Puerto Rico is in crisis, faced with more than US$100 billion in debts of governmental and related entities. On May 19, 2016, with the support of House Natural Resources Committee Chairman Rob Bishop (R-UT), House Speaker Paul Ryan and the White House, Congressman Sean Duffy (R-WI) introduced HR 5278, the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). The revised bill is scheduled for a markup in the Natural Resources Committee on Mary 24 and 25. The Obama administration has signaled support for the legislation through Treasury Secretary Jack Lew.
PROMESA seeks to address the growing financial and humanitarian crisis in Puerto Rico, an Island Territory of the United States. This crisis already has resulted in Puerto Rico defaulting on a US$422 million debt payment in early May with a considerably larger default on Puerto Rico's governmental related debt expected on July 1 if federal legislation is not adopted to respond to this risk.
At its core, PROMESA authorizes the creation of a seven-member Oversight Board charged with overseeing the island's economic decision-making, with power to institute reorganization proceedings for the territory and a territorial covered instrumentality in US district court.
The revised legislation seeks to respond to various criticisms of an earlier version of the bill (HR 4900) that had been introduced on April 12, 2016. HR 4900 had been scheduled to be marked up by the Natural Resources Committee on April 14, but that markup was abruptly canceled when the Treasury Department and many Democratic lawmakers sought several additional changes to the bill.
While some parties continue to voice concerns over certain aspects of PROMESA, and some provisions of the bill could well be amended when the Natural Resources Committee marks up the bill, as revised, the legislation is supported by the White House, Speaker Ryan, and the most of the Committee leadership. Treasury Secretary Lew, Speaker Ryan, Chairman Bishop and White House Press Secretary Josh Earnest all made or issued statements supporting the revised bill, with Speaker Ryan stating, "[w]e got this bill exactly where we wanted it." As result, notwithstanding the continuing fervent opposition of some, initial reports indicate that PROMESA is likely to have sufficient support for passage when it reaches the House floor.
Key changes made to earlier version of the bill
The revised bill makes certain changes to the structure and powers of the oversight board, adds language to clarify and preserve the relative priority of the island's various creditors, and defines the steps required before the new oversight board can go to court seeking to impose a restructuring plan on bondholders, as well as procedures for creditor-sponsored modifications.
Responding to the concerns of many congressional Democrats and the White House, the revised bill removes language from HR 4900 that would have transferred a portion of the Vieques National Wildlife Refuge to the territorial government. However, reflecting the compromises made to reach an agreement, the bill retains language opposed by congressional Democrats that would allow a limited suspension of the minimum wage and federal overtime regulations, and it does not equalize Medicaid benefits, as the White House had proposed. The revised bill also would create an eight-member congressional task force with the power to make economic growth recommendations. (The earlier version of the bill had given this authority to the oversight board.)
A Committee fact sheet in support of the bill [link] states that Puerto Rico "borders on full scale economic collapse," with government debt of more than US$118 billion in the form of bonds and unfunded pension liabilities. The Committee asserts that the "Island's state-run economy is hopeless inefficient" and that it has "failed to produce audited financial statements for two years." "On July 1, the island is likely to default on an additional US$2 billion including US$800 million of constitutional backed general obligation debt." The Committee claims that PROMESA "will bring lawful order to chaos in Puerto Rico and mitigate a looming humanitarian crisis" and "will institute fiscal and economic reforms to promote growth and ensure the Island meets its credit obligations."
The structure of the bill
PROMESA is divided into six titles, with the oversight board at its focus. The bill lays out a process for how board members would be selected. The board, whose members will be unpaid, would be empowered to (among other things):
- Force sale of government assets, consolidate agencies and reduce workforce
- Conduct hearings, request information from the territory and issue subpoenas
- Prevent the execution of legislative acts, executive orders, regulations, rules and contracts that undermine economic growth initiatives or violate the Act
- Institute special reorganization proceedings under Title III of the act
- Hire an executive director and staff, as well as outside professionals
According to the Committee's fact sheet, other key features of the legislation include:
- Express statements that PROMESA holds supremacy over any inconsistent territorial law and regulations
- Temporary suspension of the national minimum wage and raising the maximum age of applicability from 20 to 25
- Requirement that the territory score its legislation to estimate costs
- Imposition of quarterly and annual reporting requirements
- Creation of a "firewall between the constitutionally protected creditor protection and pensions in the development of Fiscal Plans"
- "A stay on litigation to create an environment for consensual negotiations with creditors"
The Committee's fact sheet states that PROMESA is not a bailout and is expressly designed to prevent a bailout: "No taxpayer money is used to pay Puerto Rico's debt or otherwise bailout the territory under PROMESA."
The fact sheet further notes that PROMESA is not "Chapter 9 for Puerto Rico." Title III of PROMESA, however, adopts many sections of Chapter 9 and other sections of the Bankruptcy Code. That said, the Committee notes that to address certain criticisms of the earlier draft, this version includes "additional language and provisions to further clarify the relative lawful priorities and lawful liens as provided for in the Puerto Rican Constitution," and language designed to ensure that any actions taken be "in the best interest of creditors." The Committee further notes that the revised bill includes "[n]ew language to prohibit inter-debtor transfers thereby disallowing the Governor from executing any budgetary adjustment between the enactment of this Act and the appointment of the Oversight Board."
The Natural Resources Committee has scheduled a markup of PROMESA with opening statements to occur at 5 p.m. on May 24. Once opening statements are completed, the Committee will reconvene on May 25 at 10 a.m. to consider proposed amendments to the bill. The House will be in recess during Memorial Day week. If, as expected, the Committee completes its markup before the Memorial Day recess, it is likely that PROMESA will be on the House floor some time during the week of June 7. If delayed, given the impending large default on July 1, the House is likely to complete work on the bill as revised on or before June 24 when it next recesses for the Fourth of July District Work Period.
Dentons professionals are deeply experienced in distressed municipal situations, including work on behalf of the DC Control Board, the Official Committee of Retirees in the Chapter 9 bankruptcy of the City of Detroit, and the reorganization of the City of Harrisburg, PA. Our Public Policy and Regulation team, including our Advocacy group, continues to closely monitor all activity on Capitol Hill, in the White House and at the Treasury Department relevant to efforts to respond to Puerto Rico's financial crisis.
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