Congress Is Almost Done Drafting a Puerto Rico Bill. Now What?

The House Natural Resources Committee is so close to finalizing language to help Puerto Rico with its debt crisis that stakeholders are taking positions on specific provisions of a draft leaked late last week.

Republicans on the committee, led by Chairman Rob Bishop (R-Utah), are taking an optimistic tone with the legislation by borrowing the Spanish word for “promise” and calling the bill the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA.

Bishop’s bill so far has taken criticism from both Democrats and Republicans, though the final version will still probably pass when it comes to the House floor next month for a vote. That’s because the measure avoids allowing San Juan to declare Chapter 9 bankruptcy, a key red line set by the conservative Republican Study Committee.

The commonwealth’s elected representative to Congress, however, is still trying to extract a few more promises from Republicans before the House votes on the legislation. Resident Commissioner Pedro Pierluisi, a Democrat, said in a lengthy statement on Sunday that he would like to see a handful of changes to the draft measure before he’ll support it.

Most of Pierluisi’s requested changes focus on the the strong financial oversight board that the bill would establish. He said the bill needs to be changed so the board expires sooner than the current ending of five years of balanced budgets on the island.

Puerto Rico Gov. Alejandro García Padilla said at a Monday afternoon press conference in San Juan that the bill as it currently stands is unacceptable to him because of the strength of the fiscal control board.

“This board would come to impose itself against democracy,” García Padilla said, according to an informal translation of his remarks. “This is not acceptable.”

Pierluisi also wants Congress to avoid giving the board the authority to micromanage the financial decisions that the island makes. He said legislators appear to have copied language from a similar measure to address a fiscal crisis in the District of Columbia in the mid-1990s. The proposed Puerto Rico board would have “excessive, unnecessary and anti-democratic powers.”

“I have advised the chairman of my strong opposition to these provisions, and I believe he is open to taking a good, hard look at them,” Pierluisi said.  “Let me be clear.  This bill can and will evolve. It contains great, good, mediocre, and bad provisions.”

Pierluisi has also objected, along with officials in San Juan, to create a position on the board that would have the authority to reject contracts Puerto Rico’s government signs.

Daniel Hanson, an analyst with the Washington-based consulting firm Height Securities, said in an analysis of the draft that Pierluisi might have enough sway in Congress to get his way on some measures. “Pierluisi’s opposition may carry some limited weight in Congress, as he is the lone representative of the territory to Washington D.C.,” he wrote.

The draft legislation, as it stood on Friday, contained dozens of measures sandwiched between brackets, symbolizing langauge that hasn’t been finalized through negotiations.

These bracketed provisions range from the mundane, such as whether a top official should be called the chief management officer or the chief restructuring officer, to the highly significant.

One bit of language that is both uncertain and important concerns the legal definition for a “debtor.” The current draft contains a bracketed line that would include insolvent entities as debtors, along with uncontroversial debtors such as the territory itself and “territorial instrumentalities,” referring to the public utilities that have racked up so much debt.

The draft language also sets out a complex mechanism that would allow for a stay on debt litigation, a move without precedent in U.S. law. The way the bill foresees that process is still in flux, but an automatic stay would be placed on debt litigation until the control board enters into force.

Susheel Kirpalani, a partner with  the law firm Quinn Emanuel who represents senior holders of Puerto Rico’s sales tax-backed COFINA bonds, told Morning Consult he thinks the bill represents an “excellent, responsible first draft.”

“I think that the House Natural Resources Committee has done an outstanding job of trying very hard to ensure that battle-tested principles that have been upheld under the U.S. Constitution are upheld under any kind of restructuring regime for Puerto Rico,” Kirpalani said in an interview.
But other bondholders aren’t so satisfied with the legislation. Bishop is already taking flak on the stay from the Main Street Bondholders Coalition, which represents small bondholders vested in Puerto Rico.

“We are extremely disappointed Chairman Bishop has put forth such a highly political bill, one that endangers a consensual solution between the Puerto Rican Government and constitutional bondholders,” Matthew Kandrach, vice president of the 60 Plus Association, said in a Monday statement. “The bill is a toxic combination of [House Minority Leader] Nancy Pelosi’s legal stay and the dangerous, precedent-setting Super Chapter 9 proposal that congressional Republicans supposedly rejected last year.”

The committee is expected to release the final version of the discussion draft on Tuesday and continue to update the bill before formally introducing legislation when the House returns in mid-April.

Morning Consult