Diverse interests have emerged seeking to derail a bill aimed at a satisfactory resolution to Puerto Rico’s debt crisis.
The U.S. House Natural Resources Committee (HNRC) is considering HR 4900, entitled the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, which means promise in Spanish. A critical component of the bill is creation of a federal oversight board with broad powers over Puerto Rico’s fiscal and budgetary affairs. The seven members of the oversight board would be appointed by the U.S. president, but chosen from lists of qualified candidates offered by various parties.
Some critics have protested the potential infringement on Puerto Rico’s sovereignty, while others want assurances the island territory or investors will not get a “bailout.” (PIMCO currently manages more than $40 billion of municipal investments issued by U.S. cities, counties and states. PIMCO portfolios do not hold any exposure to bonds from the Commonwealth of Puerto Rico or its various governmental entities.)
In our view, PROMESA represents a responsible framework for managing the unavoidable restructuring of Puerto Rico’s debt and other liabilities. We expect no contagion to the broader municipal market from PROMESA. More specifically, PROMESA will not trigger higher borrowing costs for states or municipalities.
Some are worried the federal government might take over a state’s finances in a similar manner; yet there are no convincing arguments because the Constitution protects the sovereignty of the states. Again, this bill wouldn’t create such a precedent. PROMESA is possible because the Constitution explicitly allows Congress to set all laws on U.S. territories, which have fewer rights than states.
In addition, it would be incorrect to classify PROMESA as a “bailout.” No incremental federal tax dollars are allocated to the Territory under the bill. In fact, if this legislation does not advance, the probability of future federal tax dollars flowing to the Territory or bondholders may actually increase.
The failure of U.S. Congress to address the complex fiscal and debt crisis in Puerto Rico is a greater risk to the $3.5 trillion tax-exempt municipal market. It is essential to enact a stay on litigation to provide a fiscal control board with an appropriate amount of time to reach a sensible solution. Without a stay, creditor litigation on individual liens is likely to ensue. The outcomes of these decisions have the potential to set confusing precedents for not just holders of general obligation debt, but for other portions of the municipal market, including holders of essential service revenue bonds that constitute the majority of outstanding municipal debt.
Time matters. At this point, it appears that the 1 May deadline to address the worsening situation in Puerto Rico will not be met, and Puerto Rican issuers will likely miss some of the $470 million debt service due on that date. Some hope that the missed payments will add pressure on policymakers to act, but given the disagreement between the parties (and within the Republican Party), it appears that the crisis will have to get worse before it is tackled by Congress. An even larger debt service payment looms on 1 July.
Accordingly, we urge Congress to continue moving PROMESA forward. A successful resolution to the unique crisis in Puerto Rico can only be achieved with a strong federal oversight board empowered to both enforce fiscal discipline and adjust the Territory’s public debt in a fair and equitable manner designed to achieve debt sustainability. We believe PROMESA will achieve these objectives.
David Hammer is a PIMCO executive vice president in the New York office and co-head of municipal bond portfolio management.