto Rico to restructure a portion of its debts, I think they are making a terrible miscalculation,” he said in a statement. “Creditors should favor a legal framework” for reorganizing debt.
Puerto Rico faces a $357 million general obligation bond payment on Jan. 1, but it is unclear that it will be able to pay. Although the current administration there has doubled the sales tax, the island is short on cash, tax revenues are coming in below projections and it already has moved money intended for future revenue bond payments to avoid large defaults. But if the Jan. 1 payment is not made, it would mark the commonwealth’s first major default. In August, the island’s Public Finance Corporation missed a $58 million bond payment.
Speaking Wednesday at the National Press Club, a visibly angry Puerto Rico Gov. Alejandro Garcia Padilla said the territory would have no choice but to default on its upcoming bond payments. “Puerto Rico will default in January or in May,” he said. “There is no money.”
But the territory is seeking the authority it lacks to restructure its debt and put itself on a more sustainable path.
The fate of Puerto Rico has become a political as well as fiscal issue. The territory has as many presidential convention votes as New Hampshire and there are about 1 million Puerto Ricans living in Florida — and potentially voting there. If the GOP-led Congress fails to help Puerto Rico, it could affect the 2016 presidential outcome in a key swing state.
Sens. Orrin G. Hatch (R-Utah), Lisa Murkowski (R-Alaska) and Charles E. Grassley (R-Iowa) — chairs of the Senate Finance, Energy and Natural Resources, and Judiciary committees — on Dec. 9 proposed a bill that would provide about $3 billion in assistance to the territory in addition to cutting the employee share of Social Security taxes in half for five years.
But the trio said that there wasn't enough audited financial information about Puerto Rico's debt to pass legislation that would address restructuring. Hatch helped make sure that the omnibus bill included language giving the Treasury authority to provide technical assistance to Puerto Rico, a way of addressing that concern.
“While there is no silver bullet to resolving the growing debt and economic crisis in Puerto Rico, any path forward must impose fiscal restraint and oversight," Hatch said in a statement Wednesday. "We can now begin the process of improving basic bookkeeping in the territory and end the opacity and lack of transparency in their finances."
Hatch said that the health-care provisions in the budget "are less than desirable. Providing blank checks without oversight or fiscal responsibility is not my preferred approach."
But Treasury officials and financial advisers to Puerto Rico warn that the delay in providing some form of bankruptcy option for the territory would bring further economic damage. In his speech, Weiss said that about 1,500 people were fleeing the island every week and that businesses were also packing up. He said that the second largest shipping company serving Puerto Rico recently pulled out, and that in the last year, General Electric, Pfizer, Merck, Novartis, Micron and Procter & Gamble all reduced or terminated operations in Puerto Rico.
Although many Republicans have called Chapter 9 a bailout, it would in fact not impose any costs on the federal government, Weiss said, adding that failure to restructure debt would.
"We cannot predict the outcome of the complex litigation that would inevitably follow a disorderly default," he said. "But we know that it would be contentious and protracted. ... This could impede the pursuit of restructuring negotiations and stand in the way of Puerto Rico’s economic recovery. There is real risk of another lost decade, this one more damaging than the last."