Legislation pending before the U.S. Congress to include Puerto Rico within Chapter 9 of the U.S. Bankruptcy Code is attracting attention and a wide range of support from within Puerto Rico and the broader U.S. bankruptcy community. Opponents of the measure, representing investment firms with over $1.5 billion worth of Puerto Rico bonds, are attempting to block it.
The bill (Puerto Rico Chapter 9 Uniformity Act of 2015 (H.R. 870)), introduced by Puerto Rican Resident Commissioner Pedro Pierluisi (D/statehood), would grant Puerto Rico authority to authorize a local municipality to adjust its debt. The legislation has been the subject of a congressional hearing and is awaiting passage by the House of Representatives.
Under existing law, a state may permit its municipalities to seek relief under Chapter 9. Puerto Rico is excluded from the definition of “state” in the law, denying the U.S. territory access the federal debt-restructuring mechanism that has been used in Detroit and other financially troubled municipalities.
Support for the bill has been broad. The Puerto Rican Senate and House of Representatives have approved a joint resolution in support of the federal proposal and requested the U.S. Congress and President expedite its approval. The legislation has the support of former Puerto Rican Governor Luis Fortuno (R/statehood), Puerto Rican Senate President Eduardo Bhati (D/commonwealth), financial institutions, the National Bankruptcy Conference, numerous academics and local Puerto Rican community organizations.
In testimony before the House Judiciary Committee last February, Melba Acosta-Febo, President of the Government Development Bank for Puerto Rico (GDB), explained that that combined debt for the Puerto Rico Electric Power Authority (PREPA), the Puerto Rico Aqueduct and Sewer Authority (PRASA) and the Puerto Rico Highways and Transportation Authority (PRHTA) exceeds $20 billion. The total debt for the Puerto Rican government is over $72 billion – not including extraordinarily high interest payments that must be paid due to Puerto Rico’s “junk” bond status. These additional costs bring the total value of Puerto Rico’s debt closer to $165 billion – approximately 150% of its Gross Domestic Product (GDP).
The Congressional Budget Office has confirmed that the bill, if enacted, would not impose any costs on the federal government. The Pierluisi proposal does not involve a transfer of federal funds to Puerto Rico but, instead, enables the Puerto Rico government to authorize its public corporations to utilize a legal mechanism available in the 50 states.
Opposition to the bill has been centralized among investment firms who are heavy investors in Puerto Rico bonds, who argue that Chapter 9 hurts bondholders and the municipal bond market generally. A representative of some of these firms testified before Congress that they “would not oppose the application of Chapter 9 to Puerto Rico if Congress made Chapter 9 a fairer statute, which would take only a few changes.”
In his testimony before the House Judiciary Committee, University of Michigan law professor John Pottow noted and dismissed the Chapter 9 argument. As he explained:
I can imagine someone saying, “I don’t like chapter 9, period, and so the fewer entities that can use, it, the better!” If that sort of objection is launched, the Committee should reject it. This is because an objection of this sort is unprincipled unless it is tethered to a specific argument about why drawing a distinction between Puerto Rico and other states is justified. It is fine (although in my view wrong-headed) to object to chapter 9. It is not fine to deploy arbitrary discrimination in access to chapter 9.