WASHINGTON, DC – Today, Sen. Bob Menendez (D-NJ) announced he will introduce a comprehensive legislative package to provide Puerto Rico a real path to solvency through comprehensive reforms. Joined by Sens. Sherrod Brown (D-Ohio), Ranking Member of the Senate Banking Committee, Maria Cantwell (D-Wash), Ranking Member of the Senate Committee on Energy and Natural Resources, and Sen. Richard Blumenthal (D-CT), the legislative package is comprised of the Puerto Rico Stability Act (Menendez, Brown, Cantwell, Blumenthal) and the Puerto Rico Recovery Act (Menendez, Brown, Blumenthal). When combined, the legislative package would help the island avert a complete financial collapse, stabilize its financial standing in an orderly and legal fashion, and provide for equitable tax credit treatment and health care equity for the 3.5 million U.S. citizens residing in Puerto Rico.
With over $72 billion in debt accumulated over a decade-long recession, the economy of Puerto Rico is quickly crumbling with no clear path to salvage without technical assistance and restructuring by the federal government. Having already defaulted on several debt payments to creditors in the past year, and without being granted bankruptcy protections by the U.S. government, the island’s economy will soon face further hardships as it is expected to miss another round of large payments to bondholders in May and July unless major reforms are enacted.
“For the 3.5 million American citizens living on the island of Puerto Rico, time is running short,” said Sen. Menendez. “Congress has to act immediately to fix the federal funding shortfalls and give Puerto Rico the tools it needs to fully restructure its debt. That’s why I’m introducing a comprehensive legislative package that provides critical healthcare funding, individual tax incentives to encourage work in the formal economy, and a mechanism for territory-wide restructuring of the island’s debts. I look forward to working with my colleagues on both sides of the aisle so we may prevent this fiscal crisis from devolving into a full blown humanitarian calamity.”
“For years, those on Wall Street have taken advantage of Puerto Rico with exorbitant interest rates, and now they’ve left the American citizens there out to dry,” said Sen. Brown, Ranking Member of the Senate Banking Committee “We cannot allow Wall Street greed to destabilize Puerto Rico’s economy and harm the American citizens who live there.”
“Senator Menendez is providing the kind of leadership we need by introducing a comprehensive restructuring bill that gives Puerto Rican’s the bankruptcy reform they most desperately need,” said Sen. Cantwell. Ranking Member of the Senate Committee on Energy and Natural Resources.
The Puerto Rico Stability and Recovery Package seeks to provide the government of Puerto Rico territory-wide restructuring authority that allows for the readjustment of all of its debt -- not just the 1/3 that would be covered under Chapter 9 of the U.S. Bankruptcy Code. Additionally, the legislation would establish a nine-member Financial Stability and Reform Board and a Chief Financial Officer (CFO) position, both carefully calibrated to provide much needed transparency, oversight, and technical assistance to the restructuring and budgeting processes in the island.
As part of a long-term stabilizing strategy, the legislation also includes policies to move Puerto Rico towards a Medicaid system that provides steady funding moving forward and would extend the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) to all eligible families in Puerto Rico. Because of a disparity in current law, hundreds of thousands of American citizens residing in Puerto Rico do not qualify for the EITC and CTC programs, even though they would be eligible to receive these federal credits by moving to the mainland. Not only does this arbitrary policy unfairly punish struggling American families based solely on where they live, but it has also contributed to Puerto Rico’s current economic crisis by decreasing labor participation and increasing outmigration.
While House Republicans are currently negotiating their own legislative proposals to address Puerto Rico’s debt crisis by the end of the first quarter of this year, today’s bill introductions represent the most comprehensive solution put forth by Congress to address the island’s deteriorating economic and fiscal turmoil in a holistic manner.
Unlike Chapter 9, which would only cover approximately 1/3 of Puerto Rico’s $72 billion in debt, this proposal gives Puerto Rico the ability to restructure all of its debt. This is necessary to bring the island’s debt-service payments to a sustainable level. This proposal would also establish a “Chief Financial Officer” (CFO) and “Fiscal Stability and Reform Board” (Board), both of which are carefully calibrated to provide much needed transparency, oversight, and technical assistance. Additionally, under this plan, the Governor of Puerto Rico will develop a five-year Fiscal Plan, which will be subject to the Board’s approval, and will serve as the guiding financial benchmark for the island’s debt restructuring and budgeting processes.
In order to trigger the restructuring mechanism, the Puerto Rican Legislature would need to pass a resolution to opt in to the process (and request the establishment of the Fiscal Stability and Reform board). This resolution would need to be signed by the Governor. Once the Board is established, the Governor would then appoint a CFO. The Board will consist of 9 members chosen as follows (6 members must be full-time residents of Puerto Rico, 6 members must have knowledge of Puerto Rico’s history, culture, and socioeconomics, and all members must have financial and management expertise) with staggered terms to ensure continuity:
Once the Board is established, the Governor will submit a five-year “Fiscal Plan” to the Board, which proposes levels of debt, spending, and tax policy necessary to restore solvency and fully fund pensions. The Board will either approve or disapprove of the Fiscal Plan. Once the Fiscal Plan is approved, the Governor will submit an annual budget to the Board, which can either certify or deny that the proposed budget complies with the Fiscal Plan. If the Board certifies that the budget complies with the Fiscal Plan, the budget is sent to the legislature for standard review and approval. If the Board denies the initial budget proposal, the Governor would submit a new budget, and the Board will either certify or deny the new budget as compliant. If the Governor’s second budget is not compliant with the Fiscal Plan, the budget will still go to the legislature, but the Board would clearly and publicly state the reasons why the budget does not comply with the Fiscal Plan. If the budget fails to comply with the Fiscal Plan, this vote of “no confidence” from the Board will send a strong and unequivocal message to the legislature, capital markets, and Puerto Rican people that the proposed budget is unsustainable.
As soon as Puerto Rico passes a resolution to opt in to the restructuring mechanism, the proposal institutes an automatic 12-month stay to give Puerto Rico time to organize its finances. During this time, the Board will work with the Governor as outlined above to approve the Fiscal Plan. Once this process is complete, as in typical Chapter 9 bankruptcy proceedings, the Governor will submit a restructuring proposal. If the creditors object, the judge (to be selected by the First Circuit Court of Appeals) can approve the plan against the creditor objections, or require Puerto Rico to resubmit an alternative restructuring proposal. In order to approve the restructuring proposal, the judge would have to confirm that such proposal complies with the Fiscal Plan, treats pensions as senior secured debt, and if feasible, does not unduly impair general obligation bonds (government-issued debt).
Because of a disparity in current law, hundreds of thousands of American citizens in Puerto Rico do not qualify for the EITC and CTC programs, even though they would be eligible to receive these federal credits by moving to the mainland. This disparity has contributed to Puerto Rico’s current economic crisis by decreasing labor participation and increasing outmigration.
A significant portion of Puerto Rico’s financial obligations are health care-related and this bill would address several key issues to put the island’s health system on strong financial footing. Currently, the Medicaid program, rather than being provided federal reimbursement for necessary costs, is capped and set to hit a funding “cliff” as soon as mid-2017. When this happens, the island will instead receive funding to cover only a very small portion of its Medicaid costs, a burden no state could handle. This bill includes policies to move Puerto Rico towards a Medicaid system that provides stable funding for the long-term. Additionally, there are several policies in Medicare that treat the island differently than the rest of the nation. This leaves providers and seniors facing unfair penalties and lower reimbursements. This bill includes key provisions to more accurately align Medicare policies in Puerto Rico with the rest of the country.
April 22, 2021