Puerto Rico My heart's devotion Let it sink back in the ocean Always the hurricanes blowing Always the population growing
And the money owing
So begins Puerto Rican darling Anita in West Side Story’s signature song, “America.” Little did she know how prophetic her words would become.
The not-so Rich Port has accumulated debt of $73 billion — a crushing 70 percent of its annual GDP — much of it owed to bondholders who, curiously, want their money back.
A year ago, Gov. Garcia Padilla admitted Puerto Rico couldn’t repay the billions owed. Ever since, the Obama Treasury Department has worked with the House Natural Resources Committee to transfer Puerto Rico’s woes to a federal oversight board with the power to alter the island’s tax and spending decisions, reduce its debt and rewrite contracts to prioritize its public pension systems over bondholders. The Senate is expected to take up the measure next week.
Ahead of this vote, the Padilla administration stepped up its own pressure. Two weeks ago, Padilla released his final budget proposal for the commonwealth and, for the first time, appropriated no money to the island’s general obligation bondholders. Instead, in violation of the Puerto Rican Constitution, he increased other spending by almost $1 billion.
Then, last week, a Puerto Rican government-appointed commission released a “preliminary audit report,” which claimed that up to $30 billion of Puerto Rico’s public debt was sold in violation of Puerto Rico’s constitutional debt limit. The commission found that, if this were true, that debt is invalid — meaning the government is not obliged to pay it back at all, despite willingly breaking its own laws to borrow even more money.
Details on the audacious report are scarce, but news trickled out that it had been written, in part, by the Service Employees International Union. At first glance, SEIU’s stake in the game is fairly obvious: every dollar bondholders lose is a dollar gained for Puerto Rico’s massively underfunded public pension system, and a win for big labor.
Less immediately apparent are SEIU’s deep ties to the Padilla administration and one of its key lobbyists, New York PR firm SKDKnickerbocker, currently on a $3.4 million retainer. The partner at the firm who controls nearly every Puerto Rican government contract is a longtime SEIU lobbyist and former employee.
The union also has troubling personal ties to Padilla himself, whose brother Antonio is the only paid employee at a questionable Puerto Rican nonprofit run by longtime SEIU President Dennis Rivera.
SEIU and SKDK aren’t the only consultants with close ties to the Obama administration who have a lucrative interest in securing preferential treatment for Puerto Rico’s pension system.
Puerto Rico’s team of consultants (and their pals at Treasury) have perfected the art of ensuring that secured bondholders lose out to pensioners while making tons of money. As Puerto Rico struggles to stay afloat, it’s showering more than $100 million on mainland lawyers, consultants and publicists.
One consultant is Jim Millstein, whose company MillCo Advisors can reap as much as $52.4 million from contracts with Puerto Rico. At Treasury during the General Motors and Chrysler bankruptcies, where he was “chief restructuring officer,” Millstein is a practiced hand at cashing in on crises. He oversaw the AIG and Citigroup bailouts. He’s an alum of Cleary Gottlieb Steen & Hamilton, currently retained by Puerto Rico, and the Wall Street investment bank Lazard, which has many financial interests on the island including a hedge fund with stakes in Puerto Rican bonds.
Both firms have extensive experience in making bondholders fund pension systems in bankruptcy. They were both deeply involved in the GM and Chrysler bankruptcies, when established bankruptcy law was tossed aside so United Auto Worker pensioners won out over secured and unsecured creditors. Additionally, Lazard advised Detroit pensioners during its Chapter 9 bankruptcy, when they got preferential treatment over bondholders.
Another Lazard alum is Antonio Weiss, a Treasury “counselor” who joined the administration as Treasury’s point man on Puerto Rico — after receiving $21 million from his investment bank.
Indeed the band is back together and the playbook is wide open for anyone to read. As Treasury and wealthy consultants take the pension fight to center stage in Puerto Rico, simmering debt problems in Illinois and Chicago await. There is no way the Obama Treasury (or Hillary Clinton’s) will leave Rahm Emanuel hanging.
As the Puerto Rico legislation advances to the Senate Finance Committee, here’s hoping Chairman Orrin Hatch (R-Utah) has some questions for the sharks in Puerto Rico and their ties to Treasury.
Jared Whitley is a veteran of Utah politics and journalism, having worked for the Senate, White House and myriad news outlets. This year he won the Best in the West competition for column writing.