Monday, June 13, 2016

House passes PROMESA bill to aid resolution of Puerto Rico debt crisis

By Mark S. Nelson, J.D.

The House passed what members of both parties said is an imperfect solution to Puerto Rico’s debt crisis. Sponsored by Rep. Sean Duffy (R-Wis), the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) (H.R. 5278; Rep. No. 114–602) creates an oversight board to work with the Commonwealth’s government to help restore economic stability and to allow for debt restructuring. The full House passed PROMESA by a vote of 297-127 following an afternoon session to mull eight amendments under a resolution adopted by the House Rules Committee.

A statement by the White House press secretary urged the Senate to quickly pass PROMESA. The statement noted that the president would like to sign the bill into law ahead of the July 1 payment deadline. A separate Administration message voiced strong support for the legislation, while noting worries about provisions regarding the minimum wage, public sector pensions, and the degree to which Puerto Ricans can voice their concerns to the oversight board.

Oversight board, debt restructuring. Representative Duffy called the bill an “excellent resolution” and a “great compromise” while asking members not let “the perfect be the enemy of the good.” According to Rep. Duffy, the bill’s two-pronged approach (oversight board and debt restructuring) to Puerto Rico’s debt crisis will help restore the island’s economic health and enable future economic growth. He also emphasized that the bill is not a taxpayer bailout because no taxpayer funds are involved. Representative Duffy summarized key provisions in the bill when he introduced it last month.

Of the several amendments for which debate was permitted, one offered by Rep. Duffy and Pedro Pierluisi (Resident Commissioner) won approval by voice vote. The revision will remove a statutory cap on participation by firms in Puerto Rico in the Small Business Administration’s HUBZone program, in which firms in historically underutilized business zones can gain access to opportunities regarding federal procurement. The amendment also imposes risk-based verification requirements.

Speaker Paul Ryan (R-Wis) warned that the crisis in Puerto Rico will become worse and could become “a man-made humanitarian disaster” if Congress does nothing. He also said the bill is not a bailout, but that taxpayer funds could be implicated if legislation does not move forward to help the Commonwealth fix its debt woes. The speaker also told critics of the bill it will not encourage bad behavior by states because the bill applies only to territories.

Many Democrats said they would back the Duffy bill as the only viable option to move a bill that can pass the Senate and garner a presidential signature. Pierluisi, who has previously sought passage of his own bill to bring Puerto Rico within U.S. bankruptcy laws, urged passage of PROMESA because it can help to stabilize the Commonwealth’s debt crisis. Pierluisi explained that the debt crisis was the product of an attempt to give Puerto Rico’s citizens a better life that is more comparable to what is possible in the U.S. states. But he also said Puerto Rico will remain a second class economy until it either gains U.S. statehood or becomes a sovereign state.

But PROMESA-backer Rep. James Sensenbrenner (R-Wis) said a separate bankruptcy option would have been less than ideal because Puerto Rico would have emerged from that process unable to re-enter bond markets. He noted that the Duffy bill’s approach has been used successfully in other contexts and that the oversight board would have one member from Puerto Rico.

Representative Raul Grijalva (D-Ariz), who voted for PROMESA, told members that hedge funds were among the creditors that had hurt Puerto Rico, sparking a crisis that has led to a 44 percent poverty rate and a 13 percent unemployment rate. He also said the bill gives too much power to the oversight board, despite the bill’s provisions to slow litigation over the island’s debt.

Nydia Velázquez (D-NY) urged support of the bill, although she said the vote for her was a difficult one on a “profoundly personal issue.” She said Wall Street and the Commonwealth both had roles in creating the debt crisis. But like Rep. Grijalva, who noted the absence of language on pensions and the lack of a response to the Zika virus, Rep. Velázquez too worried about things left out of the bill, such as growth incentives and health care parity.

PROMESA critics, hedge funds, and sovereignty. The several Puerto Rico aid bills that have been introduced in Congress over the past year generally fall into one of three categories: humanitarian, fiscal discipline, and bankruptcy reform. PROMESA aims at dealing with the humanitarian aspects of the debt crisis primarily via the fiscal discipline approach which is to be overseen by the board.

Representative Norma Torres (D-Calif) lost her bid to amend the minimum wage section of PROMESA. The Torres amendment would have removed Section 403 of the bill, which allows for limits on the minimum wage for some workers. The amendment was rejected on a recorded vote of 196-225 and Rep. Torres ultimately voted against PROMESA. Representative Luis Gutierrez (D-Ill) also renewed his objections on the House floor to a bill he said was flawed.

One of the signature criticisms of the fiscal discipline approach has been the perception that hedge funds holding Puerto Rico debt are among the several causes of the crisis and would be the primary beneficiaries of legislation to stabilize the island’s finances. Senator Orrin Hatch (R-Utah), who introduced his own bill similar in many ways to PROMESA, responded to critics during consideration of last year’s omnibus appropriations bill in a floor speech in which he denied that bills to fix Puerto Rico’s ailing economy are just for the benefit of hedge funds.

A bankruptcy revamp that would bring the Commonwealth within Chapter 9 of the U.S. Bankruptcy Code, for now, remains elusive. Yesterday, the Supreme Court held that Puerto Rico’s prosecutorial powers derive from the U.S. for purposes of deciding a Fifth Amendment double jeopardy case (Justices Breyer and Sotomayor dissented from the split court’s decision). But the high court has not yet issued an opinion in a different consolidated appeal that directly raises the bankruptcy issue.