Treasury Secretary Jack Lew today responded to a letter sent by Senate Finance Committee Chairman Orinn Hatch (R-UT) regarding Puerto Rico’s fiscal problems and possible solutions.
The response letter emphasizes the Obama Administration’s support for providing Puerto Rico access to an orderly federal bankruptcy process to restructure its financial obligations:
“Puerto Rico also needs an orderly process to address its liabilities. Without our collective action, I am deeply concerned that a protracted and disorderly restructuring process will cause long-term damage to the health, safety, and financial well-being of the families living and working in Puerto Rico. For that reason, a central element of any federal response should include a tested legal bankruptcy regime that enables Puerto Rico to manage its financial challenges in an orderly way. Puerto Rico currently does not have access to the federal bankruptcy courts to restructure its financial obligations. Local officials tried to address this shortfall on their own by passing a law to provide a bankruptcy-like process, but the United States Court of Appeals for the First Circuit held that federal law preempts the local legislation. Further, the Court held that only Congress may grant Puerto Rico access to bankruptcy protection. Under the status quo, without a tested legal regime in place, a resolution of Puerto Rico’s financial obligations would likely be chaotic, protracted, and costly both for Puerto Rico and more broadly for the United States.
Allowing Puerto Rico to resolve its liabilities under the supervision of a bankruptcy court involves no federal financial assistance and is in no way a federal bailout. An untested and potentially disruptive process with numerous creditor lawsuits and years of litigation would depress the local economy, increase costs, and make long-term recovery harder to achieve. It also makes it likely that more residents of Puerto Rico will seek assistance from federal employment, health, housing, and temporary assistance programs. Moreover, the continued deterioration of Puerto Rico’s economic and financial conditions has the potential to further harm retiree investment portfolios across the country. A significant portion of Puerto Rico’s debt is still held directly by individual retail investors or indirectly through the municipal bond funds they own.
We believe that Puerto Rico can and will emerge from the current crisis and return to growth. The fundamental question is when and at what cost to its economy, residents, creditors, and at what additional cost in federal government benefits to U.S. citizens in Puerto Rico who continue to suffer through these challenging times. By granting Puerto Rico access to an orderly bankruptcy regime as soon as possible, Congress can help put Puerto Rico -and the millions of U.S. citizens who live there- on the best path to a sustained recovery.”
The Hatch letter, sent on July 17th, requested a response by July 31st. A number of questions raised in the earlier letter were not answered in the Treasury Secretary’s response, including possible changes to the tax laws affecting Puerto Rico and the administration’s position on exempting Puerto Rico from the Jones Act and federal minimum wage law.