Congressional legislators are expected to release new draft legislation dealing with Puerto Rico's fiscal crisis before the end of the week, as Washington scrambles to head off drastic steps, including a moratorium on debt payments, by the island's government.
On Wednesday, Governor Alejandro García Padilla signed a bill that gives him the authority to cease payments to bondholders on any debt until 2017. Last year, the governor announced that Puerto Rico could no longer meet its debt obligations, which total some $70 billion. The government has already defaulted on a small amount of debt. Its next round of payments, totaling $422 million, is due on May 1.
In Washington, the Republican-controlled House Committee on Natural Resources last week released a draft bill that would appoint an oversight board with the capacity to override Puerto Rico's own government as it tries to trim the island's debt. That draft also gave the board authority to restructure the debt, a move that Puerto Rico's government has insisted is necessary — but one that many bondholders strongly oppose. While the text did not explicitly give Puerto Rico access to Chapter 9 Bankruptcy, a tool that municipalities in the 50 states can utilize, it said that court-supervised restructuring should "apply" bankruptcy rules if necessary.
Predictably, the draft was criticized by all sides. In a joint statement, Democratic representatives Nydia Velázquez and José Serrano said the proposed oversight board would "usurp the role of Puerto Rico's democratically-elected government."
In the bill's current form, four of the board's five members would be appointed from pools chosen by the Senate and House Republican leadership.
The board, said Pedro Pierluisi, Puerto Rico's nonvoting representative in the House, "must have teeth, but not fangs." Pierluisi criticized language that he said mimicked a controversial bill passed in 1995 creating financial control board for Washington DC in response to its own gaping deficit.
"As a territory, Puerto Rico lacks democracy at national level, so a bill that suppresses — rather than supervises — our democratic process at the local level cannot stand," said Pierluisi.
House majority leader Paul Ryan called the draft bill "thoughtful, comprehensive legislation," but conservative groups were quick to paint it as a taxpayer funded bailout. One organization, the Center for Individual Freedom (CFIF), has purchased more than $200,000 in ad time, to air this month in Washington DC, including during Sunday's NBC Meet the Press broadcast. In one ad, which has already appeared on television in Washington and was posted online, CFIF said that the restructuring provisions in the bill could lead "high-spending states like Illinois" to also declare bankruptcy. Under current US law, states cannot declare bankruptcy, although municipalities can.
According to the campaign finance watchdog Sunlight Foundation, CFIF is a so called "dark money group" which is not required to publicize its donors. But IRS records show that the group did receive nearly $5 million in 2011 from Crossroads GPS, which Sunlight Foundation described as "another dark money group tied to Karl Rove," the longtime GOP strategist.
"If history is any indicator, a move by a group like this is just the first of an organized effort to influence legislation," said Josh Stewart, communications director at Sunlight. "This is clearly aimed at legislators."
VICE News spoke with several congressional aides this week, who said negotiations currently center on the scope of the oversight board, as well as its ability to order restructuring. A new draft is expected before the end of the week. One Republican congressional staffer who requested anonymity because they weren't authorized to speak publicly during the negotiations, said the recent ad buys had angered even top GOP leadership, including committee Chairman Rob Bishop (R-UT).
"They are deceitful and factually incorrect," said the staffer, who tied the group to a small number of wealthy creditors riled by the bill. "They don't have to disclose who they are, but I think it is primarily general obligation bondholders."
The Puerto Rican constitution guarantees general obligation debt, but the bill signed by Governor García Padilla gives him the authority to cease payment on all bonds, including general obligation.
"Negotiations are going back and forth, between ensuring that there are adequate protections for Puerto Rico, to legislation that is favoring some of the more challenging predatory creditors," said Eric LeCompte, executive director of Jubilee USA, a coalition of faith based groups that advocates for debt relief. "Some of these creditors want this legislation to be punitive, they want it to hurt Puerto Rico."
It remains unclear how those opposing viewpoints can be reconciled, especially during a polarizing election season in the US. But congressional aides from both parties said the negotiations still held the potential for a bipartisan solution to the crisis. An added and unpredictable element is the future of House Speaker Ryan, who has promised to help Puerto Rico. His name is now being floated to the media by some establishment Republicans as a possible alternative presidential candidate in the event of a brokered GOP convention. The week before the draft bill was published, Ryan apologized for previously referring to Americans receiving public benefits as "takers" — a label long applied by the right to American citizens in Puerto Rico.
While the specter of an oversight body has been painted in some circles as a colonial instrument, polls show that a majority of its residents — angered by decades of mismanagement and corruption — approve of an outside body to guide recovery.
"A lot of people here don't trust the political elite to solve this problem, and they would like to see some kind of control board," said Edwin Meléndez, director of the Center for Puerto Rican Studies at Hunter College. "But they are also concerned that fiscal restraint is only attending to part of the problem and there is no discussion of growth and stimulus. There is no plan for economic recovery."
"We know what happened with austerity in places like Greece," said Meléndez. "By itself it's not going to solve the problem."
Indeed, Puerto Rico's plight goes well beyond its debt. Hundreds of thousands have left the island in recent years, many for states like Florida. Today, the 4.7 million Puerto Ricans living stateside outnumber the island's 3.5 million residents. Already wracked by budget cuts, Puerto Rico's poverty rate sits at 45 percent, and its unemployment rate hovers above 12 percent, more than double the figure for rest of the US. By some estimates, only 40 percent of Puerto Ricans are in the island's official labor force.
On Wednesday Governor Padilla said the moratorium bill "provides us with the tools to address the highest priority of needs — providing essential services to our people — without fear of retribution."
While many bondholders criticized the bill, some, including those that hold sales-tax funded COFINA bonds, welcomed it.
"With entrenched private institutions obstructing the legislative process in Washington, it is understandable that Puerto Rican leaders are taking steps to equip the island with the tools it needs," Susheel Kirpalani, a lawyer representing the COFINA Senior Bondholders Group, told Reuters.
According to Congressional staff who spoke to Vice News on condition of anonymity due to the ongoing negotiations, House legislators met on Tuesday with officials from the White House and Treasury Department. The Obama administration and Treasury officials have said Puerto Rico needs access to restructuring — which could involve lowering the principal of the debt and altering payments — lest it default further on its debt. While the House will hold a hearing next Wednesday on a new version of the bill, and could hold a vote in the coming weeks, it appears likely that Puerto will be unwilling or unable to make the payments due on May 1. After the passage of Wednesday's bill in San Juan, that step is now authorized by the Puerto Rican government.
The bonds with payments due on May 1 were issued by the island's government development bank, which has taken drastic steps recently, including the opening of several hundred accounts at commercial banks, part of an apparent attempt to safeguard its remaining assets.
"The biggest issue right now is the government development bank," said Meléndez. "I don't know what the hell they are doing."
Speaking from Puerto Rico, the professor said signs of depression were everywhere.
"You wait, sometimes days, to see doctors," he said. "If you drive around, you aren't going to see people in riots, but you will see, especially in the interior, a lot is closed. Commercial spaces and buildings are completely empty because they can't be rented or they couldn't be sold after they were finished, or are abandoned."
"There has to be accountability," he added.