WASHINGTON – The official discussion draft bill released on Tuesday to help Puerto Rico is drawing criticism from nearly all sides.
House Democrats are saying they can't support the bill because it would do away with the commonwealth's autonomy. Puerto Rico officials are blasting parts of the bill as a power grab.
Creditors oppose a "cram down" provision they say would force them to accept a restructuring plan they don't support. They also worry that a stay on litigation over Puerto Rico debt would eliminate an avenue to recoup their investments and diminish any attempts to negotiate agreements.
Matt Posner, a principal at financial consulting firm The Court Street Group, said his biggest concern is the stay on litigation, which would be in effect from Dec. 18, 2015 to 18 months after the bill is enacted.
"The second you allow it to not face any legal challenges to a debt payment moratorium, that's the second that Puerto Rico stops paying creditors, hands down," he said. "It sets a very dangerous precedent going forward. "
Posner added that the restructuring capabilities in the proposal could affect the municipal market by allowing states like Illinois and New Jersey to seek out similar treatment.
"This is opening up the door [for them] to come to Congress down the road and say 'you gave it to Puerto Rico why don't you give it to us,'" he said.
The Republican-led House Natural Resources Committee had taken the lead on drafting the legislation and had held hearings on Puerto Rico, which is currently dealing with roughly $70 billion in debt, $46 billion in pension liabilities and a faltering economy.
An early version of the committee's discussion draft began circulating last Friday and was updated when issued Tuesday, although most of the major provisions stayed the same.
One notable change, which Pedro Pierluisi, Puerto Rico's nonvoting member of Congress is taking credit for, is the elimination of a provision that had called for a chief management officer to serve under the board and oversee certain Puerto Rico departments and other governmental operations. Pierluisi said the provision would have constituted micromanaging Puerto Rico's government.
The draft would delegate the majority of the power to fix the territory's crisis to an oversight board whose five members would be appointed by the U.S. president.
The board would have the sole ability to file a petition for restructuring on behalf of the commonwealth or its public entities, and restructuring would be treated as a last resort.
Debtors could not have the board file a petition for restructuring on their behalf until they have released their most recent audited financial report and engaged in voluntary debt restructuring discussions with creditors.
The restructuring language explicitly stays away from Chapter 9 bankruptcy protection, which had initially been sought by the Treasury Department and Democrats. Instead it includes language adapted from the federal bankruptcy code that indicates debt may be repaid in line with Puerto Rico's constitution.
"Chapter 9 bankruptcy is a tool designed for municipalities of sovereign states, not territories," said the summary of the draft bill. "Retroactively adding territories to Chapter 9 of the bankruptcy code is ill-conceived and would undermine the rule of law; result in a bailout of Puerto Rico on the back of tens of thousands of U.S. taxpayers who have invested their savings in Puerto Rico bonds; undercut efforts to reform Puerto Rico's irresponsible fiscal policies; and create serious implications for the island's future access to capital markets, which is the only path to a new economy."
Stephen Spencer, a financial advisor to several major Puerto Rico creditors including OppenheimerFunds and Franklin Advisors, said the bill's provisions are "worse for creditors than Chapter 9" and that the creditors are "very disappointed" with the bill.
"Most troubling, by including the broad 'cram down' provision … the bill would retroactively eliminate an important investor protection relied upon by millions of individual investors through the U.S. mainland and Puerto Rico," Spencer said.
The cram down provision cited by Spencer is Title III's inclusion of Section 1129(b) of the U.S. Bankruptcy Code, which allows a judge to force creditors to take the terms of a restructuring plan submitted by the board on behalf of Puerto Rico or its authorities even if the creditors object to it.
The updated draft bill also keeps provisions allowing the board to approve and require implementation of the commonwealth's budgets and other recommendations for government operations even if there is opposition from Puerto Rico's elected officials.
Pierluisi noted that the proposal is a discussion draft and that more changes will be made to it in the coming weeks. But he added that the legislation still has a variety of problems that need consideration, specifically the extent of the board's power.
"The oversight board must have teeth, but not fangs," he said. "Certain provisions in the draft bill, nearly every one of which was cut-and-pasted from the 1995 bill establishing a board for the District of Columbia, make a mockery of the quintessentially American principle of self-government."
Pelosi and Reps. Nydia Velazquez and Jose Serrano, both Democrats from New York, also released statements criticizing the draft's attempt to take away Puerto Rico's autonomy.
"Today, as Republicans release their discussion draft, more progress must be made throughout the legislation," Pelosi said. "The sweeping powers of the oversight board proposed in Republicans' current discussion draft are far from what Democrats can support. In its current form, this board would exert undue and undemocratic control over Puerto Rico's government and residents."
Velazquez and Serrano, in their joint statement, said the powers the draft bill gives the board "do not provide oversight, but rather usurp the role of Puerto Rico's own democratically elected government."
The two New York representatives said the restructuring portion of the draft is "promising" but asked that it be changed to ensure that retiree benefits are paid. The committee did not prioritize the commonwealth's obligations in the draft but instead left the ordering up to the board, which would be directed by Puerto Rico's existing laws.
House Republicans and members of the Natural Resources Committee have been clear that they expect changes to the proposal before it is formally introduced during the week of April 11 and as the bill moves through the committee and full House.
Natural Resources Committee chair Rob Bishop, R-Utah, said in a statement accompanying the official discussion draft that "perfecting this legislation has been and will remain a transparent process with input from all stakeholders."
"This discussion draft will change," he said. "We are releasing it now to encourage feedback, so people can respond to the draft proposal, not a supposition of its contents."
House Speaker Paul Ryan, R-Wis., applauded Bishop and the committee's work to try to meet an end of March deadline he had imposed to get a solution for the commonwealth.
"This draft is thoughtful, comprehensive legislation that gives the U.S. territory the tools it needs to deal with its systemic fiscal and budgeting problems—without a taxpayer bailout," he said. "I look forward to working with the committee so we can get Puerto Rico on a path to fiscal health."
A Treasury Department spokesperson said the current draft needs improvements and encouraged the committee and Congress to work toward a bipartisan solution. “Puerto Rico urgently needs the ability to comprehensively restructure its financial liabilities paired with independent oversight that respects the Commonwealth’s self-governance,” he said.
