Plan to Rescue Puerto Rico Advances, Led by House Republicans

Politicians in Washington are coalescing around a financial plan to rescue Puerto Rico, just weeks before an expected major default on bond payments that would spread more turmoil through the island’s shaky economy.
The plan, being drafted as legislation by House Republicans, would not grant Puerto Rico’s most fervent request: permission to restructure its entire $72 billion debt in bankruptcy. It would, however, give the island certain crucial tools that bankruptcy proceedings can offer — but only if it first comes under close federal oversight and meets other conditions.
The oversight would be provided by a five-member voting board, selected by the president of the United States from candidates with expertise in finance, law or other relevant fields; at least two would have their primary residence in Puerto Rico. The secretary of the Treasury and the governor of Puerto Rico would also serve on the board, but would not have a vote.
The board would have offices both in Washington and San Juan, and would have the power to subpoena documents from both governments. It would audit Puerto Rico’s government, improve operations, find savings and ultimately determine how much of the $72 billion debt really has to be restructured, if any. The creation of such a board has been highly controversial on the island, where some residents and officials have called it an act of “colonialism,” and expressed some concern about outsiders making financial decisions — like budget cuts — that could adversely affect island residents.
The rescue package is primarily the work of House Republicans under the direction of Paul Ryan, the House speaker, in consultation with the Treasury Department and Democratic leaders, including Representative Nancy Pelosi, the minority leader.
Like Puerto Rico, the Treasury Department has been calling for all of the island’s debts to be eligible for restructuring, no matter which part of the government issued them.
But while the House Republicans drafting the rescue package have worked closely with Treasury, they remain skeptical of Puerto Rico’s financial disclosures and want the oversight board to first audit each unit of government, allowing restructurings only “in certain areas” and “where necessary,” according to a legislative summary reviewed by The New York Times.




The plan would also require Puerto Rico to provide fair-value measurements of all pension assets and liabilities, instead of the numbers now provided by actuaries, which tend to understate the amounts promised. Puerto Rico currently reports a pension shortfall of around $43 billion, but at fair value the shortfall could be twice that amount or even more. Telling the truth about the cost of its pension plan would make it harder for Puerto Rico to mismanage the plan in the future.
Much of the rescue package has been drafted in the House Natural Resources Committee, which jumped into action after Paul Ryan, the House speaker, set the March deadline back in December. Jim Lo Scalzo/European Pressphoto Agency
The Treasury had recommended that Puerto Rico give pension payments to retired government workers priority over payments to bondholders, but lawmakers rejected that approach.
Rearranging the existing payment priorities “would have serious consequences on the broader municipal bond market and existing creditor-to-debtor relationships,” the summary said.
Before any restructuring of its debt, most it in the form of municipal bonds, the government would first be required to seek a consensual settlement in mediation. It would also have to issue up-to-date audited financial statements and balance its budget; Puerto Rico’s debt grew to its current crushing size because for years it took out new long-term debt just to get enough cash to get through the year.
If Puerto Rican officials are unable to make the budget balance with existing resources, the oversight board would have the power to do it for them — which could mean cuts in services.
On the other hand, House Republicans agreed with the Treasury that any restructuring would best take place outside of bankruptcy. Giving Puerto Rico access to the bankruptcy courts threatened to become a constitutional minefield. Instead of working through the bankruptcy code, the lawmakers devised a restructuring framework under the Territorial Clause of the United States Constitution, which gives Congress broad authority to write “all needful rules and regulations” for territories.
The legislative summary states that giving Puerto Rico access to Chapter 9 “is ill conceived and would undermine the rule of law.”
Much of the rescue package has been drafted in the House Natural Resources Committee under its chairman, Rob Bishop of Utah. It jumped into action after Mr. Ryan set the March deadline back in December, instructing the committees with jurisdiction “to come up with a responsible solution” by then.
If the lawmakers stay on schedule — a “discussion draft” is to be made public Tuesday — the rescue package could be the first substantial piece of legislation to get traction in the House since Mr. Ryan was elected speaker in October, promising to rejuvenate the legislative process by giving the committees the lead in drafting all major bills.
“Open the process,” Mr. Ryan said at the time. “Let people participate, and they might change their tune. A neglected minority will gum up the works. A respected minority will work in good faith.”
Although the Natural Resources Committee might seem an odd place to resolve an offshore financial collapse, the committee has jurisdiction over America’s territories, which include Puerto Rico.
The top-ranked Democrat on the committee, Raul Grijalva of Arizona, yielded his position in hearings to Puerto Rico’s nonvoting member of Congress, Pedro Pierluisi, also a Democrat, to give someone from the island a central role.
A number of representatives, all Democrats, who are not members of the committee also took part because they have close ties to Puerto Rico. Several of them have said they thought the Republicans were negotiating in good faith, although they had not yet seen the draft of the bill.
A court-supervised restructuring would offer Puerto Rico some of the legal tools that bankruptcy makes available. The plan, for example, would hold off creditor lawsuits while the restructuring is underway, a central feature of bankruptcy court.
Chapter 9 is the part of the bankruptcy code for insolvent governments. Currently, the code specifically bars Puerto Rico from seeking any relief under Chapter 9, and the governor and other officials have been calling for an amendment to change that.
On Tuesday, Puerto Rico went before the Supreme Court seeking the right to enact its own version of a bankruptcy law. Justices were aggressive in their questioning but seemed perplexed about why Congress — in 1984 — denied the island bankruptcy protection.
The Natural Resources committee also has taken an interest in Puerto Rico’s big electric power authority, which is responsible for about $9 billion of the island’s total debt. It appears to be insolvent and is embroiled in a scandal over improprieties in its purchases of fuel oil, its biggest expense.
A summary of the rescue plan cites power costs as one reason people and businesses have been leaving Puerto Rico.
Correction: March 24, 2016
An earlier version of this article misidentified the state represented by Rob Bishop, chairman of the House Natural Resources Committee. It is Utah, not Colorado.
Correction: March 25, 2016
An earlier version of this article misstated the time period during which Puerto Rico appeared before the Supreme Court. It was on Tuesday, not last week.
A version of this article appears in print on March 25, 2016, on page B1 of the New York edition with the headline: House Republicans Advance Plan to Rescue Puerto Rico. Order Reprints| Today's Paper|Subscribe
By MARY WILLIAMS WALSH

Plan to Rescue Puerto Rico Advances, Led by House Republicans

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