Republican lawmakers say Puerto Rico must make serious fiscal reforms before they will support a Democrat-led effort to allow the territory to declare bankruptcy.
Democratic Sens. Harry Reid, Chuck Schumer and Richard Blumenthal introduced companion legislation Wednesday to H.R. 870, which was introduced in February by Puerto Rico’s non-voting Democratic Rep. Pedro Pierluisi, and would extend Chapter 9 bankruptcy protections to the island.
“This measure is vital to prevent a humanitarian and financial catastrophe—a clearly avoidable disaster,” Blumenthal said in a press release. “Creditors, investors, ordinary citizens … all will be harmed if the Congress fails to act.”
“We can either do the right thing and give Puerto Rico the bankruptcy option it needs and deserves, or we can risk a disaster on the island and billions in bailout payments later,” added Schumer. “Allowing Puerto Rico’s municipalities to go through the bankruptcy process, just like other American municipalities, is the right way to begin untangling the fiscal mess on the island, and I hope both parties will come together to get this done.”
Chapter 9, which is available to U.S. states but not to territorial governments, allows political subdivisions such as municipalities and government agencies to restructure debts on more favorable terms, with the intent of eventually restoring them to solvency. In 2013, Detroit became the largest city ever to file under Chapter 9.
Puerto Rico has racked up roughly $72 billion in public debt, mostly through the tax-free U.S. municipal bond market, which Gov. Alejandro Garcia Padilla announced in late June is “unpayable” based on its current structure. In response, Garcia Padilla proposed a series of economic reforms along with voluntary debt restructuring, endorsing many of the recommendations contained in an independent report by a former World Bank economist. (RELATED: Welfare, Regulatory Reform on Agenda for Debt-Ridden Puerto Rico)
The U.S. Department of Treasury, however, told Reuters that Puerto Rico could face more difficulty negotiating new terms with its creditors than Garcia Padilla seems to expect, and endorsed Chapter 9 as a more orderly solution.
“The Puerto Rican people—over 3.5 million U.S. citizens—have persevered through a deep recession, and they should not be left to manage their financial challenges in an untested and potentially disruptive process,” the Treasury Department said in a statement.
Neither H.R. 870 nor its new Senate companion have received a single Republican co-sponsor, leaving both on a difficult path forward in the GOP-controlled Congress, but a few well-positioned members are at least considering the idea. (RELATED: Republicans Abandoning Principles in Bailout for Puerto Rico)
According to Bond Buyer, the Senate Judiciary Committee is likely to be the first hurdle for the new bill, and several Republican committee members, including Chairman Chuck Grassley, have expressed tentative support for the concept on the condition that Puerto Rico follows through with pro-growth economic and fiscal reforms.
The measure also has the support of some conservative organizations, such as Americans for Tax Reform, which endorsed H.R. 870 in a blog post, saying it is preferable to a taxpayer bailout that does nothing to address the underlying issues in the Puerto Rican government.
Chapter 9 “would allow for a structured wind-down of this crisis under the administration of bankruptcy courts,” Ryan Ellis writes in the post, adding, “That’s a far better alternative than another bailout coming from Washington.”
“This measure is not a bailout,” Blumenthal stressed, pointing out that it “[involves] not a dime of federal funds. It enables an orderly, rational restructuring of debt, instead of a financial free for all and potential free fall.”
Others, however, contend that bankruptcy and bailout are not the only options available to Puerto Rico. In fact, The 60 Plus Association even claims the two are virtually the same thing, with the only difference being whether the territory is bailed out by American taxpayers or American investors. (RELATED: Congress Could Make US Retirees Shoulder Puerto Rico’s Debt)
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. Statistics compiled by USA Today show that Oppenheimer Rochester Ltd is a particularly heavy investor, with its bond funds taking five of the top 10 spots for exposure to Puerto Rican debt.
Rather than forcing creditors to take losses while simply wiping the slate clean for Puerto Rico, The 60 Plus Association argues that the territory should be forced to make reforms and cut wasteful programs. “Municipalities and hotels could pay for their electricity use,” for instance, and government utilities “could improve [their] labor efficiency and cut union pensions.”
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