WASHINGTON — Resident Commissioner Pedro Pierluisi, D-P.R., has introduced a bill that would authorize the Treasury Department to guarantee future bonds issued by Puerto Rico and its authorities if it finds they have meaningfully improved the management of their finances.
The Puerto Rico Financial Improvement and Bond Guarantee Act of 2015 would also authorize the Federal Reserve to buy certain short-term bonds issued by Puerto Rico’s governmental entities.
Pierluisi said the bill is “carefully calibrated” to both “enable Puerto Rico to regain access to the capital markets on reasonable terms and to address the legitimate concerns that have been expressed regarding the need for the Puerto Rico government to get its fiscal house in order.”
There may not be much support in Congress or the administration for this legislation as both lawmakers and Treasury officials have repeatedly said there will be no federal bailout for Puerto Rico.
Pierluisi, a nonvoting member of Congress, said the bill is modeled on prior acts of Congress, including the New York City Seasonal Financing Act of 1975 (P.L. 94-143), which authorized Treasury to establish a $2.3 billion fund to make short-term loans to New York City when it was facing a major fiscal crisis and was unable to obtain loans from its usual sources.
“If Congress has authorized the Treasury Department to provide loans to a municipality in the states that was undergoing a fiscal crisis, Congress should also provide [Treasury] with the express authority to guarantee bonds issued by a U.S. territory that is home to 3.5 million American citizens, does not presently have access to the capital markets on reasonable terms, is losing approximately 60,000 residents a year to the states, and may soon be required to curtail essential governmental services,” Pierluisi said in a release.
The bill would require Treasury to examine the current financial management practices of Puerto Rico or its bond issue authorities, identify gaps and weaknesses in its financial management practices and make recommendations to address them.
If Puerto Rico’s governor requested a bond guarantee for the territory or an authority, Treasury would determine whether the government or territory had improved the management of its finances and implemented the department’s recommendations. If Treasury finds those objectives were met and there is a “reasonable prospect” of repayment of principal and interest by the territory or authority, it would notify Congress and guarantee the repayment of principal and interest of the new bonds.
Pierluisi said Section 14 of the Federal Reserve Act authorized the Fed to buy bonds issued by governmental entities in “the continental United States.”
“Although the Federal Reserve has not used its Section 14 authority in the modern era, there is no principled reason why this authority should not be available to buy bonds issued by government entities in the U.S. territory of Puerto Rico,” Pierluisi said.
Pierluisi is also the sponsor of a bill pending before the House Judiciary Committee that would extend Chapter 9 bankruptcy protection to Puerto Rico’s authorities and municipalities.
Meanwhile, a group of Senate Democrats and presidential candidate Sen. Bernie Sanders , an Independent from Vermont, sent a letter urging Sen. Charles Grassley, R-Iowa, chairman of the Senate Judiciary Committee, to hold a hearing on a companion bill to Pierluisi’s that is pending before the panel.
The Puerto Rico Chapter 9 Uniformity Act, S. 1774, would permit Puerto Rico to authorize the restructuring of the debt of its authorities and municipalities under Chapter 9 of the bankruptcy code. The bill was introduced on July 15 by Sens. Richard Blumenthal, D-Conn., and Chuck Schumer, D-N.Y.
“Puerto Rico is in the midst of a severe financial crisis, which has the potential to become a humanitarian disaster,” the lawmakers told Grassley. “It is important to remember that not only does this crisis threaten the welfare of the 3.5 million of U.S. citizens of Puerto Rico, but it also threatens the U.S. economy at large.”
The lawmakers wrote that, between 1938 and 1984, there was a general consensus that Puerto Rico had the power to authorize its authorities and municipalities to adjust their debts. But in 1984, Congress excluded the territory from the ability to file under Chapter 9, finding it wasn’t a state for that purpose.
The letter may fall on deaf ears. Grassley, who testified before the Senate Finance Committee on Puerto Rico last week, agreed with that panel’s chair Sen. Orrin Hatch, R-Utah, that the bankruptcy bills won’t fix the territory’s woes. Hatch said he needs more information about Puerto Rico’s financial condition and debt.
