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NYC Bar Association Hosts Lively Panel Discussion on Puerto Rico Bankruptcy, Economic Options

On Tuesday night, September 29, 2015, the New York City Bar Association hosted a lively panel discussion on the current economic crisis in Puerto Rico.

The prominent panelists included Rafael Bernabe, Economist and Author of “Puerto Rico: Crisis y Alternativas”; Hon. Arthur J. Gonzalez, Retired Chief Judge of the United States Bankruptcy Court for the Southern District of New York and Current Senior Fellow at New York University School of Law; Dr. Andres Torres, Professor of History, Lehman College; Natasha Bannan, National President-Elect, National Lawyers Guild; and moderator Juan Cartagena, President and General Counsel, LatinoJustice PRLDEF.

Dr. Andres Torres described the background of the current economic situation and argued that the Puerto Rican economy has been “imploding” since 2006.

In the period between 2006 and today, there has been a 13% drop in Puerto Rico’s net economic growth, domestic investment fell by 11%, the number of employees dropped by 18%, the unemployment rate in Puerto Rico rose to almost 12% (twice the unemployment rate in the United States), and the labor force participation rate fell to 36% (which does not even include part-time employees who want full-time work or people who have abandoned their search for a job, for example).   At the same time, the government debt ballooned by approximately $30 billion, from $43 billion to $73 billion.

Dr. Torres argued that the “conventional” view—that Puerto Rico suffers from an uncompetitive labor force, weak industrial policy and poor public fiscal policy (failure to collect taxes and unwise borrowing decisions)—is not accurate; instead, Puerto Rico’s problems can be traced to its historical reliance on special development subsidies from the United States.

Dr. Torres suggested that the United States willingly provided these subsidies when Puerto Rico played a strategically important geopolitical role in the twentieth century, but since the end of the Cold War, Puerto Rico’s value as an asset of the United States is declining.

As a result, Puerto Rico has been unable to convince the “American elites” in business and politics to continue subsidizing its economy, and its future is unclear.

Dr. Torres argued that local politicians in Puerto Rico should stop propping up the “unstable and artificial relationship between the United States and its territory” and consider alternatives.

Hon. Arthur Gonzalez provided a primer on U.S. bankruptcy law and an analysis of the chapter 9 debate.  He began by explaining how chapters 7 and 11 work under the U.S. Bankruptcy Code, and how chapter 9, which applies only to municipalities, differs.

Among other things, chapter 9 lacks the judicial oversight of the other chapters.  This is because Congress was conscious of the sovereign immunity protections of the 10th Amendment when it drafted chapter 9 and, as such, prohibited a municipality from filing for relief under chapter 9 unless it has been authorized by its state to do so.

Although the Bankruptcy Code defines Puerto Rico as a state, it specifically excludes Puerto Rico as a state for chapter 9 purposes (so it cannot authorize its municipalities to file chapter 9).  This is key to the litigation over the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”) pending before the United States Supreme Court.

Thus, the bankruptcy court’s power over a municipal debtor arguably is limited to its ability not to approve a reorganization plan if it does not meet Bankruptcy Code standards.

Judge Gonzalez suggested that the primary benefit to any bankruptcy proceeding, and one that Puerto Rico was trying to achieve by enacting the Recovery Act, is the opportunity to resolve all disputes in a single forum using a collective process.

In that sense, chapter 9 would be helpful to bring creditors to the table and potentially redistribute a portion of the revenues that are subject to municipal bondholders’ liens.  Judge Gonzalez noted that chapter 9 availability for municipalities would be part of a broader solution to adjust all of Puerto Rico’s indebtedness.

Natasha Bannan of the National Lawyers Guild posited that international human rights law offers a comprehensive solution to Puerto Rico’s crushing debt load.  In her view, the debt should be repudiated as odious debt,” an equitable concept in international law that essentially permits a country to avoid repaying borrowed funds that have been used in ways that do not benefit, or even oppress, its citizens.

Ms. Bannan expressed “moral outrage” on behalf of the 3.4 million people in Puerto Rico who are subject to austerity measures and whose basic human rights are being sacrificed to pay debt service to creditors, including those who “knowingly purchased risky bonds.”

While Ms. Bannan acknowledged that Puerto Rico is not a sovereign nation that can affirmatively seek relief from an odious debt, she argued that it is a valid equitable defense to any action brought against Puerto Rico for defaulting on such debt.

Ms. Bannan argued that the harmful consequences of the debt—such as lack of access to international financial markets; lack of control over tariffs, air space, communications, modes of transport, etc.; high cost of food; “brain drain” or forced migration on a massive scale; and underfunded or eliminated critical public services—implicate moral and ethical concerns that should serve as a call to action to the “colony” of Puerto Rico.

Ultimately, she argued, if the government of Puerto Rico cannot demonstrate how its constituents have benefited from the debt, it should refuse under equitable principles to pay it.  She did not address the implications of this refusal upon Puerto Rico’s access to the financial markets or its future cost of capital, however.

The economist Rafael Bernabe argued that Puerto Rico is subservient to U.S. corporate interests.  U.S. corporations have benefited from Puerto Rico’s tax policies for 100 years, and in recent years, they have realized approximately $30-37 billion in annual profits that flow out of the island.

Significantly, that profit is not being reinvested in Puerto Rico, and as a result, the Puerto Rican economy is incapable of generating sufficient employment for its workforce, and its wages and income per capita are very low.

This has led to increased migration to the United States, which has comparatively better pay and more plentiful jobs.  Mr. Bernabe argued that, contrary to popular belief, these problems have been intensified by the recent crisis, not caused by it.

Thus, he contended, the policy of providing tax exemptions for companies that invest in Puerto Rico is no longer working, if it ever did.

Mr. Bernabe argued that the government’s cycle of borrowing more money to pay its debt service while imposing austerity measures upon its people, rather than increasing taxes, is ill-advised and should be discontinued.  Instead, the solution is “an economic program for sustainable and self-propelled economic development” in Puerto Rico that would generate profit and income for reinvestment in Puerto Rico.

In short, argued Mr. Bernabe, Puerto Rico needs taxation of corporate profits, debt relief, better economic infrastructure facilitated by a 21st century version of the New Deal-era Puerto Rico Reconstruction Administration, and social mobilization.

The panelists’ perspectives demonstrate that the solution to Puerto Rico’s economic crisis must be multi-faceted and is not as simple as chapter 9 bankruptcy, or unilateral bondholder negotiations, or revised fiscal policies, or increased austerity measures, or borrowing additional funds.  Instead, Puerto Rico must find a comprehensive financial, social and political solution to the problems it faces.


2 thoughts on “NYC Bar Association Hosts Lively Panel Discussion on Puerto Rico Bankruptcy, Economic Options”

  1. Thanks for this very interesting message…as a Puerto Rico resident it’s very scary and very worried for friends and family in P R …

    Pastor LUIS F Colon /. Baptist Church

  2. A “lively panel discussion,” was it? Hard to imagine, given that the participants appear to have been an “all the usual suspects” collection of the same types of flaming leftists who for decades have been labeled Puerto Rico “experts” by the “intellectual mainstream” on the East and West Coasts, as well as at “elite” universities and colleges nationwide. Mightn’t the discussion have been a whole lot MORE “lively” if even a couple of outspoken CONSERVATIVES had been present? (Or did I fail to recognize the name of some lone “token conversative” panelist?)

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