Puerto Rico - Amendment to H.R. 5278 (PROMESA)
The House Natural Resources Committee held a hearing on Puerto Rico on May 24th and 25th to markup H.R. 5278 (PROMESA). The committee has jurisdiction over all U.S. territories, including Puerto Rico. The hearing examined the legislation and also the financial issues confronting the territory. Congressman McClintock, a member of the committee, delivered remarks at the hearing and he offered the following amendment to H.R. 5278:
Amendment to H.R. 5278 (PROMESA)
Congressman Tom McClintock
House Natural Resources Committee
May 25, 2016
This amendment simply exempts from this act the debt issued by Puerto Rico that was backed by its constitutional pledge of full faith and credit and taxing power. Of the commonwealth’s $72 billion of outstanding bonds, this would exempt roughly $18 billion of constitutionally protected debt. And lest we forget, only 12 percent of Puerto Rico’s G.O. bonds are owned by hedge funds. Forty percent are held by the people of Puerto Rico themselves.
I laid out the reasons for this amendment in my remarks yesterday. I agree that there is no reason to treat San Juan’s municipal debt any differently than San Jose’s. But constitutionally issued debt is fundamentally different, and its reliability must be maintained.
This is important to every state that relies on constitutional full faith and credit pledges. The federal government has – until now – never threatened or considered undermining constitutional full faith and credit guarantees by allowing Chapter Nine provisions to be applied to sovereign debt – whether that debt is issued by a territory or a state.
If Congress is willing to undermine a commonwealth’s constitutionally guaranteed bonds today, there is every reason to believe it would be willing to undermine state guarantees tomorrow. This, in turn, invites credit markets to question any constitutional debt guarantee as no longer secured on constitutional bedrock but rather dependent on the shifting whims of Congress. If they do, the value of those bonds is devalued and interest rates paid by taxpayers on that debt will increase.
The Governors of six states have already issued this warning: that “granting Puerto Rico such unprecedented bankruptcy authority would likely raise the borrowing costs of our states, reducing our ability to invest in vital services and eroding investor confidence in the whole notion of full faith and credit debt.” Economist Ike Brannon of Capital Policy Analytics has noted that “There is evidence that the mere introduction of this legislation is already having adverse effects on the market. The cost of credit default swaps on Illinois general obligation debt, which essentially function as insurance against default, has gone up nearly 100 percent this year, signaling a burgeoning uncertainty over the protections afforded to ‘full faith and credit’ debt.” He estimates than even a minor 10 to 15 basis point increase in financing costs will cost taxpayers an additional $4 billion to $8 billion.
PROMESA could have respected the $18 billion of constitutionally-issued debt, while applying Chapter Nine to the remaining $54 billion of municipal debt of Puerto Rico. Its supporters claim this is their intent, and they point to language in Title II of the bill instructing the control board to “respect the relative lawful priorities in the constitution, other laws, or agreements.” The problem is that among those “other laws” is the government’s repudiation of its debt. Further, the same section instructs the control board to “provide adequate funding for public pension systems,” and includes other contradictory instructions. The only possible interpretation of these conflicting provisions is that the sanctity of the sovereign debt is subject to balancing – and therefore subordination to junior claims -- by the control board.
This amendment removes any ambiguity by protecting the constitutionally issued debt from the effect of this bill. If the supporters of this bill are sincere in their stated objective of wanting to protect Puerto Rico’s constitutionally issued debt, they should have no objection to this amendment. If they are not sincere, then they should oppose the amendment, but at least openly admit their true intentions, and accept responsibility for the billions of dollars of increased interest costs that taxpayers across the country will have to pay on their state debts as markets adjust to this new world in which full faith and credit depends on the whim of Congress.
It is not only in the interests of high debt states like California, Illinois and New York to protect the full faith and credit guarantees -- it is also in the interest of the people of Puerto Rico to uphold the full faith and credit clause in their constitution. They will desperately need that credibility in order to re-enter the credit market once their affairs are put back in order.
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