A looming debt crisis in Puerto Rico is setting off a fresh fight in Congress, where lawmakers are debating a statutory fix that could allow the island territory to declare bankruptcy.
Advocates of the change say it would resolve a technical oversight from a decades-old bankruptcy law, while skeptics warn that it could throw into question billions of dollars in debt now owned by investors across the country.
Earlier this week, Puerto Rico’s governor declared that the nation’s $72 billion pile of debt was too much for it to handle. To avoid a “death spiral,” Gov. Alejandro Garcia Padilla said the commonwealth would have to break its promise to pay back some money owed.
But a quirk in the nation’s bankruptcy code is throwing Congress into the middle of the matter, as lawmakers will need to quickly pass a new law if Puerto Rico is going to gain access to the nation’s bankruptcy courts.
Puerto Rico’s nonvoting representative, Resident Commissioner Pedro Pierluisi (D), is working to build support for legislation that has simmered in Congress for months but has taken on new urgency following the governor’s declarations.
Sens. Chuck Schumer (D-N.Y.) and Richard Blumenthal (D-Conn.) are working to build support for similar legislation in the Senate.
A 1984 update to the nation’s bankruptcy laws left Puerto Rico out of the picture, apparently by accident. Chapter 9 of the bankruptcy code gives states the power to allow agencies or municipalities to declare bankruptcy, as happened most recently in Detroit. But the law is silent on territories like Puerto Rico, leaving it on the outside looking in when it comes to public bankruptcies.
“As best we can tell, it’s a typographical error in the bankruptcy code,” said John Pottow, a bankruptcy expert and legal professor at the University of Michigan. “It should be noncontroversial.”
Giving that power to Puerto Rico would allow some of its subsidiaries, like a debt-laden power utility, to enter into bankruptcy court, giving the territory some breathing room on its finances.
Lawmakers pushing to address that change say it was a simple oversight, and Puerto Rico was always supposed to have the same ability as the states.
Furthermore, they say letting Puerto Rican agencies settle their troubled finances within the bankruptcy system is a far better alternative than the current undefined environment.
“The question will be … who is paid, in what order and by how much,” said Blumenthal in an interview with The Hill. “That is a decision that will be made under the rational and orderly guidance of the bankruptcy court, or it will be done chaotically.”
There is strong support for the change in Puerto Rico, and experts and many investors also back opening up bankruptcy to the island.
But some GOP lawmakers and investors on the hook say that the reality is that billions of dollars in Puerto Rican debt have been sold, and now the rules could be retroactively changed, leaving someone short-changed.
Furthermore, skeptics argue that handing Puerto Rico the keys to bankruptcy court, without new restrictions and oversight of its finances, effectively forgives years of financial mismanagement.
At a February hearing at the House Judiciary Committee, Rep. Darrell Issa (R-Calif.) aired some of those concerns, questioning the proposal and whether Congress can make the change after billions in dollars of debt had been sold.
He added that when cities have hit hard times, oftentimes they are faced with heightened oversight, oftentimes from the federal government, as they dig out from their fiscal troubles. Granting Puerto Rico bankruptcy powers without those additional strings gave him pause.
“Why should we look at pervasive problems and allow them to be bankrupted out from underneath without the reforms that would prevent it from happening
in the future?” Issa added.
And investors that could be on the losing end of a bankruptcy arrangement are crying foul. At that same hearing, a representative of investors in debt from the Puerto Rico Electric Power Authority (PREPA), likely to go bankrupt if the change goes through, blasted the idea, saying the utility could make up the money elsewhere rather than shirking investors.
House Judiciary Committee Chairman Bob Goodlatte (R-Va.), who would steer the bill through the House, is striking a tempered tone. The chairman is urging close study of the proposal, while noting it could have broad economic consequences, according to a committee aide.
A spokesperson for Sen. Chuck Grassley (R-Iowa), chairman of the Senate Judiciary Committee, said Thursday that there was no clear path forward just yet, but he is hearing from all interested parties.
"What is clear, though, is that bankruptcy alone isn't going to solve all of the financial problems Puerto Rico has gotten itself into," said the spokesperson.
And the matter has not broken strictly down partisan lines. Former Florida Governor Jeb Bush (R) expressed support for the bankruptcy proposal when he visited Puerto Rico in April.
Pierluisi told The Hill that he hopes to see the bill move before Sept. 1, the deadline for restructuring talks at the power authority. He was highly confident the bill would eventually advance and described the opposition as a narrow band of investors trying to extract concessions from PREPA.
“The financial community at large … investing in Puerto Rico support the bill,” he said. “The only opponents are the funds and major creditors which are negotiating with [PREPA] as we speak.”
“Apparently they believe it’s in their interests … to keep Puerto Rico in the current limbo,” he added.
Puerto Rico’s financial woes are a decade in the making, as the territory was hit hard by the financial collapse and never really recovered. A large number of Puerto Ricans have moved to the U.S. mainland seeking better opportunities, further exacerbating the territory’s woes by shrinking its tax revenue base.
Meanwhile, the island’s municipal debt has long been popular with investors, in part due to the fact that investors receive interest exempt from all federal, state and local taxes, a feature unique to Puerto Rico bonds. All that has combined to make Puerto Rico by far the most indebted place in the United States, reaching the point where public officials are declaring it unsustainable.
Puerto Rico has so far been staying current with its debt payments as they come due, but experts say that without a change, it’s highly likely the territory will have a very hard time keeping that up.
Advocates of the bill are working to gather support but also are extremely quick to make clear that the bankruptcy bill has nothing to do with another toxic term in Washington: bailout.
White House press secretary Josh Earnest ruled out a federal bailout of the island earlier this week, instead highlighting legislative efforts to change the bankruptcy code.
And Blumenthal was adamant that no federal dollars are at risk under his bill.
“There’s no federal funding involved. None,” he said. “It’s not a bailout.”
With Puerto Rico trying to keep up with payments, lawmakers say they are trying to move legislation as fast as possible.
“I have a feeling that things are going very fast by congressional standards,” said Pottow. “Bankruptcy is, by definition, an urgent situation.”
“I purposely didn’t seek cosponsors,” said Pierluisi. “I hope that it doesn’t become politicized because you can look at this from any angle and it is the right thing to do.”
This story updated at 1:13pm, July 6th. The story incorrectly identified Rep. Darrel Issa (R-Calif.) as a Democrat.