In another reflection of ideological shifts within the Democratic Party, several potential presidential candidates are joining forces on a bill that would enable mass debt cancellation for the struggling island of Puerto Rico.
Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., are introducing the bill, the U.S. Territorial Relief Act of 2018, joined by Sens. Kamala Harris, D-Calif., and Kirsten Gillibrand, D-N.Y., putting many of the Senate’s top contenders for the presidency in 2020 on the record that they believe Puerto Rico’s debt should be discharged comprehensively.
Puerto Rico carries over $70 billion in debt, most of it unsecured and eligible for the relief outlined in the bill.
Gillibrand’s inclusion is notable because she voted for PROMESA, the Democratic establishment’s previous solution to the debt crisis in Puerto Rico. That bill, endorsed and signed by President Barack Obama, created an appointed fiscal oversight board to manage Puerto Rico’s affairs, which has led to punishing austerity proposals, mass protests and a wave of privatization, with assets sold off to finance interest payments. The selling point in PROMESA, however, was the creation of a bankruptcy-like mechanism that could be used to wipe out some debt legally. But then, hurricanes Maria and Irma destroyed the island’s infrastructure, putting Puerto Rico in the impossible position of rebuilding, attracting economic investment, and paying down debt simultaneously.
“Puerto Rico was already being squeezed before Hurricane Maria hit and will now have to rebuild under the weight of crushing debt,” said Warren in a statement. “Our bill will give territories that have suffered an extraordinary crisis a route to comprehensive debt relief and a chance to get back on their feet.”
The bill is a far cry from PROMESA’s framework of an outside fiscal manager imposing colonial-style rule on Puerto Rico. Not only does it seek to address the new reality of an island devastated by natural disaster, but it also demonstrates that the center of gravity in the Democratic Party has moved toward more radical intervention than the IMF-style technocracy of the past. Indeed, the left’s rising star, Alexandria Ocasio-Cortez, whose mother was born in Puerto Rico, made debt cancellation a central plank in her campaign to defeat PROMESA supporter Rep. Joe Crowley. On the campaign trail, she frequently invoked his support of the bill.
Last November, Warren, Sanders, Gillibrand, and Harris proposed a $146 billion “Marshall Plan” for Puerto Rico to support recovery and economic development. But the senators didn’t address debt relief until now.
A House companion is being sponsored by Rep. Nydia Velázquez. “After Maria, Puerto Rico needs every tool possible to recover physically and economically. This legislation provides another path for the island to get back on its feet and begin the journey toward a brighter future. I thank Sen. Warren for her leadership and I plan to introduce the House companion in September,” she said.
Under the bill, territories can opt for relief of unsecured public debt if they meet two out of three criteria: a population decrease of more than 5 percent over the past 10 years, the receipt of federal disaster assistance, and per capita debt over $15,000 per resident. Puerto Rico would qualify under all three factors, as would the U.S. Virgin Islands.
The option, which could only be used once every seven years, would have to be ratified by the territory’s legislature and governor, or by a two-thirds vote of the legislature, a nod to the possible opposition of Puerto Rico’s Gov. Ricardo Rosselló. Creditors would have the opportunity to contest the discharge of their bonds in a streamlined judicial proceeding.
The vulture funds holding most of the debt have extraordinary political power but make unsympathetic protagonists in the debate, so opponents of debt relief have instead focused on elderly Puerto Rican people who may hold bonds as part of their retirement income. The bill addresses that by creating a $15 billion taxpayer-funded compensation fund to benefit Puerto Rican creditors like residents, local businesses and banks, and union and public pension plans, as long as it is taken up within three years of enactment.
Mutual funds like Oppenheimer and Franklin Advisors, which manage Puerto Rican debt for retail investors in the U.S., would be eligible for some compensation if they waive all manager’s fees on it, as well. A special master would allocate the funds.
Losses would fall on hedge fund speculators who scooped up Puerto Rican debt in search of a quick payday — though the losses would ultimately be relatively minimal given the bargain-basement prices the investors paid for the junk bonds. “Disaster funding and the other resources in struggling territories’ budgets must not go to Wall Street vulture funds who snapped up their debt,” said Warren.
Meanwhile, the compensation would act, bill sponsors hope, as supplementary disaster relief for local bondholders to kickstart the economy. The bill also creates an audit commission to explore the causes and sources of Puerto Rican debt.
While the bill wouldn’t eliminate PROMESA’s fiscal board, without a debt crisis to manage, its relevance would come into question. So the bill could also go some distance toward restoring self-governance to Puerto Rico.
Warren and Sanders also supplied a letter of support from seven law professors who specialize in bankruptcy, led by Georgetown University’s Adam Levitin. “This is a bold stroke, the legislative equivalent of cutting through the Gordian Knot,” the professors write. “It recognizes the dire financial situation of the territories and awards relief without the time-consuming and expensive process of a traditional bankruptcy proceeding.”
The professors concluded that the law was constitutional, consistent with Congress’s authority to create rules on bankruptcy and for U.S. territories. Laurence Tribe, a constitutional law professor from Harvard, also weighed in with a separate letter, affirming the bill’s constitutional soundness. “It has always been recognized that the Framers made a deliberate determination to give Congress maximum latitude in adjusting debtor-creditor relations,” Tribe writes. “The U.S. Territorial Relief Act is on solid constitutional footing. Let any debate about the legislation focus on its policy merits.”
Ana Maria Archila, co-executive director of the Center for Popular Democracy, welcomed the legislation. “The vast majority of Puerto Rican debt is owned by actors who invested knowing full well that Puerto Rico could not pay,” she said. “There’s no way for Puerto Rico to recover if it has to use public money to pay hedge funds.”
Donald Trump and the Republican Congress are unlikely to pass this bill into law anytime soon. But bondholders would have to be mindful that a potential Democratic administration entering office as soon as 2021 is likely to have the perspective of wiping away their expected gains. That could change the dynamic in ongoing debt negotiations.
Trump himself, before backtracking last year, could have been a supporter of the bill. “They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out,” Trump said on Fox News. “You can say goodbye to that. I don’t know if it’s Goldman Sachs, but whoever it is, you can wave goodbye to that.”