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Puerto Rico Oversight, Management, and Economic Stability Act

by Pete Sepp / /

The Honorable Rob Bishop, Chairman
The Honorable Raul Grijalva, Ranking Member
Committee on Natural Resources
1324 Longworth House Office Building
Washington, DC 20515

Dear Chairman Bishop, Ranking Member Grijalva, and Members of the Committee:

As the Committee on Natural Resources continues to focus on marking up H.R. 4900, the “Puerto Rico Oversight, Management, and Economic Stability Act” (PROMESA), I write to offer the views of National Taxpayers Union (NTU) on next steps. NTU believes that through the committee process and floor deliberation, Members should be able to work together to craft a solid legislative package for Puerto Rico that is capable of passing the House.

Discussion drafts of the legislation have contained laudable provisions to establish a robust oversight process for Puerto Rico’s precarious fiscal position. However, the final disposition of the oversight body’s powers, which are critical to taxpayers, is still being deliberated. Progress has been made toward introducing consensual elements in the debt restructuring provisions, as well as modifications to the stay on litigation, but as the Committee itself has noted there are many important constitutional implications at stake in these matters. The bill makes some strides toward helping Puerto Rico ascend to economic vitality, but additional tax, regulatory, and budget reforms should be incorporated.

With these points in mind, NTU would caution against further attempts to weaken the powers, independence, or capacity of the oversight entity to achieve budgetary discipline among governmental units of the Commonwealth. However, other powers of the oversight entity should continue to be examined for revision, among them the forced restructuring scheme still contained in H.R. 4900.

Throughout the drafting process, and in its own legislative summary, the Natural Resources Committee has echoed the sentiments shared by conservatives across America that a retroactive application of the bankruptcy code to Puerto Rico is, to use the Committee’s own words, “ill-conceived and would undermine the rule of law.” This warning is all the more relevant in light of Commonwealth leaders’ recent decision to grant the Governor “emergency” powers to declare a moratorium on bond payments, including constitutional general obligation debt. Such a shocking abrogation of legal and fiscal responsibility is, on its own, cause enough for Congress to reexamine and further modify the restructuring regime that PROMESA would create.

Without a more balanced negotiating environment between creditors and Puerto Rico’s government, one based on voluntary consent of creditors, the Commonwealth and its entities will have no incentive to curb fiscal excesses and arrive at debt settlements in good faith.

The restructuring language in the Committee’s draft of PROMESA is aimed at recognizing Puerto Rico’s status as a territory rather than a state, and as a fact sheet published by the Committee, pains have been taken to prevent “any contagion in-state municipal bond markets.” While H.R. 4900 acknowledges that sovereign states do operate differently from U.S. territories, PROMESA’s expansion of restructuring power – beyond municipalities and public corporations and extending to the Commonwealth itself – still will not escape the attention of wayward debt-ridden state governments. Congress must therefore take extra care not to embolden further reckless financial behavior on the island or the mainland. Even if H.R. 4900 is not called “Super Chapter 9,” its restructuring provisions do bear a resemblance to the Treasury’s proposal carrying that name. Voluntary entry safeguards for restructuring, which appear to have been added to H.R. 4900, should be matched by judiciously fashioned escape provisions. Collective Action Clauses continue to furnish a guide to the design of such protections.

The current version of PROMESA also contains a stay on creditor legal action, which has been shortened from an original 18 months to 6 months – a wise nod to both the dangers of creating moral hazard and the implications of suspending individual bondholders’ rights to legal recourse. It is important to bear in mind that the longer the lifespan of the stay, the easier it will be for Puerto Rico to walk away from negotiations and stop all payment to bondholders, while expending resources that otherwise would have gone to those bondholders on government employee pensions and other friends and allies on the island.

Yet, the revised provision, which shares some features of a plan offered by Minority Leader Pelosi, would still be the first legal stay ever imposed on a class of creditors by Congress, and differs from stays enacted in regular Chapter 9 proceedings because it could extend beyond the confines of the bankruptcy court. The Committee should consider further revising these strictures to avoid establishing a tilted field that will hurt Puerto Rico’s borrowing ability in the long run.

Finally, but equally important, we believe that PROMESA’s commendable pro-growth reforms should be strengthened. Federal corporate tax law changes – which could be modeled after the most commonly-discussed elements of international tax reform – along with lifting Jones Act shipping restrictions and providing greater minimum wage flexibility, could dramatically increase the legislation’s chances of restoring economic stability to the Commonwealth. Those who contend that such upgrades could not be incorporated this far into the markup should understand that legislative language for all of these reforms is already well-developed. With a modest effort involving communication among the committees, basic, sensible tax reforms and other improvements could be incorporated into H.R. 4900.

Proponents of PROMESA are correct in arguing that the legislation does not offer bailout money to Puerto Rico from taxpayers, but lawmakers should clearly understand several blunt realities. If an unduly harsh restructuring framework is ruled a taking of private property by the courts, then the burden of compensation could indeed fall to taxpayers. Most critically, if H.R. 4900 fails to establish budgetary discipline and create the best possible policies to facilitate an economic resurgence on the island, the resulting financial meltdown and human suffering will likely prompt a bailout on its own. The Committee’s summary seems to agree that this scenario must be avoided, which is all the more reason for Members to make the relatively small commitment of time now for prudent improvements to H.R. 4900.

We understand the pressure under which this Committee has operated in crafting H.R. 4900, and we recognize the substantial pro-taxpayer progress that has been made in successive drafts. For these reasons we look forward to a continued dialogue as Congress works to find a solution for Puerto Rico that is grounded as firmly as possible in fiscally conservative values. We also encourage you to review some additional legislative guidance that NTU has provided on Puerto Rico’s finances, available online here and here. There is no time to lose, but there is still time to ensure that the voices of limited government are heard more clearly.

Sincerely,

Pete Sepp, President