WASHINGTON – With the House Natural Resources Committee planning to release a new Puerto Rico bill on Wednesday and vote on it a week later, Treasury Secretary Jack Lew traveled to the commonwealth to hold meetings to drum up support for a legislative solution.
Lew's trip to meet with government officials and other local leaders on Monday was to try to garner support from Puerto Ricans for a powerful, presidentially appointed control board the bill would impose on the commonwealth, according to one knowledgeable source who did not want to be identified. The board, among other things, could unilaterally set the commonwealth's budgets in certain situations.
Obama administration officials have been in discussion with House Natural Resources Committee members and staff for weeks trying to craft language that will draw support from Republicans and Democrats in Congress. The current bill has been criticized from both sides and a vote on it was postponed in early April after it became clear it would not have had enough votes to pass.
Lew's trip and the new bill come a little more than a week after the commonwealth's Government Development Bank defaulted on a substantial amount of its $423 million debt payment due May 1. The default is a precursor to a larger one that may occur on July 1 when the commonwealth has $2 billion of debt payments to make, including $800 million for general obligation bonds guaranteed by Puerto Rico's constitution.
The commonwealth is struggling with roughly $70 billion in debt and $46 billion in unfunded pension liabilities.
The current bill seeks to balance competing interests by creating a seven-member, presidentially-appointed oversight board for Puerto Rico that would have the power to require balanced budgets, address pension liabilities, and file debt restructuring petitions on behalf of the commonwealth and its entities in a federal district court as a last resort if voluntary negotiations do not succeed.
The new bill planned for Wednesday is expected to keep that structure but incorporate changes that address the complaints.
The only substantial portion of the current bill that will be changed in the new measure will be the proposed restructuring language, according to the source.
The committee's goal will be to revise the language enough to make debt restructuring more workable, feasible and likely, as Democrats want, while appeasing conservatives' concerns about the bill's similarity to bankruptcy, he said. Conservative Republicans have said the bill's restructuring is too similar to Chapter 9 bankruptcy and would set a dangerous precedent if financially troubled states want to restructure in the future.
Democrats have criticized a portion of the bill that would lower the minimum wage to $4.25 for workers up to 25 years old on the island and transfer part of the Vieques National Wildlife Refuge to the island's government. But the source said that committee chair Rep. Rob Bishop, R-Utah, and House Speaker Paul Ryan, R-Wis., are making the gamble that "Democrats, when confronted with restructuring language that Treasury says works, will have to eat the minimum wage and land transfer language."
Matt Posner, a principal with Court Street Group, said Republicans will be looking for the new bill to give an explicit priority of payment to the commonwealth's constitutionally backed general obligation bonds and to also make clear that pensions do not have priority over debt.
Republicans have also criticized a Democrat-backed temporary moratorium on litigation contained in the bill that they say would incentivize the commonwealth to ignore its payment obligations. Posner said there could be language included that would create a moratorium on debt litigation but require that Puerto Rico pay back its interest during that time period as a way to balance the competing interests.
Democrats, on the other hand, will be pushing for pensions to have some priority, but Posner said the committee is unlikely to include such language given the politics of Ryan and other Republicans.
One other area of potential change in the new bill could be to its current collective action clause, which says a majority of creditors in number and two-thirds in dollar amount of a particular class voting can bind hold-outs to a restructuring plan. Treasury officials have said this clause makes restructuring too stringent and unworkable. Democrats have reportedly been pushing to lower the necessary number to one-third from two-thirds.
Posner added that even with a new bill released by Wednesday, action on any legislation is unlikely until Puerto Rico "hits a real crisis" as it would if it misses its July GO bond payment.
