Puerto Rico is in the throes of a massive debt crisis, and a proposed alternative to a threatened taxpayer bailout could force American retirees to shoulder much of the cost.
A temporary agreement between the Puerto Rico Electric Power Authority (PREPA) and its investors is set to expire Thursday, reigniting a debate over whether the territory’s public corporations should be allowed to declare bankruptcy, according to a report by Reorg Research.
PREPA is perhaps the most visible illustration of Puerto Rico’s growing debt crisis. The Puerto Rican government has amassed over $70 billion in outstanding debt—dwarfing the debt loads of every state but New York and California—of which about $9 billion is owed by PREPA.
According to the Puerto Rico Fiscal Stability Coalition, the Commonwealth’s burgeoning debt load could necessitate a taxpayer bailout of Puerto Rico, which they estimate would cost up to $164 billion. (RELATED: Republicans Abandoning Principles in Bailout for Puerto Rico)
To prevent that, Puerto Rico’s non-voting delegate to the U.S. House of Representatives, Democratic Rep. Pedro Pierluisi, proposed H.R. 870 in February, which would define Puerto Rico as a “state” in the context of allowing its municipalities and public corporations to file for Chapter 9 bankruptcy. (RELATED: Grover Norquist to Push for Statehood for Puerto Rico)
The 60 Plus Association, though, says there are a number of alternatives to both bailouts and bankruptcy that would be less punitive to investors. For instance, negotiating with bondholders could allow struggling entities to restructure their debts while enacting necessary reforms to improve their financial viability going forward.
Along those lines, PREPA bondholders have pitched a $2 billion revitalization plan they say would restore the utility to solvency through a combination of debt forgiveness, rate reforms, and a $1.3 billion infusion of capital. PREPA, however, has rejected the idea, claiming it would lead to rate increases.
Arturo Porzecanski, a distinguished economist in residence at American University, argues in an op-ed for The Hill that the utility’s intransigence should not be surprising, because “the Commonwealth has every incentive to spurn offers of financing in exchange for reforms as long as there is a chance that Congress will provide the Chapter 9 option.”
When Congress empowered U.S. states to authorize Chapter 9 bankruptcies, he explains, it explicitly denied the privilege to Puerto Rico and the District of Columbia. As a sort of compensation, Congress made Puerto Rico’s government debt tax-exempt, helping the territory become the third-largest issuer of municipal bonds in the United States.
Nearly 60 percent of Puerto Rico’s debt is held by American citizens, much of it through 401(k)’s and other investment vehicles that individuals use to save for retirement. In addition, about 70 percent of U.S. municipal bond funds have some level of exposure to Puerto Rican debt, CNBC reports. (RELATED: The DC Exclusive: A Secret $6 Billion Bailout for Puerto Rico?)
The problem with H.R. 870, Porzecanski says, is that it applies retroactively, and would therefore “change the rules of the game” for the millions of Americans who invested in Puerto Rican bonds “because of the Commonwealth’s solemn pledge that they would be serviced in accordance with the creditor-friendly laws in place.”
Chapter 9, he concludes, “would render a myriad of mainland investors vulnerable to potentially inordinate losses in multiple court-supervised workouts.”
H.R. 870 is being fast-tracked in the House, according to an analysis by the law firm Jones Day, and a companion bill could soon be introduced in the Senate.
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