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House Committee Releases Draft Puerto Rico Legislation to Near-Universal Disapproval

On March 29, 2016, House Republicans released their draft “rescue plan” for Puerto Rico. The draft legislation from the House Natural Resources Committee contains several provisions, and Committee Chair Rob Bishop (R-UT) insists that the draft will change. According to Chairman Bishop, the Committee has chosen to release the draft to “encourage feedback.”

Feedback was immediate and very little was positive.  A follow up proposal is expected to be released soon to reflect comments and suggestions on the initial draft.

The legislation, introduced as the “Puerto Rico Oversight, Management, and Economic, Stability Act,” or “PROMESA,” seeks to establish an oversight board to assist the government of Puerto Rico, including instrumentalities, in managing its public finances, and for other purposes.

Overview of the Draft Legislation

  • Oversight Board: The draft legislation creates an oversight board with 5 appointed members and the ability to hire experts as needed. The board would not be subject to the control of the Governor or Puerto Rico’s legislature, meaning the board will control the process without having to answer to the local government. The board will have the ultimate authority to enact a fiscal plan and a budget, if the Governor and legislature fail to do so.
  • Debt Restructuring: The draft legislation includes the potential for debt restricting, but only as a last resort. In order for any debt restructuring to take place, the following conditions must be met (1) Required audited financial statements, (2) A fiscal plan and budget are in place, and (3) Mediation among the various debtors and creditors. Only after all conditions have been met, the Oversight Board would be able to authorize a petition filed in the U.S. district court for restricting. The legislation allows for court supervised debt restructuring where necessary, but not in the context of access to Chapter 9.
  • Infrastructure Revitalization: A Revitalization Coordinator, in consultation with the Governor and various Puerto Rico agencies, will nominate revitalization projects to the Oversight Board from all submitted, and the board will have the authority to approve or disapprove projects.
  • Other Aspects of the Legislation: The proposed legislation addresses wages in the territory by allowing Puerto Rico to adjust minimum wage requirements for temporary workers up to the age of 25. It would also exempt Puerto Rico from the U.S. Department of Labor’s proposes 113% increase in the individual salary threshold to qualify as exempt from federal overtime pay requirements. These provisions essentially allow for lower wages in Puerto Rico.

Reaction to the Draft Legislation

The draft legislation is drawing repudiation from across the political spectrum, including Puerto Rico’s New Progressive Party (Statehooders) and Popular Democratic Party (“Commonwealthers”), Democrats, Republicans, and even bondholders.

House and Senate Democrats had hoped for access to Chapter 9 or at least more concrete debt restructuring provisions, but much of the criticism of the draft legislation centers on the authority given to the Oversight Board.

Juan Hernandez (PPD), director of the Puerto Rico Federal Affairs Administration, said that “the scope of the proposed fiscal oversight board is both too broad and directly contradicts the relationship that has developed between Congress and Puerto Rico over the last 66 years.”

Resident Commissioner Pedro Pierluisi (PNP) released a statement in which he acknowledges that “if Congress is going to provide Puerto Rico with reasonable debt restructuring authority, it will be coupled with a fiscal oversight board.” He qualified this by adding that any “oversight board must have teeth, but not fangs.”

Pierluisi continued to say that “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.  As a territory, Puerto Rico lacks democracy at the national level, so a bill that suppresses—rather than supervises—our democratic process at the local level cannot stand.”

Representatives Jose Serrano (D-NY) and Nydia Velazquez (D-NY) issued a joint statement where they lay out several concerns with the legislation; chief among them is the authority of the Oversight Board:

“While recognizing that the bill is a draft and will evolve over coming weeks, we have several immediate concerns.  First and foremost is that the oversight board, as currently structured, undermines Puerto Rico’s rule of law. It would allow the board to declare Puerto Rico’s own laws ‘null and void,’ while also permitting the board to enact its own laws over the objections of the island’s government. Such powers do not provide oversight, but rather usurp the role of Puerto Rico’s own democratically-elected government. Vesting such power in the Board is, at best, troubling and, at worst, dangerous. Because of these concerns, we cannot support the legislation in its current form.”

Matthew Kandrach, vice president of the 60 Plus Association, said that his group is “extremely disappointed Chairman Bishop has put forth such a highly political bill, one that endangers a consensual solution between the Puerto Rican [g]overnment and constitutional bondholders.

White House spokesman Josh Earnest said that the White House believes the legislation represents a constructive, good-faith effort but could be improved. Earnest said that mechanisms should be added to boost oversight of Puerto Rico’s government and by expanding the Earned Income Tax Credit (EITC) to Puerto Rico.

Republicans oppose the legislation for other reasons. The draft legislation allows for the Control Board to seek a stay of litigation. Rep. Jeff Duncan (R-SC) opposes a stay on litigation and believes that the pressure should be kept up. He is a member of the Natural Resources Committee.

On the issue of wages, Brad Setser of the Council on Foreign Relations argued that if you lowered the minimum wage to $5 per hour, wages in Puerto Rico would still be about $4 per hour higher than in the Dominican Republic, so Puerto Rico still would not get the low-wage business. With a $5 per hour minimum wage, Puerto Ricans would be earning at least $5 per hour less than the going equilibrium wage in Orlando.

There appears to be much work to be done. The legislation as it stands does not appear likely to pass in this divided Congress. Puerto Rico owes debt payments of roughly $2.4 billion between May 1 and July 1, so Congress must act swiftly. As Pierluisi said in his statement, “it is important that we all take a collective deep breath and stay focused on the task at hand.  The future of Puerto Rico is at stake.”

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