Last week, Puerto Rico’s Gov. Alejandro Garcia Padilla enraged already aggravated Puerto Rican bondholders by proposing a 2017 fiscal year budget that allocates 86 percent less money to debt service payments than the current budget. Padilla plans to cut $1.266 billion in 2017 bond payments while increasing funding for a variety of programs, including the public employee pension plan. It is fast becoming clear to bondholders that Padilla and the Puerto Rican legislature (1) do not intend to service their debts and (2) have no ability whatsoever to repay the principal.
Padilla’s actions are both despicable and predictable. For years, the Puerto Rican government used the plain language of its constitution and its favorable tax status to lure investors into buying its bonds. This allowed the island enough access to credit markets to ignore, or at least postpone, tough political and financial decisions. Now that Puerto Rico has exhausted its credit, is shut out of the bond market, and can no longer refinance its old debt with new debt, Padilla has decided that his government will neither be constrained by the Puerto Rican constitution nor by existing contractual obligations. By robbing bondholders of both their rights and their money, Padilla and his legislative cronies have turned Puerto Rico into a kleptocracy.
Last week, the House Natural Resources Committee approved HR4900, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), and it will now proceed to the House floor. The bill would create a strong and autonomous financial oversight board for Puerto Rico with the power to require balanced budgets, address pension liabilities and facilitate debt restructuring (through voluntary creditor negotiations, or, if necessary, through a court supervised process). PROMESA is a controversial proposal for several reasons, not the least of which is the fact that it essentially confiscates power from Puerto Rican elected officials and concentrates that power in the hands of seven appointed members of the control board. It is an aggressive, unprecedented piece of legislation, and I have serious concerns about it. But it also might be the only viable path forward, not only for the Puerto Rican people, but also for its creditors.
I have expressed my opinion in this column that any debt restructuring legislation should (1) reaffirm priority for constitutionally secured, general obligation bondholders who are entitled to up to 15 percent of the island’s average annual total tax revenue to both service and repay their loans, (2) not explicitly prioritize pensions over other unsecured creditors, and (3) provide for compensatory payments as a way to balance competing creditor interests should a temporary litigation moratorium be imposed. After reading the legislation, discussing it with Congressman Rob Bishop, and reviewing it with the drafting attorney, I am persuaded that PROMESA would actually help re-establish — rather than diminish — these creditor rights because of the direction it gives to the control board.
Today, under the Padilla regime, these creditor rights are being purposely and maliciously violated. Without PROMESA (or another bill like it), creditors would have to try to enforce their contractual rights through the federal courts. But even if the courts grant individual creditors judgments and liens against the Puerto Rican government, how will those orders be enforced in Puerto Rico when the island’s own government refuses to comply? A piecemeal solution to the Puerto Rican debt crisis could further entrench Padilla and his political cronies in their current course of action.
There is no question but that Puerto Rico is in an awful mess, and that PROMESA is less than an ideal solution to deal with it. But it might be the best this Congress can do.
Dan Liljenquist is a former Republican state senator from Utah and former U.S. Senate candidate. He is nationally recognized for work on entitlement reform.