WASHINGTON – Draft legislation created by a House committee to help Puerto Rico has a good chance of moving forward with a lot of changes, but one major hurdle is its proposed temporary moratorium on litigation over Puerto Rico debt, sources said on Wednesday.
The proposed Puerto Rico Oversight, Management, and Economic Stability Act was first circulated last Friday. But the House Natural Resources Committee, which has taken the lead on formulating a plan for the troubled commonwealth, released an updated version late Tuesday in the form of a discussion draft.
Most of the major provisions stayed the same between the drafts, including giving a five-member, presidentially appointed oversight board the sole ability to file a petition for restructuring on behalf of the commonwealth or its public entities. Restructuring would be treated as a last resort after an attempt to reach a voluntary restructuring agreement with creditors.
The moratorium would be in effect from Dec. 18, 2015 to 18 months after the bill is enacted. The Natural Resources Committee itself admitted in a legislative summary accompanying the draft that the stay "is a highly complex and sensitive component with constitutional implications."
Creditors worry that it 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 that "the second you allow [Puerto Rico] to not face any legal challenges to a debt payment moratorium, that's the second that Puerto Rico stops paying creditors, hands down."
"It sets a very dangerous precedent going forward," he said. "This is opening up the door [state like Illinois and New Jersey] 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.
Another observer who has closely followed the legislation said the legislators have to be careful not to encourage inaction by passing the moratorium, which would undermine the draft's insistence on voluntary debt restructuring between Puerto Rico and its creditors before the oversight board could authorize the filing of a petition for restructuring in court.
There is disagreement about the need for a stay, which would be designed to protect Puerto Rico from litigation as it risks defaulting on several payments due in May and July.
Matt Fabian, a partner in Municipal Market Analytics, said the bill would take at least a few months to pass if everything goes well, while implementation would take another couple of months. That would leave Puerto Rico vulnerable to the possible defaults over the summer and, if the overall bill is not passed, could mean Congress would have to pass a measure for a briefer stay while the larger package continues moving forward.
But others said allowing Puerto Rico and its public authorities to default without placing a temporary moratorium on litigation could bring the debtors to the negotiating table more effectively.
The draft has also faced criticism for several other provisions it contains, leading legislators to make clear the bill will undergo changes before it is expected to be formally introduced, discussed in a hearing, and voted on in the Natural Resources Committee during the week of April 11.
House aides say that, if passed by the committee, the bill would go to the full House and then move to the Senate for consideration. Several senators, including Senate Finance Committee chair Orrin Hatch, R-Utah, have been critical of territory-wide restructuring ideas in the past and could create some problems for the legislation, some observers said. However, most agreed that if the House is able to pass the bill with relatively broad bipartisan support, it is likely the Senate would follow suit.
A Hatch spokesperson said on Wednesday Hatch will have to review the draft in its entirety before commenting, but he "remains committed to working with his colleagues in Congress to create a viable plan that will help bring relief to the people of Puerto Rico and put the territory back on a strong fiscal footing for the long term."
If both houses in Congress pass legislation, it would then be up to President Obama to sign it into law. White House spokesman Josh Earnest said on Tuesday that the White House believes "there should be a mechanism in place to ensure that promised reforms are implemented" and that it will "continue to work with Congress to try to find a solution that will allow both the government and the economy of Puerto Rico to get back on its feet."
Meanwhile, the draft bill has received several complaints from major players in Puerto Rico. House Democrats say they can't support the draft because it would do away with the commonwealth's autonomy. Puerto Rico officials are blasting parts of it as a power grab. Creditors are opposing a "cram down" provision they say would force them to accept a restructuring plan they don't support.
One notable change from the originally circulated draft, 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.
Under the draft, 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 has 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.
