Waiting for Godot in Puerto Rico

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eBlog, 4/13/16

In this morning’s eBlog, we consider the emerging and unprecedented development involving the Treasury and the House Leadership to address the nearing insolvency in Puerto Rico—where leaders in the U.S. House and Treasury—as well as in Puerto Rico—appear to have made significant progress towards imminent action critical to the U.S. territory’s fiscal and human safety. It is interesting that House Speaker Paul Ryan (R-Wis.), a Democratic administration, and Puerto Rican leaders have managed to construct a package the House could act on as early as next week that would be critical to avoiding a human and fiscal catastrophe—even as the Governor of New Jersey appears to be unable to offer any comparable fiscally constructive—or maybe even constitutional—hope for resolution, as Atlantic City nears insolvency.

Waiting for Godot. With Puerto Rico Governor García Padilla warning the U.S. territory is likely to default on some $422 million in debt payments owed next month, as well as on larger payments of nearly $2 billion owed in July—and as the island’s growing humanitarian and Zika crisis threatens the territory’s ability to protect public health and safety, House Natural Resources Committee Chairman Rob Bishop (R-UT) and bill sponsor Rep. Sean Duffy (R-WI) last night introduced H.R. 4900, the “Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA),” noting the Committee had neared the conclusion of a long and collaborative drafting process in coordination with the U.S. Treasury, and stating: “This package of reforms will restore the guard rails of freedom and self-governance in Puerto Rico. It will hold Puerto Rico accountable to its debt, uncover audited financial statements, enforce fiscal responsibility and cut red tape holding down the Island’s economy. It provides tools to redirect Puerto Rico from a path of destitution towards a path of prosperity, preserving freedom and opportunity for the next generation…This is the constitutionally sound solution that will provide real, long-lasting reform to the Commonwealth while respecting the rights of all parties and creditors. It is the Island’s best shot to mitigate its financial collapse and future calls for a bailout, which would be untenable. Congress must act now to avoid a humanitarian crisis that will severely impact 3.5 million Americans living in Puerto Rico and millions of Americans on the mainland.” Please click HERE to view the bill. The proposed bill would give Puerto Rico authority to discharge debt and “cram down” or force its creditors to accept less than full payment on debts due—much as under chapter 9 municipal bankruptcy; the legislation, if enacted, would also halt most creditors’ lawsuits against Puerto Rico. In addition, the bill includes a provision for a federal oversight board—similar to boards used in New York City and Washington, D.C. when they neared insolvency—notwithstanding bitter opposition from Puerto Rican leaders. Nevertheless, Puerto Rico Governor Garcia Padilla last night said he believed that Congress had taken Puerto Rico’s complaints of federal overreach seriously and acted in good faith to tailor the oversight board to Puerto Rico’s situation—even as hedge funds and other opponents of the proposed bill claimed the bill essentially authorized municipal bankruptcy for the island. The Committee is scheduled to hold a hearing on the bill this morning and report legislation on Thursday—which could go to the full House next week.

Key Provisions:

• Under the proposed bill, the new oversight board that would have the power to require Puerto Rico to balance its budgets, address pension liabilities, and file restructuring petitions on behalf of the commonwealth and its entities.
• The bill outlines the board’s makeup, its power to unilaterally impose regulations on the commonwealth, and the required steps for an entity to undergo restructuring; however, it limits the authority of the board to filing restructuring petitions on behalf of the Commonwealth and its public authorities after the debtors sought to reach an agreement with their creditors through voluntary debt restructuring proposals and have provided the board with up-to-date financial statements.
• The bill proposes seven instead of five Presidentially appointed members of the oversight board. It also broadens the number of people who would be recommending potential members: The President would now choose two individuals from those recommended by House Speaker Ryan, two from the Senate Majority Leader, one from the House Minority leader, and one from the Senate Minority leader. At least one of the two individuals chosen from the Speaker’s list must have a primary residence or place of business in Puerto Rico.
• The bill eliminates a provision from an earlier version which provided the proposed oversight board power to unilaterally implement recommendations and binding regulations.
• The draft retains provisions giving the board power to approve a fiscal plan and budget for the commonwealth if Puerto Rico’s government cannot create one which is acceptable.
• As long as the oversight board remains in operation, Puerto Rico would be barred—without board approval—from issuing debt or guarantees, exchanging, modifying, repurchasing, redeeming, or entering into similar transactions with respect to its debt.
• Several other portions of the bill seek to put steps in place to assess the commonwealth’s fiscal health and lay groundwork for economic growth.
• If the oversight board were to find, for instance, that the territory’s pension system was “materially underfunded,” it could mandate an independent actuary to evaluate the fiscal and economic impacts of its cash flows. The bill details what the analysis is to cover.
• The bill also allows the Governor, subject to the approval of the board, to designate a period of up to five years when employers in Puerto Rico must pay employees as of the date of enactment a wage of at least $4.25 an hour.
• The bill would help revitalize Puerto Rico’s infrastructure by expediting permitting for “critical projects:” The governor would be authorized to appoint a “Revitalization Coordinator” from nominees put forth by the oversight board who would help with this process.

House Speaker Paul Ryan said the proposed bill would hold “the right people accountable for the crisis,” and that it would be key to shrinking the size of its government while getting Puerto Rico on a path to fiscal health—and that, over the long-term, it would protect “American taxpayers from bailing out Puerto Rico.” Similarly, Chairman Bishop noted the draft would be the “best shot to mitigate Puerto Rico’s financial collapse and future calls for a bailout, which would be untenable,” adding: “If we get this right, we have an opportunity to put the people of Puerto Rico on a path to economic opportunity; however, if we do nothing, the American people will be on the hook.”

Demonstrating some of the governance challenges, Rep. Nydia Velazquez (D-N.Y.), cautioned against a new provision in the draft bill which would require five board members to vote for a restructuring petition before it could move forward, noting to her colleagues that: “Given that four Board members will be appointed by Republicans, there is significant reason to believe that restructuring authority will never be granted…This concern is compounded by §601, a new provision, which adds a collective action clause to the bill. This clause requires two-thirds of creditors to voluntarily agree to restructure their debt, a hurdle that is not realistically achievable.” In addition, the draft retains a temporary moratorium imposed on litigation over the debt of Puerto Rico and its authorities—a moratorium which would apply retroactively to actions commenced on or before last Dec. 18th—and would continue until the earlier of Feb. 15, 2017 or the date that the first restructuring case is filed.

New Jersey & You. The New Jersey State Assembly Budget Committee yesterday grilled Gov. Chris Christie’s administration as the Governor continues his pressure for a state takeover—with the members wondering if the city’s problems were caused more by the Governor than Atlantic City’s elected leaders. The grilling came amid vituperative comments by the Governor about his fellow Republican leader, Atlantic City Mayor Don Guardian. Yesterday, the State Assembly Budget Committee questioned Department of Community Affairs Director Charles Richman with regard to how Atlantic City deteriorated financially in the wake of being placed under state supervision six years ago—with a state-imposed emergency manager: Now Atlantic City is weeks away from running out of cash flow and has invoked a 28-day payless period to allow time for May tax revenue to arrive to fund the next payroll. Assembly Budget Chair Gary S. Schaer (D-Passaic) noted: “Atlantic City’s financial problems were long ignored by the state and allowed to corrode to what we have today…It is the height of hypocrisy for the Governor to argue that Atlantic City’s best bet is for the state to take over its finances, when the city’s financial failures were exacerbated under the supervision of the state.”

Mr. Richman, in his testimony, stated that under state supervision, the Christie administration did not have power to contain all spending, since it only had oversight on new hires; it lacked authority to implement layoffs. Now, of course, Gov. Christie was told New Jersey House leaders he will not agree to sign into law a state Senate-passed rescue package that provides payment-in-lieu of tax revenues from casinos absent still another state intervention package approved by the State Senate—a package which would empower New Jersey’s Local Finance Board to renegotiate outstanding debt and municipal contracts for up to five years—an approach opposed by both the city and State Assembly Speaker Vincent Prieto (D-Secaucus), who, instead, has proposed an alternative approach—still another avenue opposed by the Governor—which would give a five-member committee increased control if certain benchmarks were not reached by the City. The “fiscicuffs” are now poised to enter the third circus ring next week, when Atlantic County Superior Court Judge Julio Mendez, after rejecting Gov. Christie’s request for a freeze in his courtroom last Friday, agreed to another hearing date next Tuesday.

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