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The Developing Bailout of Puerto Rico

Thursday May 26th, 2016   •   Posted by Craig Eyermann at 6:25am PDT   •  

capitol2A major step toward the bailout of the bankrupt government of the U.S. territory of Puerto Rico was taken on May 25, 2016, when a draft of the “Puerto Rico Oversight, Management, and Economic Stability Act” (PROMESA) advanced from a Congressional committee with bipartisan approval. The Wall Street Journal describes the bill now pending in the U.S. House of Representatives.

The legislation would create a debt-restructuring process and empower a federal oversight board to supervise what is shaping up to be the largest municipal debt workout in American history. The measure wouldn’t spend any federal money.

The House Committee on Natural Resources, which has oversight of federal territories, advanced the bill on a 29-10 vote, with 14 Republicans and 15 Democrats backing the legislation.

The bill, which produced a rare moment of bipartisan cooperation in an election year, has drawn strong opposition from some bondholders and other political groups that spent millions of dollars on television advertisements to defeat it.

However, passage of the bill before July 1, 2016, when Puerto Rico will likely default on an additional $2 billion payment on the money it owes to its creditors, most notably insurance companies Ambac, MBIA and Assured Guaranty, who loaned money to the territory’s commonwealth government and its institutions based in part on Puerto Rico’s constitutional guarantee that it would fully honor its debt obligations. A restructuring of Puerto Rico’s debt that doesn’t make these institutions whole would affect their ability to pay annuities to Americans who put significant portions of their savings into these investments in order to provide a steady stream of income throughout their retirements. A stream of retirement income that the legislation may now be putting at risk.

Writing at RealClearPolicy, American Consumer Institute president Steve Pociask raises concerns that the legislation represents a real blunder:

At the White House’s prodding, the U.S. House of Representatives recently introduced the second version of its “Puerto Rico Oversight, Management, and Economic Stability Act” (PROMESA), which would allow Puerto Rico to restructure its debt in much the same way as bankrupt companies. The legislation, which underwent a superficial rewrite following its original introduction in April, is unique considering that states are not allowed to file for Chapter 9 bankruptcy and that Puerto’s Rico own constitution requires it to meet its debts obligations.

In effect, PROMESA’s vague language allows a powerful and unelected “oversight board” to decide who it wants to protect. For example, the board has the option of bailing out fund-depleted government pension systems ahead of bondholders, who have a constitutionally-mandated priority over all other government expenses. Many of these bondholders are retirees who have put their life savings into bonds and mutual funds. They could find themselves in financial straits, if PROMESA is signed into law.

Pociask goes on to describe how Puerto Rico arrived at its current predicament. We recommend reading the full article—the problems it describes apply to every state and local government entity in the United States.

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May 2016