Dual Sovereignty & Municipal Bankruptcy

October 22, 2015. Share on Twitter

Complexities of Federalism & Municipal Bankruptcy. U.S. Treasury Counselor Antonio Weiss will testify today before the U.S. Senate Committee on Energy and Natural Resources, where he will ask Congress to act swiftly to provide expanded Chapter 9 municipal bankruptcy protection to both the Commonwealth of Puerto Rico, as well as its public authorities, and to provide other relief. The plan also would provide that in order to gain access to expanded Chapter 9 bankruptcy relief, Puerto Rico would have to agree to federal fiscal oversight. The second part of the plan would be for Congress to authorize the creation of an oversight body made up of a broad group of stakeholders that would preserve Puerto Rican authority, but would be independent from the territory’s government. In addition, the administration is proposing that Congress provide funding and authorize technical assistance to help Puerto Rico bring its accounting and disclosure practices into the 21st century.

The 11th hour effort comes in the wake of a growing liquidity crisis, and less than a day after Puerto Rico’s Government Development Bank ended discussions with a group of Puerto Rico’s municipal bondholders without reaching any consensus on restructuring the Bank’s debt—the Bank plays a key role, as it lends to Puerto Rico’s agencies and faces a looming municipal bond payment of more than $350 million due on December 1st. It also comes in the wake of Puerto Rico Governor Garcia Padilla’s, who will also be testifying this morning, repeated warnings that the commonwealth’s debts cannot be repaid—warnings that, to date, appear to have had limited impact on so far fruitless voluntary debt-restructuring negotiations. In his testimony this morning, Mr. Weill is also expected to call for “independent and credible” fiscal oversight from Congress, possibly referring to the concept of a financial control board—mechanisms which were key to avoiding insolvency for both New York City and Washington, D.C. Mr. Weiss is expected to propose a modified version or variation of the current federal statute for chapter 9 municipal bankruptcy—one which would be available to all U.S. territories, and which, obviously, would not be subject to state authorization, as it required under the current federal law for any municipality to be eligible for such protection. In addition, he is expected to propose the restructuring of Puerto Rico’s current $72 billion in outstanding municipal debt. In the Treasury’s legislative outline released late yesterday, the agency warned Puerto Rico would exhaust the emergency steps it has taken to remain solvent by this winter, noting: “As currently structured, Puerto Rico’s debt load is unsustainable.” The Treasury proposal also will recommend overhaul of the island’s Medicaid program, as well as access to the earned-income tax credit.

The complexity of addressing Puerto Rico’s looming insolvency is complicated in that chapter 9 municipal bankruptcy, in recognition of dual sovereignty, provides that no mainland municipality may file for municipal bankruptcy without state authorization. Since Puerto Rico is not a state, but rather a territory, not only does Puerto Rico not have access to chapter 9, but neither does it have the requisite authority to authorize access to any of the island’s 87 municipalities. Current negotiations have involved some 18 different municipal debt issuers—so that 20 creditor committees have been created, focused on competing interests.

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