Puerto Rico and the PROMESA Act: Claims and Responses
Claim: If conservatives don’t agree to this bill, the alternative is a $72 billion bailout package.
Response: Things are going to get worse in Puerto Rico before they get better. Even though there is no reason to believe a Republican-controlled Congress would ever pass a direct taxpayer bailout, calls for such action are likely to increase whether or not PROMESA (H.R. 4900) is passed, as Puerto Rico will likely continue to experience economic and fiscal troubles. Congress and Puerto Rico need to pass economic reforms to slow and reverse the ruinous outmigration of Puerto Rico’s young workers. PROMESA reshuffles the deck, but it doesn’t change the game.
Claim: If Congress doesn’t pass some sort of assistance package, Puerto Ricans are just going to abandon the island and move to the mainland, causing an economic death spiral.
Response: Puerto Ricans are moving to the mainland in large numbers because of the lack of economic growth and opportunity on the island — not, for the most part, because of the government’s financial distress and liquidity issues. Regardless of what happens with Puerto Rico’s government debt, this exodus will continue if Puerto Rico can’t return to growth, which it can only do by creating opportunities for young adults and attracting and keeping businesses on the island. There is no reason to believe this bill would create those economic opportunities.
Claim: The fiscal oversight board has the tools it needs to jumpstart Puerto Rico’s economy.
Response: The oversight board only has explicit powers to approve, and by extension amend, Puerto Rico’s budget. But Puerto Rico’s primary problem is not its budget, but rather anti-growth policies — imposed both by the territory itself and from the federal government — such as the Jones Act, minimum wage, and costly labor market regulations (like micromanaged bonus and paid leave policies) that impede growth. The control board has no power to shape those policies.
Claim: PROMESA’s minimum wage provision is a huge, precedent-setting win for conservatives.
Response: The partial minimum wage exemption in H.R. 4900 is “opt-in,” meaning Puerto Rico’s governor has to proactively enact it. Even if Puerto Rico does adopt it, the provision is limited to temporary workers under 25. Furthermore, this does not represent a conservative breakthrough with Democrats in Congress: Democrats are already on the record going much further to completely exempt distressed territories, such as American Samoa, from the federal minimum wage.
Claim: PROMESA does not allow for Chapter 9 bankruptcy.
Response: Despite protests to the contrary, Title III of H.R. 4900 is clearly designed to mimic Chapter 9 bankruptcy. The main differences are that it actually subjects even more debts to the process than allowed by U.S. states, and that the process is initiated by an oversight board instead of the government.
Claim: Even though it provides a bankruptcy process on the back-end, voluntary negotiations on the front-end will prevent Chapter 9 provisions from taking effect.
Response: In the first stage, the oversight board will offer a comprehensive restructuring plan, and each bond pool can vote to accept their place in the plan. The vote is not strictly on the merits of the plan though, as those who can’t get enough yes votes will be dumped into Chapter 9 bankruptcy along with over $40 billion worth of unfunded pension liabilities. With this as the alternative, suggesting the first stage is simply “voluntary” leaves out important context.
Claim: Calling H.R. 4900 a “bailout” is nothing but a scare tactic that ignores the actual provisions in the bill.
Response: Clearly the PROMESA Act contains no direct federal funding for to Puerto Rico (though it is worth remembering that Congress did provide Puerto Rico with $865 million in increased Medicare payments in last year’s omnibus). Under a very narrow definition of a bailout — one that only includes direct, taxpayer cash assistance — H.R. 4900 does not qualify. However, whatever one wishes to call it, PROMESA is clearly an ad hoc federal intervention that would establish a new, favorable framework for Puerto Rico to address its debts.
Claim: The current legislation sets no precedent for distressed states.
Response: PROMESA sets a political precedent, although not a legal one. In fact, creditors will arguably expect Congress to do even more to assist distressed state governments. States may reasonably conclude that Congress will be willing, when the time comes, to change bankruptcy law in their favor, offer a stay of litigation, and/or offer them novel mechanisms for restructuring their debt. If this narrative takes hold, it will increase moral hazard and encourage more fiscal irresponsibility among states.
Claim: Years of lawsuits will be extremely expensive, create chaos, and ruin Puerto Rico’s chances of growth, and thus must be avoided at all costs.
Response: There is no doubt that the legal claims process would be slow and messy. But it is not the legal process itself that creates economic chaos, but rather outside interventions or unfair outcomes. The current and future impediments to Puerto Rico’s growth are the unreformed cronyist patronage of the Puerto Rican government and Washington’s overregulation. Without reform, even a quick restructuring holds little promise of growth. (On another note with regard to chaos: PROMESA’s stay on litigation, which strips creditors of their civil right to access the courts and affords Puerto Rico’s corrupt government the opportunity for mischief, is hardly a way to prevent chaos.)
Claim: The fiscal oversight board will be directed to act in a fair and equitable way and in the best interests of creditors, which fundamentally separates this situation from mishandled bankruptcies like Detroit.
Response: As in Detroit, this process depends on the discretion of those granted power to not abuse that power to, for instance, grant special treatment to politically sympathetic groups, such as pensioners, instead of senior creditors. While one can hope that the oversight board and the federal district judge appointed under Title III will act in accordance with Congress’ intent, there is no guarantee that they will do so. Even the legislation’s instructions to maintain existing debt payment priorities leaves room for interpretation and does not specify the degree to which one group of creditors holds priority over any other. On these questions, Congress should not jump in and usurp the role of the courts.