WASHINGTON – The Treasury Department’s Antonio Weiss on Thursday will ask Congress to move swiftly to provide expanded Chapter 9 bankruptcy protection to Puerto Rico, as well as its authorities, and to provide other relief to the territory as it faces dire fiscal and liquidity crises.
The bankruptcy measure, envisioned as a new section of Chapter 9 that would be available to all U.S. territories but not to U.S. states, would be proposed as part of a comprehensive, four-part plan to address the territory’s problems.
Weiss, counselor to Treasury Secretary Jack Lew, is expected to describe the principles-based plan at a hearing held by the Senate Energy and Natural Resources Committee on Puerto Rico.
The hearing follows the disclosure by the Government Development Bank of Puerto Rico on Wednesday that it had to abandon talks with a group of bondholders over a debt exchange proposal.
Puerto Rico, with 3.5 million residents, has a massive $71 billion of debt and $44 billion of unfunded pension liabilities as well as unpaid bills, delayed tax refunds and many other problems. Its tax supported debt service consumes about one-third of its annual revenues and its total liabilities exceed 160% of its gross national product. The territory has been effectively shut out of the bond market since 2013 and projects it will run out of liquidity by year-end.
Puerto Rico estimates it will face a $28 billion fiscal shortfall over the next five years. But implementation of all of its proposed actions, coupled with economic growth, would only reduce that gap to $14 billion, according to the administration.
Obama administration officials believe Puerto Rico’s situation is dire, that the territory and federal officials have limited tools to address the problems, and that the only solution is this four-part comprehensive plan, which would require action by Congress.
Administration officials believe that expanded Chapter 9 bankruptcy protection is the only fair and orderly solution to structuring the territory’s financial liabilities and stress that it is not a federal bailout. Puerto Rico has 18 different debt issuers, around which 20 creditor committees have been formed, each with its own competing interest. Chapter 9 access to Puerto Rico’s authorities would only cover one-third of the territory’s debt so Treasury wants to grant the whole territory the ability to restructure under Chapter 9 bankruptcy law. Bankruptcy protection would put a hold on litigation and force all creditors to negotiate.
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 broad group of stakeholders that would preserve Puerto Rican authority but would be independent from the territory’s government.
In addition, the administration wants Congress to provide funding and authorize technical assistance to help Puerto Rico bring its accounting and disclosure practices into the 21st century.
Puerto Rico has a history of poor fiscal performance. Historically, its budgets have relied on unrealistic revenue estimates and it has lacked fiscal controls to ensure discipline. Its financial disclosure has been poor. The territory is more than a year late in filing its financial statement for fiscal 2014.
The third piece of the plan would be for Congress to take action to reform Puerto Rico’s historically inadequate Medicaid treatment and other health care programs. The reforms would include removing the cap on the territory’s Medicaid program and increasing the federal support the territory receives through the federal Medicaid match. But administration officials want to avoid any changes that would increase the U.S. federal deficit.
To promote economic growth in Puerto Rico, the fourth part of the plan would be for Congress to provide Puerto Rico with access to the Earned Income Tax Credit program.
Administration officials say Puerto Rico has been mired in a decade-long recession, during which more than 300,000 of its residents left the island, causing its economy to shrink by more than 10% and its unemployment to soar. Its unemployment rate was 11.6% in August, more than twice the U.S. level. The number of residents living at or below the federal poverty rate exceeds 45%, compared to a U.S. national average of about 16%. The median annual household income in the territory is about $19,000, roughly one-third of that in the U.S.
Without additional reforms in Puerto Rico and decisive action by Congress, Puerto Rico’s economy will continue to contract, federal officials are warning.
Meanwhile, Puerto Rico Gov. Alejandro Garcia Padillo, who is scheduled to testify at the hearing, applauded the administration’s proposals.
“My administration has made a concerted effort to work with the Obama Administration and Congress over the past three years and these measures are a direct reflection of our shared commitment to the future of Puerto Rico,” he said. "Last week, my administration introduced legislation for a local oversight board that complies with the applicable legal framework, and we will thus evaluate the federal oversight board carefully to ensure it -- as stated in Treasury's report – ‘respects Puerto Rico's autonomy,’ and complies with the democratic principles underlying our relationship with the United States.”
Resident Commissioner Pedro Pierluisi, who will also testify, welcomed the proposals. He said extending the federal earned income tax credit and child tax credit is consistent with legislation he introduced in September and the Medicaid initiative is in line with legislation he introduced in June.
“In addition, I have made clear that I would support reasonable federal oversight of the Puerto Rico government’s financial management practices, but not federal control — and the Administration’s proposal is consistent with that principle,” Pierluisi said. “Finally, I thank the Administration for supporting my bill to provide state-like treatment for Puerto Rico under Chapter 9 of the federal bankruptcy code. The Administration and I agree that there needs to be a fair and orderly legal process for Puerto Rico to restructure a meaningful portion of its debt. As the Administration recognizes, it will be up to Congress to decide whether to provide for such a process through federal legislation and, if it does, to determine the form and extent of that legislation.”
Puerto Rico Senate President Eduardo Bhatia Gautier said the administration’s proposals are “a big step in the right direction.”
“Although each of the proposals deserves careful study to determine their content, in principle they are very positive,” he said.
