The legislative process has a way of changing legislation, and when politicians are done working on the drafts of bills, they can be quite different than how they started. This is the case with the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) that Congress recently passed to address the crisis. The requirement of insolvency for entities to have their debts restructured magically disappeared, and this changes the substance of the legislation greatly.
While Republicans in Congress had pushed for reforms for Puerto Rico while the San Juan government and the Obama Administration favored bailout and bankruptcy, allies of the administration lobbied extensively for bankruptcy. When the earlier version of PROMESA was unveiled, Congressional leadership insisted the bill did not contain and would not allow or enable any form of bankruptcy for the Commonwealth.
But several weeks makes a lot of difference, in Congress and in Washington D.C. On June 9, Congress passed a “compromised” version of PROMESA that was endorsed by both House Speaker Paul Ryan (R-WI) and well as Democrat Leader Nancy Pelosi (D-CA). On top of that, the White House has announced it will sign the bill and urged the Senate to pass the version the House has already passed. Could PROMESA have somehow become a bankruptcy and bailout after all, if both Rep. Pelosi and President Obama have signed on to support it?
When introduced earlier this year, as H.R. 4900 by Rep. Sean Duffy (R-WI), Section 206 (4) required for restructuring of debts of any entity in Puerto Rico, “only if the entity does not receive, as determined in the Oversight Board’s sole discretion, 10 percent or more of its revenues from the taxing power of the government of the covered territory, the entity is insolvent; and…”
Notice in that draft, the word insolvent is there, and therefore it is required that an entity is insolvent before the Oversight Board can restructure its debts. But by removing the world “insolvent” in the current draft that passed the House, the Oversight board can restructure and even forgive debts at will. Basically, removing the one word insolvent turns PROMESA into exactly what it was not intended to be, legislation enabling a full bankruptcy and bailout of Puerto Rico.
“Section 206 of the bill allows the control board to restructure debts before Puerto Rico or any of its entities are insolvent. Under this scenario, it gives them access to bankruptcy restructuring even if they are capable of paying their bills,” writes Edward Woodson in Liberty Unyielding, where he raised question of PROMESA being “Bankruptcy in sheep’s clothing.”
Clearly provision 206 in the current draft of PROMESA that Congress passed allows the restructuring of debts for entities that are not insolvent, and can pay their bills. This change quite effectively renders PROMESA a bailout and bankruptcy bill. It proceeds to the Senate next, where Senators can if they choose, change the legislation before they pass it, and re-insert the insolvency provision. If the Senate fails to make that key change, PROMESA will pass in a very different form than it was originally proposed.