Heritage Action opposes H.R. 5278 and absent substantive changes will include it as a key vote on our legislative scorecard
On Thursday, the House is scheduled to consider H.R. 5278, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which attempts to address Puerto Rico's current debt crisis.
Since June 2015, The Heritage Foundation has written over 20 reports and commentary pieces analyzing the situation in Puerto Rico, proposing needed reforms, and analyzing Congressional proposals. In March 2016, Heritage Action laid out what a conservative response to Puerto Rico's debt crisis would look like. To summarize those efforts:
- Pro-growth reforms are essential, particularly exemptions from the Jones Act and federal minimum wage
- No direct cash bailouts or indirect bailouts of any kind
- No coercive debt restructuring or other violation of creditors' legal claims
Unfortunately, PROMESA falls woefully short on pro-growth reforms. The legislation does nothing to limit the Jones Act's restrictions on Puerto Rico's ability to openly trade with the U.S. mainland, and its minimum wage provision is extremely limited, even if Puerto Rico's governor decides to implement it. In fact, Puerto Rico's non-voting member of Congress Pedro R. Pierluisi told CQ "that in his interpretation it was mostly 'meaningless' in that it will never be implemented." Without these measures, Puerto Rico has little chance to grow, making it more likely that Puerto Rico will be back again soon asking for a bailout.
PROMESA does not contain a cash bailout of Puerto Rico; however, it would institute a new debt restructuring regime, which represents a significant upheaval of the legal regime under which creditors purchased Puerto Rican bonds. The debt restructuring contained in Title III of PROMESA allows, at the end of the process, for a Chapter 9-style proceeding in which an agreement can be imposed on all creditors even if only a small minority of creditors agree to the conditions. While the latest installment of the bill contains helpful language intended to ensure bondholders' rights and priorities are respected, the fact remains that their legal claims will have been altered and disrupted unnecessarily by PROMESA.
Finally, perhaps the most egregious violation of legal claims is the dangerous and unprecedented legal stay that prohibits creditors from accessing the courts to enforce their property rights against the Puerto Rican government. The stay creates a window of opportunity between the time PROMESA is enacted and the formation of the proposed control board in which Puerto Rico's crooked government can deny creditors payments and potentially funnel government funds to other people and programs. In their initial response to the first Puerto Rico draft, Heritage noted the problematic and dangerous nature of the proposed legal stay. Since that time, it has become evident how important the stay is to negotiators for Obama's Treasury Department, indicating they intend for Puerto Rico to shift their finances in ways that would otherwise bring lawsuits against the government. As Heritage notes:
As drafted, [PROMESA] creates an incentive for Obama to drag his feet and allow his allies to govern the island free of legal challenges and oversight. If the stay of litigation is as important as its proponents claim, then delaying it until the Oversight Board is appointed will give the president a good reason to move quickly to install the Board and begin the reform and restructuring process laid out in PROMESA.
Congress should go back to the drawing board for its response to Puerto Rico. Congress must enact pro-growth policies that will allow Puerto Rico to escape it's decade long depression. Congress can pass measures to facilitate voluntary negotiations between Puerto Rico and its credits, but it should not retroactively impose a coercive debt restructuring regime. Finally, Congress should avoid any gross violations of property rights, including prohibiting litigation absent the existence and oversight of a control board.
Heritage's Salim Furth, Ph.D. and Rachel Greszler conclude, "Given the bill's suspension of legal rights and lack of pro-growth reforms, PROMESA offers conservatives little to cheer."
Related:
Heritage Action Scorecard
Heritage: Minimum wage lessons from Puerto Rico (May 2015)
Heritage: Changing U.S. bankruptcy law will not help Puerto Rico (June 2015)
Heritage: Allowing Puerto Rico to declare bankruptcy is a bailout (July 2015)
Heritage: Puerto Rico needs growth, not bailouts (July 2015)
Heritage: Puerto Rico's default is just the beginning (August 2015)
Heritage: Puerto Rico's warning to the mainland (September 2015)
Heritage: Puerto Rico's pathway forward without bankruptcy (September 2015)
Heritage: Cronyism on display in Puerto Rico (January 2016)
Heritage: How a debt bailout for Puerto Rico short-circuits options for reform (February 2016)
Heritage: The right solution for Puerto Rico (February 2016)
Daily Signal: Is Obama administration plan for Puerto Rico a 'bailout'? (February 2016)
Heritage: Why Congress should care about Puerto Rico (February 2016)
Heritage: Puerto Rico's 'Wal-Mart Tax' Ruled Unconstitutional (March 2016)
Heritage: Investors Deserve to Know Puerto Rico's True Pension Liabilities (March 2016)
Heritage: Little Improvement in New Congressional Puerto Rico Plan (April 2016)
Heritage Action opposes H.R. 5278 and absent substantive changes will include it as a key vote on our legislative scorecard