By Gabe Rubin
January 28, 2016 at 4:37 pm ET
The entire Senate Democratic caucus signed a letter Wednesday calling for Republicans to allow Puerto Rico to restructure its massive debt. But that show of unity masked divisions among Democrats as to what they would agree to as part of a negotiated solution to the island’s fiscal crisis.
Puerto Rico has some $72 billion in outstanding debt obligations, which Gov. Alejandro García Padilla has said cannot be paid. The island has already partially defaulted on some of its obligations, opting to pay higher priority creditors instead of bondholders with less solvent investments.
New York Sen. Chuck Schumer, the No. 3 Democrat in the Senate, struck a hard line on a solution Thursday, dismissing all options other than giving the island the ability to restructure its debts through Chapter 9 bankruptcy. “Without broad bankruptcy, you’re not going to solve Puerto Rico’s problems,” he said in an interview. “Broad bankruptcy doesn’t cost any money, and it does the most to solve the problem.”
Importantly, he also said transitional funds could not be used as an “alternative to bankruptcy.” Republicans have advocated for just that.
Asked whether he would consider any other possible restructuring options, such as a negotiated deal with Puerto Rico’s creditors, Schumer responded, “No. I’ve said what I’m going to say.”
The letter sent by Senate Democrats to Majority Leader Mitch McConnell (R-Ky.) advocated allowing Puerto Rico to use Chapter 9 bankruptcy, but it stopped short of endorsing it as the only possible restructuring option. It also noted that Puerto Rico had access to a bankruptcy option until 1984. Therefore, Democrats argue, it would not be unprecedented to restore that access.
Sen. Richard Blumenthal (D-Conn.), a member of the Senate Judiciary Committee, disagrees with Schumer’s Chapter 9-or-nothing approach. “There are other ways to restructure. Bankruptcy is just a vehicle to restructure,” Blumenthal said in an interview Thursday.
Blumenthal also said that transitional funds “may well be” necessary to prevent “chaos” in Puerto Rico in the near term. He opposes a Republican bill that would use $3 billion in funds from the Affordable Care Act to pay for the plan, but only because it raids Obamacare. “I would oppose that source of funds, but I’m open to alternatives that combine a restructuring of debt, whether through bankruptcy or other means, with longer-term relief,” he said.
Senate Republicans have all but ruled out allowing Puerto Rico access to Chapter 9 bankruptcy. McConnell said he is open to transitional assistance that doesn’t involve taxpayer money. On the specific question of bankruptcy, McConnell has deferred to the committees with jurisdiction over the law. Those leaders said they are opposed to changing the bankruptcy laws.
Allowing Puerto Rico access to Chapter 9 bankruptcy would not require the use of federal funds, but it would be a significant change to U.S. bankruptcy law. Creditors would also lose money, although they are unlikely to recoup the full value of their investments regardless of which solution lawmakers pick to address the island’s debt problem.
Senate Judiciary Committee Chairman Chuck Grassley (R-Iowa), whose panel has jurisdiction over the federal bankruptcy code, is not a fan of allowing bankruptcy for Puerto Rico. He has repeatedly said a solution to the commonwealth’s crisis must focus on other forms of restructuring and major reforms to its finances.
Along with Sens. Orrin Hatch (R-Utah) and Lisa Murkowski (R-Alaska), Grassley proposed legislation late last year that would provide some tax relief for island residents while imposing a financial control board to oversee the island’s financial restructuring. The bill also would provide $3 billion in transitional assistance funds.
Sen. David Perdue (R-Ga.), another member of the Judiciary Committee, said allowing Puerto Rico bankruptcy protection would be too much of a departure from the intent of the law.
“Chapter 9 was set up for municipalities. This is not a municipality. And we don’t make that available to states, so Puerto Rico doesn’t have that protection,” Perdue said in an interview Thursday. “They have to look at their asset sheet.”
Perdue suggested that the private sector might be willing to step in to provide transitional funds as part of a deal to privatize some inefficient public assets, such as the island’s electrical utility.
There remains no clear deadline for action in the Senate, and a spokesman for McConnell declined to comment on a timeline Wednesday. Speaker Paul Ryan (R-Wis.) wants the House to come up with a plan by the end of March.
Gabe Rubin previously worked at Morning Consult as a reporter covering finance.