The Promise of PROMESA

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eBlog, 6/30/16

In this morning’s eBlog, we applaud Sen. Majority Leader Mitch McConnell’s leadership in securing swift passage of the House-passed PROMESA legislation yesterday in the full Senate, clearing the way for the President to sign the bill into law and for the appointment of a financial control board.

Puerto Rico: Ensuring Essential Public Services. With Senate Majority Leader Mitch McConnell (R-Ky.) advising his colleagues: “The U.S. territory of Puerto Rico is in crisis, it owes billions of dollars in debt, and it could be forced to leave residents without essential services like hospitals and public safety resources without prompt congressional action…this bill [PROMESA] won’t cost the taxpayers a dime…What it will do is help Puerto Rico restructure its financial obligations and provide much-needed oversight to put into place reforms,” the Senate voted 68-30 to pass and sent the legislation for President Obama’s signature—avoiding default on a $2 billion debt payment due tomorrow. As enacted, the new law will create a process to guide what looms as the largest municipal-debt workout in U.S. history; it comes as Puerto Rico’s government has already commenced defaulting on $70 billion in debts. As enacted, the new neither authorizes nor prevents a default; rather it provides the U.S. territory with a stay against creditor litigation. In the wake of passage, President Obama called the bill “critical first step toward economic recovery and restored hope for millions of Americans who call Puerto Rico home,” adding “I look forward to signing the bill into law, and remain committed to working with Congress and the people of Puerto Rico to return to lasting economic growth and opportunity. U.S. Treasury Secretary Jacob Lew noted: “In a world where people have given up on Washington to deal with technical, complicated, controversial things, it ought to be a moment of some encouragement.” The Congressional action came against a background of increasing fiscal pressure: U.S. hedge funds, which own Puerto Rico’s most senior municipal bonds, had strongly opposed the Congressional legislation, and had even sued to block a local debt moratorium measure, had argued that their bonds were “required to be paid first in times of scarcity, ahead of even what government deems ‘essential services.’” Some municipal bond investors and outside political groups spent millions of dollars on a lobbying effort to kill the debt-relief bill, which could force them to accept larger upfront losses on their investments. U.S. Treasury officials had warned the lawsuit hinted at the likelihood that investors would seek an injunction in the event of a default that would force Puerto Rico to cut essential public services to pay its constitutionally prioritized debts. In an odd pairing, labor unions also opposed the legislation.

Some bondholders say the island’s government, with the blessing of the Treasury Department, has made Puerto Rico’s difficulties worse by threatening to default on debt. They say the territory has exaggerated its financial difficulties.

Pedro Pierluisi, Puerto Rico’s nonvoting member of Congress, applauded PROMESA’s passage and said he is “firmly convinced that it is the best legislative solution to a terrible problem” that his constituents have been forced to confront: “Once the President signs the bill into law, the next step will be to select the seven members of the oversight board,” he added: “I intend to play a role in this process, because it is critical that the board members be intelligent, hard-working, fair, and familiar with Puerto Rico. It is my hope and expectation that at least several of the board members, in addition to being highly qualified, will be of Puerto Rican birth or descent or have strong ties to Puerto Rico.” The legislation authorizes a seven-member oversight board, appointed by the President with input from Congress, with one of the board members required to either have a permanent residence or place of business in the commonwealth. The oversight board will be tasked with overseeing Puerto Rico’s finances and approving any court-supervised debt restructuring. The oversight board PROMESA would create would have the power to require balanced budgets and fiscal plans, as well as to file debt restructuring petitions on behalf of the Commonwealth and its entities in a federal district court as a last resort if voluntary negotiations do not succeed. It would also have the power to require Puerto Rico to follow recommendations it makes, even if the commonwealth’s government disagrees.

Republicans have been wary of the bill’s restructuring process for its similarity to municipal bankruptcy and the possibility it could create a precedent for fiscally troubled states, such as Illinois to come to Congress asking for similar treatment—members, that is, apparently unfamiliar with the nation’s dual sovereignty. Democrats have been concerned with, among other things, the way the oversight board would be structured and its unilateral decision-making power. They also have condemned a separate provision that would allow the governor of Puerto Rico to authorize employers to temporarily pay employees under the age of 25 a $4.25 per hour minimum wage instead of the federal minimum wage of $7.25.

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