Puerto Rico’s Senate this afternoon passed a bill proposed by Governor Alejandro Garcia Padilla (“Commonwealth”) this morning to enable a number of the territory’s semi-autonomous agencies, public corporations and authorities, to reduce their debts and other obligations, including those under contracts and agreements with labor unions.
Its House of Representatives is expected to pass the bill providing bankruptcy processes for parts of the Commonwealth government tonight.
The legislation marks a sharp reversal in policy for Garcia Padilla. He has repeatedly said that the Commonwealth would meet all of its financial obligations; his administration has even published advertisements in national newspapers to assure bond buyers of full payment of interest and principal.
Puerto Rico’s economy has lagged that of the States for four decades and has particularly declined during seven of the past eight years — with the one year of growth being at .1%. Its economic problems are largely attributable to its territory status, which denies Puerto Rico about $10 billion a year in Federal funding and untold billions of dollars more due to minimal Federal government purchasing compared with the States and having no power in the making and implementation of national laws.
The Commonwealth government has tried to compensate by borrowing, primarily through issuing more bonds. Its debts now total about $72 billion — more than any State other than California and New York, which each have much larger economies and populations.
Much of the debt has been issued by the Commonwealth’s semi-autonomous agencies, which provide basic services such as electricity, water, sewer, highways, air and sea ports, land and sea mass transit, etc. These agencies generate revenue but have also been subsidized by the central government.
The ability of the agencies and the central government to borrow more to operate has been severely limited because of the amount of debt, failing economy, and falling population as hundreds of thousands of Puerto Ricans have voted for equality within the country — statehood — by moving to the States, which they can do freely as U.S. citizens.
The legislation would permit the debt restructuring A) with the approval of some creditors (75% of 50%) with judicial review and a three-person implementation committee or B) through a plan developed by a public corporation with some creditors under the oversight of a special court.
The Electric Power Authority and Highway and Transportation Authorities are said to expect to not have enough cash to meet their obligations after next month.The cash position of Electric Power Authority (PREPA) has been reduced to as little as $4 million on hand on some days, according to PREPA Governing Board Member Agustin Irizarry. The agency recently had to borrow $60 million raised from a bond sale to pay for new plants to pay its sole remaining fuel oil supplier so that it could obtain more oil. The Ports Authority is reportedly another prime candidate for a bankruptcy-type process.
The Federal bankruptcy code provides a process for government entities within States to declare bankruptcy but not for those under territory governments.