White House Unveils Plan for Puerto Rico

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<h3>James A. Klotz</h3>

James A. Klotz

The Obama administration is proposing a wide-ranging plan to fortify Puerto Rico’s finances that includes a way for the beleaguered commonwealth to restructure its $73 billion in debt.

The proposal goes further than bankruptcy bills pending in Congress and would need congressional approval.

“The Commonwealth of Puerto Rico is in the midst of an economic and fiscal crisis, and without Congressional action the situation could become a humanitarian crisis,” the White House said in a statement.

The plan was first disclosed late Wednesday to The New York Times and Agencia EFE, and came on the same day talks between Puerto Rico’s Government Development Bank and some of its creditors broke down.

Plan includes fiscal oversight

Under the administration’s plan, a legal framework would be established for Puerto Rico to restructure its debt, and an independent body would be created to oversee its finances. In addition, health-care funding would increase and the earned-income tax credit would be extended to the commonwealth’s residents.

On Thursday, officials testified at a Senate hearing on Puerto Rico’s finances.

“Most fundamentally, the debt is unsustainable, and the market knows this,” Antonio Weiss, counselor to U.S. Treasury Secretary Jacob J. Lew, said during testimony.

Puerto Rico is prohibited from restructuring its debt under Chapter 9 of the federal bankruptcy code. States are forbidden as well, though cities and counties may seek bankruptcy protection.

Earlier this year, an attempt by Puerto Rico lawmakers to allow its public corporations to restructure their debt was struck down by a federal judge.

Doubts on Dec. 1 payment

Puerto Rico faces a number of pressing issues, including a decade-long economic slump, swelled debt, a decline in population and an antiquated power system. The poverty rate of 45% is the highest of any state or territory, and its unemployment rate, at 11.6%, is more than twice the national level.

During Thursday’s hearing, Gov. Alejandro Garcia Padilla said the GDB “is not expected to be able to make” a $355 million debt payment due Dec. 1 and, without a restructuring, the Puerto Rico Electric Power Authority will likely be unable to repay about $1.5 billion of debt in the first half of next year.

The White House said pending legislation to extend Chapter 9 protection to Puerto Rico’s municipalities “is an important first step.”

“But with the escalating crisis, bankruptcy protection is now needed for the Commonwealth as well. Congress should authorize a broader legal framework that allows for a comprehensive restructuring of Puerto Rico’s debts. This framework should be reserved exclusively for U.S. territories. As under current law, states would remain ineligible to file for bankruptcy under this or any other bankruptcy regime.”

The administration’s proposal is likely to meet stiff resistance in Congress, where measures on restructuring have stalled, and by creditors, many of whom contend that Puerto Rico has the wherewithal to meet its obligations without restructuring its debt.

James A. Klotz

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James A. Klotz is the President of FMSbonds, Inc.
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Oct 23, 2015

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