Puerto Rico's Delegate Demands Changes to Debt Crisis Draft Bill

  • House Republicans circulate a plan to impose new oversight
  • Pierluisi says conditions are too harsh to win his support

Speaker Paul Ryan promised that House Republicans would have a plan to help Puerto Rico deal with its $70 billion debt by the end of March, yet some island officials are finding the emerging draft difficult to swallow.

They may have no choice.

The bill being written would create a five-member board that will hire experts to oversee a process for Puerto Rico to restructure its debts, which threaten to cripple the commonwealth’s finances this spring. The board, which would also oversee management of the island’s finances, is modeled after one imposed in 1995 on the District of Columbia.

A draft version and summary of the bill is being circulated by the House Natural Resources Committee, which aims to post publicly a “discussion” draft by March 29. Ryan and the committee’s chairman, Representative Rob Bishop of Utah, plan formal action on the bill by Bishop’s panel in mid-April.

For Puerto Rico Governor Alejandro Garcia Padilla and other island officials, handing over financial control to a federally appointed panel will be difficult. It represents a loss of autonomy and even humiliation. They instead have been pushing for something more like Chapter 9 protection under the U.S. Bankruptcy Code, which Puerto Rico is not eligible for and which many congressional Republican oppose.

Several Conditions

Pedro Pierluisi, Puerto Rico’s Democratic delegate in Congress, is already raising concerns, saying he has several remaining conditions. 

“If they are not met, the bill will not become law,” Pierluisi said in a statement on Saturday. “And, if a bill does not become law, Puerto Rico and its creditors will almost certainly go over a cliff -- together -- this summer.”

Still, he couched his conditions with an insistence he can work to make modifications with his Republican and Democratic colleagues “to create a final product that is a net positive for the people of Puerto Rico.”

The Republicans drafting the bill are trying to find a middle ground between their own caucus’s objections to anything that resembles a bailout or bankruptcy, and Puerto Rico’s demands for some control over its fiscal planning.

The bill, being written in consultation with the Treasury Department and House Democrats, contains elements that will be unpopular on Wall Street and with some Republicans. For instance, existing language would allow for the oversight board to petition a judge for a court-supervised restructuring, which would amount to a cram-down mechanism to force resistant investors to accept a deal.

Red Flags

Some of Pierluisi’s concerns, though, go to the very heart of the bill, raising red flags about what could be fights ahead. For instance, he points to a section of the bill that says the board would be terminated once Puerto Rico has five consecutive years of balanced budgets. 

“I believe this is too long, and that three years is a more appropriate time frame,” he said.

He also notes the bill as drafted includes provisions taken verbatim from the 1995 law that created the independent board for the District of Columbia “that -- in my view -- give the board excessive, unnecessary and anti-democratic powers.”

New Oversight

Pierluisi said the draft would authorize the oversight board to make recommendations about ways to improve fiscal stability and then, if the Puerto Rican government doesn’t adopt the measures, authorizes the board to implement them “over the objections of the Puerto Rico government.”

“While I doubt the board would ever exercise this power, it should not even have it,” Pierluisi said in his statement.

The D.C. panel had similar powers to override decisions by the mayor and city council. That control board ended ts oversight in 2001 after four straight years of balanced budgets and approved audits. Alice Rivlin, a former presidential budget director, was chairwoman of the control board from 1998 to 2001.

Pierluisi also raised objections to a section that would allow the board to appoint a chief management officer to oversee Puerto Rico’s government agencies, which he says “seems to cross the line from ‘macromanagement’ to ‘micromanagement.’” In addition, he said he’s focused on a section that would give the board a role in the government contracting process.

Still, Pierluisi emphasized that he intends to work with Bishop and Republicans “to get this bill in a position where it can become law.”

Deteriorating Conditions

There may be no choice, as conditions on the island continue to deteriorate -- and not just in terms of debt. 

Padilla has warned the island may default May 1 on a $422 million debt payment unless the territory reaches an agreement with its creditors. Puerto Rico and its agencies face another $2 billion payment July 1.

Meanwhile, population losses are hitting every corner of the island. Puerto Rico is experiencing the largest out-migration in more than 50 years, according to a Pew Research Center analysis released on March 24 of new county-level U.S. Census Bureau data.

The island is also dealing with a potentially devastating outbreak of the Zika virus, which is transmitted by mosquitoes. Padilla has requested federal help to deal with an outbreak that the Centers for Disease Control says could hit as much as 20 percent of the island’s population. So far, there’s been no commitment for added Zika funding from Republicans.

Pierluisi did not mention all of these concerns in his statement, but issued a veiled warning to officials in Puerto Rico.

“It is not constructive when certain political leaders in Puerto Rico support debt restructuring authority, but oppose the creation of an oversight board to instill fiscal discipline and improve government efficiency and transparency,” he said. “This is a completely unrealistic position.”

Before it's here, it's on the Bloomberg Terminal.