Looking for a way to help debt-ridden Puerto Rico, administration officials on Wednesday proposed an ambitious — if politically perilous — plan that stops short of a direct federal bailout but that its backers hope is sweeping enough to keep the island from becoming America’s Greece.
The plan would create a new territorial bankruptcy regime and impose new fiscal oversight on Puerto Rico, which is mired in the depths of a decade-long recession, running out of cash and struggling to make payments on $72 billion of debt. It represents an urgent bid by President Obama to offer a way forward. But it requires cooperation from a Republican-led Congress bent on imposing spending restraint.
In describing the package on Wednesday, administration officials emphasized that they had exhausted the limits of their own authority to help Puerto Rico, and needed quick action by Congress to avoid a catastrophe.
“Administrative actions cannot solve the crisis,” Jacob J. Lew, the Treasury secretary, said in a joint statement with Jeffrey D. Zients, the National Economic Council director, and Sylvia Mathews Burwell, the health and human services secretary.
“Only Congress has the authority to provide Puerto Rico with the necessary tools to address its near-term challenges and promote long-term growth,” the statement said.
The situation in Puerto Rico “risks turning into a humanitarian crisis as early as this winter,” one senior administration official said, speaking on condition of anonymity because the person was not authorized to speak publicly. Antonio Weiss, Mr. Lew’s counselor, will explain the administration’s plan in Capitol Hill testimony on Thursday.
The Puerto Rican government has already “done a lot” to restore fiscal order, the official added, but “Puerto Rico cannot do it on its own, and the United States government has a responsibility to 3.5 million Americans living in Puerto Rico” to step in with additional help.
The plan was shared late Wednesday with The New York Times and Agencia EFE, a news organization in Puerto Rico. On the same day, the island’s Government Development Bank said it had ended weeks of fruitless negotiations with certain creditors, aimed at persuading them to voluntarily accept lower bond payments. The bank has a bond payment of about $300 million coming due on Dec. 1.
Virtually all of the administration’s proposed plan would have to be refined and approved by Congress. It would create a special territorial bankruptcy regime — something that does not now exist — to give Puerto Rico a place to restructure all of its $72 billion in debt, which it says it cannot hope to repay.
The new regime could ultimately be a new chapter of the bankruptcy code, available only to Puerto Rico and other American territories. A senior administration official said the specifics would be left up to Congress.
In a nod to Republicans in Congress, who have resisted even limited bankruptcy access for Puerto Rico, the administration also proposes to establish an independent body to monitor the island’s fiscal affairs. Its role would be to improve Puerto Rico’s credibility by policing the imposition of structural economic reforms; it would also demand better financial disclosures.
Officials said the oversight body might resemble one that Congress established for the District of Columbia in the 1990s.
At the same time, the package would seek to bring Puerto Rico, where unemployment tops 12 percent and 46 percent of citizens qualify forMedicaid, the federal health program for the poor, into parity with the federal health programs and tax credits available in the states.
The proposal calls for a Medicaid overhaul in Puerto Rico that would expand coverage and access to important services in the short term, and eventually remove a cap that currently applies to the island’s Medicaid program. The effect would be more federal dollars for the Medicaid program in Puerto Rico. Administration officials also said they believed Puerto Rico’s health care facilities needed to be brought up to standards on the mainland.
The administration is also proposing to extend the earned-income tax credit, a refundable credit for the working poor that is payable even to people who earn too little to owe income tax. It is not currently available in Puerto Rico.
Officials said that extending that type of tax credit would help increase the labor participation rate on the island, now a paltry 40 percent, the lowest in the United States and its territories. A fact sheet compiled by the administration said it would provide an “added incentive for formal participation in Puerto Rico’s economy.”
The tax credit, invented by conservative economists, already enjoys some degree of bipartisan backing. Administration officials who detailed the proposal offered no estimate of the cost of extending it to Puerto Rico, nor did they have a cost projection for the Medicaid expansion.
The legislative proposal will be presented on Thursday to the Senate Committee on Energy and Natural Resources, which has jurisdiction over all of America’s territories. It is led by Senator Lisa Murkowski, Republican of Alaska, which was itself a territory until 1959, when it became the 49th state.
Puerto Rico is now barred from seeking any form of relief under Chapter 9, the type of bankruptcy that municipal governments use. The administration’s proposal for a territorial bankruptcy regime represents a bolder approach than the bankruptcy bills that Congress has considered since the island’s debt crisis began.
Federal law allows for cities, counties, special districts and the like to seek bankruptcy protection if their states agree, but the states themselves are excluded. There are concerns that if Puerto Rico gains access to bankruptcy, fiscally troubled states like Illinois might try to follow suit.
Puerto Rico’s creditors have been arguing that the island’s government has been portraying its financial situation as beyond repair, hoping to force the administration and Congress to give it access to Chapter 9 bankruptcy. The recent bankruptcies of distressed cities like Detroit showed them that bondholders can emerge with just pennies on the dollar, and they believe the same thing will happen if Puerto Rico is allowed to declare bankruptcy.
The legislation introduced so far would make bankruptcy relief available only to Puerto Rico’s municipalities and its government enterprises, not to the government itself. Even those limited bills have failed to gain support from Republican lawmakers.
There is some willingness, particularly among top Senate Republicans, to work out a compromise on the bankruptcy issue, according to a person briefed on the matter who was not authorized to speak publicly about it. But the Republican leadership appears willing only to grant Puerto Rico limited access to the bankruptcy courts and only with strings attached, like a federal “control board” to oversee the island’s finances.
Control boards have been used in cases of severe municipal distress to take the power to spend public money out of the hands of elected officials. They do not generally have the powers that bankruptcy judges do to abrogate contracts, such as labor contracts and promises to repay debt.
Both Democrats and Republicans are under pressure to respond to the Puerto Rico crisis. Largely because of the island’s economic problems, Puerto Ricans are flooding the mainland United States, particularly central Florida, and are becoming an increasingly important voting bloc in the 2016 presidential race.
In the hearing, Puerto Rico’s governor, Alejandro García Padilla, will offer his first congressional testimony since his announcement in June that Puerto Rico’s debt had become “unpayable” and he would seek a “negotiated moratorium” with its creditors. His most recent appearance was in 2013, when he accused advocates of statehood of skewing a 2011 plebiscite to make it appear that a majority wanted Puerto Rico to become a state.
“That is a great example of how you can lie with numbers,” he told the same Senate panel at the time.
Another scheduled witness is Pedro Pierluisi, Puerto Rico’s nonvoting member of Congress and the statehood advocate who designed the 2011 voting process that the governor disputed. Mr. Pierluisi introduced the House bill to to give very limited bankruptcy access to Puerto Rico. In September, he testified before the Senate Finance Committee, challenging the governor’s handling of the debt crisis and saying that general-obligation bonds “must be paid — period.” The third witness is to be Mr. Weiss, the special adviser to the Treasury Secretary.
Mr. Weiss was initially President Obama’s nominee to be the under secretary for domestic finance — a hot-seat job as the Federal Reserve prepares to raise interest rates and Republicans fight to enforce the current debt ceiling.
Source: The New York Times