U.S. Senators Introduce Identical Companion Bill to H.R. 870, the Puerto Rico Chapter 9 Uniformity Act
Washington, DC—Senator Richard Blumenthal of Connecticut and Senator Charles Schumer of New York, along with 10 other U.S. Senators, today filed an identical companion bill to H.R. 870, the Puerto Rico Chapter 9 Uniformity Act, which was introduced by Resident Commissioner Pedro Pierluisi on February 11, 2015 and was the subject of a hearing before a subcommittee of the House Judiciary Committee on February 26th.
The Senate bill is S. 1774.
Other original cosponsors of the Senate measure include Senator Harry Reid of Nevada, Senator Kirsten Gillibrand of New York, Senator Bill Nelson of Florida, Senators Robert Menendez and Cory Booker of New Jersey, Senator Elizabeth Warren of Massachusetts, Senator Martin Heinrich of New Mexico, Senator Christopher Murphy of Connecticut, Senator Bernie Sanders of Vermont, and Senator Mazie Hirono of Hawaii. It is expected that the number of senators cosponsoring the legislation will increase in the coming days.
“I want to thank the senators who introduced and cosponsored the companion bill to H.R. 870, and I am looking forward to working with these senators to gain additional support for the bill from both Republicans and Democrats. Because Puerto Rico is a territory, and not a state, the 3.5 million American citizens that live in Puerto Rico cannot elect senators to protect and promote their interests. Instead, we must rely on the goodwill of senators who were not elected by island residents and are not directly responsible to them. Today, a number of senators stepped up to the plate. They did so because this bill clearly is the right thing to do and the smart thing to do, both for the economy of Puerto Rico and for the broader U.S. economy,” said Pierluisi.
The bill introduced in the Senate today, like the bill filed by the Resident Commissioner in February, seeks state-like treatment for Puerto Rico under Chapter 9 of the federal Bankruptcy Code, nothing more and nothing less. Through Chapter 9, Congress has empowered each state government to authorize a “municipality” within the state to adjust its debts under the supervision of a federal bankruptcy judge based on federal substantive and procedural law. A state government may authorize—or decline to authorize—its insolvent municipalities to file for Chapter 9 protection. The power to decide rests with the state government. Puerto Rico is treated like a state in every chapter of the Bankruptcy Code except for Chapter 9. Between 1938 and 1984, judges and scholars generally agree that Puerto Rico did have the power to authorize its municipalities to adjust their debts. However, in 1984, Congress enacted legislation that expressly excluded Puerto Rico from Chapter 9. As a federal appeals court recently noted, the legislative history offers no indication why Puerto Rico was excluded.
Puerto Rico’s exclusion from Chapter 9 led the territory’s government, in July 2014, to enact local legislation called the “Puerto Rico Public Corporation Debt Enforcement and Recovery Act.” The Recovery Act sought to authorize certain Puerto Rico public corporations to adjust their debts. Multiple investment firms that own PREPA bonds sued the Puerto Rico government, arguing that the Recovery Act—which differs from Chapter 9 in multiple respects—violates the U.S. Constitution. On February 6, 2015, a federal district court judge in Puerto Rico held that the Recovery Act is preempted by the U.S. Bankruptcy Code and is therefore invalid under the Supremacy Clause of the Constitution. On July 6, 2015, the U.S. Court of Appeals for the First Circuit affirmed the district court’s decision. The appeals court concluded that “Congress preserved to itself that power to authorize Puerto Rican municipalities to seek Chapter 9 relief.” According to the court, Puerto Rico’s only option is to “turn to Congress for recourse.”
Since introducing H.R. 870 in February, Pierluisi has worked to build bipartisan backing for the bill. The legislation is supported by virtually all bankruptcy experts, including the prestigious National Bankruptcy Conference. The bill has been endorsed by major editorial boards, like Bloomberg View, The Washington Post, The New York Times, The Wall Street Journal, and The Los Angeles Times. The legislation is also supported by companies in the states that do business in Puerto Rico and have an interest in a strong and stable island economy. Furthermore, the bill has been endorsed by numerous individuals and organizations of a conservative bent, since it promotes the rule of law and does not require the expenditure of a single dollar by the federal government or American taxpayers. Finally, the vast majority of Puerto Rico’s creditors support the bill or do not oppose it, while market participants without a direct financial stake in the outcome—like credit rating agencies and municipal bond research firms—generally view the bill positively.
“This bill would simply grant Puerto Rico a power that every state has and that Puerto Rico itself had for nearly half a century until Congress inexplicably removed it in 1984, namely the power to authorize its municipalities—specifically, its public corporations—to seek Chapter 9 protection if they are insolvent and meet other strict conditions. This bill is not intended to, and will not, resolve all of Puerto Rico’s economic and fiscal problems. It must be complemented by other reforms at both the federal and local level. However, if it enacts this legislation into law, Congress will be empowering a U.S. jurisdiction to help itself, at no cost to federal taxpayers,” said Pierluisi.
Puerto Rico currently has about $72 billion in debt, although the debt structure is not monolithic. About seventeen entities in Puerto Rico have bonds outstanding. This includes general obligation bonds issued by the central government, bonds backed by sales tax revenue, and bonds issued by the territory’s public corporations like the electric power authority (PREPA), the water and sewer authority (PRASA), and the highway and transportation authority (PRHTA). These three public corporations are in different stages of financial distress and, together, have about $20 billion in debt.